PFRS 1 1.
4 RECOGNITION AND MEASUREMENT
(First-time Adoption of Philippine Financial
Standards)
1.1 INTRODUCTION
 The reporting standards used in the
Philippines were primarily based on US
GAAP (then called ‘SFAS’ – Statements of
Financial Accounting Standards).
 Full adoption of the IFRSs is on 2005.
1.2 OBJECTIVE
 To ensure that an entity’s first PFRS financial
statements, including interim financial reports
covered thereon, contain high quality
information that is transparent to users,
comparable, makes way for accounting in
accordance with PFRSs, and can be
prepared with cost efficiency.
1.3 FIRST PFRS FINANCIAL STATEMENTS
 “the first annual financial statements in which
an entity adopts PFRSs, by an explicit and
unreserved statement of compliance with
PFRSs.
 Financial statements prepared in accordance
with PFRSs are considered the entity’s “First
PFRS financial statements” if the previous
financial statements:
(a) were prepared in accordance with
other reporting standards not consistent
with the PFRSs; or
(b) did not contain an explicit and
unreserved statement compliance with
PFRSs; or
(c) contained an explicit and unreserved
statement of compliance with some, but
not all, PFRSs; or
(d) were prepared using some, but not all,
applicable PFRSs; or
(e) prepared in accordance with PFRSs but
were used for internal reporting
purposes only; or
(f) did not contain a complete set of
financial statements as required under
PAS 1 Presentation of Financial
Statements; or
(g) The entity did not present financial
statements in previous periods.
 PFRS 1 is applied only once, that is, when the
entity first adopts PFRSs.
FIRST-TIME ADOPTER
 An entity presenting its first PFRS financial
statements.
 PFRS 1 requires an entity to prepare and
present an opening PFRS statement of financial
position at the date of transition to PFRSs.
DATE OF TRANSITION TO PFRSs
 The beginning of the earliest period for
which an entity presents full comparative
information under PFRSs in its first PFRS
financial statements.
1.5 ACCOUNTING POLICIES
 The entity selects its accounting policies
based on the latest versions of PFRSs as at
the current reporting date.
 PFRS 1 prohibits the application of non-
uniform accounting policies or earlier versions
of PFRSs to the comparative periods as these
undermine comparability.
1.6 RETROSPECTIVE APPLICATION
 In general, PFRS 1 requires retrospective
application of the accounting policies selected
by the first-time adopter.
RETROSPECTIVE APPLICATION
 means as if PFRSs have been used all
along.
 This application requires restating assets
and liabilities in the opening statement of
financial position in order to conform to
PFRSs.
 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; and
(d) Apply PFRSs in measuring all recognized
assets and liabilities.
 First-time adopters should not apply these,
except in certain cases specified under PFRS
1.
 In general, first-time adopters shall apply
the transitional provisions of PFRS 1.
1.7 EXCEPTIONS TO THE REQUIREMENTS OF
PFRS 1
 Exemptions from compliance with the
“retrospective application”: (1) when the cost
 of compliance exceeds the expected [ACRONYMS]
benefits; (2) if retrospective application
requires management judgements about past  GAAP – Generally Accepted Accounting
conditions after the outcome of a particular Principles
transaction is already known.  OCBOA – Other Acceptable Basis of
Accounting
OTHER EXCEPTIONS:
(1) Derecognition of financial instruments.
(2) Hedge accounting
(3) Business combinations
(4) Fair value of revaluation amount as
deemed cost
(5) Cumulative translation differences
(6) Compound financial instruments

