Unit IV Accounting Standards Part IV

Updates in Philippine Accounting and Financial Reporting Standards 1
“Not intended for publication. For classroom instruction purposes only”.

Unit IV – Accounting Standards Part 4
“Accounting standards are authoritative standards for financial reporting

and are the primary source of generally accepted accounting principles
(GAAP). Accounting standards specify how transactions and other events
are to be recognized, measured, presented and disclosed in financial
statements. Their objective is to provide financial information to investors,
lenders, creditors, contributors, and others that is useful in making
decisions about providing resources to the entity.”
Learning Outcomes
At the end of the unit, you will be able
 Demonstrate skill in preparation of financial statements and applying relevant

principles of financial reporting standards.
Pretest
Thank you for answering the test. Please see

the back content for the answer key or you may view
it in the google class.
The next section is the content of this unit. It

contains vital information. Please read the content.
Content
FIRST TIME ADOPTION OF PFRS 1

First Time Adopter
A first-time adopter is an entity that present for the first time its financial statements in
conformity with Philippine Financial Reporting Standards. In other words, an entity is
considered first time adopter when for the first time such entity makes an explicit and
unreserved statement that its general-purpose financial statements comply with
Philippine Financial Reporting Standards.
First PFRS financial statements

The first PFRS financial statements are the first annual statements in which an entity
adopts PFRS by an explicit and unreserved statement of compliance with PFRS.
Financial statements presented by an entity in the current year would quality as first
PFRS financial statements under the following conditions:
 When an entity presented its most recent previous financial statements:
a. Under national GAAP inconsistent with PFRS in all respects.
b. In conformity with PFRS in all respects but these statements did not contain
an explicit and unreserved statement of compliance with PFRS.
c. Containing an explicit statement of compliance with some but not all PFRS.
d. Under national GAAP with a reconciliation of selected figures to amounts

determined under PFRS.
 When an entity prepared financial statements in the previous period under PFRS but
the financial statement were for internal use only.
 When an entity prepared financial statements in previous period under PFRS for
consolidation purposes without preparing a complete set of financial statement
 When an entity did not present financial statements in the previous period.
Date transition to PFRS
The date of transition to PFRS refers to the beginning of the earliest period for which an
entity presents full comparative information under PFRS in its first PFRS financial
statements. The date of transition to PFRS depends on two factors, namely:
a. The date of adoption of PFRS
b. The number of years of comparative information that an entity decides to present

together with the financial statements in the year of adoption
Illustration An entity presented its most recent financial statements under previous
GAAP on December 31, 2020. The entity decided to adopt PFRS on December 31, 2021
and to present a one-year comparative information for 2020. The beginning of the
earliest period for which the entity should present full comparative information would be
January 1, 2020. In this case, the opening PPRS statement of financial position would
be dated January 1, 2020. However, if the entity decided to present two-year
comparative information tor 2019 and 2020, the beginning the earliest period for which
the entity should present full comparative information would be January 1, 2019. In this
case, the opening s statement of financial position Would be dated January 1, 2019.
Opening PFRS statement of financial position
An opening PFRS statement of financial position is the statement of financial position
prepared by a first time adopter on the date of transition to PFRS. The opening PFRS

statement of financial position is the starting point for accounting in accordance with
PFRS. In preparing the opening statement of financial position, an entity is required to
a. Recognize all assets and liabilities required by PFRS.
b. Derecognize assets and liabilities not permitted by PFRS.
c. Reclassify items that it recognized under previous GAAP as one type of asset,
liability or equity but a different type of asset, liability or equity under PFRS.
d. Measure all recognized assets and liabilities in compliance with PFRS.

Any adjustments required to present an opening PFRS statement of financial position
should be recognized in retained earnings or it appropriate, in another component or
equity.
First PFRS financial statements
If the entity adopts PFRS for the first time in the current year, its first PFRS financial
statements include the following:
 Three statements of financial position at the end of current year, at the end of
prior year and at the date of transition to PFRS
 Two statements of comprehensive income for the current year and prior year
 Two separate income statements for the current year and prior year
 Two statements of changes in equity for the current year and prior year
 Two statements of cash flows for the current year and prior year
 Notes to financial statements including comparative information

SHARE-BASED COMPENSATION PFRS 2
Share-based compensation plan is a compensation arrangement established by the

entity whereby the entity's employees shall receive equity shares in exchange for their
services or the entity incurs liabilities to the employees in amounts based on the price
of its shares.
Compensation plans are a common feature of employee remuneration for directors,
senior executives and other key employees. The compensation plans are usually tied
to performance in a strategy that uses compensation to motivate the recipients.
Share-based compensation plans are classified into equity settled and cash settled.
Equity settled Cash settled
The entity issues equity instruments in The entity incurs a liability for services
consideration for services received, for received and the liability is based on the
example, share options. entity's equity instruments, for example,
share appreciation rights.

Share options
Share options are granted to officers and key employees to enable them to acquire
shares of the entity during a specified period upon fulfill certain conditions at a specified
price. Typically, share options are granted to officers and key employees as part of their
remuneration package, in addition to a cash salary and other employment benefits.
Thus, these options are conceived as additional compensation on the part of senior
officers and other key employees.
Measurement of compensation
The compensation resulting from share option is measured following two methods,
namely:
a. Fair value method. Under this method, the compensation is equal to the fair
value of the share options on the date of grant.
b. Intrinsic value method. Under this method, the compensation is equal to the
intrinsic value of the share options. The intrinsic value is the excess of the market
value of the share over the option price.
Paragraph 24 of PFRS 2 provides that the intrinsic value method can be used only if
the fair value of the share option cannot be estimated reliably.
Recognition of compensation
a. If the share options vest immediately, the employee is not required to complete a
specified period of service before unconditionally entitled to the share options. In
this case, on grant date, the entity shall recognize the compensation as expense
in full immediately.
b. If the share options do not vest until the employee completes a specified service
period, the compensation is recognized as expense over the service period or
vesting period, meaning, from the date of grant to the date of which the options
can first be exercised.
This is on the theory that the share options are in recognition for services
rendered between the date grant and the exercise date.
Acceleration of vesting
PFRS 2, paragraph 28, provides that if an entity cancels or settles a grant of share
options during the vesting period, the entity shall account for the cancelation or
settlement as an acceleration of vesting.
a. The entity shall recognize immediately the compensation expense that otherwise
would have been recognized for services received over the remainder of vesting
period.

b. Any payment made to the employee on the cancelation or settlement of the grant
shall be accounted for as the repurchase of equity interest, meaning, deduction
from equity.
In other words, of the payment exceeds the fair value of the share options, the excess
shall be recognized as an expense.
NOTE:
 If the share options are canceled or settled during the vesting period, it is as if the
vesting date had been brought forward and the balance of the fair value not yet
expensed is recognized immediately.
 If suppose the share option is not exercise, any amount in excess of the fair
value of the share options already recognized is treated as expense.
Share appreciation right
A share appreciation right entitles an employee to receive cash which is equal to the
excess of the market value of entity's share over a predetermined price for a stated
number of shares on settlement or exercise date. In other words, a share appreciation
right entitles the employee to a cash payment equal to the increase in the price of a
given number of shares over a given period. Like a share option, a share appreciation
right is viewed as compensation for services rendered. Unlike in a share option, the
entity shall recognize a liability because a share appreciation right is actually an
obligation on the part of the entity to pay cash in the future on exercise date. Simply
stated, a share appreciation right creates a liability.
Measurement of compensation
The compensation is based on the fair value of the liability at the reporting date and
shall be remeasured at every year-end until it is finally settled. Any changes in fair value
are included in profit or loss. The fair value of liability is equal to the excess of the market
value of share over a predetermined price for a given number of shares over a definite
vesting period.
Recognition of compensation
a. If the share appreciation right vests immediately, the compensation is recognized
immediately.
b. If the share appreciation right does not vest until employee completes a definite
vesting period compensation is recognized over the vesting period.
NONCURRENT ASSET HELD FOR SALE PFRS 5
A noncurrent asset is an asset that does not meet the definition of a current asset. The
noncurrent asset may be an individual asset, like land and building, or a disposal group.
A disposal group is a group of assets to be disposed of, by sale or otherwise, together
as a group in a single transaction, and liabilities directly associated with those assets
that will be transferred in the transaction.

