Conceptual Framework: & Accounting Standards

CONCEPTUAL FRAMEWORK
&
ACCOUNTING STANDARDS
2019 Edition
Lecture Aid
By: Zeus Vernon B. Millan
1
PAS 21 The Effects of Changes in Foreign
Exchange Rates
Learning Objectives
• Differentiate between the two ways of

conducting foreign activities.
• State the initial and subsequent measurements
of foreign currency transactions.
• Describe the procedures in translating
financial statements into a presentation
currency. Conceptual Framework & Acctg.
2
Standards (by: Zeus Vernon B. Millan)
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. The financial statements need to be translated
to Philippine pesos.
Conceptual Framework & Acctg.

3
Two main accounting issues
• Exchange rates are constantly changing. Therefore, the

principal issues in accounting for foreign activities are
determining:
1. Which exchange rate(s) to use; and
2. How to report the effects of changes in exchange rates
in the financial statements.

4
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.
• It is the currency in which the entity’s cash inflows and

outflows are normally denominated into and is not necessarily
the currency of the country where the entity is based.

5
Factors in determining functional currency
Primary factors
An entity’s functional currency is:
1. The currency that mainly influences:
o Sales prices
o Cost of goods sold / Cost of services provided
Secondary factors
2. The currency in which funds from financing activities are
generated.
3. The currency in which receipts from operating activities are
usually retained.

6
Foreign currency
• All currencies other than the entity’s functional currency
Foreign currency transactions
• A transaction that is denominated or requires settlement

in a foreign currency

7
Monetary items vs. Nonmonetary Items
• Monetary items – are units of currency held and assets

and liabilities to be received or paid in a fixed or
determinable amount of money.
• Nonmonetary items – are those which do not give rise
to the receipt or payment of a fixed or determinable
amount of money

8
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:

Items Translated using
a. Monetary Items Closing rate (spot exchange
rate at reporting date)
b. Nonmonetary items Exchange rate at the date of
measured at historical transaction
cost
c. Nonmonetary items Exchange rate at the date
measured at fair value when the fair value was
determined
9
Exchange difference
• The difference resulting from translating a given

number of units of one currency into another currency
at different exchange rates
a. Monetary items Recognized in profit or loss
in the period in which they
arise
b. Nonmonetary items Profit or loss

OCI
10
Illustration
On December 1, 20x1, Entity A sells goods to Entity B, on credit, for a
total sale price of $1,000. Entity B settles the account on January 6,
20x2. Entity A’s functional currency is the Philippine peso (₱). The
relevant exchange rates are as follows:
Dec. 1, 20x1 Dec. 31, 20x1 Jan. 6, 20x2
₱50:$1 ₱52:$1 ₱47:$1
1. How much is the foreign exchange gain (loss) to be recognized by

Entity A on December 31, 20x1?
Entity A on January 6, 20x2?
11
Illustration
On December 1, 20x1, Entity A sells goods to Entity B, on credit, for a
total sale price of $1,000. Entity B settles the account on January 6,
20x2. Entity A’s functional currency is the Philippine peso (₱). The
relevant exchange rates are as follows:
Dec. 1, 20x1 Dec. 31, 20x1 Jan. 6, 20x2
₱50:$1 ₱52:$1 ₱47:$1

Entity A on December 31, 20x1? 2,000 gain
Entity A on January 6, 20x2? 5,000 loss
12
Illustration
• On December 1, 20x1, you imported a machine from a foreign
supplier for $100,000, due for settlement on January 6, 20x2. Your
functional currency is the Philippine peso.
The relevant exchange rates are as follows:

Dec. 1, 20x1 Dec. 31, 20x1 Jan. 6, 20x2
₱50:$1 ₱52:$1 ₱47:$1
How much foreign exchange gain (loss) will you recognize on

December 31, 20x1?
a. 200,000 c. 100,000
b. (200,000) d. (100,000)
13
Illustration
• On December 1, 20x1, you imported a machine from a foreign
supplier for $100,000, due for settlement on January 6, 20x2. Your
functional currency is the Philippine peso.
The relevant exchange rates are as follows:

