CHAPTER 1

OVERVIEW OF ACCOUNTING

Objectives:
Define the meaning of accounting
Identify and learn the PAS 1 to PAS 23

Definition of Accounting

Accounting is “the process of identifying, measuring, and

communicating economic information to permit informed judgment and
decisions by users of information.”

Three important activities

1. Identifying - the process of analyzing events and transactions to

determine whether or not they will be recognized. Only
accountable events are recognized.

2. Measuring - involves assigning numbers, normally in monetary

terms, to the economic transactions and events.

3. Communicating - the process of transforming economic data into

useful accounting information, such as financial statements and
other accounting reports, for dissemination to users.

1
Types of Events

1. External events – events that involve an external party.

a. Exchange (reciprocal transfer) – reciprocal giving and receiving

b. Non-reciprocal transfer – “one way” transaction

c. External event other than transfer – an event that involves

changes in the economic resources or obligations of an entity
caused by an external party or external source but does not
involve transfers of resources or obligations.

2. Internal events – events that do not involve an external party.

a. Production – the process by which resources are transformed into

finished goods.

b. Casualty – an unanticipated loss from disasters or other similar

events.

Measurement

The several measurement bases used in accounting include, but not

limited to, the following:

- historical cost,

- fair value,

- present value,

- present value,

- current cost, and

- sometimes inflation-adjusted costs.

The most commonly used is historical cost. This is usually combined

with the other measurement bases. Accordingly, financial statements are
2
 said to be prepared using a mixture of costs and values

Types of accounting information classified as to users’ needs

1. General purpose accounting information - designed to meet the

common needs of most statement users. This information is governed
by the Philippine Financial Reporting Standards (PFRSs).

2. Special purpose accounting information - designed to meet the specific

needs of particular statement users. This information is provided by
other types of accounting, e.g., managerial accounting, tax basis
accounting, etc.

3
- Double-entry system – each accountable event is recorded in two
parts – debit and credit

- Going concern - the entity is assumed to carry on its operations

for an indefinite period of time.

- Separate entity – the entity is treated separately from its owners,

- Stable monetary unit - amount in the financial statements are

stated in terms of a common unit of measure; changes in
purchasing power are ignored.

- Time Period – the life of the business is divided into series of

reporting periods.

- Materiality concept – information is material if its omission or

misstatement could influence economic decisions.

- Cost-benefit – the cost of processing and communicating

information should not exceed the benefits to be derived from it

- Accrual Basis of accounting – effects of transactions are

recognized when they occur (and not as cash is received or paid)
and they are recognized in the accounting periods to which they
relate

- Historical cost concept – the value of an asset is determined on

the basis of acquisition cost.

- Concept of Articulation – all of the components of a complete set

of financial statements are interrelated.

- Full disclosure principle – financial statements provide sufficient

detail to disclose matters that make a difference to users, yet
sufficient condensation to make the information understandable,
keeping in mind the costs of preparing and using it.
4
 - Consistency concept – financial statements are prepared on the
basis of accounting policies which are applied consistently from
one period to the next.

- Matching – costs are recognized as expenses when the related

revenue is recognized.

- Residual equity theory – this theory is applicable where there are

two classes of shares issued, ordinary and preferred. The
equation is “Assets – Liabilities – Preferred Shareholders’ Equity
= Ordinary Shareholders’ Equity.”

- Fund theory – the accounting objective is the custody and

administration of funds

- Realization – the process of converting non-cash assets into cash

or claims for cash

- Prudence (Conservatism) – the inclusion of a degree of caution in

the exercise of the judgments needed in making the estimates
required under conditions of uncertainty , such that assets or
income are not overstated and liabilities or expenses are not
understated

Common branches of accounting

5
1. Financial accounting - focuses on general purpose financial statements

2. Management accounting – focuses on special purpose financial reports

for use by an entity’s management.

3. Cost accounting - the systematic recording and analysis of the costs of

materials, labor, and overhead incident to production.

4. Auditing - the process of evaluating the correspondence of certain

assertions with established criteria and expressing an opinion thereon

5. Tax accounting - the preparation of tax returns and rendering of tax

advice, such as the determination of tax consequences of certain
proposed business endeavors

6. Government accounting - refers to the accounting for the government

and its instrumentalities, placing emphasis on the custody of public
funds, the purposes for which those funds are committed, and the
responsibility and accountability of the individuals entrusted with those
6
 funds.

Four sectors in the practice of accountancy

1. Practice of Public Accountancy - involves the rendering of audit or

accounting related services to more than one client on a fee basis.

2. Practice in Commerce and Industry - refers to employment in the private

sector in a position which involves decision making requiring
professional knowledge in the science of accounting and such position
requires that the holder thereof must be a CPA.

3. Practice in Education/Academe – employment in an educational

institution which involves teaching of accounting, auditing, management
advisory services, finance, business law, taxation, and other technically
related subjects.

4. Practice in the Government – employment or appointment to a position

in an accounting professional group in the government or in a
government–owned and/or controlled corporation where decision
making requires professional knowledge in the science of accounting, or
where civil service eligibility as a CPA is a prerequisite

Conceptual Framework for Financial Reporting

The Conceptual Framework sets out the concepts that underlie the
preparation and presentation of financial statements for external users

Objective of general-purpose financial reporting

- The objective of general-purpose financial reporting is to provide

financial information about the reporting entity that is useful to
existing and potential investors, lenders and other creditors in
making decisions about providing resources to the entity. A
secondary objective of financial statements is to show the results

7
 of the stewardship of management

- The objective of general-purpose financial reporting forms the

foundation of the Conceptual Framework. Other aspects of the
Conceptual Framework flow logically from the objective.

Users and their Needs

Primary users – those to whom general purpose financial reports are

directed:
(a) Existing and potential investors
(b) Lenders and other creditors

Only the common needs of primary users are met by the financial
statements

Qualitative Characteristics

1. Qualitative Characteristics

(1) Relevance
(a) Predictive value
(b) Feedback value
 Materiality – entity-specific aspect of relevance
(2) Faithful representation
(a) Completeness
(b) Neutrality
(c) Free from error
2. Enhancing qualitative characteristics

(3) Comparability

(4) Verifiability
(5) Timeliness
(6) Understandability

8
Elements of Financial Statements
Financial Position
1. Asset - resource controlled by the entity as a result of past events and
from which future economic benefits are expected to flow to the entity.

2. Liability - present obligation of the entity arising from past events, the
settlement of which is expected to result in an outflow from the entity
of resources embodying economic benefits.

3. Equity – assets less liabilities

Performance

1. Income - encompasses both (a) revenues and (b) gains

2. Expense - encompasses both (b) expenses and (losses)

PAS 1 Presentation of Financial Statements

PAS 1 prescribes the basis for presentation of a general purpose

financial statements to improve comparability both with the entity's
9
financial statements of previous periods (intra-comparability) and with
the financial statements of other entities (inter-comparability).

Complete set of financial statements

1. Complete set of financial statements

2. Statement of profit or loss and other comprehensive income

3. Statement of changes in equity

4. Statement of cash flows

5. Notes (5a) comparative information in respect of the preceding

period; and

6. Additional statement of financial position (required only when certain

instances occur)

General features

1. Fair Presentation and Compliance with PFRSs - The application of

PFRSs, with additional disclosure when necessary, is presumed to
result in financial statements that achieve a fair presentation

2. Going concern - An entity is not a going concern if, as of the financial

reporting date or prior to the date of authorization of the financial
statements for issue, management either:

a. Intends to liquidate the entity or to cease trading, or

b. Has no realistic alternative but to do so.

3. Accrual Basis of Accounting - An entity shall prepare its financial

statements, except for cash flow information, using the accrual basis
of accounting

4. Materiality & Aggregation - Each material class of similar items must

10
 be presented separately in the financial statements.

5. Offsetting - Assets and liabilities, and income and expenses, shall not
be offset unless required or permitted by a PFRS

6. Frequency of reporting – An entity shall present a complete set of

financial statements (including comparative information) at least
annually

7. Comparative Information - An entity shall present comparative

information in respect of the preceding period for all amounts
reported in the current period’s financial statements, unless other
standards permit or require otherwise

8. Consistency of presentation - An entity shall retain the presentation

and classification of items in the financial statements from one period
to the next unless:

a. it is apparent that another presentation or classification would

be more appropriate following a significant change in the nature
of the entity’s operations or a review of its financial statements;
or

b. a PFRS requires a change in presentation

Statement of financial position

A statement of financial position may be presented as either

a. Classified - showing distinctions between current and

noncurrent assets and liabilities, or

b. Unclassified (based on liquidity) - showing no distinction

between current and noncurrent items

Current Assets

11
An entity shall classify an asset as current when:
1. it expects to realize the asset or intends to sell or consume it, in
its normal operating cycle

2. it holds the asset primarily for the purpose of trading

3. it expects to realize the asset within twelve months after the

reporting period

4. the asset is cash or a cash equivalent unless the asset is

restricted from being exchanged or used to settle a liability for
at least twelve months after the reporting period

Current Liabilities

An entity shall classify a liability as current when:

1. it expects to settle the liability in its normal operating cycle

2. it holds the liability primarily for the purpose of trading

3. the liability is due to be settled within twelve months after the

reporting period

4. the entity does not have an unconditional right to defer

settlement of the liability for at least twelve months after the
reporting period

Presentation of Deferred taxes

12
 Deferred tax liabilities (assets) are presented as noncurrent items
in a classified statement of financial position, irrespective of their
expected dates of reversal

Statement of profit or loss and other comprehensive income

An entity shall present all items of income and expense recognized in a

period

1. in a single statement of profit or loss and other comprehensive

income

2. in 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 beginning with profit or
loss and displaying components of other comprehensive
income

Total comprehensive income

Total comprehensive income comprises all components of Profit

or loss; and Other comprehensive income

Presentation of Expenses

1. Nature of expense method

13
 2. Function of expense method

PAS 2 Inventories

Inventories are assets

1. Held for sale in the ordinary course of business (Finished

Goods)

2. In the process of production for such sale (Work In Process)

3. In the form of materials or supplies to be consumed in the

production process or in the rendering of services (Raw
materials and manufacturing supplies)

Financial statement presentation

All items that meet the definition of inventory are presented on the
statement of financial position as one line item under the caption
“Inventories.” The breakdown of this line item (as finished goods, WIP
and Raw materials) is disclosed in the notes

Inventories are normally presented in a classified statement of

14
financial position as current assets

Measurement

a. Inventories are measured at the lower of cost and net

realizable value (NRV)

b. The cost of inventories comprise all costs of purchase, costs of

conversion and other costs incurred in bringing the inventories
to their present location and condition

c. 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

Cost Formulas

1. Specific identification - - shall be used for inventories that are not

ordinarily interchangeable (i.e., used for inventories that are unique).
Cost of sales is the cost of the specific inventory that was sold

2. FIFO - cost of sales is based on the cost of inventories that were

purchased first. Consequently, ending inventory represents the cost
of the latest purchases

3. Weighted Average Cost - cost of sales is based on the average cost

of all inventories purchased during the period.