Noncurrent asset held for sale

PFRS 5, paragraph 6, provides that a noncurrent asset or disposal group is classified as
held for sale if the carrying amount will be recovered principally through a sale
transaction rather than through continuing use.
This simply means that the entity. does not intend to use the asset as part of the on-
going business but instead intends to sell it and recover the carrying amount principally
through sale.
Conditions for classification as held for sale
A noncurrent asset or disposal group shall be classified as held for sale if the following
conditions are present:
 The asset or disposal group is available for immediate sale in the present
condition. In other words, the current condition of the asset should be adequate
to be effectively "sold as seen".
 The sale must be highly probable.

Definition of highly probable
For the sale to be highly probable, the following conditions must be met:
a. Management must be committed to a plan to sell the asset or disposal group.
b. An active program to locate a buyer and complete the plan must have been
initiated.
c. The sale is expected to be a "completed sale" within one year from the date of
classification as held for sale.
d. The asset or disposal group must be actively marketed for sale at a sale price
that is reasonable in relation to the fair value.
e. Actions required to complete the plan indicate that it is unlikely that the plan will
be significantly changed or withdrawn.
Measurement of asset held for sale
PFRS 5, paragraph 15, provides that an entity shall measure a noncurrent asset or
disposal group classified as held for sale at the lower of carrying amount or fair value
less cost of disposal. PFRS 5, paragraph 25, further provides that a noncurrent asset
classified as held for sale shall not be depreciated.
Writedown to fair value less cost of disposal
If the fair value less cost of disposal is lower than carrying amount of the asset or
disposal group, the writedown to fair value less cost of disposal is treated as an
impairment loss. If the noncurrent asset is a disposal group, the impairment loss is
apportioned across the assets based on carrying amount.

Subsequent increase in fair value

If subsequently there is an increase in the fair cost of disposal, PFRS 5, paragraph 21,
provides that an entity shall recognized a gain but not ln excess of any impairment loss
previously recognized.
Abandoned noncurrent asset
PFRS 5, Paragraph 13, provides that an entity shall not classify as held for sale a
noncurrent asset or disposal group that is to be abandoned. This is because the carrying
amount will be recovered principally through continuing use or the noncurrent asset is to
be used until the end of its economic life.
Temporarily abandoned
PFRS 5, paragraph 14, provides that an entity shall not account for a noncurrent asset
that has been temporarily taken out of use as if it had been abandoned. For example, an
entity ceases to use a manufacturing plant because demand for its product has declined.
However, the plant is maintained in workable condition and it is expected that it will be
brought back into use if demand picks up. In this case, the plant is not regarded as
abandoned.
Change in classification
Circumstances could arise leading to the noncurrent asset no longer being classified as
held for sale. For example, there is a decision not to sell the noncurrent asset or the
criteria for being classified as held for sale may no longer be met. In such a case, PPRS
5, paragraph 27, provides that the entity shall measure the noncurrent asset that ceases
to be classified as held for sale at the lower between:
a. Carrying amount or the asset on the basis that had not been classified as held for
sale.
b. Recoverable amount at the date of the subsequent decision not to sell.

NOTE: PFRS 5, paragraph 28, states that any adjustment to the carrying amount of a
noncurrent asset that ceases to be classified as held for sale should be included in profit
or loss.
Presentation of asset classified as held for sale
PFRS 5, paragraph 3, provides that assets classified as noncurrent in accordance with
PAS 1 shall not be reclassified as current assets until they meet the criteria to be
classified as held for sale.
Simply stated, a noncurrent asset that is already classified as held for sale shall be
presented separately as current asset. PFRS 5, paragraph 38, provides that if the
noncurrent asset is a disposal group classified as held for sale, the assets and liabilities
of the group shall be presented separately and cannot be offset as a single amount.
In other words, the assets of the disposal group shall be described as noncurrent assets
classified as held for sale presented separately as a single amount under current assets.

The liabilities of the disposal group shall be described as liabilities directly associated
with noncurrent assets classified as held for sale presented separately as a single
amount under current liabilities.
DISCONTINUED OPERATION PFRS
Component of an Entity
A component of an entity is classified as discontinue operation:
a. When the entity has actually disposed of the operation
b. When the operation meets the criteria to be classified as held for sale.
PFRS 5, paragraph 12, prohibits the retroactive classification as a discontinued
operation when the discontinued criteria are met after the end of reporting period. The
discontinued operation is accounted for as a "disposal group classified as held for sale."
The component of an entity must be available for immediate sale in the present condition
and the sale must be highly probable.
Examples of discontinued operation
a. Selling by a diversified entity of a major division that represents the entity's only
activities in the electronics industry.
b. Selling by a meat packing entity of controlling interest in a furniture entity. All

other operations of the entity are in the meat packing business.
c. Selling by a communications entity of all its radio stations. The entity’s remaining
activities are television stations and publishing house.
d. A conglomerate is engaged in commodity business, real estate, manufacturing

and construction business. Selling of any of the four businesses is a discontinued
operation.
Examples which are not discontinued operation
a. Phasing out of product line within a product group
b. Shifting of production or marketing activities for a particular line of business from

one location to another
c. Closing of a facility, factory or branch

Income statement presentation
PFRS 5, paragraph 33, provides that an entity shall disclose a single amount
comprising the total of post-tax profit or loss of the discontinued operation and the post-
tax gain or loss recognized on the measurement to fair value less to cost of disposal or
on the disposal of the assets or disposal group constituting the discontinued operation.
Simply stated, the income or loss from discontinued operation, net of tax shall be