Dec. 1, 20x1 Dec. 31, 20x1 Jan. 6, 20x2
₱50:$1 ₱52:$1 ₱47:$1
How much foreign exchange gain (loss) will you recognize on

December 31, 20x1?
a. 200,000 c. 100,000
b. (200,000) d. (100,000)
14
Recognition of exchange differences
• When a foreign currency transaction occurred in one period and

settled in another period:
a. The exchange difference between the transaction date and the
end of reporting period is recognized in the period of
transaction, while
b. The exchange difference between the end of the previous
reporting period and the date of settlement is recognized in the
period of settlement.
• When a foreign currency transaction occurred and settled in the

same period, all the exchange difference is recognized in that period.
15
Foreign operations
• 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.

16
Translation of Financial Statements
Items Translated Using

a. Assets and Liabilities Closing rate at the date of
statement of financial position
b. Income and Expenses Exchange rates at the dates of

the transaction
Or
Average rate
All resulting exchange differences are recognized in other

comprehensive income.

17
Illustration
Entity A started its operations on January 1, 20x1. On this date, Entity A’s
equity consisted of P2M share capital, which were issued also on this date.
Entity A’s functional currency is the Philippine peso (₱). However, it wishes to
present its 20x1 financial statements into Chinese yuan (¥). The following
information was gathered on December 31, 20x1, after a year of operations.
Total assets ₱10M Income ₱7M
Total liabilities ₱5M Expenses (4M)
Share Capital 2M Profit ₱3M
Retained earnings 3M
Total liabilities and equity ₱10M
Relevant exchange rates:

January 1, 20x1 (historical rate for the share capital) ₱5:¥1
Average rate ₱8:¥1
December 31, 20x1 (closing rate) ₱10:¥1 18
Illustration
1. How much is the translated equity?
a. 50,000,000 c. 1,000,000
b. 25,000,000 d. 500,000
2. How much is the translated profit or loss?

a. 375,000 c. 24,000,000
b. 500,000 d. 25,000,000
3. How much is the foreign exchange difference arising from the translation?
a. 275,000 loss c. 1,750,000 gain
b. 275,000 gain d. 1,750,000 loss
19
Illustration
1. How much is the translated equity?
a. 50,000,000 c. 1,000,000
b. 25,000,000 d. 500,000
2. How much is the translated profit or loss?

a. 375,000 c. 24,000,000
b. 500,000 d. 25,000,000
3. How much is the foreign exchange difference arising from the translation?
a. 275,000 loss c. 1,750,000 gain
b. 275,000 gain d. 1,750,000 loss
20
Disclosure
a. Exchange differences recognized in profit or loss and

OCI
b. The fact and reason for using a different presentation
currency from the entity’s functional currency.
c. The fact and reason for a change in functional currency.

21
END
Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 22
PAS 23 BORROWING COSTS
Learning Competencies
• State the core principle under PAS 23.

• Compute for borrowing costs that are eligible for
capitalization.

23
Definition
Under PAS 23, paragraph 5, borrowing costs are
defined as interest and other costs that an entity incurs in
connection with borrowing of funds.
Paragraph 6 provides that borrowing costs specifically

include:
a. Interest expense calculated using the effective interest
method
b. Finance charge with respect to a finance lease
c. Exchange difference arising from foreign currency
borrowing to the extent that it is regarded as an
adjustment to interest cost
24
Qualifying asset
• Qualifying asset is an asset that necessarily takes a

substantial period of time to get ready for its intended
use or sale. Depending on the circumstances, any of the
following may be qualifying assets:
a. Inventories
b. Manufacturing plants
c. Power generation facilities
d. Intangible assets
e. Investment properties measured under cost model
25
Qualifying asset - continuation
• The following are not qualifying assets

a. Financial assets, and inventories that are manufactured, or
otherwise produced, over a short period of time.
b. Assets that are ready for their intended use or sale when
acquired are not qualifying assets.
c. Assets that are routinely manufactured or otherwise
produced in large quantities on a repetitive basis.
d. assets measured at fair value, such as biological asset