Wtd. Ave. Cost = (TGAS in pesos ÷ TGAS in units)

Recognition as an expense

The carrying amount of an inventory that is sold is charged as

expense (i.e., cost of sales) in the period in which the related revenue is
recognized. Likewise, the write-down of inventories to NRV and all
losses of inventories are recognized as expense in the period the write-

15
down or loss occurs

For further discussion please refer to the link provided: Overview of Accounting
https://www.youtube.com/watch?v=RlhHMzzMKwA
For further discussion please refer to the link provided: Conceptual Framework
https://www.youtube.com/watch?v=CaGife7RCnE
For further discussion please refer to the link provided : PAS 1 – Presentation of FS
https://www.youtube.com/watch?v=c54-lIDFqbk

Reference Book:
Conceptual Framework and Accounting
Standards
By: Zeus Vernon B. Millan, 2019

16
 CHAPTER 2 STATEMENT OF CASH FLOWS

Objectives:
1. Define the statement of cash flows
2. Differentiate the accounting policies, changes in
accounting estimates and errors

PAS 7 Statement of Cash Flows

The statement of cash flows provides information about the

sources and utilization (i.e., historical changes) of cash and cash
equivalents during the period. The statement of cash flows presents
cash flows according to the following classifications:

a. Operating activities include transactions that enter into the

determination of profit or loss. These transactions normally affect
income statement accounts

b. Investing activities include transactions that affect long-term

assets and other non-operating assets

c. Financing activities include transactions that affect equity and

non-operating liabilities

1
Examples of cash flows from Operating Activities

- cash receipts from the sale of goods, rendering of services, or

other forms of income

- cash payments for purchases of goods and services

- cash payments for operating expenses, such as employee

benefits, insurance, and the like, and payments or refunds of
income taxes

- cash receipts and payments from contracts held for dealing or

trading purpose

The statement of cash flows provides information about the

sources and utilization (i.e., historical changes) of cash and
cash equivalents during the period. The statement of cash
flows presents cash flows according to the following
classifications

Operating activities include transactions that enter into the

determination of profit or loss.

Examples of cash flows from Investing Activities

- cash receipts and cash payments in the acquisition and

disposal of property, plant and equipment, investment property,
intangible assets and other noncurrent assets

- 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)

- cash receipts and cash payments on derivative assets and

liabilities (other than those that are held for trading or classified
as financing activities)
2
 - loans to other parties and collections thereof (other than loans
made by a financial institution)

Examples of cash flows from Financing Activities

- cash receipts from issuing shares or other equity instruments

and cash payments to redeem them

- cash receipts from issuing notes, loans, bonds and mortgage

payable and other short-term or long-term borrowings, and
their repayments

- cash payments by a lessee for the reduction of the outstanding

liability relating to a lease

Interests and Dividends

3
Reporting cash flows from operating activities

Direct method - shows each major class of gross cash receipts and
gross cash payments

Indirect method - adjusts accrual basis profit or loss for the effects of
changes in operating assets and liabilities and effects of non-cash items

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.” (PAS 8.5)

Accounting policies are the relevant PFRSs adopted by an entity in

preparing and presenting its financial statements

Philippine Financial Reporting Standards (PFRSs) are Standards and

Interpretations adopted by the Financial Reporting Standards Council
(FRSC). They comprise the following:

a. Philippine Financial Reporting Standards

4
 (PFRSs)

b. Philippine Accounting Standards (PASs)

c. Interpretations

5
 When it is difficult to distinguish a change in accounting policy
from a change in accounting estimate, the change is treated as a
change in an accounting estimate

An entity shall change an accounting policy only if the change:

- is required by a PFRS

- results to a more relevant and reliable information about an

entity’s financial position, performance, and cash flows

Examples of changes in accounting policy

- Change from FIFO cost formula for inventories to the Average

cost formula

- Change in the method of recognizing revenue from long-term

construction contracts

- Change to a new policy resulting from the requirement of a

6
 new PFRS

- Change in financial reporting framework, such as from PFRS

for SMEs to full PFRSs

- Initial adoption of the revaluation model for property, plant, and

equipment and intangible assets

- Change from the cost model to the fair value model of

measuring investment property

- Change in business model for classifying financial assets

resulting to reclassification between financial asset categories

Examples of changes in accounting estimate

- Change in depreciation or amortization methods

- Change in estimated useful lives of depreciable assets

- Change in estimated residual values of depreciable assets

- Change in required allowances for impairment losses and

uncollectible accounts

- Changes in fair values less cost to sell of non-current assets

held for sale and biological assets

Errors

Errors include the effects of

- Mathematical mistakes

- Mistakes in applying accounting policies

- Oversights or misinterpretations of facts

- Fraud

7
Events after the Reporting Period

Events after the reporting period are “those events, favorable or

unfavorable, that occur between the end of the reporting period and the
date that the financial statements are authorized for issue.” (PAS 10)

Two types of events after the reporting period

- Adjusting events after the reporting period – are those that

provide evidence of conditions that existed at the end of the
reporting period

- Non-adjusting events after the reporting period – those that are

indicative of conditions that arose after the reporting period

Date of authorization of the financial statements

This date is the date when management authorizes the financial

statements for issue regardless of whether such authorization for issue
is for further approval or for final issuance to users

Examples of adjusting events:

- The settlement after the reporting period of a court case that

confirms that the entity has a present obligation at the end of
reporting period

8
 - The receipt of information after the reporting period indicating
that an asset was impaired at the end of reporting period. For
example:

d. The bankruptcy of a customer that occurs after

the reporting period may indicate that the
carrying amount of a trade receivable at the
end of reporting period is impaired.

e. The sale of inventories after the reporting

period may give evidence to their net realizable
value at the end of reporting period

- The determination after the reporting period of the cost of asset

purchased, or the proceeds from asset sold, before the end of
reporting period

- The discovery of fraud or errors that indicate that the financial

statements are incorrect

Examples of non-adjusting events normally requiring disclosures

- Changes in fair values, foreign exchange rates, interest rates

or market prices after the reporting period

- Casualty losses (e.g., fire, storm, or earthquake) occurring after

the reporting period but before the financial statements were
authorized for issue

- Litigation arising solely from events occurring after the

reporting period

- Major ordinary share transactions and potential ordinary share

transactions after the reporting period

- Major business combination after the reporting period

9
- Announcing a plan to discontinue an operation after the
reporting period

For further discussion please refer to the link provided: PAS 7 – Statement of Cash Flows
https://www.youtube.com/watch?v=lxeFyzC2u5I
For further discussion please refer to the link provided : PAS 8 – Accounting Policies
https://www.youtube.com/watch?v=BP49bwQcBvk
For further discussion please refer to the link provided: PAS 10 –Events After Reporting
Period
https://www.youtube.com/watch?v=f989U5Ju_iA

Reference Book:
Conceptual Framework and Accounting
Standards
By: Zeus Vernon B. Millan, 2019

10
 CHAPTER 3 INCOME TAXES

Objectives:
Identify the recognition of property, plant and equipment
Define the deferred taxes and current taxes

PAS 12 Income Taxes

1
 Accounting profit vs. Taxable profit

The varying treatments of economic activities between the PFRSs

and tax laws result to permanent and temporary differences:

Permanent differences

Permanent differences are those that do not have future tax consequences

Examples:

- Interest income on government bonds and treasury bills

- Interest income on bank deposits

- Dividend income

- Fines, surcharges, and penalties arising from violation of law

- Life insurance premium on employees where the entity is the

irrevocable beneficiary

2
Temporary differences

Temporary differences are those that have future tax consequences.

Temporary differences are either:

- Taxable temporary differences – arise, for example, when

financial income is greater than taxable income or the carrying
amount of an asset is greater than its tax base

- Deductible temporary differences arise in case of the opposites of

the foregoing

Taxable temporary differences result to deferred tax liabilities while

deductible temporary differences result to deferred tax assets.

Deferred taxes

- If the increase in deferred tax liability exceeds the increase in

deferred tax asset, the difference is deferred tax expense. If it is
the opposite, the difference is deferred tax income or benefit

- A deferred tax asset is recognized only to the extent that it is

realizable

- Deferred taxes are measured using enacted or substantially

enacted tax rates that are applicable to the periods of their
expected reversals

- Deferred tax assets and liabilities are not discounted

- Deferred tax asset and liabilities are presented as non-current

3
PAS 16 Property, Plant and Equipment

Characteristics of PPE

- Tangible assets – items of PPE have physical substance

- Used in normal operations – items of PPE are used in the

production or supply of goods or services, for rental, or for
administrative purposes

- Long-term in nature – items of PPE are expected to be used from

more than a year

Examples of items of PPE

4
 1. Land used in business

2. Land held for future plant site

3. Building used in business
4. Equipment used in the production of goods
5. Equipment held for environmental and safety reasons
6. Equipment held for rentals
7. Major spare parts and long-lived stand-by equipment
8. Furniture and fixture
Recognition
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
- the cost of the item can be measured reliably
Measurement of Cost
The cost of an item of PPE is the cash price equivalent at the
recognition date. If payment is deferred beyond normal credit terms, the
difference between the cash price equivalent and the total payment is
recognized as interest over the period of credit unless such interest is
capitalized in accordance with PAS 23 Borrowing Costs

Cost Model

After recognition, an item of PPE is measured at its cost less any

accumulated depreciation and any accumulated impairment losses

Depreciation

Depreciation is the systematic allocation of the depreciable amount

of an asset over its estimated useful life. When computing for depreciation,
5
each part of an item of PPE with a cost that is significant in relation to the
total cost of the item shall be depreciated separately.

Depreciation begins when the asset is available for use, i.e., when it
is in the location and condition necessary for it to be capable of operating in
the manner intended by management.