presented as a single amount in the income statement below the income from continuing
operations.
Included in discontinued operation
a. The amount of revenue, expenses and income or loss attributable to the
discontinued operation during the current period and the related income tax.
b. An impairment loss is recognized when the fair value less cost of disposal of the
discontinued operation is lower than the carrying amount or the net assets. If the
fair value less cost of disposal is higher than the carrying amount, the difference
is not recognized.
c. Any gain or loss from the actual disposal of the assets and settlement of the
liabilities of a discontinued operation.
d. The termination cost of employees and other costs which are directly incurred as
a result of the discontinuance.
Presentation in statement of financial position
PFRS 5, paragraph 38, provides that an entity shall also present separately on the face
of the statement of financial position the following information:
a. Assets of the component held for sale separately under current assets.
b. Assets of the component held for sale are measured at the lower of fair value
less cost of disposal and their carrying amount.
c. Liabilities of the component separately under current liabilities.
d. Noncurrent assets of the component held for sale shall not be depreciated.
PFRS 5, paragraph 3, provides that the assets of the component shall be presented as a
single amount under current assets and the liabilities of the component shall be
presented as a single amount under current liabilities. The assets and liabilities of the
component cannot be offset against the other.
Cash flow presentation
PFRS 5, paragraph 33, provides that the net cash flows attributable to the operating,
investing and financing activities of a discontinued operation shall be separately
presented in the statement of cash flows or disclosed in the notes.
EXPLORATION AND EVALUATION OF MINERAL RESOURCES PFRS 6
Mineral resources include minerals, oil, natural gas and similar nonregenerative
resources.
The term exploration and evaluation of mineral resources is defined as the search for
mineral resources after the entity has obtained legal right to explore in a specific area as

well as the determination of the technical feasibility and commercial viability of extracting
the mineral resources.
Exploration and evaluation expenditures are expenditures incurred by an entity in
connection with the exploration and evaluation of mineral resources before the technical
feasibility and commercial viability of extracting a mineral resource.
Simply stated, exploration cost is the cost incurred in an attempt to locate the natural
resource that can economically be extracted.
Accordingly, exploration and evaluation expenditures do not include expenditures
incurred:
a. Before an entity has obtained the legal right to explore a specific area.
b. After the technical feasibility and commercial viability of extracting a mineral

resource are demonstrable.
This pertains to development expenditure.
NOTE:
 Expenditures related to development of mineral resources, for example,
preparation for commercial production, such as building roads and
tunnels, cannot be recognized as exploration and evaluation
expenditures.
 Development cost is the cost incurred to extract the natural resource that
has been located through successful exploration.
Exploration and evaluation expenditures
 Acquisition of rights to explore
 Topographical, geological, geochemical and geophysical studies
 Exploratory drilling
 Trenching
 Sampling
 Activities in relation to evaluating the technical feasibility and commercial viability
of extracting a mineral resource.
 General and administrative costs directly attributable to exploration and
evaluation activities.
Exploration and evaluation asset
The exploration and evaluation expenditures may qualify as exploration and evaluation
asset. However, the standard does not provide a clear cut guidance for the recognition
of exploration and evaluation asset. Accordingly, an entity must develop its own
accounting policy for the recognition of such asset. As a matter of fact, IFRS 6 permits
an entity to continue to apply its previous accounting policy provided that the resulting
information is relevant and reliable.
Measurement and classification

Exploration and evaluation asset shall be measured initially at cost. After initial
recognition, an entity shall apply either the cost model or the revaluation model.
Exploration and evaluation asset is classified either as tangible asset or an intangible
asset
For example, vehicles and drilling rigs would be classified as tangible assets and drilling
rights would be classified as intangible assets8.
Accounting methods for exploration cost
a. Successful effort method
The exploration cost directly related to the discovery of commercially producible

natural resource is capitalized as cost of the resource property. The exploration
cost related to "dry holes" or unsuccessful discovery is expensed in the period
incurred.
b. Full cost method
All exploration costs, whether successful or unsuccessful, are capitalized as cost

of the successful resource discovery. This is on the theory that any exploration
cost is a "wild goose chase" and therefore necessary before any commercially
producible and profitable resource can be found. The cost of drilling dry holes is
part of the cost of locating productive holes.
Both methods are used in practice. Most large and successful oil entities follow the
successful effort method. The full cost method is popular among small oil entities.
OPERATING SEGMENTS PFRS 8
An entity shall disclose information to enable users of financial statements to evaluate
the nature and financial effects of the business activities in which it engages and the
economic environments in which it operates. In other words, segment reporting is the
disclosure of certain financial information about the products and services an entity
produces and the geographical areas in which an entity operates. The purpose of such
disclosure is to enable investors and users make better assessment of each business
activity leading to the understanding of the performance of the entity as a whole.
Scope of PFRS 8
PFRS 8 shall apply to the separate or individual financial statements of an entity, and to
the consolidated financial statements of a group with a parent
a. Whose debt or equity instruments are traded in a public market.
b. That files or is in the process of filing the consolidated financial statements with a
securities commission or other regulatory organization for the purpose of issuing
any class of instruments in a public market.
However, if a financial report contains both the consolidated financial statements of a
parent and the parent's separate financial statements, segment information is required
only in the consolidated financial statements.

Operating segment
An operating segment is a component of an entity:
a. That engages in business activities from which it may earn revenue and incur
expenses, including revenue and expenses relating to transactions with other
components of the same entity
b. Whose operating results are regularly reviewed by the entity's chief operating
decision maker to make decisions about resources to be allocated to the
segment and assess its performance.
c. And for which discrete financial information is available.

An operating segment can generally be thought of as a distinguishable component of an
entity that is engaged in business activities which generate revenue and incur expenses.
Moreover, to be classified as an operating segment, separate financial information must
be available about the segment and its operating results shall be regularly reviewed by a
chief operating decision maker.
An operating segment may engage in business activities for which it has yet to earn
revenue. For example, start-up operations may be operating segments before earning
revenue.
Not every part of an entity is necessarily an operating segment or part of an operating
segment.
For example, corporate headquarters or some functional departments that may not earn
revenue or may earn revenue that is incidental only to the activities of the entity would
not be operating segments.
Chief operating decision maker
The term chief operating decision maker identifies a function and not necessarily a
manager with a specific title. This function is to allocate resources to the segments and
assess their performance. The chief operating decision maker may be the entity's chief
executive officer, chief operating officer or a group of executive directors depending on
who within the organization is responsible for the allocation of resources and assessing
the performance of operating segments.
Identifying operating segments
The management approach is used in identifying operating segments. The management
approach means that the operating segments are identified on the basis of internal
reports about components of an entity that are regularly reviewed by the chief operating
decision maker in order to allocate resources to the segment and to assess its
performance. In other words, operating segments are identified based on the
components of the entity that are considered to be important for internal management
reporting purposes. The idea is that the reporting of segment information is seen through
the "eyes of management” and users would wish to see the business as the chief
operating decision maker sees it.

Reportable operating segments

An entity shall report information about an operating segment that meets any of the
following quantitative thresholds:
 The segment revenue, including both sales to external customers and
intersegment sales or transfers, is 10% or more of the combined revenue,
internal and external, of all operating segments.
 The absolute amount of profit or loss of the segment is 10% or more of the
greater in absolute amount of:
a. Combined profit of all operating segments that reported a profit.
b. Combined loss of all operating segments that reported loss.
 The assets of the segment are 10% or more of the combined assets of all
operating segments.
Operating segments that do not meet any of the quantitative thresholds may be
considered reportable and separately disclosed on a voluntary basis if management
believes that information about the segment would be useful to the users of the financial
statements.
Overall size test - 75% threshold
If the total external revenue of reportable operating segments constitutes less than 75%
of the entity external revenue, additional operating segments shall be identified as
reportable segments even if they do not meet the 10% quantitative thresholds until at
least 75% of the entity external revenue is included in reportable segments.
Aggregation of segments
Two or more operating segments may be aggregated into a "Single operating segment"
if the segments have similar economic characteristics and the segments share a majority
of the following five aggregation criteria:
a. Nature of product or service
b. Nature of production process
c. Type or class of customers
d. Marketing method or the method used to distribute the product
e. The nature of the regulatory environment, for example, banking, insurance or