26
Accounting for borrowing cost
1. If the borrowing is directly attributable to the acquisition,
construction or production of a qualifying asset, the borrowing cost
is required to be capitalized as cost of the asset.
Borrowing cost can be capitalized when the asset is a

qualifying asset and it is probable that the borrowing cost will
result to future economic benefit and the cost can be measured
reliably.
2. All other borrowing costs shall be expensed as incurred.
27
Asset financed by Specific Borrowing
The amount of capitalizable borrowing cost is the actual
borrowing cost incurred during the period less any investment income
from the temporary investment of those borrowings.
Interest expense on specific borrowing ₱ xx

Less: Investment income earned on specific borrowing (xx)
Borrowing cost eligible for capitalization ₱ xx
28
Illustration
At the beginning of the current year, an entity obtained a loan of
P4,000,000 at an interest rate of 10%, specifically to finance the
construction of new building. The building was completed at the
current year-end.
Availments from the loan were made quarterly in equal amounts. Total
borrowing cost incurred amounted to P250,000 for the current year.
Prior to their disbursement, the proceeds of the borrowings were

temporarily invested and earned interest income of P40,000.
Actual borrowing cost 250,000

Interest income from investment of proceeds (40,000)
Capitalizable borrowing cost 210,000
29
Asset financed by General Borrowing
The amount of capitalizable borrowing cost is equal to the
average carrying amount of the asset during the period
multiplied by a capitalization rate or average interest rate.
However, the capitalizable borrowing cost shall not exceed the

actual interest incurred.
The capitalization rate or average interest rate is equal to the

total annual borrowing cost divided by the total general borrowings
outstanding during the period.
30
Determining borrowing costs eligible for capitalization
Qualifying assets financed through General borrowing

Total interest expense on general borrowings ₱ xx
Divide by: Total general borrowings xx
Capitalization rate %

Average expenditure on the asset ₱ xx
Multiply by: Capitalization rate %
Borrowing cost that may be eligible for capitalization ₱ xx
The amount computed in the formula above shall be compared with the actual
borrowing costs incurred during the period. The amount to be capitalized is the
lower amount. Conceptual Framework & Acctg.
31
Illustration
An entity had the following borrowings on January 1 of the current
year. The borrowings were made for general purpose and the proceeds
were partly used to finance the construction of a new building.
Principal Borrowing cost

10% bank loan 3,000,000 300,000
12% short-term note 1,500,000 180,000
8% long-term loan 3,500,000 280,000
8,000,000 760,000
The construction of the building was started on January 1 and was

completed on December 31 of the current year.
January 1 400,000
March 31 1,000,000
June 30 1,200,000
September 30 1,000,000
December 31 400,000
Total expenditures on the building 4,000,000 32
Illustration
At the beginning of the current year, an entity borrowed P1,500,000 at
an interest of 10% specifically for the construction of a new building.
The actual borrowing cost on this loan is P150,000.
The entity had also outstanding during the year a 5-year 8% general
borrowing of P7,000,000.
The construction of the building started on January 1 and was

completed on December 31 of the current year.
January1 500,000
April 1 1,000,000
May 1 1,500,000
September 1 1,500,000
December 31 500,000
Total cost 5,000,000
33
Illustration PROBLEM
On January 1, 2019, Cagayan Company took out a loan of P24,000,000
in order to finance specifically the renovation of a building. The
renovation work started on the same date. The loan carried annual
interest at 10%. Work on the building was substantially complete on
October 31, 2019.
The loan was repaid on December 31, 2019 and P200,000 investment
income was earned in the period to October 31 on the proceeds of the
loan not yet used for the renovation.
What is the amount of borrowing cost to be included in the cost of the

building?
a. 2,400,000
b. 2,200,000
c. 2,000,000
d. 1,800,000
34
On January 1, 2019, Cagayan Company took out a loan of P24,000,000
in order to finance specifically the renovation of a building. The
renovation work started on the same date. The loan carried annual
interest at 10%. Work on the building was substantially complete on
October 31, 2019.
The loan was repaid on December 31, 2019 and P200,000 investment
income was earned in the period to October 31 on the proceeds of the
loan not yet used for the renovation.
What is the amount of borrowing cost to be included in the cost of the

building?
a. 2,400,000
b. 2,200,000
c. 2,000,000
d. 1,800,000
35
During 2019, Elysee Company constructed a new facility at a cost of
P30,000,000.
The expenditures for the building, which was finished late in 2019,
were incurred evenly during the year.
The entity had the following loans outstanding on December 31, 2019:
• 10% note to finance specifically the construction, dated January 1,
2019, P10,000,000. This note is unpaid on December 31, 2019.
Investments were made on the proceeds from this loan and income
of P100,000 was realized in 2019.
• 12% 20-year bonds issued at face amount on April 30, 2018,

P30,000,000.
• 8% 5-year note payable, dated March 1, 2018, P10,000,000.
What amount of interest is capitalized as a cost of the new building? 36

During 2019, Elysee Company constructed a new facility at a cost of
P30,000,000.
The expenditures for the building, which was finished late in 2019, were
incurred evenly during the year.
The entity had the following loans outstanding on December 31, 2019:
• 10% note to finance specifically the construction, dated January 1,
2019, P10,000,000. This note is unpaid on December 31, 2019.
Investments were made on the proceeds from this loan and income of
P100,000 was realized in 2019.
• 12% 20-year bonds issued at face amount on April 30, 2018,

P30,000,000.
• 8% 5-year note payable, dated March 1, 2018, P10,000,000.
What amount of interest is capitalized as a cost of the new building?

37
1,450,000
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; and
c. It undertakes activities that are necessary to prepare
the asset for its intended use or sale.

38
Suspension of capitalization
• Capitalization of borrowing costs shall be suspended

during extended periods of suspension of active
development of a qualifying asset.

39
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.

40
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.

41
Disclosures related to borrowing costs
a. The amount of borrowing costs capitalized during the period.

b. The capitalization rate used to determine the amount of borrowing
costs eligible for capitalization.
Segregation of assets that are “qualifying assets” from other assets in

the statement of financial position is not required to be disclosed.

42
END
PAS 24 Related Party Disclosures
Learning Objectives
• Enumerate examples of related parties.
• Describe the disclosure requirements for related parties.

Objective and Scope
• PAS 24 prescribes the necessary disclosures regarding related party

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

45
Core principle
• The financial position and profit or loss of an entity may be affected

by a related party relationship even if related party transactions do
not occur. The mere existence of the relationship may be
sufficient to affect the transactions of the entity with other parties.
• Necessary disclosures, therefore, should be provided to draw users’
attention to the possible effects of such relationships and
transactions on the financial statements presented.

46
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

47
Definition of terms
• 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 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.

48
Definition of terms - continuation
• 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.
• Close members of the family of an individual

a. the individual’s domestic partner and children;
b. children of the individual’s domestic partner; and
c. dependents of the individual or the individual’s domestic partner.
• 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.


49
Unrelated parties
• The following are not related parties:
1. Two entities simply because they have a director in common.
2. Two venturers simply because they share joint control over a joint
venture.
3. Providers of finance, trade unions, public utilities, and departments
and agencies of a government that does not control, jointly control
or significantly influence the reporting entity, simply by virtue of
their normal dealings with an entity.
4. A customer, supplier, franchisor, distributor or general agent with
whom an entity transacts a significant volume of business, simply by
virtue of the resulting economic dependence.

50
Disclosure
1. Parent-subsidiary relationship regardless of whether there have been

transactions between them.
2. Key management personnel compensation broken down into the
following categories SPOTS and loans to key management personnel.
3. 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.

51
END
PAS 26 Accounting and Reporting by
Retirement Benefit Plans
Learning Objectives
• State the applicability of PAS 26.
• Describe the accounting and reporting requirements of PAS
26.

Applicability
PAS 19 PAS 26
 Applied by an employer  Applied by, for example, a
in (among others) trustee, when preparing
determining the cost of the financial
providing retirement statements of a
benefits. retirement benefit
plan. PAS 26
complements PAS 19.

54
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; and
• accompanying notes to the financial statements

55
Financial Statements of a Defined Benefit
Plan
1. a statement that shows:
a. the net assets available for benefits;
b. the actuarial present value of promised retirement benefits,
distinguishing between vested benefits and non-vested benefits;
and
c. the resulting excess or deficit (PAS 26.17)
or
2. a statement of net assets available for benefits including either:
a. a note disclosing the actuarial present value of promised retirement
benefits, distinguishing between vested benefits and non-vested
benefits; or
b. a reference to this information in an accompanying actuarial
report. (PAS 26.17)
• A statement of changes in net assets available for benefits and

accompanying notes are provided in both (1) and (2) above.
56
END
PAS 27 Separate FS

Learning Objectives
• Describe the applicability of PAS 27.

• Describe the measurement bases allowed
under PAS 27.
AA PART 1: Zeus Vernon B. Millan

Scope
• 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
• 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:
• Investments in subsidiaries, associates and joint ventures are

accounted for in the separate financial statements either:
1. at cost,
2. in accordance with PFRS 9 Financial Instruments,
3. using the equity method
• The entity shall apply the same accounting for each

category of investments
END

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CONCEPTUAL FRAMEWORK

• Differentiate between the two ways of

1. Foreign currency transactions – individual

2. Foreign operations – groups often include overseas

Conceptual Framework & Acctg.

• Exchange rates are constantly changing. Therefore, the

Conceptual Framework & Acctg.

• When preparing financial statements, a reporting entity must

• Functional currency is the currency of the primary

• It is the currency in which the entity’s cash inflows and

Conceptual Framework & Acctg.

Conceptual Framework & Acctg.

• All currencies other than the entity’s functional currency

Foreign currency transactions

• A transaction that is denominated or requires settlement

Conceptual Framework & Acctg.

• Monetary items – are units of currency held and assets

Conceptual Framework & Acctg.

• Subsequent recognition: At the end of each reporting period:

• The difference resulting from translating a given

b. Nonmonetary items Profit or loss

1. How much is the foreign exchange gain (loss) to be recognized by

1. How much is the foreign exchange gain (loss) to be recognized by

The relevant exchange rates are as follows:

How much foreign exchange gain (loss) will you recognize on

The relevant exchange rates are as follows:

How much foreign exchange gain (loss) will you recognize on

• When a foreign currency transaction occurred in one period and

• When a foreign currency transaction occurred and settled in the

• A foreign operation is an entity that is a subsidiary,

Conceptual Framework & Acctg.

Items Translated Using

b. Income and Expenses Exchange rates at the dates of

All resulting exchange differences are recognized in other

Conceptual Framework & Acctg.

Relevant exchange rates:

2. How much is the translated profit or loss?

2. How much is the translated profit or loss?

a. Exchange differences recognized in profit or loss and

Conceptual Framework & Acctg.

Conceptual Framework & Acctg.

Paragraph 6 provides that borrowing costs specifically

• Qualifying asset is an asset that necessarily takes a

• The following are not qualifying assets

Conceptual Framework & Acctg.

Borrowing cost can be capitalized when the asset is a

2. All other borrowing costs shall be expensed as incurred.

Interest expense on specific borrowing ₱ xx

Prior to their disbursement, the proceeds of the borrowings were

Actual borrowing cost 250,000

However, the capitalizable borrowing cost shall not exceed the

The capitalization rate or average interest rate is equal to the

Qualifying assets financed through General borrowing

Principal Borrowing cost

The construction of the building was started on January 1 and was

The construction of the building started on January 1 and was

What is the amount of borrowing cost to be included in the cost of the

What is the amount of borrowing cost to be included in the cost of the

• 12% 20-year bonds issued at face amount on April 30, 2018,

What amount of interest is capitalized as a cost of the new building? 36

• 12% 20-year bonds issued at face amount on April 30, 2018,

What amount of interest is capitalized as a cost of the new building?

• The capitalization of borrowing costs as part of the cost