Depreciation ceases when the asset is derecognized or when it is

classified as “held for sale” under PFRS 5, whichever comes earlier

The Straight-line method of Depreciation

Straight line method – depreciation is recognized evenly over the life

of the asset by dividing the depreciable amount by the estimated useful life

Depreciation = (Historical cost – Residual value) ÷

Estimated useful life

Revaluation Model

After recognition as an asset, 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

Revaluation surplus

Fair value* xx
Less: Carrying amount (xx)
Revaluation surplus – gross of tax xx

The fair value is determined using an appropriate valuation technique,

taking into account the principles set forth under PFRS 13

Derecognition:
6
 The carrying amount of an item or PPE shall be derecognized:

- on disposal

- when no future economic benefits are expected from its use or

disposal

PAS 19 Employee Benefits

Employee benefits are “all forms of consideration given by an entity in

exchange for service rendered by employees.

Four categories of employee benefits under PAS 19

- Short-term employee 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

- Post-employment benefits - are employee benefits (other than

termination benefits) that are payable after the completion of
employment

7
- 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

- Termination benefits - are employee benefits provided in

exchange for the termination of an employee’s employment as a
result of either:

1. an entity’s decision to terminate an employee’s employment

before the normal retirement date

2. an employee’s decision to accept an entity’s offer of benefits

in exchange for the termination of employment

For further discussion please refer to the link provided: PAS 12 – Income Taxes

https://www.youtube.com/watch?v=puCzQ3duUhI
For further discussion please refer to the link provided : PAS 16 - PPE
https://www.youtube.com/watch?v=Z7SfSVmychY
For further discussion please refer to the link provided: PAS 19 – Employee Benefits
https://www.youtube.com/watch?v=2xTUfFcE6wE

Reference Book:
Conceptual Framework and Accounting
Standards
By: Zeus Vernon B. Millan, 2019

8
 CHAPTER 4
PAS 24 – ACCOUNTING FOR GOVERNMENT GRANTS

Objectives:
Explain the recognition of government grants
Identify the presentation of government grants in the financial statements and the borrowing costs

Government grants are assistance received from the

government in the form of transfers of resources in exchange for
compliance with certain conditions. Government grants exclude
government assistance whose value cannot be reasonably
measured or cannot be distinguished from the entity’s normal
trading transactions.

Examples of Government Grants

1
 1. Receipt of cash, land, or other non-cash assets from the
government subject to compliance with certain conditions
2. Receipt of financial aid in case of loss from a calamity
3. Forgiveness of an existing loan from the government
4. Benefit of a government loan with below-market rate of
interest
The following are not government grants:
- Tax benefits
- Free technical or marketing advice
- Provision of guarantees
- Government procurement policy that is responsible for a
portion of the entity’s sales
- Public improvements that benefit the entire community
Recognition
Government grants are recognized if there is reasonable
assurance that:
the attached conditions will be complied with; and the grants will
be received
Classifications of government grants according to attached
condition
1. Grants related to assets - grants whose primary
condition is that an entity qualifying for them should
purchase, construct or otherwise acquire long-term
assets
2. Grants related to income – grants other than those
related to assets
Accounting for Gov’t. Grants
The main concept in accounting for gov’t. grants is the MATCHING
CONCEPT. This means that the gov’t. grant is recognized as income

2
as the entity recognizes as expense the related cost for which the grant
is intended to compensate.
Presentation of Government grants related to assets
Government grants related to assets are presented in the
statement of financial position either by:
- Gross presentation –the grant is presented as deferred
income (liability)
- Net presentation – the grant is deducted when computing for
the carrying amount of the asset
Presentation of Government grants related to income
Grants related to income are sometimes presented in the income
statement either by:
- Gross presentation – the grant is presented separately or
under a general heading such as “Other income”, or
- Net presentation – the grant is deducted in reporting the
related expense
Repayment of Government Grants
A government grant that becomes repayable is accounted for as
a change in accounting estimate that is treated prospectively under
PAS 8.

PAS 21 The Effects of Changes in Foreign Exchange Rates

3
Two ways of conducting foreign activities
1. Foreign currency transactions – individual entities
often enter into transactions in a foreign currency
2. Foreign operations – groups often include overseas
entities
Functional currency
- When preparing financial statements, a reporting entity must
identify its functional currency
- Functional currency is the currency of the primary economic
environment in which the entity operates
- The primary economic environment in which an entity
operates is normally the one in which it primarily generates
and expends cash
Foreign currency transactions
Initial recognition:
- The foreign currency amount is translated at the spot
exchange rate at the date of the transaction
Subsequent recognition: At the end of each reporting period:
- Foreign currency monetary items are re-translated using the

4
 closing rate
- Non-monetary items that are measured at historical cost in a
foreign currency shall be translated using the exchange rate
at the date of the transaction
- Non-monetary items that are measured at fair value in a
foreign currency shall be translated using the exchange rates
at the date when the fair value was determined
Monetary items – are units of currency held and assets and liabilities to
be received or paid in a fixed or determinable number of units of
currency.
A foreign operation is 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

PAS 23 BORROWING COSTS

Borrowing costs that are directly attributable to the acquisition,

construction or production of a qualifying asset form part of the cost of
that asset. Other borrowing costs are recognized as an expense.” (PAS
23.1)
Borrowing costs are interest and other costs incurred by an entity in
connection with the borrowing of funds. Borrowing costs may include:
- interest expense on financial liabilities or lease liabilities
computed using the effective interest method
5
 - Exchange differences arising from foreign currency
borrowings to the extent that they are regarded as an
adjustment to interest costs
Qualifying asset is an asset that necessarily takes a substantial period
of time to get ready for its intended use or sale.
Commencement of capitalization
The capitalization of borrowing costs as part of the cost of a
qualifying asset commences on the date when all of the following
conditions are met:
a. The entity incurs expenditures for the asset
b. The entity incurs borrowing costs
c. It undertakes activities that are necessary to prepare the asset
for its intended use or sale
Suspension of capitalization
Capitalization of borrowing costs shall be suspended during
extended periods of suspension of active development of a qualifying
asset.
Cessation of capitalization
An entity shall cease capitalizing borrowing costs when
substantially all the activities necessary to prepare the qualifying asset
for its intended use or sale are complete
Financial statement presentation
Qualifying assets are not segregated from other assets in the
financial statements. They are presented as regular assets under their
normal classification as provided under other standards.

For further discussion please refer to the link provided: PAS 20 - Government Grants
https://www.youtube.com/watch?v=TKZNC8KIBrk
For further discussion please refer to the link provided: PAS 21
https://www.youtube.com/watch?v=ingRv6iy4Us
For further discussion please refer to the link provided : PAS 23 – Borrowing Cost
6
https://www.youtube.com/watch?v=4j3d0QnZY4g
 Reference Book:
Conceptual Framework and Accounting
Standards
By: Zeus Vernon B. Millan, 2019

7
 CHAPTER 5
PAS 24 – RELATED PARTY DISCLOSURES

Objectives:
Enumerate examples of related parties
Describe the disclosure requirements for related parties

PAS 24 prescribes the necessary disclosures regarding related

party relationships and transactions, outstanding balances and
commitments between an entity and its related parties.

Related parties
A related party is “a person or entity that is related to the
reporting entity that is preparing its financial statements.” (PAS 24)
Examples of related parties:
1. Investor and investee relationship where control, joint
control or significant influence exists
2. Key management personnel
3. Close family member
4. Post-employment benefit plan
Control – an investor controls an investee when the investor is
exposed, or has rights, to variable returns from its involvement with the
1
investee and has the ability to affect those returns through its power
over the investee.
Significant influence is the power to participate in the financial and
operating policy decisions of an entity, but is not control over those
policies. Significant influence may be gained by share ownership,
statute or agreement.
Joint control is the contractually agreed sharing of control over an
economic activity.
Key management personnel are those persons having authority and
responsibility for planning, directing and controlling the activities of the
entity, directly or indirectly, including any director (whether executive or
otherwise) of that entity
A related party transaction is a transfer of resources, services or
obligations between a reporting entity and a related party, regardless of
whether a price is charged
Disclosure:
- Parent-subsidiary relationship regardless of whether there
have been transactions between them
- Key management personnel compensation broken down into
the following categories SPOTS and loans to key
management personnel.
- Related party transactions - nature of transaction and
outstanding balances
Disclosures that related party transactions were made on terms
equivalent to those that prevail in arm’s length transactions are made
only if such terms can be substantiated.

2
PAS 26 Accounting and Reporting by Retirement Benefit Plans

PAS 19 - Applied by an employer in (among others) determining the

cost of providing retirement benefits
PAS 26 - Applied by, for example, a trustee, when preparing the
financial statements of a retirement benefit plan.

Financial Statements of a Defined Contribution Plan

- a statement of net assets available for benefits
- a statement of changes in net assets available for benefits
- accompanying notes to the financial statements

Financial Statements of a Defined Benefit Plan

a statement that shows:
1. the net assets available for benefits
2. the actuarial present value of promised retirement benefits,
distinguishing between vested benefits and non-vested benefits
3. the resulting excess or deficit
a statement of net assets available for benefits including either:
1. a note disclosing the actuarial present value of promised retirement
benefits, distinguishing between vested benefits and non-vested
benefits
2. a reference to this information in an accompanying actuarial report

3
PAS 27 Separate Financial Statements

- PAS 27 does not mandate which entities should produce

separate financial statements
- An entity shall apply PAS 27 in accounting for investments in
subsidiaries, joint ventures and associates when it elects, or is
required by local regulations, to present separate financial
statements
Separate financial statements are those presented in addition to
consolidated financial statements or in addition to financial statements in
which investments in associates or joint ventures are accounted for using
the equity method. Separate financial statements need not be appended
to, or accompany, those statements.
Preparation of separate financial statements
Separate financial statements shall be prepared in accordance with all
applicable PFRSs, except as follows:
1. Investments in subsidiaries, associates and joint ventures are
accounted for in the separate financial statements either:
a. at cost
b. in accordance with PFRS 9 Financial Instruments
c. using the equity method
4
2. The entity shall apply the same accounting for each category of
investments

PAS 28 Investments in Associates and Joint Ventures

Associate - an entity, including an unincorporated entity such as a

partnership, over which the investor has significant influence
Significant influence - the power to participate in the financial and
operating policy decisions of the investee but is not control or joint control
over those policies.
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.
Equity method
- Investments in associates or joint ventures are accounted for
using the equity method. Under this method, the investment is
initially recognized at cost and subsequently adjusted for the
investor’s share in the changes in the EQUITY of the investee.
Discontinuance of the use of equity method
- An investor starts to apply the equity method on the date it