1.8 PRESENTATION AND DISCLOSURE

 The first PFRS financial statements shall
include at least one-year comparative
information.
 If the entity presents non-PFRS comparative
information and historical summaries for
periods before the date of transition, it need
not restate those summaries to PFRS.
 The first-time adopter shall explain how the
transition to PFRSs affected its financial
statements by:
(a) Reconciliations of equity reported under
previous GAAP to equity under PFRSs
both (a) at the date of transition to PFRSs
and (b) the end of the last annual period
reported under the previous GAAP.
(b) Reconciliation of total comprehensive
income for the last annual period
reported under the previous GAAP to
total comprehensive income under PFRSs
for the same period.
(c) Disclosure of impairment loss and reversals
of impairment losses recognized when the
opening statement of financial position
was prepared.
(d) Disclosures of errors discovered in the
course of transition to PFRSs.
(e) Material adjustments made to restate the
financial statements of PFRSs.
(f) Appropriate explanations if the entity
has elected to apply any of the
exemptions permitted under PFRS 1.
 PFRS 2
(Share-based payment)
1.1 INTRODUCTION
 The Corporation Code of the Philippines
prohibits the issuance of shares in exchange
for promissory notes or future services.
1.2 SHARE-BASED PAYMENT TRANSACTIONS
SHARE-BASED PAYMENT TRANSACTION
 A transaction in which the entity acquires
goods or services and pays for them by
issuing its own equity instruments or cash
based on the value of its own equity
instruments. It can be:
 Equity-settled SBPT - one in which the
entity receives goods or services and
pays for them by issuing its shares of
stocks or share options; or
 Cash-settled SBPT - one in which the
entity receives goods or services and
incurs an obligation to pay cash at an
amount that is based on the fair value
of its own equity instruments; or
 Choice between equity-settled and cash-
settled - one in which the entity
receives goods or services and either
the entity or the counterparty is given
a choice of settlement in the form of
equity instruments or cash based on
the fair value of equity instruments.
EQUITY INSTRUMENT
 a contract that evidences a residual interest
in the assets of an entity after deducting all
of its liabilities.
 PFRS 2 applies to all entities, including
subsidiaries using their parent's or fellow
subsidiary's equity instruments as
consideration for goods or services, and to
all share-based payment arrangements
except the following.
(a) Transactions with owners (including
employees who are also shareholders)
acting in their capacity as owners, e.g.,
issuance of dividends, granting of stock
rights in relation to an owner's.
preemptive right, and treasury share
transactions.
(b) Business combinations.
(c) Issuance of shares as settlement of
forward contracts, futures, and other
derivative instruments.
1.3 RECOGNITION
 Goods or services received that do not
qualify as assets are recognized as
expenses.
 The entity recognizes:
(a) a corresponding increase in equity if the
goods or services are received in an
equity-settled share-based payment
transaction, or
(b) a liability if the goods or services are
acquired in a cash-settled share-based
payment transaction.
1.4 EQUITY SETTLED SHARE-BASED PAYMENT
TRANSACTIONS
 Goods or services received from' equity-
settled share-based payment transactions
with non-employees are measured at the fair
value of the goods or services received, or if
this is not determinable, at the fair value of
the equity instruments granted.
EQUITY-SETTLED SHARE-BASED PAYMENT
TRANSACTION WITH:
Non-employees
Order of priority in measurement:
(1) Fair value of goods or services received
(2) Fair value of equity instruments granted
Employees and Others providing similar
services
Order of priority in measurement:
(1) Fair value of equity instruments granted
(2) Intrinsic value
EMPLOYEES AND OTHERS PROVIDING SIMILAR
SERVICES
 refer to "individuals who render personal
services to the entity and either
(a) The individuals are regarded as
employees for legal or tax purposes,
(b) The individuals work for the entity
under its direction in the same way as
individuals who are regarded as
employees for legal or tax purposes, or
(c) The services rendered are similar to
those rendered by employees."
EQUITY INSTRUMENT GRANTED
 "the right. (conditional or unconditional) to
an equity instrument of the entity conferred
by the entity on another party under a
share-based payment arrangement."
FAIR VALUE
 is measured at the measurement date.
 For transactions with non-employees, the
measurement date is the date when the
entity receives the goods or services.
 For transactions with employees and
others providing similar services, the
measurement date is the grant date.
GRANT DATE
 the date at which the entity and the
counterparty agree to, and have shared
 understanding of the terms and conditions
of, a share-based payment arrangement.
INTRINSIC VALUE
 the difference between the fair value of the
shares which.
1.5 SHARE-BASED COMPENSATION PLANS
SHARE-BASED COMPENSATION PLAN
 An arrangement whereby, in exchange for
services, an employee is compensated in
the form of (or based on) the entity's
equity instrument.
 Examples of share-based compensation:
a. Employee share options (equity-
settled)
b. Employee share appreciation rights
(cash settled)
c. Compensation plans with a choice of
settlement between (a) and (b) above
 Given to key employees as bonuses or
additional compensation.
1.6 EMPLOYEE SHARE OPTION PLANS
SHARE OPTION
 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."
1.7 MEASUREMENT OF COMPENSATION
 Employee share option plans are equity-
settled share-based payment transactions
with employees. Accordingly, the services
received are measured using the following
order or priority:
(1) Fair value of equity instruments granted
at grant date
(2) Intrinsic value
 The compensation expense (salaries
expense) on the employee share option plan
is recognized as follows:
(a) If the share options granted vest
immediately, meaning the employee is
entitled to the shares without the need to
satisfy any condition, salaries expense is