public utility
Information to be disclosed for each segment
An entity shall disclose the following for each reportable operating Segment:

a. General information about the operating segment
b. Information about profit or loss, including specified revenue and expenses

included in the measure of profit or loss
c. Information about segment assets and segment liabilities and the basis of
measurement.
d. Reconciliations of the totals of segment revenue, segment profit or loss, segment

assets, segment liabilities and other material segment items to corresponding
items in the entity's financial statements.
Disclosure about general information
An entity shall disclose the following general information about an operating segment:
a. Factors used to identify the reportable segments
b. Type of products and services from which each reportable segment derives
revenue.
Disclosure of profit or loss, assets and liabilities
An entity shall disclose for each reportable segment a measure profit or loss, total assets
and total liabilities. An entity shall disclose a measure of profit or loss under all
circumstances. However, an entity shall disclose a measure of total assets and total
liabilities for each reportable segment if such an amount is regularly provided to the chief
operating decision maker.
Entity-wide disclosures
Entity-wide disclosures are additional information that is required to be disclosed by all
entities if such information is not provided as part of the reportable segment information.
An entity shall disclose information about the following:
a. Information about products and services
b. Information about geographical areas
c. Information about major customers

Revenue from products and services
An entity shall disclose the revenue from external customers for each product and
service.
Revenue and assets from geographical areas
An entity shall disclose the following geographical information:
a. Revenue from external customers in the entity's country of domicile, and in all
foreign operations in total.

b. Separate disclosure of material revenue from external customers in an individual

foreign country.
Disclosure about major customer
A major customer is defined as a single external customer providing revenue which
amounts to 10% or more of an entity's external revenue. The entity shall disclose the fact
of reliance on major customers, the total amount of revenue from major customers and
the identity of the segment or segments reporting the revenue. The entity is not required
to disclose the identity of the major customer or the amount of revenue that each
segment reports from that customer.
FINANCIAL INSTRUMENT (Measurement of financial asset) PFRS 9
Measurement of financial asset
Initial measurement
PFRS 9, paragraph 5.1.1, provides that at initial recognition, an equity shall measure a
financial asset at fair value plus, in case of financial asset not at fair value through profit
or loss, transaction cost that are directly attributable to the acquisition of the financial
asset.
As a rule, transaction cost that are directly attributable in the acquisition of the financial
asset shall be capitalized as cost of the financial asset.
However, if the financial asset is held for trading or if financial asset is measured at fair
value through profit or loss transaction cost are expensed outright.
Subsequent measurement
PFRS 9, paragraph 5.1.2, provides that after initial recognition, an entity shall measure a
financial asset at
a. Fair value through profit or loss (FVPL)
b. Fair value through other comprehensive income (FVOCI)
c. Amortized cost
NOTE: The measurement depends on the business model of managing financial asset
which may be to realize fair value change and to collect contractual cash flows.
Financial assets at fair value through profit or loss
The following financial assets shall be measured at fair value through profit or loss:
a. Financial asset held for trading or popularly known as trading securities.
b. All other investments is quoted equity instrument
c. Debt investment that are irrevocably designated on initial recognition as at fair
value through profit or loss
d. All debt investment that do not satisfy the requirements for measurement at
amortized cost and at fair value through other comprehensive income.
Financial asset held for trading

Appendix A of PFRS 9 provides that a financial asset is held for trading if:
a. It is acquired principally for the purpose of selling or repurchasing it in the near
term
b. On initial recognition, it is part of a portfolio of identified financial asset that are
managed together and for which there is evidence of a recent actual pattern of
short-term profit taking.
c. It is derivative, except for a derivative that is financial guarantee contract or a
designated and an effective hedging instrument.
In other words, trading securities are debt and equity securities that are purchased with
the intent of selling them in the near term or very soon.
Equity Security Debt Security

Encompasses any representing Ant security that represents a creditor
ownership shares and right, warrants or relationship with an entity. A debt security
options to acquire or dispose of has a maturity date and a maturity value.
ownership shares at a fixed or Examples of debt securities include
determinable price. corporate bonds, BSP treasury bills,
In simple language, equity securities commercial papers and other debt
represent an ownership interest in an instruments with maturity.
entity. Ownership shares include ordinary
shares, preference shares and right or
option to acquire ownership shares.
Additional information:
PFRS 9, paragraph 3.2.12, provides that on disposal of financial assets the difference
between the carrying amount and the consideration received is recognized as gain or
loss on disposal to be reported in the income statement.
NOTE: When equity securities qualify as financial asset held for trading, any unrealized
gain and unrealized loss are reported in the income statement as other income and
other expense respectively.
Financial asset at FVOCI
At initial recognition, PFRS 9, paragraph 5.7.5, provides that an entity may make an
irrevocable election to present in other comprehensive income or OCI subsequent
changes in fair value of an investment in equity instrument that is not held for trading.
This irrevocable approach is designed to impose discipline in accounting for nontrading
equity investment. The amount recognized un other comprehensive income is not
reclassified to profit or loss under any circumstances. However, on derecognition, the
amount may be transferred to retained earnings. If the investment in equity instrument
is held for trading, the election to present gain and loss in other comprehensive income
is not allowed. If the investment in equity instrument is held for trading subsequent
changes in fair value are always included in profit or loss or reported un the income
statement.

FVOCI means the financial asset is measured at fair value through other comprehensive
income. Under PFRS 9, paragraph 5.1.1, a financial asset measured at fair value
through other comprehensive income shall be recognized initially at fair value plus
transaction cost directly attributable to the acquisition.
NOTE:
 When equity securities do not qualify as financial asset held for trading, any
unrealized gain and unrealized loss shall be presented as component of other
comprehensive income.
 The financial asset-FVOCI is normally classified as noncurrent asset.
Additional information
Gain or loss on disposal of equity investment measured a fair value through other
comprehensive income is recognized directly in retained earnings in accordance with
PFRS 9, paragraph 5.7.1b. moreover, the cumulative gain or loss previously recognized
in other comprehensive is also transferred to retained earnings in accordance with PFRS
9 application Guidance, paragraph 5.7.1.
Debt investment at amortized cost
PFRS 9, Paragraph 4.1.2, provides that a financial asset shall be measured at amortized
cost if both of the following conditions are met:
a. The business model is to hold the financial asset in order to collect contractual
cash flows on specified date.
b. The contractual cash flows are solely payments or principal and interest on the
principal amount outstanding.
In other words, the business model is to collect contractual cash flows if the contractual
cash flows are solely payments of principal and interest. In such a case, the financial
asset shall be measured at amortized cost.
Debt investment at amortized cost
PFRS 9, paragraph 4.1.2, provides that a financial asset shall be measured at amortized
cost if both of the following conditions are met.
a. The business model is to hold the financial asset in order to collect contractual
cash flows on specified date.
b. The contractual cash flows are solely payments of principal and interest on the
principal amount outstanding.
In other words, the business model is to collect contractual cash flows if the contractual
cash flows are solely payments of principal and interest. In such case, the financial asset
shall be measured at amortized cost.
Debt investment at fair value through OCI
PPRS 9, paragraph 4.1.2A, provides that a financial asset shall be measured at fair
value through other comprehensive income if both of the following conditions are met:

a. The business model is achieved both by collecting contractual cash flows and by
selling the financial asset.
b. The contractual cash flows are solely payments of principal and interest on the
principal outstanding.
Note that the business model includes selling the financial asset in addition to collecting
contractual cash flows. In this case, interest income is recognized using the effective
interest method as in amortized cost measurement.
On derecognition, the cumulative gain and loss recognized in other comprehensive
income shall be classified to profit or loss. The measurement of debt investment at
amortized cost or fair value through other comprehensive income is discussed
extensively in intermediate accounting course.
Summary of Measurement Rules
Measurement of equity investments Measurement of debt investments