5
 obtains significant influence and ceases to apply the equity
method on the date it loses significant influence
- On the loss of significant influence, the investor shall measure
at fair value any investment the investor retains in the former
associate. The investor shall recognize in profit or loss any
difference between:
1. The fair value of any retained investment and any
proceeds from disposing of the part interest in the
associate
2. The carrying amount of the investment at the date
when significant influence is lost
Reclassification of cumulative OCI
If an investor loses significant influence over an associate, all
amounts recognized in other comprehensive income in relation to the
associate shall be accounted on the same basis as would be required if
the associate had directly disposed of the related assets or liabilities.
Share in losses of associate
If an investor’s share of losses of an associate equal or exceeds its
interest in the associate, the investor discontinues recognizing its share
of further losses.
Interest in the associate includes the following:
a. Investment in associate measured under equity method
b. Investment in preference shares of the associate
c. Unsecured long-term receivables or loans
Interest in the associate does not include the following:
a. Trade receivables and payables
b. Secured long-term receivables or loans

6
For further discussion please refer to the link provided: PAS 24 – Related Party Disclosure
https://www.youtube.com/watch?v=19mZWo-KFks
For further discussion please refer to the link provided : PAS 28 – Investment in
associates
https://www.youtube.com/watch?v=gGrPuR1MpJc
For further discussion please refer to the link provided: Joint Ventures
https://www.youtube.com/watch?v=tGQveH0148s

Reference Book:
Conceptual Framework and Accounting
Standards
By: Zeus Vernon B. Millan, 2019

7
 CHAPTER 6
PAS 29 - Financial Reporting in Hyperinflationary Economies

Objectives:
Describe the restatement procedures under PAS 29
Explain the Hyperinflationary Economies

The Stable Monetary Assumption

Under the stable monetary assumption, the purchasing power of
money is assumed to be stable. Therefore, inflation is ignored. The
exception to this concept is hyperinflation.

Price level changes

General price level changes and the purchasing power of money
have an inverse relationship:
- If the general price level increases, this means that the
purchasing power of money has decreased – a condition known
as inflation
- If the general price level decreases, this means that the
1
 purchasing power of money has increased – a condition known
as deflation
Indicators of hyperinflation

1. The general population prefers to keep its wealth in non-

monetary assets or in a relatively stable foreign currency.
Amounts of local currency held are immediately invested to
maintain purchasing power
2. The general population regards monetary amounts not in
terms of the local currency but in terms of a relatively stable
foreign currency. Prices may be quoted in that currency
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. Interest rates, wages and prices are linked to a price index
5. The cumulative inflation rate over three years is
approaching, or exceeds, 100%.
Monetary items are money held and items to be received or paid in fixed
or determinable amount of money without reference to future prices of
specific goods or services. Monetary items include monetary assets and

2
monetary liabilities.
Examples of Monetary assets:
- Cash and cash equivalents
- Loans and receivables and their related allowances
- Financial assets at amortized cost (debt instruments)
- Finance lease receivables
- Cash surrender value

Examples of Monetary liabilities:

- Financial liabilities at amortized cost (debt instruments), e.g.
accounts, notes, bonds, and finance lease payables
- Accrued expenses payable in fixed and determinable amounts of
money
- Refundable deposits, e.g., security deposits on leases to be
returned to tenants at the end of the lease term and deposits for
returnable containers
- Dividends payable
Examples of Nonmonetary assets:
- Physical assets such as inventories, property, plant, and
equipment, and investment properties and their related
accumulated depreciation
- Intangible assets
- Financial assets measured at fair value
- Advances and prepayments not collectible in cash such as
advances to suppliers, prepaid insurance, prepaid rent, and the
like
Examples of Nonmonetary liabilities:
- Financial liabilities measured at fair value
- Unearned items not payable in cash such as advances from

3
 customers, unearned rent, deferred revenues, and the like
- Warranty obligations to be settled by future delivery of services
(e.g., free repair service) or replacement with other non-
monetary items (e.g., free replacement of parts or replacement
of the good purchased)
Equity items such as share capital and share premium are also
nonmonetary items and thus restated.
Formula for restatement:

When it is impracticable to determine the historical price indices, such as

for transactions recurring very frequently, the average general price index
for the period may be used.

PAS 32 – Financial Instruments

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.”
(PAS 32.11)
Financial asset – is any 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

4
d. A contractual right to exchange financial instruments with another entity
under conditions that are potentially favorable
e. A contract that will or may be settled in the entity’s own equity
instruments and is not classified as the entity’s own equity instrument
Financial liability – is any liability that is:
a. 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
c. A contract that will or may be settled in the entity’s own equity
instruments and is not classified as the entity’s own equity instrument
Equity instrument – is “any contract that evidences a residual interest in
the assets of an entity after deducting all of its liabilities
Examples of financial assets:
- Cash and cash equivalents (e.g., cash on hand, in banks, short-
term money placements, and cash funds)
- Receivables such as accounts, notes, loans, and finance lease
receivables
- Investments in equity or debt instruments of other entities such
as held for trading securities, investments in subsidiaries,
associates, joint ventures, investments in bonds, and derivative
assets
- Sinking fund and other long-term funds composed of cash and
other financial assets
The following are not financial assets:
- Physical assets, such as inventories, biological assets, PPE and
investment property
- Intangible assets

5
 - Prepaid expenses and advances to suppliers
- The entity’s own equity instrument (e.g., treasury shares)
Examples of financial liabilities:
- Payables such as accounts, notes, loans and bonds payable
- Lease liabilities
- Held for trading liabilities and derivative liabilities
- Redeemable preference shares issued
- Security deposits and other returnable deposits
The following are not financial liabilities:
- Unearned revenues and warranty obligations that are to be
settled by future delivery of goods or provision of services
- Taxes, SSS, Philhealth, and Pag-IBIG payables
- Constructive obligations
Presentation

Financial liability - The contract requires the delivery of (a) a variable

number of the entity’s own equity instruments in exchange for a fixed
amount of cash or another financial asset or (b) a fixed number of the
entity’s own equity instruments in exchange for a variable amount of cash
or another financial asset
Equity instrument - The contract requires the delivery (receipt) of a fixed
number of the entity’s own equity instruments in exchange for a fixed
6
amount of cash or another financial asset

Redeemable vs. Callable Preference shares

Treasury shares
- Treasury shares are an entity’s own shares that were previously
issued but were subsequently reacquired but not retired
- Treasury shares are treated as deduction from equity
- Treasury share transactions are recognized directly in equity.
Therefore, they do not result to gains or losses

PAS 33 Earnings Per Share

7
 - Earnings per share (EPS) is a computation made for ordinary
shares. It is a form of profitability ratio which represents how
much was earned by each ordinary share during the period. No
EPS is presented for preference shares because these shares
have a fixed return represented by their dividend rates.
Types of Earnings per share
a. Basic earnings per share
b. Diluted earnings per share

Basic Earnings Per Share

Rights issue

Diluted earnings per share

- Diluted earnings per share 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

8
 share and in the aggregate would have had a dilutive effect
- Only basic earnings per share is presented if an entity has no
dilutive potential ordinary shares (i.e., simple capital structure)

Financial statement Presentation

Basic and Diluted earnings per share are 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
- EPS is not computed on other comprehensive income and total
comprehensive income
- EPS computed on profit or loss from continuing operations and
profit or loss for the year are presented 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

Interim reporting pertains to the preparation and presentation of

9
interim financial report for an interim period
Interim period is a financial reporting period shorter than a full financial
year
Interim financial report means a financial report containing either:
a. a complete set of financial statements (PAS 1): or
b. a set of condensed financial statements (PAS 34)
Content of an interim financial report
An entity presenting an interim financial report has the option of complying
either with PAS 1 (complete set of FS) or PAS 34 (condensed set of FS)
Complete set of financial statements under PAS 1
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
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)
Minimum content of an interim financial report under PAS 34
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
Additional concepts

10
 - Relevance over Reliability – in the interest of timeliness and cost
considerations, less information may be provided at interim dates
- Materiality and Estimates – an entity may rely on estimates to a
greater extent when preparing interim financial reports
- Note disclosures – only selected explanatory notes are provided
in interim financial reports to avoid repetition
Recognition and measurement
a. 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
b. 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); 13 th month pay and other year-end
bonuses.
c. Discretionary income are recognized immediately in the period the
income is earned, e.g., dividend income
d. Income tax expense in the interim periods is computed using the best
estimate of the weighted average annual income tax rate expected for
the full financial year.

For further discussion please refer to the link provided: PAS 29 – Inflationary Economics
https://www.youtube.com/watch?v=LZkRWT2qXvs
For further discussion please refer to the link provided : PAS 32 – Financial Instruments
https://www.youtube.com/watch?v=F9tasMC4yvw
For further discussion please refer to the link provided : PAS 33 – Earning Per Share
https://www.youtube.com/watch?v=l-Sg4Z1fX1M

Reference Book:
Conceptual Framework and Accounting
Standards
11
 CHAPTER 7
PAS 36 Impairment of Assets

Objectives:
Explain the account for the reversal of impairment
Discuss account for the impairment of individual assets and cash-generating units

Core Principle
If the carrying amount of an asset is greater than its recoverable
amount, the asset is impaired. The excess is impairment loss
Computation of Impairment loss:
Recoverable amount xx
Less: Carrying amount (xx)
Impairment loss xx
Recoverable amount is the amount to be recovered through use or sale
of an asset. It is the higher of an asset’s:
a. Fair value less costs of disposal, and Value in use
Value in use is the present value of the future cash flows expected
to be derived from an asset or cash-generating unit.
Identifying an asset that may be impaired
- An entity shall assess at the end of each reporting period
whether there is any indication that an asset may be impaired.
If any such indication exists, the entity shall estimate the
recoverable amount of the as
- If there is no indication that an asset may be impaired, an
entity is not required to estimate the recoverable amount of
the asset
Required testing for impairment
The following assets are required to be tested for impairment at
least annually, whether or not there are indications for
1
 impairment:
a. Intangible asset with indefinite useful life
b. Intangible asset not yet available for use
c. Goodwill acquired in a business combination
Measuring recoverable amount
- Recoverable amount is the higher of the asset’s fair value less
costs of disposal and value in use
- However, if there is no reason to believe that an asset’s value
in use materially exceeds its fair value less costs of disposal,
the asset’s fair value less costs of disposal may be used as its
recoverable amount. This will often be the case for an asset
that is held for disposal
Value in use
- Value in use is the present value of the future cash flows
expected to be derived from an asset or cash-generating unit
- Any residual value of the asset and disposal costs should be
included in estimating future cash inflows and outflows
- Cash flow projections shall cover a maximum period of 5
years
- Projections beyond 5 years are extrapolated
Recognizing and measuring an impairment loss
Impairment loss is recognized in profit or loss, unless the asset is
carried at revalued amount, in which case revaluation surplus is
decreased first and any excess is recognized in profit or loss. The
decrease in the revaluation surplus is recognized in other
comprehensive income
Depreciation after impairment
After the recognition of an impairment loss, the depreciation
(amortization) charge for the asset shall be adjusted in future periods to