recognized in full, with a corresponding
increase in equity, at grant date.
(b) If the share options granted do not west
until the employee completes a specified
period of service, the entity recognizes
salaries expense as the employee
renders service over the vesting period.
 Illustration: On January 1, 20x1, Entity A
grants 10,000 share options to its key
employees. The share options entitle the
employees to purchase Entity A's shares
at a subscription price of P110 per
share. Entity A's shares have a par value
$100 per share and a fair value on
grant date of P120 per share. The share
options have fair value of P15 per share
option.
Case 1: Share options vest immediately
If the share options vest immediately,
Entity A will recognize salaries
expense of $150,000 (10,000 share
options × $15 fair value per share
option) on January 1, 20×1.
Case 2: Share options do not vest
immediately
If the share options vest in 3 years,
Entity A recognizes salaries expense
over the 3-year vesting period as
follows:
1.8 CHANGES IN SERVICE CONDITION
SERVICE CONDITION
 means, to be entitled to receive or subscribe
to the shares embodied in the share options,
the employee needs to remain in the entity's
employ for a specified period of time.
 Illustration: On January 1, 20x1, Entity A
grants 100 share options to each of its
100 key employees conditional upon
each employee remaining in Entity A's
employ over the next 3 years. The fair
value of each share option is P15.
On the basis of a weighted
average probability, Entity A
estimates on January 1, 20x1
that about 20 employees (i.e.,
20% or 20 out of the 100
employees) will leave during the
three-year period and therefore
forfeit their rights to the share
options.
 During 20x1, 7 employees left.
Entity A revises its estimate to a
total of 25% employee
departure over the vesting
period.
During 20x2, 9 employees left.
Entity A revises its estimate to a
total of 28% employee
departure over the vesting
period.
During 20x3, 8 employees left.
Therefore, the actual employee
departure over the past three
years is 24% [(7 + 9 + 8) +
100].
Entity A recognizes salaries expense
over the vesting period as follows:
1.12 CHOICE BETWEEN EQUITY-SETTLED AND
CASH-SETTLED
 A share-based payment transaction that can
be settled either through equity instrument or
cash is accounted for depending on which
party is given the right of choice of
settlement:
1.9 CASH-SETTLED SHARE-BASED PAYMENT (a) The counterparty has the right of choice
TRANSACTIONS of settlement; or
CASH-SETTLED SBPT (b) The entity has the right of choice of
settlement
 one whereby an entity acquires goods or
services and incurs an obligation to pay
1.13 COUNTERPARTY HAS THE RIGHT OF
cash at an amount that is based on the fair
CHOICE
value of equity instruments.
 The most common form of a cash-settled  If the counterparty has the right to choose
share-based payment transaction is share settlement between cash (or other assets) or
appreciation rights (SARs) granted to an equity instruments, the entity has granted a
employee. compound instrument.
COMPOUND INSTRUMENT
1.10 EMPLOYEE SHARE APPRECIATION
RIGHTS (SARs)  one which includes both a debt component
(e.g., the counterparty's right to demand
SHARE APPRECIATION RIGHT payment in cash) and an equity component.
 a form of compensation given to an
employee whereby the employee is entitled 1.14 TRANSACTIONS WITH NON-EMPLOYEES
to future cash payment (rather than equity  For transactions with non-employees, the
instrument), based on the increase in the equity component is computed as the
entity's share price from a specified level difference between:
over a specified period of time. (a) the fair value of goods or services
received; and
(b) the fair value of the debt component at
1.11 MEASUREMENT OF COMPENSATION
the date the goods or services are
 Illustration: Share appreciation rights received.
 “Assets – Liabilities = Equity”
On January 1, 20x1, Entity A grants 1,000
share appreciation rights (SARs) to
1.15 TRANSACTIONS WITH EMPLOYEES
employees with the condition that the
employees remain in service within the next 3  The entity measures the fair value of the
years. Information on the SARs is shown compound instrument and its components as
below: follows:
 (a) If the fair value of one settlement
alternative is the same as the other, the
fair value of the equity component is
zero, and hence the fair value of the
compound financial instrument is the
same as the fair value of the debt
component.
(b) If the fair values of the settlement
alternatives differ, the fair value of the
equity component will be greater than
zero, in which case, the fair value of the
compound financial instrument will be
greater than the fair, value of the debt
component.
 Each component of the compound
instrument is accounted for separately,
similar to a purely equity-settled or a purely
cash-settled share-based payment
transaction. Meaning,
(a) the value assigned to the equity
alternative on grant date (if any) is
recognized as salaries expense and an
increase in equity over the vesting
period; and
(b) the value assigned to the cash
alternative is recognized as salaries
expense, and a liability, that is re-
measured at each year-end and on
settlement, as the services are received.
Changes in fair values are recognized in
profit or loss.
for as equity-settled. Consequently, the
cash alternative is simply ignored.
1.18 SETTLEMENT (upon settlement)
a. If the entity elects to settle in cash, the cash
payment is accounted for as a repurchase of
an equity interest, i.e., as a deduction from
equity, except as noted in (c) below.
b. If the entity elects to settle by issuing equity
instruments, no further accounting is required
other than a transfer from one component of
equity to another, if necessary, except as
noted in (c) below.
c. If the entity elects the settlement alternative
with the higher fair value as at the date of
settlement, the entity recognizes an
additional expense for the:
i. Excess of cash paid over the fair
value of equity instruments that
would otherwise have been issued,
or
ii. Excess of fair value of the equity
instruments issued and the amount
of cash that would otherwise have
been paid, whichever is applicable.