 Held for trading - at fair value through  Held for trading - at fair value through
profit or loss profit or loss
 Not held for trading as a rule, at fair  Held for collection of contractual cash
value through profit or loss flows at amortized cost
 Not held for trading at fair value  Held for collection of contractual cash
through other comprehensive income flows at fair value through profit or loss
by irrevocable election by irrevocable designation or fair value
 All other investments in quoted equity option
instruments- at fair value through profit  Held for collection of contractual cash
or loss flows and for sale of the financial asset
 Investments in unquoted equity - at fair value through other
instruments at cost comprehensive income
 Investments of 20% to 50%- equity  Held for collection of contractual cash
method of accounting flows and for sale of the financial asset
 Investments of more than 50% - - at fair value through profit or loss by
consolidation method to be taken up in irrevocable designation or fair value
an advanced accounting course. option.
FAIR VALUE MEASUREMENT PFRS 13

Fair value of an asset is the price that would be received to sell an asset in an orderly
transaction between market participants. Fair value of liability is the price that would be
paid to transfer a liability in an orderly transaction between market participants. Based
on the new definition, the following should be noted:
a. Fair value refers to an "exit price" or market price under current market
conditions at measurement date.
b. Fair value is the price in an orderly transaction. An orderly transaction is a

transaction that allows for normal marketing activities that are usual and
customary.

c. Fair value is the price agreed upon by market participants.

Market participants
The market participants are the buyers and sellers in the principal market who are:
a. Independent or unrelated parties
b. Knowledgeable or having a reasonable understanding of the transaction
c. Willing or motivated but not forced and compelled to enter into the transaction
Principal or most advantageous market
An active market is a market in which transactions for the asset or liability take place
with sufficient regularity and volume to provide pricing information on an ongoing basis.
A principal market is the market with the greatest volume and level of activity for the
asset or liability. In the absence of a principal market, the entity should consider the most
advantageous market.
The most advantageous market is the market that maximizes the amount that would be
received to sell the asset or minimizes amount that could be paid to transfer the liability.
Generally, the market that an entity enters when it sells an asset or transfers a liability is
the principal market or the most advantageous market.
Valuation premise
In determining the fair value of an asset or a liability, an entity may refer to information
that is directly observable or readily available. The entity can also estimate the fair value
by using a valuation method. The fair value shall not be adjusted for transaction cost. If
location is a characteristic of an asset, the fair value shall be adjusted for transport cost
that would be incurred to transport the asset from its current location to the principal or
most advantageous market.
Highest and best use
In measuring the fair value of nonfinancial asset, an entity must take into consideration
the highest and best use of the asset. Highest and best use is defined as the use of
nonfinancial asset by market participants that would maximize the value of asset.
The highest and best use of the asset should possess the following
a. Physically possible, meaning, it reflects the physical characteristics of an asset.
b. Legally permissible, meaning, it reflects any legal restrictions on the use of the
asset.
c. Financially feasible, meaning, it reflects whether the use would generate

sufficient income or cash flows.

The highest and best use of the asset might provide maximum value either on a stand-
alone basis, or as a group in combination with other asset and liability.
Valuation method
Three valuation techniques can be used to measure fair value:
a. Market approach - uses prices and relevant information for market transactions
for identical and comparable asset and liability.
b. Income approach- Focuses on converting future amounts into discounted cash

flows.
c. Cost approach -relies on the current replacement cost to replace the asset with a
comparable asset.
Fair value hierarchy
The fair value hierarchy or best evidence of fair value is enumerated as follows:
a. Level 1 inputs are the quoted prices in an active market for identical asset or
liability.
A quoted price in an active market provides the most reliable evidence of fair
value and shall be used without adjustment.
b. Level 2 inputs are inputs that are observable either directly or indirectly. Level 2
inputs include:
 Quoted prices for similar asset or liability in an active market or inactive

market
 Quoted prices for identical asset or liability in an inactive market.
c. Level 3 inputs are unobservable inputs for the asset or liability. Unobservable
inputs are usually developed by the entity using the best available information
from the entity's own data. Level 3 inputs include the present value of estimated
cash flows.
REVENUE FROM CONTRACTS WITH CUSTOMERS PFRS 15
PFRS 15 is the new global framework for revenue recognition. Entities that sell products
and services in a bundle or multiple deliverables, or those engaged in major projects
could see significant change in the timing of revenue recognition. Entities likely to be
affected by this new revenue standard include those engaged in telecom, software,
engineering, construction ana real estate. For other industries, it will be business as
usual, as in the case of sale of merchandise in the ordinary course of business.
Revenue is income in the ordinary course of business activities. Income is increase in
economic benefit during the accounting period in the form of an inflow or enhancement
of asset or decrease in liability that results in an increase in equity, other than

contribution from equity participants. PFRS 15 applies to all contracts with customers,
except
 Leases under PFRS 16
 Insurance contracts under PFRS 17
 Financial instruments under PFRS 9
Core principle
The core principle of the new revenue standard can be divided into two:
1. An entity should recognize revenue in a manner that depicts the pattern of
transfer of good or service to a customer.
2. The amount recognized as revenue should reflect the consideration to which the
entity expects to be entitled in change for good or service. Depending on whether
certain criteria are met, revenue is recognized:
a. At a point in time or at particular date when control of the good or service

is transferred to the customer.
b. Over time or over a certain period in a manner that depicts the entity's
performance.
Five-step model
An entity that recognizes revenue in accordance with the core principle should apply the
following five-step model:
Step 1 Identify the contract with the customer
Step 2 Identify the performance obligation in the contract
Step 3 Determine the transaction price
Step 4 Allocate the transaction price to the performance obligations in the
contract
Step 5 Recognize revenue when or as the entity satisfies a performance
obligation
Step 1 Identifying a contract

A contract Is an agreement between two or more parties that creates enforceable rights
and obligations in a contract, Enforceability of the rights and obligations in a contract is a
matter of law. Contracts can be written, oral or implied by an entity's customary business
practice.
Contract criteria
A contract with a customer must meet all of the following criteria
a. The parties to the contract have approved the contract in writing, orally or in
accordance with customary business practice.

b. The rights and obligations of the parties in the contract can be identified.
c. The payment terms in the contract can be identified.
d. The contract has commercial substance, meaning, the entity's cash flows are
expected to change significantly as a result of the contract.
e. The collection of the consideration is probable.

Generally, contracts should be accounted for separately. In some cases, contracts
should be combined as one if any of the following is satisfied:
a. The contracts are treated as a single package.
b. The consideration in one contract depends on the good or service of another

contract.
c. The goods or services in the contract relate to a single performance obligation.

Step 2 Identify the performance obligation
A performance obligation is a promise to deliver a good or service in a contract with
customer. A promise constitutes a performance obligation if the promised good or
service is distinct. A promised good or service is distinct if it meets both of the following
criteria:
a. The customer can benefit from the good or service.
b. The entity's promise to transfer the good or service to the customer is separately
identifiable from other promises in the contract.
Distinct good or service
 Sale of finished goods produced by a manufacturer
 Sale of merchandise inventory by a retailer
 Constructing, manufacturing or developing asset on behalf of customer, as in

long-term construction contract
 Granting license or franchise
 Pertorming a contractually agreed-upon task for a customer, as in bookkeeping

service or payroll processing service
Step 3 Determine the transaction price
The transaction price is the amount of consideration in contract to which an entity
expects to be entitled in exchange for transferring good or service to a customer. The
transaction price is adjusted for discount, rebate, price concession, return, performance
bonus, penalty and other similar item. In determining the transaction price, consideration

must be given to past business practice and published policy. Factors that may affect the
transaction price are:
 Variable consideration
 Time value of money
 Noncash consideration
 Consideration payable to a customer

Variable consideration
Variable consideration is included in the transaction price when it is highly probable that
a significant reversal of revenue or decrease in revenue will not occur. For example, an
entity has a contract to sell through a distributor. The distributor has a right to return if it
cannot sell the product and the entity recognizes revenue when the distributor resells the
product to ultimate customers. Under PFRS 15, the entity can recognize revenue when
goods are sold to the distributor based on the number of units sold less the units
expected to be returned.
Time value of money
If the contract has a significant financing component, the consideration should be
adjusted for time value of money. Revenue is measured based on the cash selling price.
The difference between the total consideration and cash selling price is accounted for as
interest income. However, if the contract period is less than one year, the entity can
disregard time value of money.
Noncash consideration
Noncash consideration is measured at fair value. If the fair value cannot be reasonably
estimated, the stand-alone selling of the promised good or service is used.
Consideration payable to the customer
The entity needs to determine if consideration payable to the customer may result in a
reduction of the transaction price. Examples include vouchers, coupons and volume
rebate.
Step 4 Allocation of the transaction price
The transaction price is allocated to each performance obligation on the basis of relative
stand-alone selling price of each good or service. Stand-alone selling price is the price
that the entity would sell a promised good or service separately to a customer
Determining stand-alone selling price
The best evidence of the stand-alone selling price is an observable price or a good or
service when sold on a stand-alone basis or when sold separately. If the stand-alone
selling price is not directly observable, the entity must estimate such price by using the
following methods:

a. Adjusted market assessment approach
The adjusted market assessment approach means the entity may refer to prices
from competitors for similar good or service adjusted for specific cost and margin.
b. Expected cost plus margin approach
The expected cost-plus margin approach means the entity may forecast
expected cost to satisfy the performance obligation adjusted for an appropriate
margin or profit.
c. Residual approach
The residual approach may be used only when either the selling price of the
good or service is highly variable or is uncertain.
NOTE: Under the residual approach, the' stand-alone selling price is the
difference between the total transaction price and the sum of the observable
stand-alone selling prices of other goods or services in the contract.
Step 5 Recognition of revenue
As entity shall recognize revenue when or as it satisfies a performance obligation by
transferring control of a good or service to a customer. Simply stated, revenue should be
recognized when an entity transfers control of the good or service to a customer. The
amount of revenue is the amount allocated to the performance obligation. Control of an
asset refers to the ability to direct the use of the asset and obtain substantially all of the
benefits from the asset. Revenue can be recognized either at point in time or over time.
Revenue recognition at a point in time
The following factors would indicate revenue recognition at a point in time:
a. The entity has the right to receive payment for the asset and for which the
customer is obliged to pay.
b. The customer has legal title to the asset.
c. The entity has transferred physical possession of the asset to the customer.
d. The customer has the significant risks and rewards of ownership of the asset.
e. The customer has accepted the asset.

Revenue recognition over time
Revenue is recognized over time when any of the following is satisfied:

a. The customer simultaneously receives and consumes the benefits provided by

the entity's performance as the entity performs. For example, routine or recurring
payroll processing services.
b. The entity's performance creates or enhances an asset that the customer

controls as the asset is created or enhanced. For example, constructing an asset
on a customer site.
c. The entity's performance does not create an asset with an alternative use to the
entity and the entity has an enforceable right to receive payment for performance
completed to date. For example, constructing a specialized asset that only the
customer can use or constructing an asset accordance with customer order.
Sale of goods
When goods are sold in the ordinary course of business, revenue is recognized
unquestionably at the point of sale. The reason is that it is at the point of sale that the
entity has transferred to the customer the significant risk and reward of ownership of the
asset. Stated differently, legal title passes to the customer at the point of sale.
Incidentally, the point of sale is usually the point of delivery which may be actual or
constructive. Legally, it is delivery that transfers title or ownership from the seller to
buyer.
Sale with a right return
PFRS 15, paragraph B21, provides that an entity shall recognize the following with
respect to a sale with a right of return:
a. Revenue equal to the total sale price less the sale price of the expected return.
b. Refund liability equal to the sale price of the expected return.
c. A recover asset and the corresponding reduction of cost of goods sold equal to
the cost of the expected return.
Consignment arrangement
Consignment is a method of marketing goods in which the entity called the consignor
transfers physical possession of pertain goods to a dealer or distributor called the
consignee that sells the goods on behalf of the consignor. The consignor shall not
recognize revenue upon delivery of the goods to the consignee until the goods are sold
by the consignee. The reason is that the product is controlled by the consignor and the
consignee does not have an unconditional obligation to pay for the product. When
consigned goods are sold by the consignee, a report called account sales is given to the
consignor together with a cash remittance for the amount of sales minus commission
and other expenses chargeable against the consignor.
Bill and hold arrangement
Bill and hold arrangement a contract under which an entity bills a customer for a product
but the entity retains possession of the product. For example, a customer may request

an entity to enter into such contract because of lack of space for the product or because
of delays in the customers production schedule. Depending on the terms of the contract,
revenue shall be recognized when the customer obtains control or takes title of the
product even though the product remains in an entity's physical possession. All of the
following criteria must be met for the recognition revenue in a bill and hold arrangement:
a. The customer has requested for the arrangement.
b. The product must be identified separately as belonging to the customer.
c. The product must be ready for physical transfer to the customer anytime.
d. The entity cannot have the ability to use the product or to direct it to another
customer.
Customer loyalty program
Many entities use a customer loyalty program to build brand loyalty, retain their valuable
customers and of course, increase sales volume. The customer loyalty program is
generally designed to reward customers for past purchases and to provide them with
incentives to make further purchases. If a customer buys goods or services, the entity,
grants the customer award credits often described as “points". The entity can redeem
the "points" by distributing to the customer free or discounted goods or services. A
customer loyalty program operates in a variety of ways. Customers may be required to
accumulate a specified minimum number of award credits or "points" before they can be
redeemed.
Measurement
An entity shall account for the award credits as a "separately component of the initial
sale transaction". In other words, the granting of award credits is effectively accounted
for as a "future delivery of goods or services". PFRS 15, paragraph 74, provides that an
entity shall allocate the transaction price to each performance obligation identified in a
contract on a relative stand-alone selling price basis. In other words, the fair value of the
consideration received with respect to the initial sale shall be allocated between the
award credits and the sale based on relative stand-alone selling price. The stand-alone
selling price is the price at which an entity would sell a promised good or service
separately to a customer.
Recognition
The consideration allocated to the award credits is initially recognized as deferred
revenue and subsequently recognized as revenue when the award credits are
redeemed. The amount of revenue recognized shall be based on the number of award
credits that have been redeemed relative to the total number expected to be redeemed.
The estimated redemption rate is assessed each period. Changes in the total number
expected to be redeemed do not affect the total consideration for the award credits.
Instead, the changes in the total number of award credits expected to be redeemed shall
be reflected in the amount of revenue recognized in the current and future periods. In

other words, the calculation of the revenue to be recognized in any one period is made
on a "cumulative basis” in order to reflect the changes in estimate.
LEASE PFRS 16
A lease is defined as a contract or part of a contract that conveys the right to use the
underlying asset for a period of time in exchange for consideration. The underlying
asset is the subject of a lease for which the right to use that asset has been provided
by the lessor to the lessee.
Lessee Lessor
The entity that obtains the right to use an The entity that provides the right to use
underlying asset for a period of time in an underlying asset for a period of time in
exchange for consideration. exchange for consideration.
Finance lease model for lessee

IFRS 16, paragraph 22, provides that at the commencement date, a lessee shall
recognize a right of use asset and a lease liability. This simply means that a lessee is
required to initially recognize a right of use asset for the right to use the underlying asset
over the lease term and a lease liability for the obligation to make payments.
NOTE: All leases shall be accounted for by the lessee as a finance Lease under the new
lease standard.
Operating lease model for lessee
IFRS 16, paragraph 5, provides that a lessee is permitted to make an accounting policy
election to apply the operating lease accounting and not recognize an asset and lease
liability in two optional exemptions.
a. Short-term lease
b. Low value lease

Stated differently, a lessee nay or may not apply the operating lease accounting if the
lease is short-term or if the underlying asset is or low value.
Short-term lease
A short-term lease as a lease is defined that has a term of 12 months or less at the
commencement date of the lease. A lease that contains a purchase option is not a
short-term lease.
Low value lease
The new lease standard does not provide for a quantitative threshold for low value asset.
Low value asset is a matter of professional judgment. The lessee shall assess the value
of an underlying asset based on the value of the asset when it is new regardless of the
age of the asset being leased. Lease of an underlying asset does not qualify as a low
value lease if the nature of the asset is such that the asset is typically not of low value
when new. For example, a lease of car would not qualify as low value lease because a

new car would typically not be of low value. Typically, low value underlying assets
include personal computers, office furniture and equipment.
Accounting for operating lease - lessee
If the lessee elects to apply the operating lease accounting, the lessee shall recognize
the lease payments as rent expense in either a straight-line basis over the lease term or
another systematic basic. The lessee shall apply another systematic basis if this is more
representative of the pattern of the lessee's benefit. Under the operating lease model,
the periodic rental is simply recognized as rent expense on the part of the lessee.
Finance lease -Lessee

A finance lease is defined as a lease that transfers substantially all of the risks and
rewards incidental to ownership of an underlying asset. At the commencement date,
the lessee shall recognize a right of use asset and lease liability.
Initial measurement of right of use asset
A right of use asset is defined as an asset that represents the right of a lessee to use
an underlying asset over the lease term in a finance lease.
The cost of right of use asset comprises.
a. The present value of lease payments
b. Lease payments made to lessor such as lease bonus, less any lease
incentive received
c. Initial direct costs incurred by the lessee
d. Estimate of cost of dismantling and restoring the underlying asset for which
the lessee has a present obligation
 Lease incentive is payment by the lessor to the lessee associated with a lease or
the reimbursement or assumption by the lessor of the cost of the lessee. The
lease incentive should be deducted from the cost of the right of use asset.
 Initial direct cost is incremental cost of obtaining a lease that would not have
been incurred if the lease had not been obtained.
 Leasehold improvement is not initial direct cost and no included in the cost of the
right of use asset.
 Any security deposit refundable upon the lease expiration is accounted for as an
asset by the lessee.
Subsequent measurement of right or use asset

The lessee shall measure the right of use asset applying the cost model. To apply
the cost model, the lessee shall measure the right of use asset at cost less any
accumulated depreciation and impairment loss.
Presentation of right of use asset
The lessee shall present the right of use asset as a separate line item as noncurrent
asset in the statement of financial position. As an alternative, the lessee may include
the right of. use asset in the appropriate line item within which the corresponding
underlying asset would be presented if owned. For example, the right of the use
asset related to equipment may be included within property, plant and equipment
Depreciation of right of use asset
The lessee shall apply normal depreciation policy for right of use asset. IFRS 16,
paragraph 32, provides that the lessee shall depreciate the right of use asset over
the useful life of the underlying asset under the following conditions:
a. The lease transfers ownership of the underlying asset to the lessee at the end
of lease term.
b. The lessee is reasonably certain to exercise a purchase option.

If there is no transfer of ownership to the lessee or if the purchase option is not
reasonably certain to be exercise the lessee shall depreciate the right of use asset
over the shorter between the useful life of the asset and the lease term.
Measurement of lease liability
The lessee shall measure the lease liability at the present value of lease payments.
The lease payments shall be discounted using the interest rate implicit in the lease
desired by the lessor. If the implicit interest rate cannot be readily determined, the
incremental borrowing rate of the lessee is used.
Components of lease payments
a. Fixed lease payments or periodic rental
b. Variable lease payments
c. Exercise price of a purchase option if the lessee is reasonably certain to

exercise the option
d. Amount expected to be payable by the lessee under a residual value

guarantee
e. Termination penalties if the lease term reflects the exercise of a termination

option

 Residual value guarantee is the guarantee made to the lessor by a party

unrelated to the lessor that the value of an underlying asset at the end of the
lease term will be at least a specified amount
 Unguaranteed residual value is that portion of the residual value of the underlying
asset, the realization of which by the lessor is not assured or is guaranteed solely
by a party related to the lessor
 Executory costs are ownership expenses such as maintenance, taxes and

insurance for the underlying asset. Such executory costs are expensed
immediately when incurred.
Lessor accounting
IFRS 16, paragraph 61, provides that a lessor shall classify leases as either an
operating lease or a finance lease.
Operating lease Finance lease
A lease that does not transfer A lease that transfers substantially all
substantially all the risks and rewards the risks and rewards incidental to
incidental to ownership of an underlying ownership of an underlying asset.
asset.
When is a lease classified as finance lease?

Whether a lease is a finance lease or an operating lease depends on the substance
of the transaction rather than the form of the contract. Under IFRS 16, paragraph 63,
among others, any of the following situations would normally lead to a lease being
classified as a finance lease:
a. The lease transfers ownership of the underlying asset to the lessee at the end
of the lease term.
b. The lessee has an option to purchase the asset at a price which is expected
to be sufficiently lower than the fair value at the date the option becomes
exercisable. At the inception of the lease, it is reasonably certain that the
option will be exercised.
c. The lease term is for the major part of the economic lite of the underlying
asset even if title is not transferred.
NOTE: Under USA GAAP, major part means at least 75%6 of the economic
life of an asset.
d. The present value of the lease payments amounts to substantially all of the
fair value of the underlying asse at the inception of the lease.

NOTE: Under USA GAAP, substantially all means at least 90% of the fair
value of the underlying asset.
Operating lease Lessor
IFRS 16, paragraph 81, provides that a lessor shall recognize lease payments from
operating lease as income either on a straight the basis or another systematic basis.
The lessor shall apply another systematic basis if this is more representative of the
pattern in which benefit from the use of the underlying asset is diminished. Otherwise
stated, the periodic rental received by the lessor in an operating lease is simply
recognized as rent income. A lessor shall present an underlying asset subject to
operating lease in the statement of financial position according to the nature of the
asset. The underlying asset remains as an asset of the lessor. Consequently, the
lessor bears all ownership or executory costs such as depreciation of leased
property, real property taxes, insurance and maintenance.
However, the lessor may pass on to the lessee the payment for taxes, insurance and
maintenance cost. The depreciation policy for depreciable leased asset shall be
consistent with the lessor's normal depreciation for similar asset.
NOTE: Initial direct cost incurred by lessor in an operating lease shall be added to
the carrying amount of the underlying asset and recognized as an expense over the
lease term on the same basis as the lease income. Any security deposit refundable
upon the lease expiration shall be accounted for as liability by the lessor. Any lease
bonus received by the lessor from the lessee is recognized as unearned rent income
to be amortized over the lease term.
Finance lease classification-lessor
On the part of the lessor, a finance lease is either:
a. Direct financing lease
b. Sales type lease

The main distinction between the two is the presence or absence of a manufacturer or
dealer profit or loss.
A direct financing lease recognizes only interest income
A sales type lease recognizes interest income and gross profit on sale.
IFRIC INTERPRETATIONS
Decommissioning Liability
IFRIC 1 define decommissioning liability as an obligation to dismantle; remove and
restore an item of property, plant and equipment as required by law or contract. The
decommissioning liability is capitalized as cost of the property and initially recognized at
present value.
Change in decommissioning liability

a. A decrease in decommissioning liability is deducted from the cost of the asset
b. An increase in decommissioning liability is added to the cost at the asset

Distribution of noncash asse to owners
The distribution of noncash asset to owners is actually payment of property dividend to
shareholders
IFRIC 17, paragraph 11, provides that an entity shall measure a liability to distribute
noncash asset as a dividend to its owners at the fair value of the asset to be distributed.
The dividend payable is initially recognized at the fair value of the noncash assets on
date of declaration and is increased or decreased as a result of the change in fair value
of the asset at year end and date of settlement. The offsetting debit or credit is through
equity or directly retained earnings.
Settlement of dividend payable
IFRIC 17, paragraph 14, provides that when an entity settles the dividend payable, the
difference between the carrying amount of the dividend payable and the carrying amount
of the asset distributed shall be recognized as gain or loss on distribution of property
dividend.
Measurement of noncash asset distributed
Paragraph 15A of PFRS 5, provides that an entity shall measure a noncurrent asset
classified for distribution to owners at the lower of carrying amount and fair value less
cost to distribute. Accordingly, if the fair value less cost to distribute is lower than the
carrying amount of the asset at the end of the reporting period, the difference is
accounted for impairment loss.
Extinguishment of financial liability
How should an entity initially measure the equity instrument issued to extinguish a
financial liability?
Actually, this transaction is simply known as equity swap. An equity swap is the issuance
of share capital by the debtor to the creditor in full or partial payment of obligation
IFRIC 19, provides that the equity instrument issued to extinguish a financial liability
shall be measured at the following amounts in the order of priority.
a. Fair value of equity instrument issued
b. Fair value of liability extinguished
c. Carrying amount of liability extinguish

The difference between the carrying amount of the financial liability and the initial
measurement of the equity instrument issued shall be recognized as a gain or loss on
extinguishment. The gain or loss on extinguishment shall be reported as a separate line
item in the income statement.

Members’ shares in cooperative entities

Member’s share in cooperative entities may be classified as equity or liability depending
on the terms and conditions of the financial instrument.
Members’ share in cooperative entities are classified as equity if the members did not
have a right to request for redemption under either of the following conditions.
a. If the entity has an unconditional right to refuse redemption of the members’
shares
b. If redemption is unconditionally prohibited by law, regulation or the entity’s

charter.

Unit IV Accounting Standards Part IV

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Unit IV Accounting Standards Part IV

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Updates in Philippine Accounting and Financial Reporting Standards 1

“Not intended for publication. For classroom instruction purposes only”.

Unit IV – Accounting Standards Part 4

“Accounting standards are authoritative standards for financial reporting

At the end of the unit, you will be able

 Demonstrate skill in preparation of financial statements and applying relevant

Thank you for answering the test. Please see

The next section is the content of this unit. It

FIRST TIME ADOPTION OF PFRS 1

“Not intended for publication. For classroom instruction purposes only”.

a. Under national GAAP inconsistent with PFRS in all respects.

d. Under national GAAP with a reconciliation of selected figures to amounts

b. The number of years of comparative information that an entity decides to present

“Not intended for publication. For classroom instruction purposes only”.

b. Derecognize assets and liabilities not permitted by PFRS.

d. Measure all recognized assets and liabilities in compliance with PFRS.

 Notes to financial statements including comparative information

Share-based compensation plan is a compensation arrangement established by the

“Not intended for publication. For classroom instruction purposes only”.

“Not intended for publication. For classroom instruction purposes only”.

“Not intended for publication. For classroom instruction purposes only”.

Noncurrent asset held for sale

 The sale must be highly probable.

“Not intended for publication. For classroom instruction purposes only”.

Subsequent increase in fair value

b. Recoverable amount at the date of the subsequent decision not to sell.

“Not intended for publication. For classroom instruction purposes only”.

b. Selling by a meat packing entity of controlling interest in a furniture entity. All

d. A conglomerate is engaged in commodity business, real estate, manufacturing

b. Shifting of production or marketing activities for a particular line of business from

c. Closing of a facility, factory or branch

“Not intended for publication. For classroom instruction purposes only”.

c. Liabilities of the component separately under current liabilities.

“Not intended for publication. For classroom instruction purposes only”.

b. After the technical feasibility and commercial viability of extracting a mineral

This pertains to development expenditure.

“Not intended for publication. For classroom instruction purposes only”.

The exploration cost directly related to the discovery of commercially producible

b. Full cost method

All exploration costs, whether successful or unsuccessful, are capitalized as cost

“Not intended for publication. For classroom instruction purposes only”.

c. And for which discrete financial information is available.

“Not intended for publication. For classroom instruction purposes only”.

Reportable operating segments

a. Combined profit of all operating segments that reported a profit.

b. Combined loss of all operating segments that reported loss.

b. Nature of production process

c. Type or class of customers

d. Marketing method or the method used to distribute the product

e. The nature of the regulatory environment, for example, banking, insurance or

“Not intended for publication. For classroom instruction purposes only”.

a. General information about the operating segment

b. Information about profit or loss, including specified revenue and expenses

d. Reconciliations of the totals of segment revenue, segment profit or loss, segment

b. Information about geographical areas

c. Information about major customers

“Not intended for publication. For classroom instruction purposes only”.

b. Separate disclosure of material revenue from external customers in an individual

“Not intended for publication. For classroom instruction purposes only”.

Equity Security Debt Security

“Not intended for publication. For classroom instruction purposes only”.

“Not intended for publication. For classroom instruction purposes only”.

Measurement of equity investments Measurement of debt investments

FAIR VALUE MEASUREMENT PFRS 13