2
allocate the asset’s revised carrying amount, less its residual value (if
any), on a systematic basis over its remaining useful life.
Cash-generating unit (CGU)
Cash-generating unit (CGU) is 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.
Impairment of individual assets included in a CGU
- Assets whose recoverable amount can be determined reliably
are tested for impairment individually
- Assets whose recoverable amount cannot be determined
reliably (e.g., assets that do not generate their own cash
flows) are included in a CGU. The CGU is the one tested for
impairment
Allocating goodwill to CGU’s
For purposes of impairment testing, goodwill acquired in a
business combination shall be allocated to each of the acquirer’s CGU
in the year of business combination.
Impairment loss for a CGU
The impairment loss on a CGU shall be allocated:
1. First, to any goodwill allocated to the CGU
2. Then, to the other assets of the unit pro rata on the
basis of the carrying amount of each asset in the
unit.

PAS 37 Provisions, Contingent Liabilities, and Contingent Assets

3
Provisions
- A provision is a liability of uncertain timing or amount
- Provisions differ from other liabilities because of the
uncertainty about the timing or amount of expenditure
required in settlement. Unlike for other liabilities, provisions
must be estimated. Although, some other liabilities are also
estimated, their uncertainty is generally much less than for
provisions.
- Other liabilities, such as accruals, are reported as part of
“Trade and other payables” whereas provisions are reported
separately
Provision vs. Contingent liability

4
Recognition of provisions
A provision is recognized when all of the following conditions are
met:
1. The entity has a present obligation (legal or
constructive) as a result of a past event
2. It is probable that an outflow of resources embodying
economic benefits will be required to settle the
obligation
3. A reliable estimate can be made of the amount of the
obligation

Measurement

Present value
Where the effect of the time value of money is material, the

5
amount of a provision shall be the present value of the expenditures
expected to be required to settle the obligation
Expected disposal of assets
Gains from the expected disposal of assets shall not be taken
into account in measuring a provision. Gains shall be recognized only
when the assets are actually disposed of
Reimbursement
- Where some or all of the expenditure required in settling a
provision is expected to be reimbursed by another party, the
reimbursement is recognized only when it is virtually certain
that reimbursement will be received if the entity settles the
obligation
- The reimbursement shall be treated as a separate asset
- In the statement of profit or loss and other comprehensive
income, the expense relating to a provision may be presented
net of the amount recognized for a reimbursement
Changes in provisions
- 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, the provision shall be reversed
Liability for premiums
- A customer option to acquire additional goods or services for
free or at a discount is accounted for under PFRS 15 if the
option provides the customer a material right that the
customer would not receive without entering into that contract
- A customer option that does not provide the customer with a
material right is not accounted for under PFRS 15; and

6
 therefore, accounted for in accordance with PAS 37
Guarantee for indebtedness of others
A provision for the guarantee for indebtedness of others is
recognized when it becomes probable that the entity will be held liable
for the guarantee, such as when the original debtor defaults on the loan
Contingent assets

PAS 38 Intangible Assets

- An intangible asset is an identifiable non-monetary asset

without physical substance
- Goodwill acquired in a business combination is outside the

7
 scope of PAS 38 because it is unidentifiable. Goodwill is
accounted for under PFRS 3 Business Combinations and
PAS 36 Impairment of Assets
Essential criteria in the definition of intangible assets
1. Identifiability – separable or arises from contractual rights
2. Control – power to obtain (or restrict others from obtaining) the
economic benefits from an asset
3. 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
Recognition
An intangible asset shall be recognized if management can
demonstrate that:
a. The item meets the definition of intangible asset
b. It is probable that the expected future economic benefits will flow to
the entity
c. The cost of the asset can be measured reliably
Initial measurement
An intangible asset shall be measured initially at cost.
Measurement of cost depends on how the intangible asset is acquired.
Intangible assets may be acquired through:
- Separate acquisition
- Acquisition as part of a business combination
- Acquisition by way of a government grant
- Exchanges of assets
- Internal generation
Acquisition by way of a government grant
Intangible assets acquired by way of government grant may be
recorded at either:

8
a. fair value
b. alternatively, at nominal amount or zero, plus direct costs incurred
in preparing the asset for its intended use
Internally generated intangible assets
The costs of self-creating an intangible asset are classified into:
1. Research costs – include costs of searching new knowledge and
identifying and selecting possible alternatives
2. Development costs – include costs of designing from selected
alternative and using knowledge gained from research
If an entity cannot identify in which phase a cost is incurred, the cost is
regarded as incurred in research phase.
Items of PPE used in R&D activities
- If the item of PPE can be used in various R&D activities or
other purposes, the cost of the PPE is capitalized and
depreciated. The amount of depreciation is included as R&D
expense
- If the item of PPE is can only be used on one specific R&D
project, the cost of the PPE is expensed immediately in its
entirety as R&D expense
Items not recognized as intangible assets
The cost of internally generated brands, mastheads, publishing
titles, customer lists, goodwill and items similar in substance are
expensed when incurred
Subsequent expenditure
Subsequent expenditures on an intangible asset are generally
recognized as ex
Reinstatement of costs in subsequent period
Expenditure on an intangible item that was initially recognized as
an expense shall not be recognized as part of the cost of an intangible

9
asset at a later date
Amortization
- Intangible assets with finite useful life are amortized over the
shorter of the asset’s useful life and legal life
- Intangible assets with indefinite useful life are not amortized
but tested for impairment at least annually
- The default method of amortization is the straight line method

PAS 40 Investment Property

Investment property is “property (land or a building – or a part of a

building – or both) held (by the owner or by the lessee under finance
lease) to earn rentals or for capital appreciation or both, rather than for:
a. use in the production or supply of goods or services or
for administrative purposes
b. sale in the ordinary course of business
Investment property
- Held to earn rentals or for capital appreciation or both
- Generates cash flows largely independently of the other
assets held by an entity
- Includes only land and building
Property, plant and equipment

10
 - Held for use in the production or supply of goods or services
or for administrative purposes
- Generates cash flows in conjunction with the other assets
held by an entity
- May include assets other than land and building
Examples of investment property
a. Land held for long-term capital appreciation rather than for short-
term sale in the ordinary course of business
b. Land held for a currently undetermined future use
c. A building owned by the entity (or held by the entity under a finance
lease) and leased out under one or more operating leases
d. A building that is vacant but is held to be leased out under one or
more operating leases
e. Property that is being constructed or developed for future use as
investment property
Ancillary services to occupants
When ancillary services are provided to the occupants of a
property held, the property is classified as investment property if the
services are insignificant to the arrangement as a whole
Measurement
a. Initial: Cost
b. Subsequent: Either the Cost model or Fair value model
Change in accounting policy
- A change from the cost model to the fair value is accounted
for prospectively
- A change from the fair value model to the cost model is not
permitted
Determining fair value
PAS 40 requires all entities to determine the fair value of

11
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.
Fair value model
- After initial recognition, an entity that chooses the fair value
model shall measure all of its investment property at fair
value, except in cases where the exemptions under PAS 40
applies
- Changes in fair values are recognized in profit or loss
- Depreciable assets classified as investment property
measured under fair value model are not depreciated
- 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
Cost model
After initial recognition, an entity that chooses the cost model
shall measure all of its investment property at cost less any
accumulated depreciation and impairment losses in accordance with
PAS 16 Property, plant, and equipment
Transfers
Transfers to, or from, investment property shall be made 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

12
d. Commencement of an operating lease to another party, for a
transfer from inventories to investment property

For further discussion please refer to the link provided: PAS 36 – Impairment of Assets
https://www.youtube.com/watch?v=QDxjMZp8X4U
For further discussion please refer to the link provided : PAS 38 – Intangible Assets
https://www.youtube.com/watch?v=kOFkm5Kq7DE
For further discussion please refer to the link provided : PAS 40 Investment Property
https://www.youtube.com/watch?v=IIVfvsBq88Q

Reference Book:
Conceptual Framework and Accounting
Standards
By: Zeus Vernon B. Millan, 2019

13
 CHAPTER 8 AGRICULTURE

Objectives:
Differentiate the following: biological assets, bearer plants, agricultural produce and inventory
Explain the initial and subsequent measurement of biological assets and agricultural produce

PAS 41 Agriculture

PAS 41 is applied to account for the following when they relate to

agricultural activity:
a. Biological assets, except for bearer plants
b. Agricultural produce at the point of harvest
c. Unconditional government grants related to a biological asset
measured at its fair value less cost to sell

Consumable vs. Bearer biological assets

Biological assets are either consumable or bearer:

1
 a. Consumable - those that are to be harvested as agricultural
produce or sold as biological assets. Ex. Timber
b. Bearer - those other than consumable biological assets. Ex. Fruit
tree.
PAS 41 applies to both consumable and bearer animals. However,
PAS 41 only to consumable plants but not to bearer plants.