1.16 SETTLEMENT (on settlement date)

 The liability component is re-measured to fair
value. If the entity settles the transaction in
the form of:
a. Equity instruments - the liability is
transferred directly to equity as
consideration for the issuance of the
shares.
b. Cash - the cash payment is applied as
settlement of the liability.

1.17 ENTITY HAS THE RIGHT OF CHOICE

 The entity accounts for the transaction as
either equity-settled or cash-settled share-
based payment transaction, depending on
whether the entity has a present obligation
to pay cash.
(a) If the entity has a present obligation to
pay cash, the transaction is accounted
for as cash-settled. Consequently, the
equity alternative is simply ignored.
(b) If the entity has no present obligation to
pay cash, the transaction is accounted
 PFRS 3
(Business Combinations)
1.1 INTRODUCTION
 A business combination occurs when one
company acquires another or when two or
more companies merge into one. After the
combination, one company gains control over
the other.
PARENT or ACQUIRER
 The company that obtains control over the
other.
SUBSIDIARY or ACQUIREE
 The other company that is controlled.
 PFRS 3 does not apply to the following:
(a) The formation of a joint venture.
(b) The acquisition of an asset or a group of
assets and related liabilities that does
not constitute a business. In such a case,
the acquirer allocates the lump sum
purchase price to the acquired items
based on their relative fair values on the
purchase date. This transaction does not
give rise to goodwill.
(c) A combination of entities under common
control.
1.2 BUSINESS COMBINATION
BUSINESS COMBINATION
 "a transaction or other event in which an
acquirer obtains control of one or more
businesses."
 Essential elements: (1) Control; (2) Business
1.3 CONTROL
 Control is normally presumed to exist when
the acquirer holds more than 50% (or 51%
or more) interest in the acquired's voting
rights. However, this is only a presumption
because control can be obtained in some
other ways, such as when:
(a) the acquirer has the power to appoint or
remove the majority of the board of
directors of the acquiree; or
(b) the acquirer has the power to cast the
majority of votes at board meetings or
equivalent bodies within the acquiree; or
(c) the acquirer has power over more than
half of the voting rights of the acquire
because of an agreement with other
investors; or
(d) the acquirer controls the acquiree's
operating and financial policies because
of a law or an agreement.
 An acquirer may obtain control of an acquire
in a variety of ways, for example:
(a) by transferring cash or other assets
(including net assets that constitute a
business;
(b) by incurring liabilities;
(c) by issuing equity interests;
(d) by providing more than one type of
consideration; or without transferring
consideration, including by contract
alone.
1.4 BUSINESS
BUSINESS
 an integrated set of activities and assets
that is capable of being conducted and
managed for the purpose of providing
goods or services to customers, generating
investment income (such as dividends or
interest) or generating other income from
ordinary activities
THREE ELEMENTS OF BUSINESS
(1) INPUT - any economic resource that results
to an output when one or more processes
are applied to it, e.g., non-current assets,
intellectual property, the ability to obtain
access to necessary materials or rights and
employees.
(2) PROCESS - any system, standard, protocol,
convention or rule that when applied to an
input, creates an output, e.g., strategic
management processes, operational
processes and resource management
processes.
(3) OUTPUT - the result of 1 and 2 above that
provides goods or services to customers,
investment income or other income from
ordinary activities.
1.5 ACCOUNTING FOR BUSINESS
COMBINATION
 Business combinations are accounted for
using the acquisition method. This method
requires the following:
(a) Identifying the acquirer;
(b) Determining the acquisition date; and
(c) Recognizing and measuring goodwill.
This requires recognizing and measuring
the following:
i. Consideration transferred
ii. Non-controlling interest in the
acquiree
 iii. Previously held equity interest
in the acquiree
iv. Identifiable assets acquired and
liabilities assumed on the
