PAS 1 Financial Statement Standards

CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS
LEARNING MODULES
PHILIPPINE ACCOUNTING
LESSON 2 STANDARDS
LEARNING OBJECTIVE
Exemplify the Philippine accounting standards.
CFAS LECTURE SERIES

This section presents the simplified notes, standards digests, and other relevant information for the
Conceptual Framework and Accounting Standards included in the syllabus of the 2022 Licensure Examination
for Certified Public Accountants. The information you will learn in this discussion will be helpful in your quest
to become a CPA in the future.
PAS 1 Presentation of the Financial Statements
PAS 1 prescribes the basis for the presentation of general purpose financial statements of an entity to
improve comparability both with the financial statements of previous periods (intra-comparability) and with
the financial statements of other entities (inter-comparability).
General-purpose financial statements are those intended to serve users who do not have the authority to
demand financial reports tailored for their own needs. These cater to the most common needs of a wide
range of external users. These are the subject matter of the conceptual framework and the PFRSs. A
complete set of financial statements comprises:
a. a statement of financial position;
b. a statement of profit or loss and other comprehensive income;
c. a statement of changes in equity;
d. a statement of cash flows;
e. notes, comprising significant accounting policies and other explanatory information
f. comparative information in respect of the preceding period; and
g. an additional statement of financial position as at the beginning of the preceding period, when an
entity applies an accounting policy retrospectively or makes a retrospective restatement of items
in its financial statements, or when it reclassifies items in its financial statements.
The standard also provides the following general features of financial statements:
a. Fair presentation and The application of PFRSs, with appropriate additional disclosure, is
compliance with PFRSs presumed to result in financial statements that achieve a fair
presentation.
b. Going concern An entity is not a going concern if, as of the financial reporting date or
before the date of authorization of the financial statements for issuance,
management either:
 Intends to liquidate the entity or to cease trading, or
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 Has no realistic alternative but to do so.

The assessment of going concern is at least 12 months.
c. Accrual basis of accounting An entity shall prepare its financial statements, except for cash flow
information, using the accrual basis of accounting.
d. Materiality & aggregation An entity shall present each material class of similar items separately in
the financial statements.
e. Offsetting Assets and liabilities, and income and expenses, shall not be offset unless
required or permitted by a PFRS.
Measuring assets net of valuation allowances, for example, obsolescence
allowances on inventories, allowances for doubtful accounts on
receivables, and accumulated depreciation on property, plant, and
equipment, are not offsetting.
f. Frequency of reporting An entity shall present a complete set of financial statements (including
comparative information) at least annually. When an entity changes the
end of its reporting period that is longer or shorter than one year, an
entity shall disclose the following:
 The period covered by the financial statements,
 The reason for using a longer or shorter period, and
 The fact that amounts presented in the financial statements are
not entirely comparable.
g. Comparative information An entity shall present comparative information of the preceding period
for all amounts reported in the current period’s financial statements
unless other standards permit or require otherwise.
h. Consistency of presentation An entity shall retain the presentation and classification of items in the
financial statements from one period to the next unless an entity finds a
more appropriate manner following a significant change in its operations
or a review of its financial statements or a PFRS requires a change in
presentation.
An entity shall identify the financial statements and distinguish them from other information in the same
published document. Moreover, an entity shall display the following information prominently about the
financial statements and repeatedly present such information when necessary to be understandable:
a. the name of the reporting entity;
b. whether the financial statements are of an individual entity or a group of entities;
c. the date of the end of the reporting period or the period covered by the financial statements;
d. the presentation currency; and
e. the level of rounding used.
The statement of financial position shall present the following line items in any order or format as the
standard does not prescribe any:
a. property, plant, and equipment;
b. investment property;
c. intangible assets;
d. financial assets (excluding amounts shown under (e), (h) and (i));
e. investments accounted for using the equity method;
f. biological assets;
g. inventories;
h. trade and other receivables;
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i. cash and cash equivalents;

j. assets classified as held for sale including those under disposal group classified as held for sale
following with PFRS 5;
k. trade and other payables;
l. provisions;
m. financial liabilities (excluding amounts shown under (k) and (l));
n. liabilities and assets for current tax, as defined in PAS 12 Income Taxes;
o. deferred tax liabilities and deferred tax assets, as defined in PAS 12;
p. liabilities included in disposal groups classified as held for sale under PFRS 5;
q. non-controlling interests, presented within equity; and
r. issued capital and reserves attributable to owners of the parent.
An entity shall present a statement of financial position either classified (showing distinctions between
current and noncurrent assets and liabilities) or unclassified (based on liquidity or showing no distinctions
between current and noncurrent items).
An entity shall classify an asset as current when:

a. it expects to realize the asset or intends to sell or consume it, in its normal operating cycle;
b. it holds the asset primarily for trading;
c. it expects to realize the asset within twelve months after the reporting period; or
d. the asset is cash or a cash equivalent with no restrictions from being exchanged or used to settle a
liability for at least twelve months after the reporting period.
Meanwhile, an entity shall classify a liability as current when:

a. it expects to settle the liability in its normal operating cycle;
b. it holds the liability primarily for trading;
c. the liability is due to be settled within twelve months after the reporting period; or
d. the entity does not have an unconditional right to defer settlement of the liability for at least twelve
months after the reporting period.
An entity shall classify all other assets as noncurrent assets and all other liabilities as noncurrent liabilities.
Generally, currently maturing long-term liabilities shall be presented as current liabilities EXCEPT under the
following circumstances in which an entity shall classify such liability as noncurrent:
a. when the entity completed the refinancing agreement, on or before the balance sheet date;
b. when the refinancing agreement happens after the balance sheet date but before the entity
authorizes the issuance of the financial statements; and
c. the entity expects to refinance it on a long-term basis under an existing loan facility at its
discretion.
When an entity breaches a loan agreement, the liability becomes payable on demand and to be classified as a
current liability UNLESS if the lender provides the entity, on or before the balance sheet date, a grace period
ending at least 12 months after the balance sheet date to rectify a breach of a loan covenant. Deferred tax
assets/liabilities are noncurrent items in a classified statement of financial position, irrespective of their
expected dates of reversal.
An entity shall present all items of income and expense recognized in a period in a single statement of profit
or loss and other comprehensive income or two statements, (1) a statement displaying the profit or loss
section only (separate statement of profit or loss or income statement) and (2) a second statement
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beginning with profit or loss and displaying components of other comprehensive income. In any case, the
standard requires an entity to present information on the profit or loss, other comprehensive income, and
comprehensive income. In other words, total comprehensive income equals profit or loss and other
comprehensive income. An entity shall recognize income and expenses in profit or loss EXCEPT when these
items belong to other comprehensive income or other standards required to present these items outside of
the profit or loss.
An entity shall recognize changes in accounting policy and correction of prior period errors as a direct
adjustment to the beginning balance of the retained earnings as part of the statement of changes in equity.
The changes during the period of other comprehensive income are presented under other comprehensive
income of the statement of comprehensive income, while the cumulative balances are part of the equity
section of the statement of financial position. Those transactions involving owners shall be recognized
directly in equity and those transactions during the period shall be presented in the statement of changes in
equity.
The statement of profit or loss and other comprehensive income shall present the following line items in the
profit or loss section in addition to the items required in the PFRSs:
a. revenue, with a separate presentation of the interest revenues calculated using effective interest
method;
b. gains and losses from the derecognition of financial assets measured at amortized cost;
c. finance costs;
d. impairment losses and impairment gains on financial assets;
e. share of the profit or loss of associates and joint ventures accounted using the equity method;
f. gains and losses on reclassifications of financial assets from amortized cost or fair value through
other comprehensive income to fair value through profit or loss;
g. tax expense; and
h. result of the discontinued operation.
The other comprehensive income section shall present line items, either net of tax or gross of tax of other
comprehensive income and the share of other comprehensive income of associates and joint ventures
accounted using the equity method. The following are examples of other comprehensive income:
a. changes in revaluation surplus;
b. unrealized gains and losses on investments in FVOCI securities;
c. remeasurements of the net defined benefit liability/asset;
d. gains and losses arising from translating the financial statements of a foreign operation; or
e. the effective portion of gains and losses on hedging instruments in a cash flow hedge.
However, the standard prohibits presenting any items of income or expense as extraordinary items in the
statement of profit or loss and other comprehensive income or the notes to financial statements.
Reclassification adjustments are amounts reclassified to profit or loss during the current period recognized
in other comprehensive income in the current or previous periods, such as changes of the fair value of debt
instrument, translation differences, and the effective portion of cash flow hedges.
An entity may present the expenses in the financial statements either through the nature of expense method
(aggregating expenses according to their nature) or the function of expense method, known as the cost of
sales method (classifying expenses by function). If an entity uses the function of expense method, it shall
disclose additional information on the nature of expenses. Meanwhile, an entity shall disclose the dividends
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declared either in the (a) notes or (b) statement of changes in equity. Furthermore, the notes to financial
statements shall disclose the following:
a. statement of compliance with PFRSs;
b. summary of significant accounting policies applied;
c. supporting information for items presented in the other financial statements; and
d. other disclosures.
PAS 2 Inventories
PAS 2 prescribes the accounting treatment as to measurement, recognition, and disclosure for all
inventories EXCEPT:
a. financial instruments covered under PAS 32 and PFRS 9;
b. biological assets and agricultural produce at the point of harvest under PAS 41;
c. those of producers of agricultural, forest, and mineral products measured at net realizable value;
and
d. those of commodity broker-traders measured at fair value.
The standard defines inventories as assets:

a. held for sale in the ordinary course of business;
b. in the process of production for such sale; or
c. in the form of materials or supplies used by an entity in the production process or rendition of
services.
Inventories shall be measured at the lower of cost and net realizable value.
The cost of inventories comprises:

a. the purchase cost, which includes the purchase price net of trade discounts and rebates, import
duties and non-refundable and non-recoverable purchase taxes, and transport, handling, and other
costs directly attributable to the acquisition of inventory;
b. the cost of converting raw materials into finished goods, which include direct labor and overhead
costs; and
c. any other cost incurred in bringing them to their present condition and location.
However, the cost of inventories excludes those costs not related to the production, such as storage costs,
administrative overhead, selling costs, and the abnormal amounts of waste materials and labor. An entity
shall expense these items outright.
The standard also provides cost formulas in determining the cost of sold inventories, also known as the cost
of sales and the cost of goods sold, and the cost of unsold inventories, which include:
a. Specific identification shall be used for inventories that are not ordinarily interchangeable, and the
goods or services are produced and segregated for specific projects. Under this formula, specific
costs can be easily attributed to an inventory item.
b. The first-in, first-out formula assumes that the inventories that were purchased or produced first
are sold, and consequently, the items remaining in inventory at the end of the period are the most
recently purchased or produced.
c. The weighted average cost formula determines the cost of inventories using the weighted average
cost of similar items at the beginning of a period and the cost of similar items produced and
purchased during the period. The average cost may be calculated periodically (weighted average) or
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as each additional purchase is made (moving average), depending upon the circumstance of the
entity.
On the other hand, the standard does not permit the use of the last-in, first-out formula to measure the cost
of inventories.
Meanwhile, the net realizable value (NRV) is the estimated selling price in the ordinary course of business
less the estimated costs of completion and the estimated costs necessary to make the sale. This valuation
provides entity-specific value and does not necessarily equal the fair value. Measuring the lower between
cost and NRV supports the basic accounting concept that an asset shall not be carried at an amount that
exceeds its recoverable amount. When unfavorable circumstances happen to an inventory, such as damage,
obsolescence, or deflation that results in a lower recoverable amount than its cost, the entity shall write
down the cost of inventory to its NRV and recognize an expense in the period when the write-down occurs.
When the previous circumstance subsequently turns to be favorable, the reversal of the written-down
amount should not exceed the original written-down so that the new carrying amount will still be the lower of
cost and the revised NRV. When an entity sold the finished goods below its cost, the entity shall write down
the cost of the raw materials to its NRV, as evidenced by its replacement cost.
Upon the sale of inventories, the carrying amount of those inventories shall be charged to expense when the
related revenue is recognized. When an entity reverses the previously written-down inventory cost, the entity
shall recognize a reduction in the cost of sale in the period in which the reversal occurs.
Furthermore, the standard requires the following disclosures in the financial statements:
a. the accounting policies adopted in measuring inventories, including the cost formula used;
b. the total carrying amount of inventories and the carrying amount in classifications appropriate to the
entity;
c. the carrying amount of inventories carried at fair value costs to sell;
d. the amount of inventories recognized as an expense during the period;
e. the amount of any write-down of inventories recognized as an expense in the period;
f. the amount of any reversal of write-down that is recognized as a reduction in the amount of
inventories recognized as an expense in the period;
g. the circumstances or events that led to the reversal of a write-down of inventories; and
h. the carrying amount of inventories pledged as security for liabilities.
PAS 7 Statement of Cash Flows
PAS 7 requires the provision of information about the historical changes in cash and cash equivalents of an
entity through the statement of cash flows, which presents the cash flows of the related activities classified
activities into operating, investing, and financing. Cash flow information is useful in assessing the ability of
the entity to generate cash (cash on hand and demand deposits) and cash equivalents (short-term, highly
liquid investments that are readily convertible to known amounts of cash and which are subject to an
insignificant risk of changes in value) and enables users to develop models to assess and compare the
present value of the future cash flows of different entities. The statement of cash flows includes only the
transactions that have affected the cash and cash equivalents. It excludes those non-cash transactions.
Operating activities include transactions that enter into the determination of profit or loss. These
transactions affect income statement accounts. In other words, operating activities affect the profit or loss.
The following are some of the examples of cash flows from operating activities:
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a. cash receipts from the sale of goods, rendering of services, or other forms of income
b. cash payments for purchases of goods and services
c. cash payments for operating expenses, such as employee benefits, insurance, and the like, and
payments or refunds of income taxes
d. cash receipts and payments from contracts held for dealing or trading purposes
Investing activities include transactions that affect long-term assets and other non-operating assets. It
usually affects the non-current assets and other investments. The following are some of the examples of
cash flows from investing activities:
a. cash receipts and cash payments in the acquisition and disposal of property, plant, and equipment,
investment property, intangible assets and other noncurrent assets
b. cash receipts and cash payments in the acquisition and sale of equity or debt instruments of other
entities (other than those that are classified as cash equivalents or held for trading)
c. cash receipts and cash payments on derivative assets and liabilities (other than those that are held
for trading or classified as financing activities)
d. loans to other parties and collections thereof (other than loans made by a financial institution)
Financing activities include transactions that affect equity and non-operating liabilities. It normally affects
the borrowings and equity. The following are examples of cash flows from financing activities:
a. cash receipts from issuing shares or other equity instruments and cash payments to redeem them
b. cash receipts from issuing notes, loans, bonds and mortgage payable and other short-term or long-
term borrowings, and their repayments
c. cash payments by a lessee for the reduction of the outstanding liability relating to a lease.
There has no consensus classification of the cash flows from interest and dividends received and paid from
other entities, however, the standard prescribes the consistency of the classifications used from period to
period. Taxes on income are normally classified as part of the operating activities unless they can be
identified with financing and investing activities.
The standard further prescribes the two methods of reporting cash flows from operating activities which
include the direct method (showing each major class of gross cash receipts and gross cash payments) and
the indirect method (adjusts accrual basis profit or loss for the effects of changes in operating assets and
liabilities and effects of non-cash items). However, the standard encourages the use of the direct method.
PAS 8 Accounting Policies, Changes in Accounting Estimates, and Errors
PAS 8 prescribes the criteria for selecting, applying, and changing accounting policies and the accounting and
disclosure of changes in accounting policies, changes in accounting estimates, and correction of prior period
errors.
Accounting policies are the specific principles, bases, conventions, rules, and practices applied by an entity in
preparing and presenting financial statements. These are the relevant PFRSs adopted by an entity in
preparing and presenting its financial statements. In the absence of an applicable standard, the entity may
contemplate the hierarchy of the reporting standards, as discussed in the previous lesson. These accounting
policies shall be consistently applied for similar transactions, other events, and conditions unless a PFRS
requires or permits the use of other appropriate policies. In this manner, an entity shall change an
accounting policy only if PFRS requires or the change results in more relevant and reliable information about
an entity’s financial position, performance, and cash flows.
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Changes in accounting policies usually involve changes in measurement basis. An entity shall treat the change
first based on the transitional provisions, if any, set by the standard. In the absence of transitional provisions,
an entity shall such change in accounting policy retrospectively. When the entity finds impracticality in the
retrospective application (applying new accounting policy to transactions, other events, and conditions as if
that policy has always been applied) , the entity may apply it prospectively (applying the new accounting policy
to transactions, other events, and conditions occurring after the date as at which the policy is changed) . The
adjustment affects the beginning balance of the retained earnings for the earliest prior period presented and
other comparative amounts disclosed for each period presented as if the new accounting policy had always
been applied. The following are some of the examples of changes in accounting policy:
1. change from the FIFO cost formula for inventories to the average cost formula
2. change in the method of recognizing revenue from long-term construction contracts
3. change to a new policy resulting from the requirement of a new PFRS
4. change in financial reporting framework, such as from PFRS for SMEs to full PFRSs
5. initial adoption of the revaluation model for property, plant, and equipment and intangible assets
6. change from the cost model to the fair value model of measuring investment property
7. change in the business model for classifying financial assets resulting in a reclassification between
financial asset categories
The use of reasonable estimates is an essential part of preparing the financial statements and does not
undermine their reliability. When the circumstances change to which an entity based its estimate, revision to
change the estimate is necessary. Revising an estimate does not relate to prior periods and is not the
correction of an error. Changes in accounting estimates usually involve the change in the realization or
incurrence of expected inflow or outflow of economic benefits from assets or liabilities. Such change in
estimate shall be applied prospectively, which will affect the profit or loss of the current period or current
and future periods if the change affects both. The following are some of the examples of changes in
accounting estimate:
1. change in depreciation or amortization methods
2. change in estimated useful lives of depreciable assets
3. change in estimated residual values of depreciable assets
4. change in required allowances for impairment losses and uncollectible accounts
5. changes in fair values less cost to sell of non-current assets held for sale and biological assets
When an entity cannot distinguish a change in accounting policy from a change in accounting estimate, the
entity shall treat the change as a change in an accounting estimate .
When an entity commits intentional and unintentional errors in the application of principles, interpretation of
facts, or by a mathematical mistake, an entity shall correct material period errors retrospectively in the first
set of the financial statements authorized for issuance after their discovery by retrospective
statement (correcting the recognition, measurement, and disclosure of amounts of elements of financial
statements, as if a prior period error had never occurred) or if impractical, by prospective application. Such
correction will affect the beginning balance of retained earning if accounted for retrospectively. The following
are some of the examples of errors:
1. mathematical mistakes
2. mistakes in applying accounting policies
3. oversights or misinterpretations of facts
4. fraud
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PAS 10 Events after the Reporting Period
PAS 10 prescribes the accounting for and disclosure of events after the reporting period.
Events after the reporting period are favorable and unfavorable events that occur between the end of the
reporting period and the date when the financial statements are authorized for issue (the date when the
management authorizes the financial statements for issue regardless of whether such authorization is final
or subject to further approval). The two types of events after reporting period include:
a. Adjusting events after the reporting period are events that provide evidence of conditions that
existed at the end of the reporting period; and
b. Non-adjusting events after the reporting period are events that are indicative of conditions that
arose after the reporting period.
Adjusting events require adjustments of the amounts in the financial statements. These include:
a. the settlement after the reporting period of a court case confirming that the entity has a present
obligation at the end of the reporting period
b. the receipt of information after the reporting period indicating the impairment of an asset at the end
of the reporting period such as:
1. the bankruptcy of a customer after the reporting period indicating the impairment of the carrying
amount of a trade receivable at the end of the reporting period
2. the sale of inventories after the reporting period as evidence of their net realizable value at the
end of the reporting period
c. the determination after the reporting period of the cost of the asset purchased, or the proceeds
from assets sold, before the end of the reporting period
d. the determination after the reporting period of the amount of profit-sharing or bonus payments, if
the entity had a present legal or constructive obligation at the end of the reporting period to make
such payments
e. The discovery of fraud or errors that indicate the financial statements are incorrect.
Non-adjusting events do not require adjustments of the amounts in the financial statements but only
disclosed if they are material. These include:
a. changes in fair values, foreign exchange rates, interest rates, or market prices after the reporting
period
b. casualty losses (i.e., fire, storm, or earthquake), occurring after the reporting period but before the
financial statements were authorized for issue
c. litigation arising solely from an event occurring after the reporting period
d. significant commitments or contingent liabilities entered after the reporting period, i.e., significant
guarantees
e. major ordinary share transactions and potential ordinary share transactions after the reporting
period
f. major business combination after the reporting period
g. announcing, or commencing the implementation of, a major restructuring after the reporting period
h. announcing a plan to discontinue an operation after the reporting period
i. change in tax rate enacted after the reporting period
j. declaration of dividends after the reporting period
However, dividends declared after the reporting period are not recognized as a liability at the end of the
reporting period because no present obligation exists at the end of the reporting period. Furthermore, the
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standard strictly prohibits the preparation of financial statements on a going concern basis if the
management determines after the reporting period either it intends to liquidate the entity or to cease
trading, or that it has no realistic alternative but to do so.
PAS 12 Income Taxes
PAS 12 prescribes the accounting for income taxes, which refer to the taxes based on taxable profits. It also
includes taxes such as withholding tax which is payable by a subsidiary, associate, or joint arrangement on
distributions to the reporting entity. The standard aims to address the accounting, presentation, and
reconciliation of the differences of the income tax expense (total amount included in the determination of
profit or loss for the period which comprises the current tax expense or income and deferred expense or
income) following the PFRSs and the current tax expense (the amount of income taxes payable or recoverable
in respect to the taxable profit or loss for a period) in the income tax return computed using the Philippine
tax laws. Deferred tax expense is the sum of the net changes in the deferred tax assets and deferred tax
liabilities during the period. When the increase in the deferred tax liability exceeds the increase in the
deferred tax asset, then the difference is a deferred tax expense. Otherwise, it is a deferred tax income.
Accounting profit is the profit or loss for a period before deducting tax expense. It is also known as pretax
income, financial income, and accounting income. On the other hand, taxable profit (taxable income) is the
profit or loss for a period determined following the rules established by the taxation authorities upon which
income taxes are payable or recoverable. It is computed by deducting the tax-deductible expenses from the
taxable income. The varying treatments of economic activities between the PFRSs and tax laws result in
permanent and temporary differences.
Permanent differences are those that do not have future tax consequences. The following are some of the
examples of permanent differences:
a. interest income on government bonds and treasury bills
b. interest income on bank deposits
c. dividend income
d. fines, surcharges, and penalties arising from the violation of law
e. life insurance premium on employees where the entity is the irrevocable beneficiary
Temporary differences are those that have future tax consequences. Temporary differences are either
taxable temporary differences (arise when financial income is greater than taxable income or the carrying
amount of an asset is greater than its tax base) or deductible temporary differences (arise in case of the
opposites of the foregoing). Taxable temporary differences result in deferred tax liabilities while deductible
temporary differences result in deferred tax assets. A deferred tax asset is recognized only to the extent
that it is realizable and is measured using enacted or substantially enacted tax rates applicable to the
periods of their expected reversals. Deferred tax assets and liabilities are not discounted. Deferred tax
assets and liabilities are presented as non-current. Furthermore, tax consequences are recognized either in
profit or loss, other comprehensive income, or directly in equity depending on the accounting treatment of
the related transaction or event.
PAS 16 Property, Plant, and Equipment
PAS 16 prescribes the accounting treatment for property, plant, and equipment (PPE) so that users of the
financial statements can discern information about an entity’s investment in its PPE and the changes in such
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investment. The standard focuses on recognizing assets, their corresponding depreciation charges, and
impairment losses, and the determination of their carrying amount. The application of this standard excludes:
a. PPEs classified as non-current assets held for sale and discontinued operations (PFRS 5);
b. biological assets related to agricultural activity other than the bearer plants (PAS 41);
c. the recognition and measurement of exploration and evaluation of assets (PFRS 6);
d. mineral rights and mineral reserves except the PPEs used in the development and maintenance of
these assets; and
e. investment property measured using the cost model (PAS 40).
Property, plant, and equipment are tangible items held for use in the production or supply of goods or
services, rental, or administrative purposes and provide expected benefits for more than one period. In
simple terms, PPE can be characterized into tangible assets , used in normal operations , and long-term in
nature. Examples of PPE items include the land used in business or held for the future plant site, the building
used in the operations, equipment used in the production of goods or held for environmental and safety
reasons or rentals, major spare parts and long-lived stand-by equipment, furniture, and fixture, and bearer
plants.
The cost of an item of property, plant, and equipment shall be recognized as an asset only if it is probable that
future economic benefits associated with the item will flow to the entity and has a reliable measurement of
cost. Initially, an entity shall measure an item of PPE at a cost that has the following elements:
1. purchase price, including non-refundable purchase taxes, after deducting trade discounts and
rebates
2. costs directly attributable to bringing the asset to the location and condition necessary for it to be
capable of operating in the manner intended by the management, such as the costs of employee
benefits arising directly from the construction or acquisition of PPE, costs of site preparation, initial
delivery and handling costs or freight costs, installation and assembly costs, testing costs, net of
disposal proceeds of samples generated during testing, and professional fees
3. present value of decommissioning and restoration costs to the extent of recognizing them as an
obligation
The recognition of costs in the carrying amount of an item of PPE ceases when it is in the location and
condition necessary for it to operate in the manner intended by management.
The cost of an item of PPE is the cash price equivalent at the recognition date. When there is a deferral in the
payment beyond the credit terms, an entity shall recognize the difference between the cash price equivalent
and the total payment as interest over the credit period unless it is capitalizable following PAS 23. When an
entity acquired a PPE through an exchange transaction that has commercial substance, an entity shall
measure the asset received in the following order:
a. the fair value of the asset given up,
b. the fair value of the asset received, or
c. carrying amount of asset given up.
If the exchange lacks commercial substance, an entity shall measure the asset received using the carrying
amount of the asset given up. After initial recognition, an entity shall measure the PPE either (a) the cost
model or (b) the revaluation model as its accounting policy and shall apply that policy to an entire class of
PPE.
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After recognition, under the cost model, an item of PPE is measured at its cost less any accumulated
depreciation and any accumulated impairment losses.
Depreciation is the systematic allocation of the depreciable amount of an asset over its estimated useful
life. When computing for depreciation, if the cost of each part of a PPE is significant relative to its total
cost, an entity shall depreciate such item separately. Depreciation begins when the asset is available for
use, i.e., when it is in the location and condition necessary for it to operate in the manner intended by
management. Depreciation ceases when an entity derecognizes the asset or when it reclassifies the asset as
“held for sale” under PFRS 5, whichever comes earlier. There are various methods of depreciation. However,
PAS 16 does not prescribe any specific depreciation method as it depends on the management’s judgment.
The entity shall select the depreciation method that most closely reflects the expected consumption pattern
of the future economic benefits embodied in the asset. A depreciation method based on the revenue is not
appropriate.
PAS 16 mentions three sample methods of depreciation, the straight-line method (depreciation is
recognized evenly over the life of the asset by dividing the depreciable amount by the estimated useful life) ,
diminishing balance method (depreciation is computed by multiplying the net book value minus the residual
value by the depreciation rate), and the units of production method (depreciation is calculated by dividing
the depreciable amount by the expected number of units to be produced over its useful life). A change in
depreciation method, useful life, or residual value is a change in accounting estimate accounted for
prospectively. Prospective accounting means the change affects only the current period and/or future
periods. The change does not affect past periods.
After recognition, under the revaluation model, an item of PPE whose fair value can be measured reliably
shall be carried at a revalued amount, being its fair value at the date of the revaluation less any
subsequent accumulated depreciation and subsequent accumulated impairment losses . For items with
significant and volatile changes in fair value, annual revaluation is necessary. For items with insignificant
changes in fair value, revaluation may be made every 3 or 5 years. If an item of PPE is revalued, the entire
class of PPE to which that asset belongs shall be revalued. The items within a class of PPE are revalued
simultaneously to avoid selective revaluation of assets and the reporting of amounts in the financial
statements that are a mixture of costs and values as at different dates. The fair value is determined using an
appropriate valuation technique, taking into account the principles set forth under PFRS 13.
Revaluation surplus (fair value less the carrying amount) is initially recognized in other comprehensive
income unless the revaluation represents impairment loss or reversal of impairment loss, in which case it is
recognized in profit or loss. Subsequently, the revaluation surplus is accounted for as follows:
a. If the revalued asset is non-depreciable, the revaluation surplus accumulated in equity is
transferred directly to retained earnings when the asset is derecognized.
b. If the revalued asset is depreciable, a portion of the revaluation surplus may be transferred
periodically to retained earnings as the asset is being used.
The carrying amount of an item or PPE shall be derecognized upon disposal, or when no future economic
benefits are expected from its use or disposal.
PAS 19 Employee Benefits
PAS 19 prescribes the accounting and disclosure for employee benefits. The standard requires an entity to
recognize a liability when an employee has provided service in exchange for employee benefits payable in the
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future and an expense when the entity consumes the economic benefit arising from service provided by an
employee in exchange for employee benefits.
Employee benefits are all forms of consideration given by an entity in exchange for service rendered by
employees. The standard categorizes the employee benefits into:
a. short-term employee benefits,
b. post-employment benefits,
c. other long-term employee benefits, and
d. termination benefits.
Short-term employee benefits are employee benefits (other than termination benefits) that are due to be
settled within 12 months after the end of the period in which the employees render the related service. When
an employee has rendered service to an entity during an accounting period, the entity shall recognize the
undiscounted amount of short-term employee benefits expected to be payable in exchange for that service:
a. as a liability (accrued expense), after deducting any amount already paid.
b. as an asset (prepaid expense) when the amount paid is over the incurred benefits and the
overpayment will reduce the future payments or result in a cash refund.
c. as an expense, unless the employee benefit forms part of the cost of an asset, e.g., as part of the
cost of inventories or property, plant, and equipment.
An entity may pay employees for their absence due to various reasons. This entitlement may
be accumulating (can be carried forward and used in future periods if unutilized during the current period’s
entitlement) or non-accumulating (cannot be carried forward).
Accumulating compensated absences may either be vesting (entitle the employees to a cash payment for
unused entitlement on leaving the entity) or non-vesting (does not entitle the employees to a cash payment
to any unutilized entitlements). When the entitlements are both accumulating and vesting, an entity shall
accrue all unused entitlements using the expected payable amount when the employees will use or monetize
those entitlements in a future period. When the entitlements are both accumulating and non-vesting, an entity
shall accrue only the unused entitlements that the employees will utilize after considering the possibility that
the employees may leave before using those entitlements. For non-accumulating compensated absences, an
entity shall recognize no liability or expense until the absences occur.
Post-employment benefits are employee benefits (other than termination benefits) that are payable after the
completion of employment. Post-employment benefit plans can be contributory (both the employer and
employee contribute to the retirement benefits fund of the employee) or non-contributory (only the
employer contributes to the retirement benefits fund of the employee) , funded (the retirement fund is
transferred to a trustee who undertakes to manage the fund and pay directly the retiring employees) or
unfunded (the employer manages any established fund and pays directly the retiring employees) . An entity
shall classify post-employment benefit plans either as defined contribution plans (the employer commits to
make fixed contributions to a fund for the retirement benefits of the employees) or as defined benefit
plans (the employer commits to pay a definite amount of retirement benefits determined using a plan
formula).
The accounting for defined contribution plans is straightforward because the reporting entity’s obligation for
each period is the amounts to be contributed for that period. Consequently, no actuarial assumptions are
required to measure the obligation or expense that results in no possibility of any actuarial gain or loss.
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The accounting for defined benefit plans is complex because actuarial assumptions are required to measure
the obligation and expense, and there is a possibility of actuarial gains and losses. An entity shall measure the
obligation on a discounted basis. It involves the following steps:
1. Determine the deficit or surplus, which is the difference between the present value of the defined
benefit obligation and the fair value of the plan assets (comprise the assets held by a long-term
employee benefit fund and qualifying insurance policies).
2. Determine the net-defined benefit liability or asset (the amount presented in the statement of
financial position). If there is a deficit, the deficit is the net-defined benefit liability. If there is a
surplus, the net-defined benefit asset is the lower of the surplus and the asset ceiling ( the present
value of any economic benefits available in the form of refunds from the plan or reductions in future
contributions to the plan).
3. Determine the defined benefit cost (comprises the service cost, net interest on the net-defined
benefit liability or asset, and the remeasurements of the net-defined benefit liability or asset).
Service cost comprises the current service cost (the increase in the present value of the defined
benefit obligation resulting from the employee service in the current period), past service cost
(change in the present value of the defined benefit obligation for employee service in prior periods
resulting from a plan amendment or curtailment) , and any gain or loss on settlement (arises when
the employer’s obligation to provide benefits is eliminated other than from payment of benefits
according to the terms of the plan). These costs are recognized in the profit or loss.
Net interest on the net defined benefit liability or asset is the change in the net defined benefit
liability or asset during the period that arises from the passage of time. It includes the interest cost
on the defined benefit obligation , interest income on plan assets , and interest on the effect of the
asset ceiling. These interests are recognized in the profit or loss.
Remeasurements of the net defined benefit liability or asset include the actuarial gains or
losses (changes in the present value of the defined benefit obligation resulting from changes in the
actuarial assumptions), difference between interest income on plan assets, and return on plan
assets (interest, dividends, and other income derived from the plan assets together with the
realized and unrealized gains or losses on the plan assets less any costs of managing plan assets
and any tax payable by the plan itself other than the tax included in the actuarial assumptions used
to measure the present value of the defined benefit obligation), and the difference between the
interest on the effect of the asset ceiling and the change in the effect of the asset ceiling . These
remeasurements are recognized in other comprehensive income.
The rate used to discount post-employment benefit obligations shall be determined by reference to market
yields at the end of the reporting period on high-quality corporate bonds. In countries where there is no deep
market in such bonds, the market yields at the end of the reporting period on government bonds shall be
used.
Other long-term employee benefits are employee benefits (other than post-employment benefits and
termination benefits) that are due to be settled beyond 12 months after the end of the period in which the
employees render the related service. Other long-term employee benefits are accounted for using the
procedures applicable for a defined benefit plan. However, all of the components of the net benefit cost are
recognized in profit or loss.
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Termination benefits are employee benefits provided in exchange for the termination of an employee’s
employment as a result of either an entity’s decision to terminate an employee’s employment before the
normal retirement date or an employee’s decision to accept an entity’s offer of benefits in exchange for the
termination of employment. Termination benefits are initially and subsequently recognized following the
nature of the employee benefit.
a. If the termination benefits are payable within 12 months, the entity shall account for the termination
benefits similarly with short-term employee benefits.
b. If the termination benefits are payable beyond 12 months, the entity shall account for the
termination benefits similarly with other long-term benefits.
c. If the termination benefits are, in substance, an enhancement to post-employment benefits, the
entity shall account for the benefits as post-employment benefits .
PAS 20 Accounting for Government Grants and Disclosure of Government Assistance
PAS 20 prescribes the accounting for, and in the disclosure of, government grants and other forms of
government assistance EXCEPT for government grants under hyperinflationary economy, government
assistance in the form of tax benefits (i.e., tax holidays, investment tax credits, accelerated depreciation
allowances, and reduced income tax rates) , government participation in the ownership of the entity, and
government grants covered by PAS 41.
Government grants (subsidies, subventions, or premiums) are transfers of resources by the government to
an entity subject to past or future compliance with certain conditions by the entity. It may include
a forgivable loan (a loan that the government as the lender waives repayment subject to certain
conditions) and the benefit of a loan at the below-market rate of interest (the difference between the
initial carrying value of the loan determined following PFRS 9 and the proceeds received) . Government
assistance is action by the government designed to provide an economic benefit specific to an entity or
range of entities qualifying under certain criteria. The standard further prescribes the usage of the income
approach in accounting government grants in which an entity shall recognize the grant in profit or loss over
one or more periods. An entity shall use only the capital approach for donations received from
shareholders.
Monetary grants are measured based on the amount of cash received or the fair value of the amount
receivable. An entity shall measure non-monetary grants using the fair value or at its nominal value. Grants
related to assets are grants whose primary condition is that the receiving entity should acquire or construct
long-term assets. On the other hand, grants related to income are those grants other than those related to
assets.
An entity recognizes government grants only when there is reasonable assurance that the entity will comply
with the conditions attached to them and the grants will be received. Government grants are recognized in
profit or loss on a systematic basis over the periods in which the entity recognizes as expenses the related
costs for which the grants are intended to compensate. Specifically, grants related to depreciable assets
shall be recognized in the profit or loss over the periods and in proportions in which depreciation expenses
on those assets are recognized. Those grants related to non-depreciable assets are recognized in profit or
loss when the costs of fulfilling the attached condition are incurred. A government grant that becomes
receivable as compensation for expenses or losses already incurred or to give immediate financial support
to the entity with no future related costs is recognized in profit or loss of the period in which it becomes
receivable.
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Government grants related to assets, including non-monetary grants at fair value, are presented in the
statement of financial position either by setting up the grant as deferred income or by deducting the grant in
arriving at the carrying amount of the asset. Meanwhile, grants related to income are sometimes presented
as a credit in the statement of comprehensive income, either separately or under a general heading such as
‘Other income’; alternatively, a deduction in reporting the related expense.
If a government grant becomes repayable, the effect is treated as a change in accounting estimate under PAS
8 and accounted for prospectively. The repayment of grants-related income is deducted from the related
deferred income balance. Any excess is recognized immediately in the profit or loss. On the other hand, the
repayment of a grants-related asset is treated as a deduction in the deferred income balance or an increase
in the carrying amount of the asset. The cumulative additional depreciation that would have been recognized
in the absence of grant is recognized immediately in the profit or loss.
An entity shall disclose the following in the financial statements:

a. the accounting policy and method of presentation,
b. the nature and extent of government grants and other forms of government assistance that directly
benefited the entity, and
c. the unfilled conditions and contingencies attached to the government grants.
PAS 21 The Effects of Changes in Foreign Exchange Rates
PAS 21 prescribes the accounting for transactions and balances in foreign currencies except for those
derivative transactions and balances (PFRS 9), the translation of the results and financial position of foreign
operations included in the financial statements of the entity by consolidation or the equity method, and the
translation of an entity’s results and financial position into the presentation currency.
Foreign currency transactions include those transactions denominated in foreign currency such as buying or
selling goods or services, borrowing or lending funds, acquiring or disposing assets, or incurring or settling
liabilities.
A foreign currency transaction shall be initially recorded in the functional currency (the currency of the
primary economic environment in which the entity operates) using the spot exchange rate (the exchange
rate for immediate delivery) between the foreign currency and the functional currency at the date of the
transaction (the date on which the transaction first qualifies for recognition following PFRSs).
When preparing financial statements, a reporting entity must identify its functional currency in the following
order:
a. the currency that mainly influences the sales prices and the cost of goods sold or cost of the
services provided,
b. the currency in which an entity generated the funds from financing activities , and
c. the currency in which the entity retained the receipts from operating activities.
At each reporting date, an entity shall translate the monetary items (units of currency held and assets and
liabilities that give rise to the receipt, or payment in a fixed or determinable number of currency units) to the
functional currency using the closing rate (the spot exchange rate at the reporting date) . An entity shall
translate the non-monetary items measured at historical cost using the exchange rate (the ratio of
exchange for two currencies) at the transaction date. On the other hand, an entity shall translate the non-
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monetary items measured at fair value using the exchange rate at the date when the entity determined its
fair value.
When a foreign currency transaction occurred in one period and settled in another period, this gives rise
to exchange difference (the difference resulting from translating a given number of units of one currency
into another currency at different exchange rates). An entity shall recognize the exchange difference
between the transaction date and the end of the reporting period in the transaction period. An entity shall
recognize the exchange difference between the end of the previous reporting period and the settlement date
in the settlement period. When a foreign currency transaction occurred and subsequently is settled during
the same period, an entity shall recognize the exchange difference during the same period.
When there is a change in an entity’s functional currency, the entity shall apply the translation procedures
applicable to the new functional currency prospectively from when the change occurs.
When an entity’s functional currency differs from the presentation currency (the currency of the financial
statements presented), an entity shall translate its results and the financial position to the presentation
currency in the following procedures:
a. Translate the assets and liabilities using the closing rate at the date of the statement of financial
position.
b. Translate the income and expenses , including other comprehensive income, using the spot exchange
rates at the dates of the transactions. For practical reasons, an entity may use the average
rates for a period if such will provide a reasonable approximation of the spot rates when the
transactions took place. However, if exchange rates fluctuate significantly, the use of the average
rates is inappropriate.
c. The resulting exchange difference is recognized in other comprehensive income.
When an entity has a foreign operation (an entity that is a subsidiary, associate, joint venture, or branch of
a reporting entity, the activities of which are based or conducted in a country or currency other than those
of the reporting entity) and is using a foreign currency, the financial statements of its foreign operation shall
be translated using the functional currency of the reporting entity. Any exchange difference arising from this
translation shall be recognized in other comprehensive income. When such foreign operation is disposed of,
the cumulative recognized amount of exchange differences in other comprehensive income and accumulated
in the equity shall be reclassified to profit or loss as a reclassification adjustment.
The reporting entity shall provide the following disclosures in the financial statements:
a. exchange differences recognized in profit or loss and other comprehensive income;
b. the fact and reason for using a different presentation currency from the entity’s functional
currency; and
c. the fact and reason for a change in functional currency.
PAS 23 Borrowing Costs
PAS 23 prescribes the accounting for borrowing costs to be capitalized as part of the cost of an asset. When
the borrowing costs are directly attributable to the acquisition, construction, or production of a qualifying
asset (an asset that necessarily takes a substantial period to get ready for its intended use or sale, i.e.,
inventories (long period to produce), manufacturing plants, power generation facilities, intangible assets,
investment properties, bearer plants) , then it will form part of the cost of an asset. Borrowing costs include
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the interest expense on financial liabilities or lease liabilities using the effective interest method and the
exchange differences on foreign borrowings regarded as an adjustment to interest costs.
Borrowing costs are capitalizable if they are avoidable (an entity would not incur if the entity had not made
the related expenditure on the qualifying asset) . An entity shall begin capitalizing borrowing costs when the
entity meets the following conditions:
1. it incurs for the asset;
2. it incurs borrowing costs; and
3. it undertakes activities that are necessary to prepare the asset for its intended use or sale.
When an entity suspends the active development of a qualifying asset, the capitalization of the borrowing
costs during the extended periods also suspends. When the temporary delay is part of the development
process, the capitalization of borrowing costs will continue. When an entity completed all the activities
necessary to prepare the qualifying asset for its intended use or sale, capitalizing borrowing costs shall
cease. However, when an entity finished only a part of the qualifying asset, an entity shall only stop the
capitalization of borrowing costs of the completed portion.
Specific borrowing refers to the funds borrowed specifically to obtain a qualifying asset. The following is the
computation of the capitalizable borrowing costs on specific borrowings:
Capitalizable Borrowing Cost = Actual Borrowing Costs - Investment Income
General borrowings are those obtained for more than one purpose. The following is the computation of the
capitalizable borrowing costs on general borrowings:
Capitalizable Borrowing Cost = Average Expenditure x Capitalization Rate
The average expenditure refers to the weighed actual expenditures during the year. On the other hand, the
capitalization rate is computed by dividing the total interest expense on general borrowings by the total
general borrowings. However, the borrowing cost to be capitalized is the lower of the computed and the
actual borrowing costs. An entity shall provide the following disclosures in the financial statements:
a. the amount of borrowing costs capitalized during the period; and
b. the capitalization rate used to determine the amount of borrowing costs eligible for capitalization.
PAS 24 Related Party Disclosures
PAS 24 prescribes the necessary disclosures of the relationships, transactions, outstanding balances,
including commitments among the related parties as they might affect the financial position and the profit or
loss of an entity. The disclosures help users assess the risks and opportunities in an entity, as influenced by
these related parties.
A related party can be a person or an entity that is related to the reporting entity. A person or a close
member of that person’s family (spouse, children, and dependents) is a related party when they have control,
significant influence, joint control, or is a member of the key management personnel of the reporting entity.
An entity becomes a related party if, among other circumstances, it is a parent, subsidiary, fellow subsidiary,
associate, or joint venture of the reporting entity, or when a person who is a related party controlled, jointly
controlled, or significantly influenced or managed the reporting entity.
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A related party transaction refers to a transfer of resources, services, or obligations between a reporting
entity and a related party, regardless of whether there is a price charged or not. When an entity had related
party transactions during the periods covered by the financial statements, an entity shall disclose the nature
of the related party relationship, the information about those transactions, outstanding balances, and
commitments necessary for users to understand their potential effects on the financial statements. The
standard further requires an entity to disclose key management personnel compensation in total and by
category as defined in the standard.
PAS 26 Accounting and Reporting by Retirement Benefit Plans
PAS 26 prescribes the minimum content of the financial statements of retirement benefit plans. The standard
applies to all retirement benefit plans (formal or informal, contributory or non-contributory, funded or
unfunded, and defined contribution plan or defined benefit plan). It excludes those government social security
type arrangement and employee benefits other than the retirement benefits.
Retirement benefit plans (pension schemes, superannuation schemes, or retirement benefit schemes) are
arrangements whereby an entity provides benefits for employees on or after the termination of service
(either as an annual income or as a lump sum), and the entity can determine or estimate in advance of
such benefits or the contributions towards them from the provisions of a document or the entity’s practices.
Under the defined contribution plans, its financial statements shall contain the following disclosures:
a. a statement of net assets available for benefits;
b. a statement of changes in net assets available for benefits; and
c. accompanying notes to the financial statements.
Under the defined benefit plans, its financial statements must contain either:
a. a statement showing (a) the net assets available for benefits, (b) the actuarial present value of
promised retirement benefits (the present value of the expected payment by a retirement benefit
plan to existing and past employees, attributable to the service already rendered) , distinguishing
between vested benefits (benefits, the rights to which, under the conditions of a retirement benefit
plan, are not conditional on continued employment) and non-vested benefits, and (c) the resulting
excess or deficit; or
b. a statement of net assets available for benefits, including either a note disclosing the actuarial
present value of promised vested and non-vested retirement benefits or a reference to this
information in an accompanying actuarial report.
An entity may conduct actuarial valuations every three years. If the entity did not prepare the actuarial
valuation at the date of the financial statements, the entity shall use the most recent valuation and disclose
its date of valuation. An entity shall carry the retirement benefit plan investments at fair value. When the fair
value of plan investments is not possible, the entity must disclose why it did not use the fair value.
PAS 27 Separate Financial Statements
PAS 27 prescribes the accounting and disclosure requirements for investments in subsidiaries, joint
ventures, and associates when an entity chooses to present separate financial statements or when local
regulations require doing so.
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Separate financial statements are additions to consolidated financial statements. These could be those of a
parent or a subsidiary by itself.
When an entity prepares separate financial statements, an investor may account for its investments in
subsidiaries, joint ventures, and associates either (a) at cost, (b) following PFRS 9, or (c) using the equity
method as described in PAS 28. The dividend from a subsidiary, associate, or joint venture are recognized in
the separate financial statements when the entity established its right to receive dividends. The dividends are
part of the profit or loss unless the entity opted to use the equity method and recognizes the dividends as a
deduction from the carrying amount of the investment.
Generally, an entity shall apply the applicable PFRSs when providing disclosures in its separate financial
statements unless a specific standard requires additional disclosures, such as PFRS 10, PFRS 11, PFRS 12, and
PAS 28.
PAS 28 Investment in Associates and Joint Ventures
PAS 28 prescribes the accounting for investment in associates (an entity over which the investor has
significant influence) and sets out the requirements for the application of the equity method when accounting
for investments in associates and joint ventures (a joint arrangement whereby the parties that have joint
control of the arrangement have rights to the net assets of the arrangement) . It excludes the investment
measured at fair value (PFRS 9), investment in subsidiary (PFRS 3 and PFRS 10), and joint arrangements
other than the investment in a joint venture (PFRS 11).
The standard describes the significant influence of having the power to participate in the financial and
operating policy decisions of the investee but is not control or joint control over those policies. The standard
further describes that significant influence is presumed to exist if the investor holds, directly or indirectly
(e.g. through subsidiaries), 20% or more of the voting power of the investee, unless it can be clearly
demonstrated that this is not the case as usually evidenced in the following ways:
a. representation on the board of directors or equivalent governing body of the investee;
b. participation in policy-making processes, including participation in decisions about dividends or
other distributions;
c. material transactions between the investor and the investee;
d. interchange of managerial personnel; or
e. provision of essential technical information.
Meanwhile, when the ownership interest is less than 20%, it is a financial asset measured at fair value (PFRS
9). When the ownership interest ranges from 51% to 100%, it is an investment in a subsidiary (PFRS 3 or
PFRS 10).
An entity with joint control (the contractual agreement of sharing of control of an arrangement, which exists
only when a decision about the relevant activities that require the unanimous consent of the parties sharing
control) of, or significant influence over, an investee shall account for its investments in an associate or joint
venture using the equity method EXCEPT (a) when it is exempted to prepare consolidated financial
statements following PFRS 10 or (b) when the investment in an associate or joint venture is held by an entity
that is a venture capital organization, or mutual funds, unit trust, and similar entities in which the entity may
use the fair value through profit or loss following PFRS 9. Under this method, the investment in an associate
or a joint venture is initially recognized at cost, and the carrying amount is increased or decreased to
recognize the investor’s share of the profit or loss of the investee after the date of acquisition.
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The investor’s share in the associate’s profit or loss increases or decreases its investment in the associate
and the investment income. The dividends received from the associate decrease the investment in the
associate and do not affect investment income. The investor’s share in the associate’s other comprehensive
income increases or decreases the investment in the associate and does not affect the investment income
since it is part of the investor’s other comprehensive income.
An investor starts using the equity method on the date when it obtains significant influence or joint control
over an investee. Upon acquisition, if the cost exceeds the fair value of the interest acquired, the excess is
goodwill and is included in the carrying amount of the investment. When the fair value of the purchased
interest exceeds its cost, an entity shall consider such difference as an income and part in determining its
share in the investee’s profit or loss in the acquisition period.
The reporting date of the investor and investee should be the same. However, when the reporting date of the
investee is different, the investee must prepare the financial statements the same as that of the investor.
When it is impractical, an entity shall include adjustments for those transactions between the reporting dates
that of the investor and investee. However, in no case, the difference in the reporting period exceeds three
months. Furthermore, both the investor and investee should use the same accounting policies. Otherwise, the
investee must adjust its financial statements following the accounting policies of the investor.
When the investee has cumulative preference shares held by other parties other than the investor classified
as equity, the investor shall compute its share after adjusting first in the profit or loss the preference
dividends regardless of when declared or not. Meanwhile, the investor’s share in the investee’s losses shall
be only up to its interest in the associate or joint venture (carrying amount of the investment in associate
or joint venture, investment in preference shares of the associate or joint venture, and unsecured, long-term
receivables or loans). Those investments in an associate or joint venture classified as held for sale shall
follow the PFRS 5 (Non-current Assets Held for Sale and Discontinued Operation). If the classified as held for
sale is only a portion, an entity shall account for the remaining using the equity method. When an entity sold
that portion classified as held for sale, the entity shall account for the remaining using PFRS 9 unless the
investor possesses a significant influence or joint control.
An entity shall discontinue the equity method when it loses significant influence or joint control over its
investee. If the investment in an associate becomes an investment in a joint venture, the entity shall continue
to apply the equity method with the need to revalue the retained interest.
PAS 29 Financial Reporting in Hyperinflationary Economies
PAS 29 prescribes the restatement of financial statements, including the consolidated financial statements,
of any entity whose functional currency is the currency of a hyperinflationary economy. The standard further
provides the following indicators of the existence of hyperinflation:
1. the general population prefers to keep its wealth in non-monetary assets or a relatively stable
foreign currency and immediately invested local currency held to maintain purchasing power;
2. the general population regards monetary amounts, not in terms of the local currency but to a
relatively stable foreign currency, which may lead to the use of that currency in quoting prices;
3. sales and purchases on credit take place at prices that compensate for the expected loss of
purchasing power during the credit period, even if the period is short;
4. the link of interest rates, wages, and prices to a price index; and
5. the cumulative inflation rate over three years is approaching or exceeding 100%.
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During hyperinflation (a general increase in prices and a decrease in the purchasing power of money are
very high), the financial statements expressed in money become misleading and need restatement. The
standard specifies how to restate the financial statements, including its comparative figures, whether they
used historical cost or current cost, using the measuring unit current at the end of the reporting period.
Generally, an entity shall restate the financial statements by applying the general price index. Those items
already expressed in terms of the current measuring unit at the end of the reporting period, such as the
monetary items and the non-monetary items measured at fair value or NRV in the statement of financial
position, will not be restated. An entity shall restate those items not expressed in terms of the measuring unit
at the end of the reporting period, such as the non-monetary items measured at cost in the statement of
financial position, and all items in the statement of comprehensive income and statement of cash flows.
Moreover, an entity shall also restate all monetary and non-monetary items of the prior period. An entity
shall recognize the gain or loss on the net monetary position resulting from the restatement in the profit or
loss.
In restating the financial statements, the formula to be used is the following:
Current price index (index as of the end of the reporting period)

Historical cost x
Historical price index (index as of the acquisition date)
When it is impracticable to determine the historical price index, an entity may use the average price
index for the period.
In the case of any entity from a group of entities reports in a hyperinflationary economy, the financial
statements of that entity shall be restated first before they can be consolidated in the group’s financial
statements. Furthermore, if a foreign operation reports in a hyperinflationary economy, its financial
statements shall be restated first under PAS 29 before they are translated following PAS 21. When an
economy ceases to be hyperinflationary, it will discontinue following this standard. The measuring unit
current at the end of the reporting period shall be the basis of the carrying amounts in its subsequent
financial statements.
An entity shall disclose the following information in the financial statements:

1. the fact that the financial statements and the corresponding figures for previous periods have been
restated for the changes in the general purchasing power of the functional currency, and, as a
result, are stated in terms of the measuring unit current at the end of the reporting period;
2. whether the financial statements are based on a historical cost approach or a current cost
approach;
3. the identity and level of the price index at the end of the reporting period and the movement in the
index during the current and the previous reporting period.
PAS 32 Financial Instruments: Presentation
PAS 32 establishes the principles in presenting the financial instruments as liabilities or equity. The standard
also provides the requirements in offsetting the financial assets and financial liabilities. The standard covers
all financial instruments EXCEPT for investment in subsidiaries, associates, joint ventures, the employer’s
rights and obligations under employee benefit plans, and share-based payments and insurance contracts.
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A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability
or equity instrument of another entity.
A financial asset is an asset that is (a) cash, (b) an equity instrument of another entity, (c) a contractual right
to receive cash or another financial asset from another entity, (d) a contractual right to exchange financial
instruments with another entity under potentially favorable conditions, or (e) a contract that will or may be
settled in the entity’s equity instruments and is unclassified as the entity’s equity instrument. The following
are some of the examples of financial assets and those that are not:
Financial Assets Not Financial Assets

a. cash and cash equivalents (e.g., cash on hand, in a. physical assets, such as inventories, biological
banks, short-term money placements, and cash assets, PPE, and investment property
funds) b. intangible assets
b. receivables such as accounts, notes, loans, and c. prepaid expenses and advances to suppliers
finance lease receivables d. the entity’s equity instrument (e.g., treasury
c. investments in equity or debt instruments of shares)
other entities such as held for trading
securities, investments in subsidiaries,
associates, joint ventures, investments in bonds,
and derivative assets
d. sinking fund and other long-term funds
composed of cash and other financial assets
A financial liability is any liability that is (a) contractual obligation to deliver cash or another financial asset to
another entity, (b) a contractual obligation to exchange financial assets or financial liabilities with another
entity under conditions that are potentially unfavorable to the entity, or (c) a contract that will or may be
settled in the entity’s equity instruments and is unclassified as the entity’s equity instrument. The following
are some of the examples of financial liabilities and those that are not:
Financial Liabilities Not Financial Liabilities

a. payables such as accounts, notes, loans, and a. unearned revenues and warranty obligations
bonds payable that are to be settled by future delivery of goods
b. lease liabilities or provision of services
c. held for trading liabilities and derivative b. taxes, SSS, Philhealth, and Pag-IBIG payables
liabilities c. constructive obligations
d. redeemable preference shares issued
e. security deposits and other returnable deposits
An equity instrument is a contract that evidences a residual interest in the assets of an entity after deducting
all the liabilities.
The issuer shall classify a financial instrument as a financial liability, financial asset, or an equity instrument
following the substance of the contract and the definition of the financial liability, financial asset, and an
equity instrument. However, an issuer shall classify a financial liability as an equity instrument if both the
instrument includes no contractual obligation and will or may be settled in the issuer’s equity instruments.
Moreover, if the contract requires the delivery of a variable number of the entity’s equity instrument in
exchange for a fixed amount of cash or another financial asset or a fixed number of the entity’s instrument
for a variable amount of cash or another financial asset, then such instrument is a financial liability. On the
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other hand, if the contract requires the delivery of a fixed number of the entity’s equity instruments for
a fixed amount of cash or another financial asset, then it is an equity instrument.
Some instruments are in the form of shares of stocks but the issuer classifies them as financial liabilities as
they meet the definition of financial liability. Redeemable preference shares are classified as a financial
liability because the issuer is mandatorily obligated to pay the redemption price when the holder exercises its
right to redeem. Callable preference shares are classified as an equity instrument because the right to call
is at the discretion of the issuer and therefore has no obligation to pay unless it chooses to call the
shares. Member’s shares in cooperatives are equity instruments if the entity has an unconditional right to
refuse the redemption of the member’s shares or the redemption is unconditionally prohibited by law or
relevant regulation. Puttable instruments (an instrument that gives the holder the right to put the
instrument back to the issuer for cash or another financial asset or is automatically put back to the issuer on
the occurrence of an uncertain future event or the death or retirement of the instrument holder) shall be
classified as a financial liability unless if it has the features of an equity instrument.
A compound financial instrument is a financial instrument that contains both a liability and an equity
instrument component from the issuer’s perspective. Each component shall be classified and accounted for
separately. To get the value of the equity component, the total fair value of the compound instrument shall be
deducted by the value of the debt component. If an entity reacquires its equity instruments (treasury
shares), these instruments shall be deducted from the equity. No gain or loss shall be recognized in profit or
loss. Consideration paid or received shall be recognized directly in the equity. Interest, dividends, losses,
and gains relating to a financial instrument classified as a financial liability shall be recognized in the profit
or loss and those classified as an equity instrument are recognized directly in the equity. The transaction
costs related to the issuance of an equity instrument shall be accounted as a deduction from the equity. If
these costs are related to financial liability, they will be included in the carrying amount of the financial
liability and subsequently amortized to profit or loss.
An entity can offset a financial asset and a financial liability in which the net amount is presented in the
statement of financial position when the entity has both a legal right of offset and an intention to settle the
amounts on a net basis or simultaneously.
PAS 33 Earnings per Share
PAS 33 prescribes the principles in the determination and presentation of the earning per share (EPS). The
standard aims to improve the performance comparisons between different entities in the same reporting
period and between different reporting periods for the same entity. The standard requires the publicly listed
companies (an entity with ordinary shares or potential ordinary shares traded in the public market) to
present EPS in their financial statements. An ordinary share is an equity instrument, that is subordinate to
all other classes of equity instruments, while a potential ordinary share is a financial instrument or another
contract that may entitle its holder to ordinary shares.
EPS information provides a measure of the interests for each ordinary share in the performance of an entity
over the reporting period. In other words, it represents the earnings of each ordinary share during the
period. The computation of EPS excludes the preference shares as they have fixed returns through their
dividend rates. The standard requires the information of these two types of EPS: (1) basic earnings per share
and (2) diluted earnings per share.
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The computation of basic EPS is by dividing the profit or loss attributable to ordinary shareholders by
the weighted average number of ordinary shares outstanding during the period. In computing the profit or
loss, consider the following procedures:
a. Profit or loss should be net of the income tax expense.
b. Deduct the preference dividends from the profit or loss. If the preference shares are cumulative,
deduct the one-year dividend, whether declared or not, from profit or loss . If the preference shares
are non-cumulative, subtract only the dividend declared from profit or loss .
c. Adjust the profit or loss for the after-tax amounts of preference dividends, differences arising on
the settlement of preference shares, and other similar effects of preference shares classified as
equity.
In determining the weighted average number of outstanding ordinary shares, ordinary shares are usually
time-weighted in the following manner:
a. Average the shares issued outright from the issuance date.
b. Average the subscribed shares from the subscription date.
c. When reacquired, average the treasury shares from the reacquisition date as a deduction to the
number of outstanding shares.
d. When re-issued, average the treasury shares from the re-issuance date in addition to the number
of outstanding shares.
Generally, an entity shall determine the timing of the inclusion of ordinary shares by the terms and conditions
attaching to their issue. An entity shall give due consideration to the substance of any contract associated
with the issuance of shares.
When an entity issued ordinary shares without a corresponding change in resources, adjust the EPS in
previous periods retrospectively. The following are some of its examples:
a. a capitalization or bonus issue (e.g., share dividend);
b. a bonus element in any other issue, for example, a bonus element in a rights issue to existing
shareholders (also referred to as preemptive stock rights);
c. a share split (increase in the number of shares with the corresponding decrease in par value); and
d. a reverse share split (consolidation of shares or decrease in the number of shares with a
corresponding increase in par value).
Rights issues are given to the shareholders because they have the preemptive right to purchase new shares
when issued by an entity. The exercise price (purchase price) is usually lower than its fair value, which
results in a difference known to be a bonus element. The standard provides that an entity shall include such
bonus elements in the computation of both the basic EPS and diluted EPS. In computing the total number of
potential shares outstanding during the period, multiply the number of shares outstanding for all
periods before the rights issue by the adjustment factor (fair value of shares immediately before the
exercise of rights divided by the theoretical ex-rights fair value per share). In computing the theoretical ex-
rights fair value per share, add the aggregate market value of the shares outstanding
immediately before the exercise of rights to the proceeds from the exercise of rights and divide by
the number of shares outstanding after the exercise of rights.
Diluted EPS is the amount of profit for the period per share, reflecting the maximum dilutions that would have
resulted from conversions, exercises, and other contingent issuances that individually would have decreased
earnings per share and in the aggregate would have had a dilutive effect. An entity shall present only
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the basic EPS if it has no dilutive potential ordinary shares (i.e., simple capital structure). The computation of
diluted earnings per share assumes that the dilutive potential ordinary shares, such as convertible
preference shares, options, and warrants, were converted or exercised. The formula presumes that the
conversion or exercise to have taken place on the date the potential ordinary shares became outstanding ,
regardless of their actual date. The computation of the diluted EPS uses the following formula:
Profit or loss + after-tax interest expense on convertible bonds

Diluted EPS =
The weighted average number of outstanding ordinary share + incremental shares
arising form assumed conversion or exercise of dilutive potential ordinary shares
Do not anymore adjust the profit or loss by the preference dividends because the standard assumes that the
holders converted these preference shares into ordinary shares. Adjust only the profit or loss by reduced
interest expense, net of tax of convertible bonds since the standard assumes that the holder already
converts the preference shares to ordinary shares.
Adjust the weighted average number of outstanding shares by the incremental shares from the assumed
conversion of these dilutive potential ordinary shares.
In the case of options, warrants, and their equivalents, the computation of the incremental shares as part of
the calculation of the diluted EPS uses the treasury share method. This method assumes that:
a. The holder exercises the options or warrants.
b. The proceeds received from the exercise are used to purchase treasury shares at the average
market price.
c. The difference between the treasury shares assumed already purchased and the option shares
represent the incremental shares.
In computing the incremental shares, multiply the option shares by the total exercise price (exercise price +
the fair value of each share option) and divide afterward by the average market price.
An entity shall present in the financial statement the basic and diluted EPS computed on the following:
a. profit or loss from continuing operations
b. profit or loss from discontinued operations, if the entity reports a discontinued operation
c. profit or loss for the year
There is no computation for EPS on other comprehensive income and total comprehensive income. An entity
shall present the EPS computed on profit or loss from continuing operations and profit or loss for the year on
the face of the statement of profit or loss and other comprehensive income. If the entity uses a two-
statement presentation, EPS is presented only on the separate income statement.
PAS 34 Interim Financial Reporting
PAS 34 prescribes the minimum content of an interim financial statement report and the principles for
recognition and measurement in complete or condensed financial statements for the interim period. It guides
those entities required by the government, securities regulators, stock exchanges, and accountancy bodies
to publish interim financial reports. It is not mandatory to all entities, but it encourages publicly listed entities
to provide at least semi-annual financial reports for the first half of the year for issuance not later than 60
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days after the end of the interim period. Moreover, non-compliance to this standard does not necessarily
mean non-conformance of the entity’s financial statements to PFRSs.
Interim reporting pertains to the preparation and presentation of an interim financial report for an interim
period (a financial reporting period shorter than a full financial year). An interim financial report means a
financial report containing either: a complete set of financial statements (PAS 1) or a set of condensed
financial statements (PAS 34) for an interim period.
When an entity opts to comply with PAS 1, the following comprises a complete set of financial statements:
a. statement of financial position;
b. statement of profit or loss and other comprehensive income;
c. statement of changes in equity;
d. statement of cash flows ;
e. notes, comprising a summary of significant accounting policies and other explanatory information
and comparative information in respect of the preceding period; and
f. a statement of financial position, as at the beginning of the preceding period (i.e., in cases of
retrospective application, retrospective restatement, or reclassification adjustment).
When an entity opts to comply with PAS 34, the following presents the minimum content of an interim
financial report:
a. condensed statement of financial position;
b. condensed statement of profit or loss and other comprehensive income presented as either (a) a
condensed single statement; or (b) a condensed separate income statement and a condensed
statement of comprehensive income;
c. condensed statement of changes in equity;
d. condensed statement of cash flows; and
e. selected explanatory notes.
The standard describes condensed to be the minimum information required by the standard. However, it does
not prohibit an entity from publishing a complete set of financial statements under PAS 1 in its interim
financial report. Furthermore, it does not prohibit an entity from including information that is more than the
minimum line items or selected explanatory notes set out under PAS 34 in its condensed interim financial
statements.
When some significant events and transactions have happened since the end of the last reporting period, the
entity shall explain those events to inform the users of the changes in the financial position and performance
of the entity. The following are some of the examples of events and transactions requiring disclosures in the
interim report:
a. write-down of inventories and their reversal;
b. impairment losses and its reversal;
c. reversals of provisions for restructuring costs;
d. acquisitions and disposals of PPE, including purchase commitments;
e. litigation settlements;
f. correction of prior period errors;
g. changes in the business or economic circumstances affecting the fair value of the financial assets
and financial liabilities;
h. loan default or breach of a loan agreement that remained not remedied;
i. related party transactions;
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j. transfers between levels of fair value hierarchy used in measuring the fair value of financial
instruments;
k. changes in the classification of financial assets;
l. changes in contingent liabilities or contingent assets.
The interim report shall include interim financial statements for periods as follows:
Financial statements and interim period Current Comparative

a. statement of financial position at the end of the current at the end of the immediately
interim period preceding year
semi-annual June 30, 2021 December 31, 2020
quarterly March 31, 2021 December 31, 2020
quarterly September 30, 2021 December 31, 2020
b. statement of profit or loss and at the end of the current a comparable interim period of
other comprehensive income interim period the immediately preceding year
semi-annual June 30, 2021 June 30, 2020
quarterly March 31, 2021 March 31, 2020
quarterly September 30, 2021 September 30, 2020
c. statement of changes in equity at the end of the current a comparable interim period of
interim period the immediately preceding year
d. statement of cash flows at the end of the current a comparable interim period of
interim period the immediately preceding year
If the business is highly seasonal, PAS 34 encourages disclosure of financial information for the latest 12
months and comparative information for the prior 12-month period in addition to the interim period
financial statements.
Gains and losses arising in an interim period are recognized immediately and are not deferred, e.g., inventory
write-downs & reversals; asset impairment losses & reversals; discontinued operations; and fair value
changes on assets measured at fair value. Costs and expenses (income) that benefit the entire year or are
incurred (earned) over the year are spread out over the interim periods, e.g., depreciation, amortization,
property taxes, insurance expense, interest expense (income), 13th-month pay, and other year-end bonuses.
PAS 36 Impairment of Assets
PAS 36 prescribes the accounting for the impairment of assets. It covers the property, plant, and equipment;
investment property measured under the cost model; investment in associates, joint ventures, and
subsidiaries; intangible assets; and goodwill.
If the carrying amount (the amount at which an asset is recognized after deducting any accumulated
depreciation or amortization and accumulated impairment losses) of an asset is greater than its
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recoverable amount (the amount to be recovered through use or sale of an asset which is the higher of its
fair value less costs of disposal and its value in use) , the asset is impaired. The excess is an impairment
loss.
An entity shall assess at the end of each reporting period if there is any indication of asset impairment. If any
such indication exists, the entity shall estimate the recoverable amount of the asset. If there is no indication
of asset impairment, an entity is not required to estimate the recoverable amount of the asset. These
indications may come from the following sources of information:
External Internal
a. Significant decline in the asset’s value more a. Evidence of obsolescence or physical damage
than what is expected as a result of the passage b. A significant change with adverse effect to the
of time of normal use. entity has taken place or will take place, which
b. Significant changes in technological, market, will affect the expected use of the asset, e.g.,
economic or legal environment in which the discontinuance, disposal, restructuring plans.
entity operates or in the market to which an c. Evidence is available from internal reporting
asset is dedicated. that indicates that the economic performance of
c. Increase in market interest rates or other an asset is, or will be, worse than expected.
market rates of return on investments which
are likely to affect discount rates used in
calculating asset’s value in use and decrease
asset’s recoverable amount materially.
d. The carrying amount of the net assets is more
than its market capitalization.
An entity is required to test the following assets for impairment at least annually, whether or not there are
indications for impairment:
a. Intangible asset with indefinite useful life
b. Intangible asset not yet available for use
c. Goodwill acquired in a business combination
When there is no reason to believe that value in use (the present value of the future cash flows expected to
get from an asset or cash-generating unit) of an asset materially exceeds its fair value less costs of disposal,
an entity may use the its fair value less costs of disposal as the recoverable amount. It will often be the case
for assets held for disposal.
In computing the value in use, an entity should consider the following:

a. The estimated future cash flows include the revenues to be derived from the continuing use of the
asset, the day-to-day costs of using the asset, and any residual value of the asset and disposal
costs. It excludes cash flows from future restructuring not yet committed, improving or enhancing
the asset’s performance, income taxes, and financing activities.
b. Cash flow projections shall cover a maximum period of 5 years.
c. Extrapolate those projections beyond five years.
d. The discount rate to be used shall be a pre-tax rate.
An entity shall recognize an impairment loss in profit or loss unless the asset uses a revalued amount. In this
case, an entity shall deduct the impairment loss first from the related revaluation surplus and recognize any
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excess thereof in profit or loss. The entity shall recognize the decrease in the revaluation surplus in other
comprehensive income.
After recognizing an impairment loss, the depreciation (amortization) charge for the asset shall be adjusted
in future periods to allocate the asset’s revised carrying amount, less its residual value (if any), on a
systematic basis over its remaining useful life.
When an entity cannot possibly estimate the recoverable amount of an individual asset, an entity shall
determine the recoverable amount of the cash-generating unit (the smallest identifiable group of assets that
generates cash inflows that are largely independent of the cash inflows from other assets or groups of
assets) to which the asset belongs to. The cash-generating unit (CGU) shall be the one tested for impairment.
For purposes of impairment testing, an entity shall allocate the goodwill acquired in a business combination
to each of the acquirer’s CGU in the year of the business combination. Moreover, an entity shall distribute the
impairment loss on a CGU first to any goodwill allocated to the CGU and then to the other assets of the
unit pro-rata based on the carrying amount of each asset in the CGU.
The reversal of an impairment loss increases the carrying amount of the asset other than the goodwill.
However, the standard provides that the reversal amount should not result in a carrying amount
that exceeds the carrying amount had no impairment happened for the asset in prior years. An entity shall
recognize the difference between the carrying amount of the asset during the reversal of the impairment and
the would-be carrying amount as a gain on reversal of impairment loss in the profit or loss unless the
recognized amount of the asset is the revalued amount. Moreover, an entity shall recognize the difference
between the would-be carrying amount and the revalued amount as a revaluation increase in the other
comprehensive income.
PAS 37 Provisions, Contingent Liabilities, and Contingent Assets
PAS 37 prescribes the accounting for provisions, contingent liabilities, and contingent assets. It excludes
those resulting from executory contracts except onerous contracts and those covered by other standards.
A provision is a liability of uncertain timing or amount. It differs from other liabilities because of
the uncertainty about the timing or amount of expenditure required in settlement. It also
requires estimates, unlike other liabilities. Although some other liabilities are also estimated, their
uncertainty is generally much less than the provisions. An entity shall report provisions separately
from other liabilities. An entity shall recognize a provision after meeting all of the following conditions:
a. The entity has a present obligation (legal or constructive) as a result of a past event;
b. An outflow of resources embodying economic benefits will probably be required to settle the
obligation; and
c. An entity can make a reliable estimate of the amount of the obligation.
Moreover, an entity shall provide appropriate disclosures of the provision in the financial statements.
Meanwhile, a contingent liability is a possible obligation arising from a past event whose existence will be
confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly
within the entity's control. A contingent liability can also be a present obligation with no probable ou tflow of
resources embodying economic benefits to settle and with no reliable measurement. An entity shall only
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disclose it in the financial statements. Furthermore, an entity shall disregard those events that remotely
provide a present obligation for the entity.
A contingent asset is a possible asset that arises from past events and whose existence needs confirmation
by the occurrence or non-occurrence of one or more uncertain future events not wholly within the entity's
control. An entity shall only disclose only in the financial statements when there is a probable contingent
asset. Otherwise, an entity shall disregard those possible or remote contingent assets.
As a general rule, an entity shall measure a provision using the best estimate of the expenditure required to
settle the present obligation at the end of the reporting period. When it involves plenty of items, an entity
shall estimate it using the expected value or probability-weighted average. When there is a continuous range
of possible outcomes, and each point is as likely as any other, the present obligation shall be measured using
the mid-point.
When the effect of the time value of money is material, the amount of a provision shall be the present value
of the expenditures expected to be required to settle the obligation. An entity shall consider the gains from
the expected disposal of assets in measuring a provision. An entity shall recognize gains only upon asset
disposal.
When an entity expects to reimburse some or all of the expenditure required in settling a provision by
another party, the entity shall recognize the reimbursement only when it is virtually certain that the entity
will receive the reimbursement after settlement. An entity shall treat the reimbursement as a separate
asset. In the statement of profit or loss and other comprehensive income, an entity may present the expense
related to a provision net of the amount recognized for a reimbursement.
Provisions shall be reviewed at the end of each reporting period and adjusted to reflect the current best
estimate. If it is no longer probable that an outflow of resources embodying economic benefits will be
required to settle the obligation, an entity shall reverse the provision.
The standard also applies in the following circumstances:

a. If a customer does not have the option to purchase a warranty separately, an entity shall account
for the warranty under PAS 37 unless the promised warranty provides the customer with a service
in addition to the assurance that the product complies with agreed-upon specifications.
b. If a customer option does not provide the customer with a material right, PAS 37 will apply.
c. PAS 37 will apply if a provision for the guarantee for indebtedness of others becomes probable that
the entity will be held liable for the guarantee, such as loan defaults of the original debtor.
PAS 38 Intangible Assets
PAS 38 prescribes the accounting treatment for intangible assets not covered by another standard. It
specifies the recognition, measurement, and disclosures of an intangible asset.
An intangible asset is an identifiable non-monetary asset without physical substance. It excludes goodwill
acquired in a business combination because it is unidentifiable, and PFRS 3 and PAS 36 shall apply.
The standard provides the essential criteria in the definition of intangible assets, which include:
a. identifiability (separable or arises from contractual rights),
b. control (power to obtain or restrict others from getting the economic benefits from an asset), and
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c. future economic benefits (may include revenue from the sale of products or services, cost
savings, or other benefits resulting from the use of the asset by the entity).
An entity shall recognize an intangible asset if management can demonstrate that:

a. the item meets the definition of intangible asset,
b. the expected future economic benefits will probably flow to the entity, and
c. an entity can measure the cost reliably.
An entity shall initially measure an intangible asset at cost. The measurement of the cost depends on how the
intangible asset is acquired. An entity can acquire intangible assets by separate acquisition, acquisition as
part of a business combination, acquisition through a government grant, exchanges of assets, and internal
generation.
When an entity separately acquires an asset, the cost of intangible assets comprises the purchase price,
including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates, and
any directly attributable cost of preparing the asset for its intended use.
When an entity acquires an asset as part of the business combination, the cost of an intangible asset
acquired in a business combination is its fair value at the acquisition date.
When an entity acquires an asset through a government grant, an entity shall measure the cost using fair
value. An entity can also use as the cost measurement the nominal amount plus direct costs incurred in
preparing the asset for its intended use.
When an entity acquires an asset through the exchange of non-monetary assets with commercial substance,
an entity shall recognize the intangible asset using the following order of priority:
a. fair value of the asset given up plus cash paid or minus cash received
b. the fair value of the asset received
c. carrying amount of the asset given up plus cash paid or minus cash received
If the exchange lacks commercial substance, the intangible asset is initially recognized using the carrying
amount of the asset given up plus cash paid or minus cash received. An exchange transaction has a
commercial substance if the expected future cash flows from the asset received significantly differ from
those of the asset given up.
When an entity internally generates the intangible assets, the costs include the research costs and the
development costs. Research costs refer to the costs of searching for new knowledge and identifying and
selecting possible alternatives. Development costs refer to the costs of designing from selected
alternatives using knowledge gained from research. If an entity cannot classify the incurred cost on what
phase it belongs to, the entity shall regard the cost incurred in the research phase. An entity shall recognize
the research costs as an expense immediately. Likewise, an entity shall recognize the development costs as
an expense immediately, unless they meet all of the following conditions for capitalization, technical
feasibility, intention to complete, ability to use or sell, probability of generating economic benefits, availability
of adequate resources, and measured reliably.
The following are not research and development (R & D) expenses but rather regular expenses:
a. costs incurred during commercial production
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 trouble-shooting during commercial production

 periodic or routine design changes to existing products
 modification of design for a specific customer
 design, construction, and operation of the plant that is feasible for commercial production
 engineering follow through in an early phase of commercial production
 quality control during commercial production
b. advertising and other marketing expenses
c. training costs
R & D expense relates to something that is still in the process of being invented. It does not relate to periodic
changes to an existing product.
When an entity has items of PPE used in R & D activities, the cost of the PPE is capitalized and depreciated if
an entity can use the item in various R & D activities or other purposes. The amount of depreciation is part of
the R&D expense. If an entity can use the item on one specific R & D project, an entity shall recognize the
cost of the PPE as an R & D expense immediately in its entirety.
An entity shall recognize an expense immediately the cost of internally generated brands, mastheads,
publishing titles, customer lists, goodwill, and items similar in substance when incurred.
When an entity subsequently incurs expenses on an intangible asset, the entity shall continually recognize it
as an expense. When an entity initially recognized an expenditure of an intangible item as an expense, the
entity shall not recognize such expenditure as part of the cost of an intangible asset at a later date.
After initial recognition, an entity shall choose as its accounting policy either (a) the cost model or (b) the
revaluation model if the intangible asset has an active market.
In amortizing an intangible asset, the following procedures shall be observed:

a. Intangible assets with finite useful life are amortized over the shorter of the asset’s useful life and
legal life.
b. Intangible assets with indefinite useful life are not amortized but tested for impairment at least
annually.
c. The default method of amortization is the straight-line method.
PAS 40 Investment Property
PAS 40 prescribes the accounting treatment for investment property and related disclosure requirements. It
covers the recognition, measurement, and disclosure of investment property. The standard does not apply to
biological assets related to agricultural activity (PAS 41) and those mineral rights and mineral reserves.
Investment property is a property ( land or a building – or a part of a building – or both) held (by
the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both,
rather than for use in the production or supply of goods or services or administrative purposes, or sale in
the ordinary course of business. It generates its cash flows independently from other assets. It is not a PPE
like an owner-occupied property held for use in the production or supply of goods and services or
administrative services. It is not also an inventory held for sale in the ordinary course of business. It is not an
asset classified as held for sale under PFRS 5. The following are examples of belonging and not belonging to
investment property:
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Investment Property Not Investment Property

a. land held for long-term capital appreciation a. property intended for sale in the ordinary
rather than for short-term sale in the ordinary course of business or property acquired
course of business exclusively with a view to subsequent disposal
b. land held for a currently undetermined future soon or for development and resale.
use b. property being constructed or developed on
c. a building owned by the entity (or held by the behalf of third parties (PFRS 15 Revenue from
entity under a finance lease) and leased out Contracts with Customers).
under one or more operating leases c. owner-occupied property (PAS 16) and owner-
d. a vacant building for lease under one, or more occupied property awaiting disposal.
operating leases d. leased property to another entity under a
e. property that is being constructed or developed finance lease.
for future use as investment property
When a certain property is partly investment property and partly owner-occupied, this property shall be
accounted as follows:
a. If an entity can sell the portions separately or lease out separately under a finance lease, an entity
shall account for the portions separately. An entity shall classify the rented portion under operating
lease as an investment property and the owner-occupied portion as property, plant, and
equipment.
b. If an entity cannot sell the portions separately, the property is investment property only if an entity
uses only an insignificant part of the property for the production or supply of goods or services or
administrative purposes. If the owner-occupied portion is significant, an entity shall classify the
entire property as property, plant, and equipment.
When an entity provides ancillary services to the occupants of a property held, the property is investment
property if the services are insignificant to the arrangement as a whole. Otherwise, an entity shall classify
such as PPE.
An investment property is recognized when it meets the definition of an investment property and the asset
recognition criteria of probable future economic benefits and reliable measurement of cost. An entity shall
measure the property initially at cost. The cost of the investment property includes the purchase prices and
any directly attributable expenditure EXCEPT for the following costs that an entity shall recognize
as expenses immediately:
a. start-up costs (unless they are necessary to bring the property to the condition necessary for it to
be capable of operating in the manner intended by management)
b. operating losses incurred before the investment property achieves the planned level of occupancy
c. abnormal amounts of wasted material, labor, or other resources incurred in constructing or
developing the property
When an investment property is acquired through the exchange of non-monetary assets, the investment
property shall be measured at fair value unless: (a) the exchange transaction lacks commercial substance or
(b) the fair value of neither the asset received nor the asset given up is reliably measurable. If the acquired
asset is not measured at fair value, the cost is measured at the carrying amount (the amount at which an
asset is recognized in the statement of financial position) of the asset given up.
LEARNING MODULES
After the initial recognition, an entity may choose either the cost model or the fair value model. Under the
cost model, an entity shall measure all of its investment property at cost less any accumulated depreciation
and impairment losses following PAS 16 Property, plant, and equipment. Under the fair value model, an entity
shall measure all of its investment property at fair value, except in the following cases: (a) changes in fair
values are recognized in profit or loss, (b) depreciable assets classified as investment property measured
under fair value model are not depreciated, and (c) if the fair value of an item of investment property
cannot be determined reliably on initial recognition, such item is subsequently measured under the cost
model.
When an entity changes its accounting policy particularly a change from the cost model to the fair value,
such change is accounted for prospectively. However, an entity is not permitted to change from the fair value
model to the cost model. Furthermore, the standard requires all entities to determine the fair value of
investment property whether it uses the cost model or fair value model. Fair values determined are used for
measurement and disclosure purposes if the entity uses the fair value model and for disclosure purposes
only if the entity uses the cost model.
Transfers to, or from, investment property shall be made by an entity when, and only when, there is a change
in use, evidenced by:
a. commencement of owner-occupation, for a transfer from investment property to owner-occupied
property;
b. commencement of development with a view to sale, for a transfer from investment property to
inventories;
c. end of owner-occupation, for a transfer from owner-occupied property to investment property; or
d. commencement of an operating lease to another party, for a transfer from inventories to
investment property.
PAS 41 Agriculture
PAS 41 prescribes the accounting treatment, financial statement presentation, and disclosures related to
agricultural activities, including the biological assets except for bearer plants, the agricultural
produce at the point of harvest, and unconditional government grants related to a biological
asset measured at its fair value less costs to sell. The standard does not cover the land used for the
agricultural activity (PAS 16 and PAS 40), bearer plants (PAS 16), government grants related to bearer plants
(PAS 20), intangible assets related to agricultural activity (PAS 38), and agricultural produce after
harvest (PAS 2 or other applicable standards).
PAS 41 defines the following terms:
a. Agricultural activities refer to the management by an entity of the biological transformation and
harvest of biological assets for sale or conversion into agricultural produce or additional biological
assets.
b. A biological asset can be a living animal or plant.
c. A bearer plant is a living plant used in the production or supply of agricultural produce, can bear
produce for more than one period, and has a remote likelihood of being sold as agricultural
produce, except for incidental scrap sales.
d. Agricultural produce refers to the harvested produce of biological assets.
LEARNING MODULES
e. Harvest refers to the detachment of produce from a biological asset or the cessation of a
biological asset’s life processes.
Biological transformation comprises the following processes that cause a qualitative or quantitative change
in a biological asset:
a. capability to change (capable of biological transformation) ,
b. management of change (facilitates biological transformation), and
c. measurement of change (measures biological transformation).
Biological transformation comprises the following processes that cause a qualitative or quantitative
change in a biological asset:
a. growth (increase in quantity or improvement in quality) ,
b. degeneration (decrease in quantity or deterioration in quality) ,
c. production (agricultural produce), and
d. procreation (creation of additional biological asset)
A biological asset can be consumable (those that are to be harvested as agricultural produce or sold as a
biological asset) and bearer (those held to bear produce).
A biological asset is recognized when it meets the definition of an asset, including the reliable measurement
of its fair value or cost. An entity shall initially and subsequently measure biological assets at fair value less
costs to sell. Its fair value is its market price less any costs to sell the produce. The costs to sell refer to
the incremental costs such as commission, levies, and transfer taxes directly attributable to the disposal of
an asset, excluding finance costs and income taxes. An entity shall recognize any gain or loss arising from
initial measurement and subsequent changes in fair value less costs to sell in profit or loss. An entity shall
recognize unconditional grants related to biological assets measured at fair value less costs to sell as
income when it becomes receivable. An entity shall recognize the conditional grants as income only when the
entity meets its conditions.
Generally, the reporting entity shall disclose the following information related to the biological assets:
1. the aggregate gain or loss arising from the initial recognition and the subsequent changes in fair
value less costs to sell during the period;
2. the description of each group of biological assets, including the nature of its activities, the non-
financial measures or estimates of the physical quantities of each group, and the agricultural
produce during the period;
3. the restrictions to the titles, the amount of the commitments for its development or acquisition of
the biological assets, and the financial risk management strategies related to the agricultural
activity; and
4. a reconciliation of changes in the carrying amount from the beginning to the end of the period,
including the gain or loss arising from changes in fair value less costs to sell, changes due to
purchases, sales, harvest, business combinations, and foreign exchange differences.
When an entity measures the biological assets at a cost where an entity cannot measure the fair value
reliably, the financial statements shall require the following additional disclosures :
a. a description of the biological assets;
b. an explanation of why an entity cannot measure the fair value reliably
c. the range of estimates within which fair value is highly likely to lie if possible;
d. the depreciation method used;
LEARNING MODULES
e. the useful lives or the depreciation rates used; and

f. the gross carrying amount and the accumulated depreciation at the beginning and end of the period.
For government grants, an entity shall disclose the nature and extent of government grants recognized in the
financial statements, unfulfilled conditions, and other contingencies attaching to the government grants; and
the significant decreases expected in the level of government grants.
Moreover, the reporting is encouraged to disclose the consumable and bearer biological assets, mature and
immature biological assets, and the changes in the fair value less costs to sell due to price change and
physical change.
SUGGESTED READINGS
This section supplements the discussion of the topic as presented in each lesson. The suggested readings
provide you more learning opportunities to fully grasp the intended learning objectives. It is only optional to
those students who wish to expand their understanding regarding this topic.
1. Conceptual Framework and Accounting Standards (2019) by Millan, pp. 110-142, 153-164, 170-179, 184-191,
195-197, 201-213, 217-234, 239-256, 262-270, 273-281, 285-289, 293-297, 300-304, 307-308, 310-
317, 320-323, 326-336, 341-359, 363-371, 373-390, 393-402, 404-420, 423-436, 440-450.
2. PFRS (2018) by PICPA-Northern Metro Manila Chapter, pp. 1-513.
SUGGESTED EXERCISES
This section provides suggested exercises for you to practice. The recommended problems and MCQ will give
you familiarity with the questions related to the topic. It is only optional to those who want to test their
acquired knowledge on this particular topic.
1. Conceptual Framework and Accounting Standards (2019) by Millan, pp. 143-152, 165-169, 180-183, 192-194,
198-200, 214-216, 235-238, 257-261, 270-272, 282-284, 290-292, 298-299, 305-306, 309, 318-319,
324-325, 337-340, 360-362, 371-372, 391-392, 402-403, 421-422, 437-439, 450-452.
REFERENCES
1. IFRS. (2018). International Financial Reporting Standards. www.ifrs.org.
2. Millan, Z. V. (2019). Conceptual framework and accounting standards 2019 edition . Bandolin Enterprises.
3. PICPA-Northern Metro Manila Chapter. (2018). PFRS.
4. Valix, C., Peralta, J., & Valix, C. A. (2020). Conceptual framework and accounting standards . GIC
Enterprises & Co., Inc.

PAS 1 Financial Statement Standards

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PAS 1 Financial Statement Standards

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CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS

CFAS LECTURE SERIES

PAS 1 Presentation of the Financial Statements

 Has no realistic alternative but to do so.

i. cash and cash equivalents;

An entity shall classify an asset as current when:

Meanwhile, an entity shall classify a liability as current when:

The standard defines inventories as assets:

The cost of inventories comprises:

PAS 7 Statement of Cash Flows

PAS 8 Accounting Policies, Changes in Accounting Estimates, and Errors

PAS 10 Events after the Reporting Period

PAS 12 Income Taxes

PAS 16 Property, Plant, and Equipment

PAS 19 Employee Benefits

PAS 20 Accounting for Government Grants and Disclosure of Government Assistance

An entity shall disclose the following in the financial statements:

PAS 21 The Effects of Changes in Foreign Exchange Rates

PAS 23 Borrowing Costs

Capitalizable Borrowing Cost = Actual Borrowing Costs - Investment Income

Capitalizable Borrowing Cost = Average Expenditure x Capitalization Rate

PAS 24 Related Party Disclosures

PAS 26 Accounting and Reporting by Retirement Benefit Plans

PAS 27 Separate Financial Statements

PAS 28 Investment in Associates and Joint Ventures

PAS 29 Financial Reporting in Hyperinflationary Economies

In restating the financial statements, the formula to be used is the following:

Current price index (index as of the end of the reporting period)

An entity shall disclose the following information in the financial statements:

PAS 32 Financial Instruments: Presentation

Financial Assets Not Financial Assets

Financial Liabilities Not Financial Liabilities

PAS 33 Earnings per Share

Profit or loss + after-tax interest expense on convertible bonds

PAS 34 Interim Financial Reporting

Financial statements and interim period Current Comparative

PAS 36 Impairment of Assets

In computing the value in use, an entity should consider the following:

PAS 37 Provisions, Contingent Liabilities, and Contingent Assets

The standard also applies in the following circumstances:

PAS 38 Intangible Assets

An entity shall recognize an intangible asset if management can demonstrate that:

 trouble-shooting during commercial production

In amortizing an intangible asset, the following procedures shall be observed:

PAS 40 Investment Property

Investment Property Not Investment Property

PAS 41 defines the following terms:

e. the useful lives or the depreciation rates used; and

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