Agricultural activity
- PAS 41 applies to biological assets, agricultural produce and
gov’t. grants only when they relate to agricultural activity
- Agricultural activity is the management by an entity of the
biological transformation of biological assets for sale, into
agricultural produce, or into additional biological assets
Common features of agricultural activity:
a. Capability to change – Living animals and plants are capable of
biological transformation
b. Management of change – Management facilitates biological
transformation by enhancing, or at least stabilizing, conditions
necessary for the process to take place
c. Measurement of change – The change in quality or quantity
brought about by biological transformation is measured and
monitored as a routine management function
Recognition
A biological asset or agricultural produce is recognized when:
a. the entity controls the asset as a result of past events
b. it is probable that future economic benefits associated with the
asset will flow to the entity
c. the fair value or cost of the asset can be measured reliably
Measurement
- A biological asset shall be measured on initial recognition and
2
 at the end of each reporting period at its fair value less costs
to sell
- Agricultural produce harvested from an entity’s biological
assets shall be measured at its fair value less costs to sell at
the point of harvest. Such measurement is the cost at that
date when applying PAS 2 Inventories or another applicable
standard
Definitions
- Fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between
market participants at the measurement date.
- Costs to sell are the incremental costs directly attributable to
the disposal of an asset, excluding finance costs and income
taxes (e.g., Commissions to brokers, Levies by regulatory
agencies and commodity exchanges, and Transfer taxes and
duties)
- Costs to sell do not include transport costs, advertising costs,
income taxes, and interest expense
- If location is a characteristic of the biological asset, the price
in the principal (or most advantageous) market shall be
adjusted for the transport costs.
Encouraged disclosures
Disclosure of the following information is encouraged but not
required:
1. Disclosure of consumable and bearer biological assets.
2. Disclosure of mature and immature biological assets.
a. Mature biological assets are those that have attained harvestable
specifications or are able to sustain regular harvests
b. Immature biological assets are those that have not yet attained

3
 harvestable specifications or are not yet able to sustain regular
harvests
3. Disclosure of breakdown of total “Gain (loss) from changes in
FVLCS” during the period attributable to price change and physical
change

PFRS 1 First-time Adoption of Philippine Financial Reporting

Standards
First PFRS financial statements are “the first annual financial
statements in which an entity adopts PFRSs, by an explicit and
unreserved statement of compliance with PFRSs.” (PFRS 1.3)
Financial statements are considered “First PFRS financial statements”
if the previous financial statements:
a. were prepared in accordance with other reporting standards not
consistent with the PFRSs
b. did not contain an explicit and unreserved statement of compliance
with PFRSs
c. contained an explicit and unreserved statement of compliance with
some, but not all, PFRSs
d. were prepared using some, but not all, applicable PFRSs
e. prepared in accordance with PFRSs but were used for internal
reporting purposes only
f. did not contain a complete set of financial statements as required
under PAS 1 Presentation of Financial Statements
g. The entity did not present financial statements in previous periods
Recognition and measurement
- PFRS 1 requires an entity to prepare and present an opening
PFRS statement of financial position at the date of transition
to PFRSs

4
 - The date to transition to PFRSs is the beginning of the earliest
period for which an entity presents full comparative
information under PFRSs in its first PFRS financial
statements. The application of the PFRSs starts on this date
Accounting policies
- The entity selects its accounting policies based on the latest
versions of PFRSs as at the current reporting date. The
selected polices are then applied to all financial statements
presented together with the first PFRS financial statements
Retrospective application
- In general (but subject to some exceptions which will be
discussed momentarily), PFRS 1 requires retrospective
application of the accounting policies selected by the first-time
adopter
PFRS 1 requires an entity to do the following in its opening PFRS
statement of financial position:
a. Recognize all assets and liabilities whose recognition is required by
PFRSs
b. Not recognize items as assets or liabilities if PFRSs do not permit
such recognition
c. Reclassify items recognized under previous GAAP that have
different classifications under PFRSs
d. Apply PFRSs in measuring all recognized assets and liabilities.

Exceptions to the requirements of PFRS 1

A first-time adopter is exempted from complying with the
“retrospective application” requirement of PFRS 1 if:
a. The cost of compliance exceeds the expected benefits.
b. Retrospective application requires management judgments about

5
 past conditions after the outcome of a particular transaction is
already known.
Presentation and disclosure
- The first PFRS financial statements shall include at least one-
year comparative information

PFRS 2 Share-based Payments

6
 Scope of PFRS 2:
a. Equity-settled share-based payment transaction – is a
transaction whereby an entity acquires goods or services and
instead of paying in cash the entity issues its own shares of
stocks or share options
b. Cash-settled share-based payment transaction – is a
transaction whereby an entity acquires goods or services and
incurs an obligation to pay cash at an amount that is based on
the fair value of equity instruments
c. Choice between equity-settled and cash-settled
Equity instrument is a contract that evidences a residual interest in the
assets of an entity after deducting all of its liabilities
Core principle
- An entity shall recognize in profit or loss and financial position
the effects of share-based payment transactions, including
expenses associated with transactions in which share options
are granted to employees
Recognition
- Goods and services received in share-based payment
transactions are recognized when the goods are received or
as the services are received. Goods or services received that
do not qualify as assets are recognized as expenses
- The entity shall recognize A corresponding increase in equity
if the goods or services were received in an equity-settled
share-based payment transaction, or a liability if the goods or
services were acquired in a cash-settled share-based
payment transaction
Equity-settled share-based payment transactions

7
Intrinsic value is the difference between the fair value of the shares to
which the counterparty has the conditional or unconditional right to
subscribe or the right to receive and the subscription price (if any) that
the counterparty is required to pay for those shares
Employee share option plans equity settled
- Share option is a contract that gives the holder the right, but
not the obligation, to subscribe to the entity’s shares at a fixed
or determinable price for a specified period of time. Some
share options given to employees may not require any
subscription price, meaning shares will be issued to the
employees in consideration merely for services rendered
Measurement of compensation
Since employee share option plan is a transaction with an employee,
the following order of priority shall be used to measure the services
received (salaries expense):
a. Fair value of equity instruments granted at grant date
b. Intrinsic value
Cash-settled share-based payment transactions
- A cash-settled share-based payment transaction is one
whereby an entity acquires goods or services and incurs an
obligation to pay cash at an amount that is based on the fair
value of equity instruments

8
 - The goods or services acquired and the liability incurred on
cash-settled share-based payment transactions are measured
at the fair value of the liability
- At the end of each reporting period and even on settlement
date, the liability shall be remeasured to fair value. Changes in
fair value are recognized in profit or loss
Employee share appreciation rights (SARs) – cash-settled
- A share appreciation right is a form of compensation given to
an employee whereby the employee is entitled to future cash
payment (rather than an equity instrument), based on the
increase in the entity’s share price from a specified level over
a specified period of time
Measurement of compensation
- The liability for the future cash payment on share appreciation
rights shall be measured, initially and at the end of each
reporting period until settled, at the fair value of the share
appreciation rights. Changes in fair value are recognized in
profit or loss
Recognition of cash-settled share-based compensation plans
- If the share appreciation rights granted vest immediately, the
entity shall recognize the related compensation expense on
the services received in full with a corresponding increase in
liability at grant date
- If the share options granted do not vest until the employee
completes a specified period of service, the entity shall
recognize the services received, and a liability to pay for them,
as the employee renders service during that period
Share-based payment transactions with cash alternatives
- If the counterparty has the right to choose settlement between

9
 cash (or other assets) or equity instruments, the entity has
granted a compound instrument
- For transactions with non-employees, the equity component is
computed as the difference between the fair value of goods or
services received and the fair value of the debt component at
the date the goods or services are received

PFRS 3 BUSINESS COMBINATIONS

A business combination is “a transaction or other event in which

an acquirer obtains control of one or more businesses.”
Control
- An investor controls an investee when the investor is
exposed, or has rights, to variable returns from its involvement
with the investee and has the ability to affect those returns
10
 through its power over the investee.
- Control is normally presumed to exist when the ownership
interest acquired in the voting rights of the acquiree is more
than 50% (or 51% or more)
Control may exist even if the acquirer holds less than 50% interest in
the voting rights of acquiree, such as in the following cases:
1. The acquirer has the power to appoint or remove the majority of
the board of directors of the acquire
2. The acquirer has the power to cast the majority of votes at board
meetings or equivalent bodies within the acquire
3. The acquirer has power over more than half of the voting rights of
the acquiree because of an agreement with other investors
4. The acquirer has power to control the financial and operating
policies of the acquiree because of a law or an agreement
Accounting for business combinations
Business combinations are accounted for using the acquisition
method. This method requires the following:
1. Identifying the acquirer
2. Determining the acquisition date
3. Recognizing and measuring goodwill. This requires recognizing and
measuring the following:
a. Consideration transferred
b. Non-controlling interest in the acquire
c. Previously held equity interest in the acquire
d. Identifiable assets acquired and liabilities assumed on the
business combination
Identifying the acquirer
- The acquirer is the entity that obtains control of the acquiree.
The acquiree is the business that the acquirer obtains control

11
 of in a business combination
- The acquirer is normally the entity that:
a. Transfers cash or other assets and incurs liabilities
b. Issues its equity interests (except in reverse acquisitions)
c. Receives the largest portion of the voting rights
d. Has the ability to elect or appoint or to remove a majority
e. Dominates the management of the combined entity
f. Significantly larger of the combining entities
g. Initiated the combination
Determining the acquisition date
- The acquisition date is the date on which the acquirer obtains
control of the acquire
Non-controlling interest (NCI)
- Non-controlling interest (NCI) is the equity in a subsidiary not
attributable, directly or indirectly, to a parent
- NCI is measured either at:
a. Fair value
b. The NCI’s proportionate share of the acquiree’s
identifiable net assets
Previously held equity interest in the acquire
- Previously held equity interest in the acquiree pertains to any
interest held by the acquirer before the business combination
Net identifiable assets acquired
- On acquisition date, the acquirer shall recognize, separately
from goodwill, the identifiable assets acquired, the liabilities
assumed and any non-controlling interest in the acquire
- Any unidentifiable asset of the acquiree (e.g., any recorded
goodwill by the acquiree) shall not be recognized
- The identifiable assets acquired and the liabilities assumed

12
 are measured at their acquisition-date fair values

For further discussion please refer to the link provided: PAS 41 – Biological Assets
https://www.youtube.com/watch?v=isjs48id-g0
For further discussion please refer to the link provided: PFRS 1 – First Time Adoption

https://www.youtube.com/watch?v=72kjAoOxjvE
For further discussion please refer to the link provided: PFRS 3 – Business Combination

https://www.youtube.com/watch?v=4ztDhzUDwmg

Reference Book:
Conceptual Framework and Accounting
Standards
By: Zeus Vernon B. Millan, 2019

13
 CHAPTER 9 PFRS 5 Non-current assets
Held for Sale and Discontinued Operations

Objectives:
Describe the criteria for held for sale classification
State the initial and subsequent measurement of held for sale assets

Core Principle
A noncurrent asset is presented in the classified statement of
financial position as current asset only when it qualifies to be classified
as “held for sale” in accordance with PFRS 5.
Scope
PFRS 5 applies to the following non-current assets:
1. Property, plant and equipment
2. Investment property measured under the Cost model
3. Investments in associate or subsidiary or joint
venture
4. Intangible assets
Classification of non-current assets (or disposal groups) as Held for
Sale
A non-current asset (or disposal group) is classified as held for
sale or held for distribution to owners if its carrying amount will be
recovered principally through a sale transaction rather than through
continuing use
Exception to the one-year requirement
An extension of the period required to complete a sale does not
preclude an asset (or disposal group) from being classified as held for
sale if:

1
 1. the delay is attributable to events or circumstances
beyond the entity’s control
2. there is sufficient evidence that the entity remains
committed to its plan to sell the asset (or disposal
group)
Event after reporting period
If the criteria for classification as held for sale are met after the
reporting period, an entity shall not classify a non-current asset (or
disposal group) as held for sale in those financial statements when
issued
Non-current assets that are to be abandoned
- An entity shall not classify as held for sale a non-current asset
(or disposal group) that is to be abandoned since the asset’s
carrying amount will be recovered through continuing use
rather than principally through a sale
- An entity shall not account for a non-current asset that has
been temporarily taken out of use as if it had been abandoned
Discontinued operations
A discontinued operation is a component of an entity that either
has been disposed of or is classified as held for sale, and
1. Represents a major line of business or geographical
area of operations
2. Is part of a single coordinated plan to dispose of a
separate major line of business or geographical area
of operations
3. Is a subsidiary acquired exclusively with a view to
resale.
Component of an entity
A component of an entity comprises operations and cash flows

2
that can be clearly distinguished, operationally and for financial
reporting purposes, from the rest of the entity. It can be cash
generating unit or group of cash generating units
FS presentation
Non-current assets held for sale and assets and liabilities of
disposal groups are presented as current assets (current liabilities) but
separately from the other assets and liabilities in the statement of
financial position
An entity shall not offset the assets and liabilities of a disposal group

PFRS 6 Exploration for and Evaluation of Mineral Resources

- Exploration for and evaluation of mineral resources is the

search for mineral resources, including minerals, oil, natural
gas and similar non-regenerative resources after the entity
has obtained legal rights to explore in a specific area, as well
as the determination of the technical feasibility and
commercial viability of extracting the mineral resource

3
 - Exploration and evaluation expenditures are expenditures
incurred by an entity in connection with the exploration for and
evaluation of mineral resources before the technical feasibility
and commercial viability of extracting a mineral resource are
demonstrable
Accounting for exploration and evaluation expenditures
- PFRS 6 permits entities to develop their own accounting
policy for exploration and evaluation assets which results in
relevant and reliable information based entirely on
management’s judgment and without the need to consider the
hierarchy of standards in PAS 8
- This means that the entity may recognize exploration and
evaluation expenditures either as expense or asset depending
on the entity’s own accounting policy
Measurement at recognition
- If the entity opts to capitalize exploration and evaluation
expenditures as assets, it shall measure them at cost
- Subsequent to recognition, the exploration and evaluation
assets shall be measured using the cost model or the
revaluation model

PFRS 7 Financial Instruments: Disclosures

PFRS 7 prescribes the disclosure requirements for financial
instruments. The disclosures are broadly classified into the following two main
categories:
a. significance of financial instruments to the entity’s financial position and
performance; and
b. the nature and extent of risks arising from financial instruments to which
the entity is exposed, and how the entity manages those risks. (PFRS

4
 7.1)
Significance of financial instruments
Statement of financial position
a. An entity is required to separately disclose the carrying amounts of
each of the categories of financial assets and financial liabilities under
PFRS 9
b. If an entity has reclassified financial assets, it shall disclose the date of
reclassification, an explanation of the change in business model, and
the amount reclassified between categories
c. If an entity has offset financial assets and financial liabilities, it shall
disclose the gross amounts of those assets and liabilities, the amounts
that were set-off, the net amounts presented in the statement of
financial position and a description of the related legal right of set-off
Statement of profit or loss and other comprehensive income
a. An entity is required to disclose separately the income, expense, gains
or losses arising from the different classifications of financial
instruments under PFRS 9
b. The entity shall disclose the fair value of each class of financial assets
and financial liabilities in a way that the fair value can be compared with
the carrying amount
Nature and extent of risks arising from financial instruments
a. Credit risk – is “the risk that one party to a financial instrument will
cause a financial loss for the other party by failing to discharge an
obligation.
b. Liquidity risk – is the risk that an entity will encounter difficulty in
meeting obligations associated with financial liabilities
c. Market risk – is “the risk that the fair value or future cash flows of a
financial instrument will fluctuate because of changes in market prices
Market risk comprises the following three types of risk:

5
 i. Currency risk – the risk associated with fluctuations in foreign
exchange rates
ii. Interest rate risk –the risk associated with changes in market
interest rates
iii. Other price risk – the risk associated with fluctuations in market
prices other than those arising from interest rate risk or currency
risk
Qualitative and Quantitative disclosures on risks
- The entity shall provide both qualitative and quantitative disclosures
for each type of the risks required by PFRS 7 to be disclosed

PFRS 8 Operating Segments

- An entity shall disclose information to enable users of its financial

statements to evaluate the nature and financial effects of the
business activities in which it engages and the economic
environments in which it operates.” (PFRS 8
-
An operating segment is a component of an entity:
- that engages in business activities from which it may earn revenues
and incur expenses (including revenues and expenses relating to
transactions with other components of the same entity)
- whose operating results are regularly reviewed by the entity’s chief

6
 operating decision maker to make decisions about resources to be
allocated to the segment and assess its performance
- for which discrete financial information is available
A component of an entity comprises operations and cash flows that can be
clearly distinguished, operationally and for financial reporting purposes, from
the rest of the entity. It can be cash generating unit or group of cash
generating units
Reportable segments
An entity shall report separately information about each operating
segment that:
- Management uses in making decisions about operating matters or
those which results from aggregating two or more of those segments
- Qualify under the quantitative thresholds
Disclosure of Major customer
A major customer is a single external customer providing revenues of
10% or more of an entity’s revenues.

PFRS 9 Financial Instruments

Financial assets
A financial asset is any asset that is:
a. Cash
b. Equity instrument of another entity
c. Contractual right to receive cash or another
financial asset or to exchange financial assets or
financial liabilities with another entity under
conditions that are potentially favorable to the entity
Financial liabilities
A financial liability is any liability that is:
a. a contractual obligation to deliver cash or another financial asset to

7
 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
Initial recognition and Classification
- Financial assets are recognized only when the entity becomes a
party to the contractual provisions of the instrument
Basis of classification
- The entity’s business model for managing the financial assets; and
- The contractual cash flow characteristics of the financial asset
Business models

8
Reclassification
- After initial recognition, financial assets are reclassified only when
the entity changes its business model for managing financial assets
- Reclassification date is the first day of the first reporting period
following the change in business model that results in an entity
reclassifying financial assets
Impairment
- The impairment requirements of PFRS 9 apply equally to debt-type
financial assets that are measured either at amortized cost or at
FVOCI
- Impairment gains or losses on debt instruments measured at FVOCI
are recognized in profit or loss. However, the loss allowance shall be
recognized in other comprehensive income and shall not reduce the
carrying amount of the financial asset in the statement of financial
position
9
 Dividends
- Dividends received from equity securities measured at FVPL or
FVOCI (except share dividend) are recognized as dividend revenue

PFRS 10 Consolidated Financial Statements

Definition of terms (PFRS 10)
a. Parent – an entity that controls one or more entities.
b. Subsidiary – an entity that is controlled by another entity
c. Group – a parent and its subsidiaries
d. Consolidated financial statements – the financial statements of a group in
which the assets, liabilities, equity, income, expenses and cash flows of the
parent and its subsidiaries are presented as those of a single economic entity
Preparation of Consolidated FS
A parent entity is required to present consolidated financial statements,
except when all of the following conditions are met:
a. The parent is a subsidiary of another entity and all its other owners do not
object to the parent not presenting consolidated financial statements
b. The parent’s debt or equity instruments are not traded in a public market (or
being processed for such purpose)
c. The parent’s ultimate or any intermediate parent produces consolidated
financial statements that are available for public use and comply with PFRSs
Elements of Control
Control exists if the investor has all of the following:
a. Power over the investee
b. Exposure, or rights, to variable returns from its involvement with the
investee
c. The ability to use its power over the investee to affect the amount of
the investor’s returns
Elements of Control

10
Measurement
- Income and expenses of the subsidiary are based on the amounts of
the assets and liabilities recognized in the consolidated financial
statements at the acquisition date

PFRS 11 Joint Arrangements

- PFRS 11 defines a joint arrangement as “an arrangement of which

two or more parties have joint control.”
Types of Joint Arrangements
a. Joint operation – is a joint arrangement whereby the parties that have joint
control of the arrangement have rights to the assets and obligations for the
liabilities, relating to the arrangement. Those parties are called joint
operators

11
b. Joint venture – is a joint arrangement whereby the parties that have joint
control of the arrangement have rights to the net assets of the
arrangement. Those parties are called joint venturers
Accounting for joint operation transactions
- Separate accounting records may or may not be required for the
joint operation itself and financial statements may or may not be
prepared for the joint operation. However, the joint operators may
prepare management accounts so that they may assess the
performance of the joint operation

12
For further discussion refer to the link provided: PFRS 8 - Operating Segments
https://www.youtube.com/watch?v=3SqJD7uJNUY
For further discussion refer to the link provided: PFRS 9 – Financial Instruments
https://www.youtube.com/watch?v=8kIKVoNdvoU
For further discussion refer to the link provided: PFRS 11 – Joints Arrangements
https://www.youtube.com/watch?v=sBPTFUX1ozI

Reference Book:
Conceptual Framework and Accounting
Standards
By: Zeus Vernon B. Millan, 2019

13
 CHAPTER 10
PFRS 12 Disclosure of Interest in Other Entities

Objectives:
Describe the objective of PFRS 12
State the types of investments that are within the scope of PFRS 12

The objective of PFRS 12 is to prescribe the minimum disclosure

requirements for an entity’s interests in other entities, particularly (a)
the nature of, and risks associated with, those interests and (b) the
effects of those interests on the entity’s financial statements
Interest in another entity

Interest in another entity – refers to involvement that exposes an

entity to variability of returns from the performance of another entity. It
is evidenced by the holding of equity or debt instruments or other form
of involvement, such as the provision of funding, liquidity support, credit
enhancement and guarantees. It includes the means by which an entity
obtains control, joint control, or significant influence over another entity.
An entity does not necessarily have an interest in another entity solely
because of a typical customer-supplier relationship. (PFRS 12
Appendix A)

1
Scope
PFRS 12 applies to entities that have an interest in a(an):
a. Subsidiary
b. Joint arrangement (i.e., Joint operation or Joint venture);
c. Associate; or
d. Unconsolidated structured entity
PFRS 12 does not apply to an interest in another entity that is
accounted for in accordance with PFRS 9 Financial Instruments.
Minimum disclosures under PFRS 12
Significant judgments and assumptions in determining the
existence of control, joint control or significant influence over an
investee or the type of a joint arrangement

PFRS 13 Fair Value Measurement

Scope
PFRS 13 applies to the fair value measurement, and related
disclosures, of an asset, liability or equity when other PFRSs require
measurement at fair value or fair value less costs to sell
Fair value is “the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date.” (PFRS 13)
Fair Value Measurement
Fair value is based on the market price of the asset in:
a. a principal market; or
b. the most advantageous market (in the absence of a principal
market)

2
PFRS 14 Regulatory Deferral Accounts

Scope
a. PFRS 14 specifies the financial reporting requirements for
regulatory deferral account balances arising from the sale of
goods or services that are subject to rate regulation
b. PFRS 14 is an optional standard that is available only to first-time
adopters. Existing PFRS users are prohibited from using PFRS
14
Definition of Terms
- Regulatory deferral account balance – “the balance of any expense
(or income) account that would not be recognized as an asset or a
liability in accordance with other Standards, but that qualifies for
deferral because it is included, or is expected to be included, by the
rate regulator in establishing the rate(s) that can be charged to
customers.”
- Rate regulation – “a framework for establishing the prices that can
be charged to customers for goods or services and that framework
is subject to oversight and/or approval by a rate regulator.”
- Rate regulator – “an authorized body that is empowered by statute
or regulation to establish the rate or a range of rates that bind an
entity. The rate regulator may be a third-party body or a related party
of the entity, including the entity’s own governing board, if that body
3
 is required by statute or regulation to set rates both in the interest of
the customers and to ensure the overall financial viability of the
entity.”
Principles under PFRS 14
a. A first-time adopter continues to apply its previous GAAP to the
recognition, measurement, impairment and derecognition of
regulatory deferral account balances, except for changes in
accounting policies and the presentation of regulatory deferral
accounts
b. An entity is prohibited from changing its accounting policy in
order to start recognizing regulatory deferral account balances.
Presentation
Statement of financial position
Separate line items are presented for the totals of:
a. regulatory deferral account debit balances; and
b. regulatory deferral account credit balances.
The regulatory deferral account balances are not presented as
current or noncurrent. Instead, they are presented separately
from the sub-totals of assets and liabilities that are presented in
accordance with other Standards
Statement of profit or loss and other comprehensive income
Separate line items are presented:
a. in other comprehensive income for the net movement of
regulatory deferral account balances that relate to items
recognized in OCI, showing distinctions between those that will
be and will not be reclassified to profit or loss; and
b. in profit or loss for the remaining net movement of regulatory
deferral account balances excluding movements that are not
reflected in profit or loss.

4
PFRS 15 Revenue from Contracts with Customers

Income vs. Revenue

The Conceptual Framework provides the following definitions:
- Income – increases in economic benefits during the accounting
period in the form of inflows or enhancements of assets or
decreases of liabilities that result in increases in equity, other than
those relating to contributions from equity participants. Income
encompasses both revenue and gains.
- Revenue – income arising in the course of an entity’s ordinary
activities.
Core principle
An entity recognizes revenue to depict the transfer of promised
goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for
those goods or services
Steps in the recognition of revenue:
1. Identify the contract with the customer
Requirements before a contract with a customer is

5
 accounted for under PFRS 15:
a. The contract must be approved and the contracting parties are
committed to it;
b. rights and payment terms are identifiable rights and payment
terms are identifiable
c. The contract has commercial substance; and
d. The consideration is probable of collection
2. Identify the performance obligations in the contract
Each promise in a contract to transfer a distinct good or
service is treated as a separate performance obligation
3. Determine the transaction price
The entity shall determine the transaction price because
this is the amount at which revenue will be measured
Transaction price is “the amount of consideration to which
an entity expects to be entitled in exchange for
transferring promised goods or services to a customer,
excluding amounts collected on behalf of third parties
(e.g., some sales taxes).” The consideration may include
fixed amounts, variable amounts, or both
4. Allocate the transaction price to the performance
obligations
The transaction price shall be allocated to each
performance obligation identified in a contract based on
the relative stand-alone prices of the distinct goods or
services promised to be transferred
5. Recognize revenue when (or as) the entity satisfies a
performance obligation
A performance obligation is satisfied when the control
over a promised good or service is transferred to the

6
 customer
Revenue is measured at the amount of the transaction
price allocated to the satisfied performance obligation

PFRS 16 Leases

Identifying a lease
“A contract is, or contains, a lease if the contract conveys the
right to control the use of an identified asset for a period of time in
exchange for consideration.” (PFRS 16.9)
Right to Control
An entity has the right to control the use of an identified asset if it
has both of the following throughout the period of use:
1. the right to obtain substantially all of the economic
benefits from use of the identified asset; and
2. the right to direct the use of the identified asset
Identified asset

7
 An asset can be identified by being explicitly stated in the
contract or by being implicitly specified at the time the asset is made
available for use by the customer
A portion of an asset can be identified if it is physically distinct
Right to direct the use
The customer has the right to direct how and for what purpose
the asset is used throughout the period of use
GENERAL RECOGNITION

8
Classification of lease by the lessor
- Finance lease - a lease that transfers substantially all the risks and
rewards incidental to ownership of an asset. Title may or may not
eventually be transferred
- Operating lease - a lease other than a finance lease.
Indicators of a finance lease

9
Accounting for operating lease
The accounting for operating leases is straight-forward. The
lessor recognizes the lease payments as rent income on a straight line
basis over the lease term, unless another systematic basis is more
representative of the time pattern of user’s benefit

PFRS 17 Insurance Contracts

Scope
PFRS 17 prescribes the principles for the recognition,
measurement, presentation and disclosure of insurance contracts by an

10
insurer. PFRS 17 applies to:
a. insurance and reinsurance contracts issued by an insurer
b. reinsurance contracts held by an insurer; and
c. investment contracts with discretionary participation features issued
by an insurer.
Insurer (issuer of insurance contract) is the party that has an
obligation under an insurance contract to compensate a policyholder
if an insured event occurs (e.g., insurance company).
Insurance contract
An insurance contract is “a contract under which one party (the
issuer) accepts significant insurance risk from another party (the
policyholder) by agreeing to compensate the policyholder if a specified
uncertain future event (the insured event) adversely affects the
policyholder.” (PFRS 17 Appendix A)
Policyholder – “a party that has a right to compensation under an
insurance contract if an insured event occurs.”
Insured event – “an uncertain future event that is covered by an
insurance contract and creates insurance risk.”
Examples of insurance contracts
1. Insurance against theft or damage
2. Insurance against product liability, professional liability,
civil liability or legal expenses
3. Life insurance and prepaid funeral plans
4. Life-contingent annuities and pensions
5. Disability and medical cover
6. Surety bonds, fidelity bonds, performance bonds and bid
bonds.
7. Product warranties issued by another party for goods sold
by a manufacturer, dealer or retailer. Product warranties

11
 issued directly by a manufacturer, dealer or retailer are
outside the scope of PFRS 17
8. Title insurance.
9. Travel insurance
10. Insurance swaps and other contracts that require a
payment depending on changes in physical variables that
are specific to a party to the contract. (PFRS 17.B26)
Types of insurance contracts
Direct insurance contract – an insurance contract where the
insurer directly accepts risk from the insured and assumes the sole
obligation to compensate the insured in case of a loss event.
Reinsurance contract – an insurance contract issued by one insurer
(the reinsurer) to compensate another insurer (the cedant) for losses on
one or more contracts issued by the cedant.
Reinsurer – the party that has an obligation under a reinsurance
contract to compensate a cedant if an insured event occurs.
Cedant – the policyholder under a reinsurance contract.
Initial Measurement
A group of insurance contracts is initially measured at the total of:
a. the fulfillment cash flows, and
b. the contractual service-margin

Contractual service margin

The contractual service margin is the unearned profit in a group
of insurance contracts

Onerous contracts
An insurance contract is onerous if the total of its fulfillment cash
flows, any previously recognized acquisition cash flows and any cash

12
flows arising from the contract at initial recognition date is a net outflow.
The net outflow is recognized as a loss in profit or loss. This results to a
carrying amount of the liability for the group equal to the fulfilment cash
flows and a zero contractual service margin
On subsequent measurement, any excess net outflow for a group
of insurance contracts that becomes onerous or more onerous is
recognized in profit or loss

Derecognition
An insurance contract is derecognized when:
a. it is extinguished, i.e., when the obligation in the insurance
contract expires or is discharged or cancelled; or
b. the contract is modified and the modification meets any of the
conditions for derecognition
Presentation
Statement of financial position
The carrying amounts of the following groups are presented
separately in the statement of financial position:
a. insurance contracts issued that are assets;
b. insurance contracts issued that are liabilities;
c. reinsurance contracts held that are assets; and
d. reinsurance contracts held that are liabilities.
Statement(s) of financial performance
The amounts recognized in the statement(s) of profit or loss and
other comprehensive income are disaggregated into to the
following:
a. insurance service result, comprising insurance revenue and
insurance service expenses; and
b. insurance finance income or expenses

For further discussion please refer to the link provided: PFRS 15 – Revenue from Contracts
https://www.youtube.com/watch?v=2nDraDtK6Tc 13
For further discussion please refer to the link provided: PFRS 16 - Leases
https://www.youtube.com/watch?v=kXZJWRHnxPI
For further discussion please refer to the link provided: PFRS 17 – Insurance Contracts
https://www.youtube.com/watch?v=llxwapGnDkU
 Reference Book:
Conceptual Framework and Accounting
Standards

14