business combination
ACQUIRER
 the entity that obtains control of the
acquiree
ACQUIREE
 the business that the acquirer obtains
control of in a business combination
ACQUISITION DATE
 the date on which the acquirer obtains
control of the acquire, normally the closing
date.
1.6 RECOGNIZING AND MEASURING
GOODWILL
Formula:
GAIN ON A BARGAIN PURCHASE
 A negative amount resulting from the
formula; also referred to as “negative
goodwill”.
 On acquisition date, the acquirer recognizes
a resulting:
(a) Goodwill as an asset
(b) Gain on a bargain purchase as gain in
profit or loss
1.7 CONSIDERATION TRANSFERRED
 The consideration transferred in a business
combination is measured at fair value, which
is the sum of the acquisition-date fair values
of the assets transferred by the acquirer, the
liabilities incurred by the acquirer to former
owners of the acquiree and the equity interests
issued by the acquirer.
EXAMPLES OF POTENTIAL FORMS OF
CONSIDERATION
(a) Cash
(b) Non-cash assets
(c) Equity instruments, e.g., shares, options
and warrants
(d) A business or a subsidiary of the
acquirer
(e) Contingent consideration
1.8 ACQUISITION-RELATED COSTS
 Acquisition-related costs are costs that the
acquirer incurs to effect a business
combination.
EXAMPLES
(a) Finder's fees
(b) Professional fees, such as advisory,
legal, accounting valuation and
consulting fees
(c) General administrative costs, including
the costs of maintaining an internal
acquisitions department
(d) Costs of registering and issuing debt and
equity securities
 Acquisition-related costs are recognized as
expenses when they are incurred, except for
the following:
(a) Costs to issue debt securities measured
at amortized cost are included in the
initial measurement of the securities, e.g.,
bond issue costs are included (as
deduction) in the carrying amount of
bonds payable.
(b) Costs to issue equity securities are
deducted from share premium. If share
premium is insufficient, the issue costs are
deducted from retained earnings.
1.9 NON-CONTROLLING INTEREST
NON-CONTROLLING INTEREST (NCI)
 the "equity in a subsidiary not attributable,
directly or indirectly, to a parent."
 also called “minority interest”
1.10 NET IDENTIFIABLE ASSETS ACQUIRED
RECOGNITION PRINCIPLE
 On acquisition date, the acquirer recognizes
the identifiable assets acquired, the
liabilities assumed and any NCI in the
acquiree separately from goodwill.
 Unidentifiable assets are not recognized.
Examples of unidentifiable assets:
(a) Goodwill recorded by the acquire prior
to the business combination
(b) Assembled workforce
(c) Potential contracts that the acquire is
negotiating with prospective new
customers at the acquisition date
RECOGNITION CONDITIONS
 (a) To qualify for recognition, identifiable  Goodwill (negative goodwill) is computed as
assets acquired and liabilities assumed follows:
must meet the definitions of assets and
liabilities provided under the Conceptual
Framework at the acquisition date.
(b) The identifiable assets acquired and
liabilities assumed must be part of what
the acquirer and the acquiree (or its
former owners) exchanged in the business
combination transaction rather than the (The ₱100,000 transaction costs are
result of separate transactions. expensed. Acquisition-related costs do not
(c) Applying the recognition principle may affect the measurement of goodwill.)
result to the acquirer recognizing assets
and liabilities that the acquire had not
previously recognized in its financial
statements.
MEASUREMENT PRINCIPLE
Illustration:
On Tanuary 1, 20×1, ABC Co. acquired
80% interest in XYZ, Ine for P1,000,000 cash.
ABC Co. incurred transaction costs of P100,00
for legal, accounting and consultancy fees in
negotiating the business combination.
ABC Co. elected to measure NCI at the
NCI's proportionate share in XYZ, Inc.'s
identifiable net assets. The carrying amounts and
fair values of XYZ's assets and liabilities at the
acquisition date were as follows:

 The acquisition-date fair value of

identifiable net assets acquired is computed
as follows:

(The acquiree’s goodwill is excluded because it is

unidentifiable. Only identifiable assets acquired
are recognized.)
 The NCI’s proportionate share in the
acquiree’s identifiable net assets is computed
as follows: