Theory of Accounts

LECTURE NOTES
THE CONCEPTUAL FRAMEWORK OF ACCOUNTING
1. The Conceptual Framework deals with the concepts used in the preparation and presentation of
financial statements (FS).
2. The Conceptual Framework is not a PFRS; it does not define standards for any particular
measurement or disclosure issue. Nothing in the Framework overrides any specific PFRS. In case
of conflict, PFRS prevails over the Framework.
3. The purpose of the Framework is to:
A.) Assist FRSC in the developing GAAP and its review and adoption of existing International
Financial Reporting Standards (IFRS).
B.) Assist preparers of FS in applying PFRS
C.) Assist auditors in forming an opinion as to whether FS conforms to GAAP.
D.) Assist users in interpreting the FS
E.) Provide interested parties with information about PFRS formulation by FRSC
4. The scope of the Framework covers the following:
A.) C APITAL CONCEPTS: the concept of capital and capital maintenance
B.) O BJECTIVE: the objective of FS
C.) Q UALITIVE CHARACTERISTICS: the qualities or attributes that make FS useful to the users.
D.) E LEMENTS: the definition, recognition and measurement of the elements of FS.
5. The objective of FS is to provide information about the financial position, performance and
changes in financial position of an entity that is useful to a wide range of users in making
economic decisions. The FS also shows the results of the stewardship of management- - the
accountability of management for the resources entrusted to it; the management of an entity
has the primary responsibility for the preparation and presentation of FS.
6. The framework is concerned with general-purpose financial statements (including consolidated
financial statements) of all commercial, industrial and business reporting public or private
entities.
7. Special purpose financial reports (e.g., prospectuses and computations prepared for taxation
purposes) are outside the scope of this Framework.
8. Underlying assumptions on FS preparation and presentation : (1) Accrual basis (2) Going
Concern
9. The users of financial statements include (1) present and potential investors, (2) employees
and their representative groups, (3) lenders, (4) suppliers and other trade creditors , (5)
customers, (6) governments and their agencies and
(7) The public.
10.
The qualitative characteristics of FS:
PRESENTATION
C Comparability: inter-period comparability; intercompany comparability.
U- Understandability: compliance with PFRS to make information
understandable to users
CONTENT (Primary)
R- Relevance: predictive value; feedback /confirmatory value; timeliness
Ry Reliability: faithful representation; substance over form; prudence;
neutrality; completeness
11. Constraints on relevant and reliable information: (1) On timeliness: if there is undue delay in the
reporting of information, it may lose its relevance (2) On cost-benefit: the benefits derived from
information should exceed the cost of providing it (3) On qualitative characteristics: the aim is
to achieve an appropriate balance among characteristics in order to meet the objective of FS.
12. Information is material if its omission or misstatement could influence economic decisions of
users taken on the basis of the financial statements. Materiality provides a threshold or cut-of
point rather than being a primary qualitative characteristic which information must have if it is
to be useful.
13. The elements of FS:
On financial position: (1) Assets (2) Liabilities (3) Equity

On performance: (4) Income ( includes revenue and gains) (5) Expenses (include losses)
14. An item that meets the definition of an element should be recognized if:
A.) PROBABLE : it is probable that any future economic benefit associated with the item will
flow to or from the entity, AND
B.) MEASURABLE: the item has a cost or value that can be measured with reliability. Four
diferent measurement bases are used to measure the elements of FS:
Historical cost (this is considered as the most common valuation basis)
Current cost
Realizable value (or settlement value , in the case of liabilities )
Present value (this is also known as discounted value)

Philippine Financial Reporting Standards (PFRS) replaces SFAS (Statements of Financial Accounting
Standards) as the main
source of Generally Accepted Accounting Principles (GAAP) in the Philippines. Based on PAS 1, par.7,
the term PFRS shall
be composed of (a) PFRS (b) Philippine Accounting Standards (PAS), and (c) Interpretations.

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 The FRSC (Financial Reporting Standards Council) replaces ASC (Accounting Standards Council). FRSC
currently issues PFRSC as
ASC, in the past, issued SFAS. Refer to page 10 of the TA Lecture Notes for further details.
The financial position of any entity is afected by the economic resources it control, its financial
structure,
its
liquidity
and
solvency, and its capacity to adapt changes in the environment in which the entity operates.

15. Two capital concepts: 1.) Financial concept (most common) and 2.) Physical concept. The
concept of capital maintenance provides the linkage between the concepts of profit since it
provides the point of reference by which profit is measured:
A.) Under the concept of financial capital maintenance, a profit is earned only if the financial
amount of ending net assets exceeds beginning net assets, excluding any contributions
from and distributions to owners during the period. This concept does not require the use of
a particular basis of measurement.
B.) Under the concept of physical capital maintenance, a profit is earned only if the physical
productive capacity (operating capability) at the end of periods exceeds the physical
productive capacity at the beginning of period, excluding any contributions from and the
distributions to owners during the period. This concept requires the adoption of the
CURRENT COST basis of measurement.
PAS 1: PRESENTATION OF FINANCIAL STATEMENTS
1. COMPONENTS OF FINANCIAL STATEMENTS (FS). A complete set of FS is composed of:
A.) Statement of financial position (balance sheet) as at the end of the period
B.) Statement of comprehensive income- for the period
C.) Statement of cash flows for the period
D.) Statement of changes in equity for the period
E.) Notes, comprising a summary of significant accounting policies & other explanatory
information.
F.) Statement of financial position as at the beginning of the earliest comparative period when
an entity applies an accounting policy retrospectively or makes a retrospective restatement
of items in its FS.
2. HEADING AND TITLES. An entity may use other titles for the statements other than those used in
PFRS and shall present with equal prominence all of the FS and distinguish them from other
information in the same published document. In addition, the following information shall be
displayed prominently:
A.) The name of reporting entity
B.) Whether the financial statements cover the individual entity or a group of entities
C.) The date at the end of reporting period or the period covered by the set of financial
statements
D.) The presentation currency (as defined under PAS 21)
E.) The level rounding (also known as truncation) used in presenting amounts in the FS
3. GENERAL FEATURES in the presentation of FS.

FAIR PRESENTATION. The application of PFRS is presumed to result in financial statements

(FS) that achieve a fair presentation. FS that comply with PFRS should include in the notes to
FS an explicit and unreserved statement of such compliance

GOING CONCERN. An entity shall prepare FS on a going concern basis unless management
either intends to liquidate the entity or to cease trading, or has no realistic alternative but to
do so.

ACCRUAL BASIS OF ACCOUNTING. An entity shall prepare its FS, except for cash flow
information, using the accrual basis of accounting.
The term Comprehensive Income refers to all changes in equity other than changes resulting from
contributions from and distribution to owners; hence, the Statement of Comprehensive Income shall
include:
1. Components of profit or loss- these are income and expense accounts usually found in the
traditional income statement. As a
Minimum requirement, the line items to be presented are: (PAS 1, par.82)
Revenue
Finance costs
Share in the income or loss of associates and joint venture accounted for using the equity
method
Tax expense
Post-tax profit or loss on discontinued operations
Profit or loss
2. Components of other comprehensive income-these are income and expense accounts are
recognized in profit or loss and
are usually required by PFRS to be recognized directly in the equity section of the statement of
financial position (balance
sheet). Examples include: (PAS 1, par. 7)
Unrealized gain or loss on available for-sale-securities(PAS 39)
Gain or loss from translating the financial statements of a foreign operation (PAS 21)

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 Change in revaluation surplus (PAS 16 and 38)

Unrealized gain or loss on from derivative contracts designated as cash flow hedge (PAS 39)
Accrual gain or loss on defined benefit pension plans (PAS 19, par.93A)
An entity has two options of presenting comprehensive income: (PAS 1, par.81)
Option 1: SINGLE STATEMENT
The components of profit or loss and components of other comprehensive income are shown in a
single statement of
comprehensive income.
Option 2: TWO STATEMENTS
An income statement showing components of profit or loss
A statement of comprehensive income beginning with profit or loss as shown in the
income statement plus or minus
the components of other comprehensive income.
Retrospective application of a change in accounting policy is covered by PAS 8. Refer to page 5 of the
TA Lecture Notes.
Inappropriate accounting policies are not rectified either by disclosure of the accounting policies used
or by explanatory
note.(PAS 1, par.18)

MATERIALITY and AGGREGATION. An entity shall present separately each material class of
similar items and shall
present separately items of dissimilar nature or function unless they are immaterial.

OFFSETTING. An entity shall not ofset assets and liabilities or income and expenses, unless
ofsetting is required
or permitted by PFRS.

COMPARATIVE INFORMATION. An entity shall include comparative information for narrative and
descriptive information when it is relevant to an understanding the current period FS.

FREQUENCY OF REPORTING. An entity shall present a complete set of FS at least annually.

When an entity presents
FS for a period longer or shorter than one year, an entity shall disclose: (A) the period covered
by FS, (B) the reasons
for using a longer or shorter period; and (C) the fact that comparative amounts for FS are not
entirely comparable.

CONSISTENCY OF PRESENTATION. An entity shall retain the presentation and classification of

items in the FS from
one period to the next unless: (A) it is apparent , following a change in the nature of the
entitys operations or a
review of its FS, which another presentation or classification would be more appropriate ; or( B)
a standard requires
a change in presentation.
4. INCOME STATEMENT PRESENTATION. When items of income and expenses are material, an entity
shall disclose their nature
and amount separately. In addition, an entity shall present an analysis of expenses using a
classification based on either
the (1) nature of expense method or (2) function of expense method, whichever provides more
reliable and more relevant
information.
5. BALANCE SHEET(BS) PRESENTATION. An entity shall present current and non-current assets, and
current and non-current
liabilities , except when a presentation based on liquidity provides more reliable and relevant
information. When the
exception applies, all assets and liabilities shall be presented broadly in order of liquidity.
6.CURRENT vs. NONCURRENT ASSETS. An entity shall classify an asset as current when:
A.) The asset is a cash or a cash equivalent (unless restricted for at least 12 months after BS date)
B.) It holds the assets primarily for the purpose of trading.
C.) It expects to realize the asset within 12 months after the reporting period (BS date)
D.) It expects or intends to realize or consume it within the entitys normal operating cycle
An entity shall classify all other assets as non-current.
7. CURRENT vs. NONCURRENT LIABILITIES. An entity shall classify a liability as current when:
A.) The liability is due to be settled within 12 months after the reporting period (BS date)
B.) It holds the liability primarily for the purpose of trading.
C.) It expects to settle the liability within the entitys normal operating cycle.
D.) The entity does not have an unconditional right to defer settlement of the liability for at least
twelve months
after the reporting period (BS date).
An entity shall classify all other liabilities as non-current.
8. BALANCE SHEET LINE ITEMS. As a minimum requirement, the face of the statement of financial
position shall include

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line items that present the following amounts:

A.) Property, plant and equipment
B.) Investment property
C.) Intangible assets
D.) Financial Assets(excluding amounts shown under E,H and I)
E.) Investments accounted for using the equity method.
F.) Biological assets (defined as living animals or plants under PAS 41)
G.) Inventories
H.) Trade and other receivables
I.) Cash and cash equivalents.
J.) Total assets held for sale (including assets of disposal groups held for sale under PFRS 5)
K.) Trade and other payables
L.)Provisions (defined as the liabilities of uncertain timing of amount under PAS 37)
M.) Financial liabilities(excluding amounts shown under J and K)
N.) Liabilities and assets for current tax.
O.) Deferred tax liabilities and deferred tax assets, not to be presented as current (PAS 1, par.56)
P.) Minority (non-controlling) interest, presented within equity
Q.) Issued capital and reserves attributable to equity holders of the parent.
An entity that uses the function of expense method (a.k.a cost of sales method) shall disclose additional
information on the nature
of expense , including depreciation and amortization expense and employee benefits expense. (PAS1, par
104)
The operating cycle of an entity is the time between the acquisition of assets for processing and their
realization in cash or
cash equivalents . When the entitys normal operating cycle is not clearly identifiable , its duration is
assumed to be twelve
months. (PAS,par.68)
An investment property is a property (land or building) held by the owner or by the lessee under a finance
lease to earn
rentals or for capital appreciation or both, rather than for use or sale (PAS 40)
A financial asset is any asset that is a cash , an equity instrument of another entity , a contractual right to
receive cash or another
financial asset from another entity. (PAS 32)
A financial liability is any liability that is a contractual obligation to deliver cash or another financial asset
to another entity. (PAS 32)
Non-controlling interests, which is previously known as minority interest, shall be presented in the
consolidated balance sheet
within equity, separately from the parent shareholders equity.(PAS 27, par 27)

9. FINANCIAL LIABILITIES .An entity classifies its financial liabilities as current when they are due to be settled

within twelve
months after the balance sheet date , even if:
A.) The original term was for a period longer than twelve months; and
B.) An agreement to refinance, or to reschedule payments, on a long term basis is completed after the
reporting period
(BS date) and before the FS are authorized for issue
10. EFFECTS OF BREACHES. When an entity breaches a provision of a long-term loan agreement on or before
the end of reporting
period (BS date) with the efect that the liability becomes payable on demand, the liability is classified as
current, even if
the lender has agreed not to demand payment as a consequence of the breach.
11. STATEMENT OF CHANGES IN EQUITY (SCE). An entity shall present a statement of changes in equity
showing:
A.) Total comprehensive income for the period, showing separately the total amounts attributed to
owners of the
parent and to non-controlling (minority) interest.
B.) For each component of equity , the efects of retrospective application / restatement under PAS 8.
C.) The amount of transactions with owners in their capacity as owners , showing separately
contributions by and
distributions to owners.
D.) For each component of equity , a reconciliation of the between the carrying amount at the
beginning and the end
of the period , disclosing each change separately.
12. DIVIDENDS. An entity shall present either in the statement of changes in equity or in the notes , the
amount of dividends

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recognized as contributions to the owners and the related amount per share.
13. NOTES TO THE FS. The notes are normally presented in the following order, which assists users in
understanding the FS and
comparing them with FS of other entities:
A.) A statement of compliance with PFRS
B.) A summary of significant accounting policies applied, which shall include:
The measurement bases used in preparing FS
The other accounting policies used that are relevant to an understanding of the FS
C.) Supporting information for an items shown on the face of each FS, in the order in which each
statement and each line
item is presented.
D.)Other disclosures, including:
Contingent liabilities and unrecognized contractual commitments
Non-financial disclosures (e.g., the entitys financial risk under PFRS 7)
THE ACCOUNTING PROCESS
1. JOURNAL
a chronological records of transactions; also called as the book of original entry
General Journal- used to record (1) transactions not covered in special journals and (2)
adjusting, closing , and
revising entries.
Special Journal: CRJ cash receipts journal
SJ- sales journal
CDJ cash disbursements journal
PJ- purchase journal
2. LEDGER(general or subsidiary )
a group of accounts; also called as the book of final entry;
ACCOUNT summarizes the efect of transactions on each asset, liability , equity, income & expenses.
Nominal(temporary) accounts- subject to closing entries, mainly found in income statement
Real (permanent) accounts not subject to closing entries , mainly found in the balance sheet
Contra Accounts- an account that is deducted from another account .(e.g., sales discounts)
Adjunct accounts- an account that is added to another account .(e.g., freight-in)
3. WORKSHEET(optional)- a tool that typically contains columns for trial balance (unadjusted and adjusted),
adjustments ,
income statement and balance sheet; it is used to facilitate FS preparation.
4. ADJUSTING ENTRIES- to update amount of certain accounts
A.) Accrued revenue- revenue already earned but not yet collected
B.) Accrued expense- expense already incurred but not yet paid ACCRUA
C.) Unearned revenue revenues already collected but not yet earned
D.) Prepaid expense expense already paid but not yet incurred
DEFERRA
E.) Others(e.g., depreciation, amortization, depletion, impairment , bad debts)
5. CLOSING ENTRIES- to bring all nominal accounts to zero balance ; Income Summary account is used to
close both
income and expense accounts.
6.REVERSING ENTRIES(optional)- to simplify recording of certain recurring transactions .
The following adjusting entries may be subject to reversing entries:
A.) ACCRUALS : accrued revenue and accrued expense
B.) DEFERRALS: prepaid expense (expense method) and unearned revenue (income method)
If an entity expects, and has the discretion, to refinance or roll over an obligation for at least twelve months after the
balance sheet under an existing loan facility, it classifies the obligation as non-current , even if it would otherwise be due
within a shorter period . (PAS 1, par. 73)
The liability is classified as non-current if the lender agreed by the balance sheet date to provide a grace period ending
at least 12 months after the balance sheet date , within which the entity can rectify the breach and during which the
lender cannot demand immediate payment.(PAS 1, par 75)
An entity is required to disclose the judgments that management has made in the process of applying the entitys
accounting policies and that have the most significant efect on the amounts recognized in the FS .(PAS 1, par 122). In
addition, the notes shall contain key assumptions concerning the future and other key sources of estimation that will
pose a significant risk of causing a material adjustment to the amount of assets and liabilities within the nest period. In
such a case, the notes shall include nature, amount and other details of such assets and liabilities.(PAS 1, par 125)

PAS 8: ACCOUNTING POLICIES , CHANGES IN ACCOUNTING ESTIMATES & ERRORS

OBJECTIVE . The objective of PAS 8 is to prescribe the criteria for selecting and changing
ACCOUNTING POLICIES changes in ACCOUNTING ESTIMATES and CORRECTION OF ERRORS to
enhance relevance, reliability and comparability of
FS of an entity over time as well as with FS of other entities.
SELECTION OF ACCOUNTING POLICIES. When a standard specifically applies to a transaction, the
accounting policy applied to an afected account shall be determined by applying the standard. In
the absence of a standard that applies to
a transaction, management shall use its judgement in developing and applying accounting
policy that is relevant and reliable.
CONSISTENCY OF ACCOUNTING POLICIES. Once selected, accounting policies must be applied
consistently for similar transactions, unless a standard specifically requires otherwise. An entity
shall change an accounting policy if the change (1) is required by a standard or (2) results in the
FS providing more relevant financial information.
CHANGES IN ACCOUNTIONG POLICIES. A change in accounting policy that is required by a
standard shall be applied in accordance with the transitional provisions therein. If a standard
contains no transitional provisions or if an accounting policy is changed voluntarily, the change

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shall be applied retrospectively (as if the policy had always been applied)as adjustment to the
opening balance of each afected component of equity(e.g., retained earnings) for the earliest
prior period presented.
For purposes of PAS 8, the following are NOT considered as changes in accounting policies:
1. Application of accounting policies for events that difer in substance from those previously
occurring.
2. Application of new accounting policy prospectively from the start of the earliest period
practicable.
EXCEPTION to the RULE. When it is impracticable for an entity to apply new accounting policy
retrospectively (i.e., it cannot determine the cumulative efect of applying the policy to all prior
periods), the entity applies the new policy prospectively from the start of the earliest period
practicable.
APPLICATION of NEW STANDARDS. When an entity has not applied a new standard that been
issued but not yet efective, the entity shall disclose this fact, and the reasonably estimable
information relevant for assessing the possible impact that application of the new standard will
have on the entitys FS in the period of initial application.
CHANGES in ESTIMATES. The efect of a change in an accounting estimate shall be recognized
prospectively by including it in the profit or loss during the periods( if the change afects that
period only) or the period of the change and the future periods (if the change afects both).
EXAMPLES of CHANGES in ESTIMATES. Due to uncertainties inherent in business activities, many
items in FS cannot be measured with the precision but can only be estimated. Estimation involves
judgments based on the latest available, reliable information. Common examples of accounting
estimates include:
1. Bad debts and inventory obsolescence
2. Fair value of financial assets or financial liabilities
3. Useful lives of depreciable assets; and
4. Provision for warranty obligations
A change in the measurement basis applied is a change in an accounting policy, it is not a change
in an accounting estimate. When it is difficult to distinguish a change in an accounting policy from
a change in an accounting policy from a change in an accounting estimate , the change is treated
as a change in an accounting estimate.
CORRECTION OF ERRORS.An entity shall correct material prior period errors retrospectively as
an adjustment to the opening balances of retained earnings and afected assets and liabilities. If
comparative statements are presented, the FS of prior period shall be restated to reflect the
retrospective application of the prior period errors. If the error occurred before the earliest period
presented, the opening balances of assets, liabilities and equity for the earliest period presented
shall be restated.
MATERIALITY. In applying the concept of materiality:
1. Accounting policies in the PFRSs need not to be applied when the efect of applying them is
immaterial.
2. FS do not comply with PFRSs if they contain material errors, whether due to omissions or
misstatements.
3. Material prior period errors should be corrected retrospectively in the first set of FS authorized
for issue after their discovery.

Accounting policies are the specific principles, bases, convention, rules and practice adopted by an entity in preparing
and presenting financial statements.
In making judgments, management shall refer to the following sources in descending order:
1.) The requirements and guidance in standards dealing with similar and related issues.
2.) The definition, recognition criteria and measurement concepts set forth in the Conceptual Framework.
In the making the judgment, management may also consider the most recent pronouncements of other standard-setting
bodies that
use similar conceptual framework to develop accounting standards, other accounting literature and accepted industry
practices, to the
extent that these do not conflict with PFRS and the Conceptual Framework.
Applying a requirement is impracticable when the entity cannot apply it after making every reasonable efort to do so.
A change in accounting estimates results from a new information or developments and, hence, are not correction of
errors.
The concept of fundamental error has been eliminated .Instead, PAS 8 uses and defines term prior period prior. Prior
period errors are omission
and misstatements in the FS for one or more periods; they are committed in prior periods but are discovered only in the
current period.
Omissions or misstatements of items are material, if they could, individually or collectively, influence the economic
decisions of users taken
on the basis of the FS. Materiality depends on the size and nature of the omission or misstatement judged in the
surrounding circumstances.

PFRS 5: NON-CURRENT ASSETS HELD

FOR

SALE & DISCONTINUED OPERATIONS

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 NON-CURRENT ASSETS HELD FOR SALE

An entity shall classify separately from other assets a non-current asset (or disposal group) as held
for sale if its carrying amount will be recovered principally through a sale transaction rather than
through continuing use.
The following conditions must be met for a non-current asset to be classified as held for sale:
1. Management is committed to a plan to sell the asset or disposal group.
2. An active program to locate a buyer and complete the plan must have been initiated.
3. The asset must be available for immediate sale.
4. The sale is highly probable within one year from the date of classification as held for sale.
5. The asset is being actively marketed for sale at price that is reasonable in relation to its fair value.
6.Actions required to complete the plan indicate that it is unlikely that the plan will be significantly
changed
or withdrawn.
An entity shall measure a non-current asset classified as held for sale at the lower of its carrying
amount or fair value less
costs to sell. Non-current assets held for sale is NOT be depreciated form the date classified as
such.
An entity shall present a non-current asset classified as held for sale and the assets of a disposal
group classified as held for
sale separately from other assets in the balance sheet. The liabilities of disposal group classified as
held for sale shall be
presented as a single amount. The major classes of assets and liabilities classified as held for sale
shall be separately disclosed
either on the face of the balance sheet or in the notes.
An entity shall measure a non-current assets that ceases to be classified as held for the sale at the
lower
of
its
carrying
amount before the asset was classified as held for sale ) and its recoverable amount (at the date
of
the
subsequent
decision not to sell).
DISCOUNTED OPERATIONS.
A discounted operation is a component of an entity that either has been disposed of , or is classified
as held for sale, and
1. Represents a separate major line of business or geographical area of operations.
2.Is a part of a single coordinated plan to dispose a separate major line of business or geographical
area of operations, or
3.Is a subsidiary acquired exclusive with a view to resell (for resale)
A component of an entity is classified as discounted operation at the date entity has actually
disposed
of
the
operation
or when the operation meets the criteria to be classified as held for sale.
An entity shall disclose a SINGLE amount on the face of income statement comprising the total of:
1. The post-tax profit or loss of discounted operations and
2. The post-tax gain or loss recognized:
A.) On the measurement to fair value less costs to sell OR
B.) On the disposal of the assets constituting the discontinued operations
A group of assets possibly to disposed of, by sales or otherwise, together as a group in a single
transaction, and liabilities directly
associated with those assets that will be transferred in the transaction.
The asset (or disposal group) must be available for immediate sale in its present condition and the sale
must
be
highly
probable.
Highly probable means that the probability of the future sale is higher than more likely than not. An
entity
shall
not
classify
as held for sale a non-current asset(disposal group) that is to be abandoned.
If anon-current asset within the scope of PFRS 5 is a part of a disposal group, the measurement
requirements
of
PFRS
5
apply
to the group as a whole, so that the group is measured at lower of its carrying amount and fair value
less
costs
to
sell.
The
write
down to fair value less cost to sell is treated as an impairment loss.
The carrying amount is adjusted for depreciation, amortization or revaluations that would have been
recognized
had
the
asset
not
been classified as held for sale.
Recoverable amount is measured as the higher of an assets fair value less costs to sell and its value in
use.
This
is
well
emphasized in PAS 36 on impairment of assets.
A component of an entity may be a subsidiary, major line business or geographical segment whose
operations
and
cash
flows
can be clearly distinguished , operationally and for financial reporting purposes, from the rest of the
entity.

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 The results of discontinued operations, net of tax, should be shown as a single amount in the income
statement
separately
from the income from continuing operations. To explain the details of this single amount, the following
should
be
disclosed
in
the notes to the FS:
1. The amount of revenue, expenses and income or loss attributable to the discontinued operation
during
the
current
period
and the related income tax.
2. Any impairment loss( as the fair value less cost to sell of the net assets of the discontinued
operations
is
lower
than
their
carrying amounts).If the carrying amount is lower , the expected gain is not recognized but only
disclosed.
3. The termination cost of employees and other costs that are directly incurred as a result of the
discontinuance.
4. Any gain or loss from the actual disposal of the assets and settlement of liabilities of a discontinued
operation.
Cost to sell is the incremental costs directly attributable to the disposal of an asset (or disposal
group
),
excluding
finance
costs and income tax expense.

PAS 24: RELATED PARTY DISCLOSURES

PURPOSE. Related party relationships are a normal feature of commerce and business. Related parties
may enter into transactions that unrelated parties would not. Also, transactions between related
parties may not be made at the same time amounts as between in related parties. (e.g., an entity
that sells goods to its parent company at cost might not sell on those terms to another customer). For
these reasons, knowledge of related party transactions, outstanding balances and relationships any
afect assessments f an entitys operations by users of financial statements, including assessments of
the risks and opportunities facing the entity; hence, related party disclosures are necessary.
RELATED PARTY. A party is related to any entity if:
A.) Directly, on indirectly through one or more intermediaries, the party:
has the ability to control , is controlled by, or is under common control with, the entity(this
includes parents, subsidiaries and fellow subsidiaries)
has an interest in the entity that gives it significant influenceover the entity
has joint control over entity
B.) The party is an associate of the entity
C.) The party is the joint venture in which the entity is a venture
D.) The party is a member of the key management personnel of the entity or its parent
E.) The party is a close family member o any individual referred in A or D
F.)The party is an entity that is controlled, jointly controlled or significantly influenced by any
individual referred to in D or E
G.) The party is a post-employment benefit plan for the benefit of employees of the entity , or of an
entity that is related party of the entity.
NOT NECESSARILY RELATED PARTIES. Under PAS 24, the following are NOT necessarily related parties:
A.) Two entities simply because they have common director or other common member of key
management personnel.
B.) Two ventures simply because they share joint control over a joint venture.
C.)Providers of finance, trade unions, public utilities, government department and agencies, simply
by
virtue
of
their
normal
dealings with an entity.
D.) A customer, supplier, franchisor, distributor, or general agent with whom an entity transacts
significant volume of business , merely by virtue of the resulting economic dependence.
CLOSE FAMILY MEMBERS OF AN INDIVIDUAL. Close family members of an individual are those family
members who may be expected to influence, or be influenced by that individual, in their dealings
with the entity. They may include:
A.)The individuals domestic partner and children
B.) Children of the individuals domestic partner
C.) Dependents of the individuals domestic partner
PARENT & SUBSIDIARIES. Relationship between parents and subsidiaries shall be disclosed irrespective
of whether there have been transactions between those related parties. An entity shall disclose the
name of the entitys parent and if diferent, the ultimate controlling party.
COMPENSATION. An entity shall disclose key management personnel compensation in total and for
each of the following
categories:
A.) Short term employee benefits (e.g., wages, social security contributions, paid leaves, bonuses)
B.) Post-employment benefits (e.g., pension, retirement benefits)
C.) Other long-term benefits (e.g., long service leave, long term disability benefits)
D.) Termination benefits

Page 8 of 36

E.) Equity compensation benefits

RELATED PARTY DISCLOSURES. If there have been transactions between related parties, an entity shall
disclose the nature of the related party relationship as a well as information about the transactions
and outstanding balances necessary for the understanding of the potential efect of the relationship
on the FS. At the minimum, disclosures shall include:
A.) The amount of the transactions
B.) The amount of the outstanding balances and
Their terms and conditions , and whether they are secured or unsecured.
The nature of settlement consideration , and details of guarantees given or received
C.) Provisions for bad debts related to the amount of the outstanding balances
D.)Expenses recognized in respect of bad debts due from related parties.
Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its
activities. (PAS 27)
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 of ownership, statute or agreement (PAS 28)
Joint Control is a contractually agreed sharing of control over an economic activity. (PAS 31)
Key management personnel refer to those persons having authority and responsibility for planning, directing, and
controlling the activities of an
entity, directly or indirectly include directors (executive or otherwise) of the entity.
Compensation includes all employee benefits, which include all forms of consideration paid, payable or provided by the
entity, or on behalf of the entity, in exchange for services rendered to the entity . (PAS 19)

EXAMPLES OF RELATED PARTY TRANSACTIONS REQUIRING DISCLOSURES

The following are examples of transactions that are disclosed if they are made with a related party:

A.) Purchases or sales of goods |(finished or unfinished)

B.) Purchases or sales of property and other assets
C.) Rendering or receiving of services
D.) Leases
E.) Transfers of research and development
F.)Transfers of license agreements
G.) Transfers under finance arrangements (including loans and equity contributions in cash or in
kind)
H.) Provision of guarantees or collateral
I.) Settlement of liabilities on behalf of the entity or by the entity on behalf of another party
Items of similar nature may be disclosed in aggregate except when separate disclosure is necessary
for
an
understanding
of
the
efects of related party transactions on the FS of the entity.

PAS 10: EVENTS AFTER

PERIOD)

THE

BALANCE SHEET DATE (EVENTS AFTER THE REPORTING

EVENTS AFTER THE BALANCE SHEET DATE are favorable and unfavorable events that occur
between the balance sheet and the date when the FS are authorized for issue; FS shall be disclose
the date when the FS were authorized for issue , and who gave that authorization

ADJUSTING EVENTS after a balance date sheet (i.e., those that provide evidence of conditions that
existed at the balance sheet date) should be recognized in the FS. Examples are (among others):
a.) Resolution or settlement after BS date of a court case that confirms that the entity had a
present
obligation
at
the
BS
date.
b.) Bankruptcy of a customer that occurs after BS date, confirming that a loss existed at the BS
date on a trade receivable.
c.) Sale of inventories after the BS date that may give evidence on net realizable value (NRV) at the
BS date.
d.) Determination after the BS date of the cost of the assets purchased; or the proceeds from the
assets sold , before the
BS date.
e.) Determination after the BS date of the profit sharing or bonus payment if the enterprise had the
present
obligation
at the BS date to make such payment.
f.)The discovery of fraud or errors that show the FS are incorrect.
An entity shall adjust the amounts recognized in its FS to reflect the adjusting events after the BS
date
.
If
an
entity
receives
an
information after the BS date about conditions that existed at the BS date , it shall update disclosures
that
relate
to
those
conditions, in the light of the new information.

NON-ADJUSTING EVENTS after the balance sheet date (i.e., those that are indicative of conditions
that arose after the balance sheet date) are not recognized but are disclosed in the notes to the FS.
Examples are( among others) :
a.) Major business combination or disposing a major subsidiary after the BS date

Page 9 of 36

b.) Announcement of the plan to discontinue an operation

c.) Major purchase and disposal of assets, or expropriation of major assets by government
d.) Destruction of major production plant by a fire after the BS date
e.) Announcement of a major restructuring
f.) Major ordinary share transactions and potential ordinary share transactions after the BS
date.
g.) Abnormally large changes after BS date in asset prices or foreign exchange rates.
h.) Changes in tax rates or tax laws enacted or announced after the BS date.
i.) Entering into significant commitments or contingent liabilities, for example , by issuing
guarantees.
j.)Commencing major litigation arising solely from events the occurred after the BS date.
k.)Decline in market value of investments between the BS date and the date when the FS are
authorized for issue.
DIVIDENDS . Dividends on equity shares declared after the balance sheet date should not be
recognized as a liability at the balance sheet date. Such dividends are disclosed in the notes to the
FS (i.e., a non-adjusting subsequent event).
GOING CONCERN. Deterioration in operating results and financial position after the balance sheet date
may indicate a need to consider whether the going concern is still appropriate; an entity should not
prepare its financial statements on a going concern basis if management determines after the
balance sheet date either that it intends to liquidate the entity or cease trading, or that it has no
realistic alternative but to do so.

This is previously called as subsequent events. Subsequent events , as defined previously , are
events
that
happened
after
the
BS date until the date of FS issuance.
If the entitys owners (or other parties) have the power to amend the FS after issue, the entity shall
disclose this fact. The process
involved in authorizing the FS for issue will vary depending upon the management structure, statutory
requirements
and
procedures followed in preparing and finalizing the FS.
An entity shall disclose the following for each material category of non-adjusting event after the BS
date:

The nature of event

An estimate of its financial efect , or statement that such an estimate cannot be made.
A restructuring is a program, planned and controlled by management, that materially changes either
the
scope
of
a
business
undertaken by an enterprise or the manner in which that business is conducted. (PAS 37)

PAS 37: PROVISIONS , CONTIGENT LIABILITIES & CONTIGENT ASSETS

1. PROVISIONS are liabilities of uncertain timing or amount. A provision should be recognized when:
AN enterprise has a present obligation (legal or constructive) as a result of a past event,
It is probable that an outflow of resources embodying economic benefits will be required to
settle the obligation , and
The amount of obligation can be measured reliably.
Provision should not be recognized for future operating losses. If an enterprise has a contract that is
onerous,
the
present
obligation under the contract should be recognized as a provision.
2. An OBLIGATION EVENT is an event that creates a legal or constructive obligation that results in an
enterprise
having
no
realistic alternative but to settle the obligation created by the event.
3. A LEGAL OBLIGATION is an obligation that is derived from a contract , legislation, or other operation
of law.
4. A CONSTRUCTIVE OBLIGATION is an obligation that derives from an enterprises actions where:
A.) The enterprise has indicated to other parties that it will accept certain responsibilities, and
B.) The enterprise had created a valid expectation on the part of other parties that will discharge
certain responsibilities
5. A CONTIGENT LIABILITY is either:
A possible obligation that arises from past events and whose existence will be confirmed only
by the occurrence or non- occurrence of one or more uncertain further events not wholly within
the control of the enterprise , OR
A present obligation that arises from past events but is not recognized because it is not
probable
that
an
outflow
of

Page 10 of 36

resources embodying economic benefits will be required to settle obligation or the amount of
the obligation cannot be measured with sufficient reliability.
Hence, an enterprise should be recognize a contingent liability on the face of FS. A contingent liability
is required to be disclosed in the notes to the FS , unless the possibility of an outflow of economic
benefit is remote.
6. A CONTIGENT ASSET is a possible asset that arises from the past events and whose existence will be
confirmed
only
by
the
occurrence or non-occurrence of one or more uncertain future events not wholly within the control
of the enterprise.
Hence, an enterprise should be recognize a contingent asset. A contingent liability is required to be
disclosed
in
the
notes
to
the FS , where an inflow of economic benefit is probable. However, when the realization of income
is
virtually
certain
,
then
the related asset is not a contingent asset and is therefore recognized. Consider the following:
CONTIGENT LIABILITY
PROBABLE
POSSIBLE
REMOTE

Recognize (as Provision)

Disclose ( in the Notes)
No requirement

CONTIGENT ASSET
Disclose ( in the Notes)
No requirement
No requirement

7. MEASUREMENT OF PROVISION. The amount recognized as a provision should be the BEST ESTIMATE
of
the
expenditure
required to settle the present obligation at the balance sheet date , taking into account the risks
and
uncertainties
surrounding the circumstances that relate to the provision.

Where the provision being measured involves a large population in terms, the obligation is
estimated by weighing all possible outcomes by their associated probabilities. This
statistical
method
of
estimation
is
known
as
the
EXPECTED VALUE.

Where there is a continuous range of possible outcomes, and each point in the range is a s
likely as any other, the
the MID-POINT of the range is used.

Where the efect of the time value of money is material, the amount of provision should be
the
PRESENT
VALUE
of the expenditures expected to be required to settle the obligation .
8. REIMBURSEMENT. Where some or all of the expenditures required in settling a provision is expected
to
be
reimbursed
by
another party, the reimbursement should be recognized as a separate asset when it is virtually
certain
that
reimbursement
will be received if the enterprise settles an obligation. The amount recognized for the
reimbursement
should
not
exceed
the amount of the provision. In the incomes statement, the expense relating to a provision may be
presented
net
of
the
amount recognized for a reimbursement.
9. RESTRUCTURING. A provision for restructuring costs is recognized only when the general criteria
for
a
provision
are
met
(see item no.1). A restructuring provision should not be associated with ongoing activities of the
enterprise
and
should
not
include costs such as retraining or relocating continuing staf, marketing or investment in new
system
and
distribution
networks.
An onerous contract is a contract in which the unavoidable costs of meeting the obligations under the
contract
exceed
the
economic benefits to be received under it. The term onerous is literally to mean burdensome.
The discount rate should a pre-tax that reflects the current market assessments of the time value of
money
and
the
risks
specific
to the liability. The discount rate should not reflect risks for which future cash flow estimates have been
adjusted.(PAS 37, par 47)
A restructuring is a program , planned and controlled by movement , that materially changes either the
scope
of
a
business
undertaken by an enterprise or the manner in which that business is conducted.

Page 11 of 36

EXCERPTS ON PHILIPPINE ACCOUNTANCY ACT

REGULATIONS (IRR)

OF

2004S IMPLEMENTING RULES AND

HISTORICAL BACKGROUND
Republic Act NO. 9298 or otherwise known as the Philippine Accountancy Act of 2004 repeals
Presidential
Decree
No.
692
or
otherwise known as the Revised Accountancy Law. The new Act was passed during the 3 rd regular
session
of
the
12 th
Philippine
Congress form the Consolidation of Senate Bill No. 2748 (passed 6 February 2004) and House Bill No.
6678 (passed 7 February 2004). President Arroyo signed and approved it on 13 May 2004, the day the
consolidated bill became a law.

RATIONALE
The Philippine Accountancy Act provides for the set of rules governing the practice of accountancy in
the
Philippines.
The
Professional Regulatory Board of Accountancy (BoA), , one of the professional boards under the
Professional Regulatory Board (PRC), is mandated by law to promulgate rules pertaining to the
supervision , control and regulation of the practice of accountancy in the Philippines. In November
2004, BoA issued and approved a set of rules and regulation implementing RA 9298, known as
Implementing Rules and Regulations (IRR)

FINANCIAL REPORTING STANDARDS COUNCIL

Within 90 days from the efectivity of the IRR for the Philippine Accountancy Act of 2004, the Financial
Reporting Standards Council (FRSC) shall be created. The FRSC replaces the ACS and will study and
evaluate the IAS and IFRS that will be adopted locally. Other than the chairman, the FRSC shall be
composed of 14 members representing the following organizations:
Professional Regulatory Board of Accountancy (BoA)
1 member
Securities and Exchange Commission (SEC)
1 member
Bangko Central ng Plilipinas (BSP)
1 member
Bureau of Internal Revenue (BIR)*
1 member
A major organization composed of FS preparers and users
1 member
Commission on Audit (CoA)
1 member
Accredited Professional Organization (APO)
8 members
*NOTE: BIR and COA were not part of the old council (Accounting Standards Council). The 8
representatives From Accredited Professional Organization (APO) shall be equally divided among the
accounting sectors:
Public practice
2 members
Commerce and industry
2 members
Education
2 members
Government
2 members
ACCOUNTING STANDARDS COUNCIL (ASC).
The ASC was the author of what is used to be known as SFAS (Statements of Financial Accounting
Standards). Formed to establish the generally accepted accounting principles in the Philippines, the
ASC had performed its function since November 1981 until it was replaced by the Financial Reporting
Standards Council, pursuant to the IRR of the new accountancy law.ASC was composed of eight
members, nominated by the following organizations:
Philippine Institute of Certified Public Accountants
4 members
Securities and Exchange Commission
1 member
Bangko Central ng Pilipinas
1 member
Board of Accountancy
1 member
Financial Executives Institute of the Philippines
1 member
In 1997, the ASC made a decision to harmonize accounting standards in the Philippines with
International Accounting Standards (IAS), which later evolved into International Financial Reporting
Standards (IFRS). Consequently, IFRS becomes the basis of the Philippine Financial Reporting
Standards (PFRS).

The FRSC Chairman, who had been or presently as senior accounting practitioner in any scope of
accounting practice, shall be appointed by the PRC upon the recommendation of BoA in coordination with
PICPA as the accredited professional organizations. The Chairman and members of FRSC shall have a term
of three (3) years renewable for another term.
IFRSs are standards issued by the International Accounting Standards Board (IASB); the IASB replaced the
International Accounting Standards Committee (IASC).
Based on paragraph 7 of PAS 1, the term PFRS shall composed of (a) PFRS (b) Philippine Accounting
Standards (c) Interpretations.
PFRS sets out the recognition, measurement, presentation and disclosure requirements dealing with
transactions
and
events
that
are important in general purpose of FS. A PFRS is developed through a due process that normally
involves
the
following:
(a)Consideration of the pronouncement of IASB.

Page 12 of 36

(b) Formation of task force, when deemed necessary, to give advice to FRSC.
(c) Issuing for comment an exposure draft approved by at least eight (8) FRSC members; comment
period
will
be
at
least
60days unless a shorter period (not less than 30 days) is considered appropriate by FRSC.
(d) Consideration of all comments received within the comment period and when appropriate,
preparing the comment letter to
the IASB.
(e) Approval of standard by at least eight (8) FRSC members.

PAS 34: INTERIM REPORTING

ENTITIES COVERED BY INTERIM REPORTING STANDARDS

1. Certain companies required by Securities Exchange and Commission (SEC) & the Philippine
Stock Exchange (PSE)
to publish interim FS
2. Certain companies that elect to publish an interim financial report.
INTERIM FINANCIAL REPORT
An interim financial report means a financial report containing either a complete set of FS or set of
condensed FS for an interim period . As a minimum requirement, an interim financial report should
include the following components:
1. Condensed balance sheet
2. Condensed income statement
3. Condensed statement showing either all changes in equity or comprehensive income
4. Condensed cash flow statement
5. Selected explanatory notes
Basic and diluted earnings per share should be presented on the face of an income statement ,
complete or condensed , for
an interim period.
SELECTED EXPLANATORY NOTES
An enterprise should include the following information, a minimum, in the notes to its interim FS, if
material and if not disclosed elsewhere in the interim financial report:
1. A statement that the same accounting policies and methods of computation are followed in the
interim FS as compared with
the most recent annual FS or, if those policies or methods have been changed , a description of the
nature and efect of the
change.
2. Explanatory comments about the seasonality or cyclicality of interim operations
3. The nature and amount of items afecting assets, liabilities, equity , net income or cash flow as that
are unusual because of
their nature, size and incidence.
4. The nature of amount of changes in estimates of amounts reported in prior interim periods of the
current
financial
year
or
changes in the estimates of amounts reported prior financial years if those changes have current
interim period.
5. Issuances, repurchase and repayments of debt and equity securities
6. Dividend paid (aggregate or per share) separately for ordinary shares and other shares
7. Segment revenue and segment result for business segments or geographical segments, whichever
is the primary basis of
segment reporting.
8. Material events subsequent to the end interim period that have not been reflected in the FS for the
interim period
9. The efect on changes in composition of the enterprise during the interim period , including
business combinations, acquisitions or disposal of subsidiaries and long-term investments,
restructurings , and discontinued operations.
10. changes in contingent liabilities or contingent assets since that last annual BS date.
PERIODS for which INTERIMS FS are REQUIRED to be PRESENTED.
Interim reports should include interim FS for periods as follows:
1. Balance sheet as of the end of the current interim period and a comparative BS as of the end of the
immediately preceding
financial year.
2. Income statements for the current interim period and cumulatively for the current financial year to
date , with comparative
income statements for the comparable interim periods (current and year-to date) of the
immediately preceding financial
year.

Page 13 of 36

3. Statement showing changes in equity cumulatively for the current financial year to date , with
comparative statement for
the comparable year-to-date period of the immediately preceding the financial year.
4. Cash flow statement cumulatively for the current financial year to date , with a comparative
statement for the comparable
year-to-date period of the immediately preceding financial year.

The SEC and PSE require companies covered by the reportorial requirements of Revised Securities A ct to file quarterly
interim
financial reports within 45 days after the end of each of the first three quarters. Also, the SEC requires companies
covered
by
the
Rules on Commercial Papers and Financing Act to file quarterly financial reports within 45 days after each year-end.
An interim period is a financial reporting period shorter than a full financial year . Interim financial reports may be
presented
monthly, quarterly, or semiannually.
Comprehensive income is to include all changes in equity , except contributions from and distributions to owners.
An example of kinds of disclosures as required by PAS 34, par 17 are as follows:
(a) write-down of inventories to net realizable value and the reversal of such write-down
(b) recognition of loss from the impairment of PPE and intangibles and the reversal of such an impairment loss
(c) reversal of any provision for the costs of restructuring
(d) acquisitions and disposals of items of PPE
(e) commitments for the purchase of PPE
(f) litigations settlements
(g) corrections of fundamental errors in previously reported financial data
(h) any debt default or breach of a debt covenant that has not been corrected subsequently
(i) related party transactions.

PFRS 8 : OPERATING SEGMENTS

RATIONALE (CORE PRINCIPLE)

An entity shall disclose information to enables the users of FS to evaluate the nature and financial efects of the
business activities
In which it engages and the economic environments in which it operates.
ENTITIES REQUIRED TO APPLY SEGMENT REPORTING STANDARDS (SCOPE)
1. Entities whose equity or debt securities in public securities market.
2. Entities that are group of companies (i.e., parent and subsidiaries ), PFRS 8 applies to the consolidated financial
statements of the
Group only.
OPERATING SEGMENTS
An operating segment is a component of an entity:
A.) 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).
B.) Whose operating results are regularly reviewed by the entitys chief operating decision maker to make
decisions about resources
to be allocated to then segment and assess its performance, and
C.) For which discrete financial information is available.
REPORTABLE SEGMENTS
An entity shall report separately information about an operating segment that meets any of the following
quantitative thresholds:
A.) Its reported revenue , including both sales to external customers and intersegment sales or transfers , is 10% or
more of the
combined revenue , internal and external, of all operating segments.
B.) The absolute amount of its reported profit or loss is 10% or more the greater, in absolute amount , of
(1) combined and reported profit of all operating segments that did not report a loss and (2) combined reported
loss of all operating
segments that reported a loss.
C.)Its assets are 10% or more of the combined assets of all operating segments.
If the total external revenue reported by operating segments is less than 75 % of the entitys revenue, additional
operating segments
should, be identified as reportable segments , even if they do not meet the 10% thresholds , until at least 75% of
entitys revenue
is included in reportable segments.
AGGREGATION OF OPERATING SEGMENTS
Two or more operating segments may be aggregated into a single operating segment if aggregation is consistent
with core principle of
PFRS 8, the segments have similar economic characteristics, and the segments are similar in each of the following
respects:
A.) The nature of the products and services
B.) The nature of the production processes
C.) The type or class of customer for their products and services.
D.)The methods used to distribute their products or provide their services
E.) If applicable, the nature of regulatory environment, for example, banking , insurance or public utilities.
DISCLOSURE OF OPERATING SEGMENT INFORMATION
An entity shall disclose the following for each period for which an income statement is presented:
A.) General informationabout the reporting segment
B.) Information about segment profit or loss, segment assetsand segment liabilities.
C.) Reconciliations of the totals of segment revenue , segment profit or loss, segment assets , segment liabilities
and other material

Page 14 of 36

segment items to corresponding entity accounts.

ENITY WIDE DISCLOSURES
Entity wide disclosure is additional information that is required to be disclosed by all entities if such information is
not provided as
part of the reportable segment information. An entity shall report information about: 1.) products and services, 2.)
geographical areas
and 3.) major customers.

The chief operating decision maker identifies a function , not necessarily a manager with a specific title. That function is
to allocate resources to
and assess the performance of the operating segments of an entity. (PFRS 8, par.7)
An entity shall disclose the following general information about an operating segment: (PFRS 8,par.22)
1. Factors used to identify the reportable segments , including the basis of organization .(e.g., whether the
management
has
chosen
to
organize the entity around diferences in products and services have been aggregated.)
2.)Types of products and services from which each reportable segment drives its revenue.
An entity shall disclose the following about each reportable segment if the specified amounts are included in the
measure
of
profit
or
loss: (PFRS 8, par.23)
(a.)Revenues from external customers and transactions with other operating segments of the same entity
(b.)Interest revenue and interest expense
(c.)Depreciation and amortization
(d.)Material times of income and expenses and material noncash items other than depreciation and amortization
(e.)Interest in profit or loss of associates and joint venture accounted for by the equity method.
(f.) Income tax expense
An entity shall disclose the following about each reportable segment if the specified amounts are included in the
measure
of
segment
assets reviewed by chief operating officer: (PFRS 8, par.24)
(a.) The amount of investments in associates and joint venture accounted for the equity method, and
(b.)The amounts of additions to non-current assets other financial instruments , deferred tax assets, post
employment benefit asset
and rights arising under insurance contracts.

PAS 41: AGRICULTURE

SCOPE & COVERAGE.

PAS 41 applies the following items, when they relate to agricultural activity:
1. Biological assets
2. Agricultural produce at the point of harvest
3. Government grants related to biological asset

PAS 41 does not apply to:

Land related to agricultural activity , which are covered by PAS 16 (Property , Plant and Equipment )
and
PAS
40
(Investment
Property).
Intangible assets related to agricultural activity , which are covered by PAS 38 (Intangible Assets).
PAS 41 applies agricultural produce only at the point of harvest. Thereafter , PAS 2 Inventories or another
standard shall be applied ; PAS 41 does not deal with the processing of agricultural activity , and the
events taking place may bear some similarity to
biological transformation , processing of agricultural produce is not within the definition of agricultural
activity in PAS 41.

EXAMPLES
Products that are the result of
processing after harvest
Biological assets
Agricultural produce
Sheep
Wool
Yarn , carpet
Trees in a plantation
Logs ( Felled trees)
Lumber
forest
Cotton
Thread, clothing
Plants
Harvested cane
Sugar
Dairy cattle
Pigs
Bushes

Milk
Carcass
Leaf

Cheese
Sauges,cured hams
Tea, curred tobacco

Vines
Grapes
Wine
Fruit Trees
Picked Fruit
Processed fruit
RECOGNITION CRITERIA
An entity shall recognize a biological asset or agriculture produce when:
A.) The entity control the asset as a result of past events;
B.) It is probable that the future economic benefits associated with the asset will flow to the entity ;
and

Page 15 of 36

C.) The fair value or cost of the asset can be measured reliably
MEASUREMENT BASIS.
A BIOLOGICAL ASSET shall be measured on initial recognition and at each balance sheet date
(reporting
period
)
at
fair
value less cost to sell .
AGRICULTURAL PRODUCE harvested from an entitys biological assets shall be measured at the point of
harvest
at
its
fair
value less estimated costs to sell.
Any gain or losson the initial recognition of biological assets at fair value less costs to sell and any
changes
in
the
fair
value
less costs to sell of biological assets during the reporting period is included in profit or loss for the
period.
All
costs
related
to biological assets that are measured at fair value are recognized in profit or loss when incurred to
purchase biological assets.
Any gain on the initial recognition of agricultural produce at fair value less costs to sell will be included
in
the
profit
or
loss
for the period to which it relates.

Biological assets are living animals and plants.

Agricultural produce is the harvested product of the entitys biological assets.
Harvest is the detachment of produce form biological assets or the cessation of a biological assets life processes.
Government grants are assistance by government in the form of transfers of resources to an entity in return for past or
future compliance with certain conditions relating to the operating activities of the entity. (PAS 20)
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(Examples of agricultural activity are raising livestock, annual or
perennial
cropping,
cultivating orchards and plantation , floriculture , aquaculture , including fish farming); biological transformation relates to
the
processes of growth, degeneration, production, and procreation that can cause changes in qualitative or quantitative
nature
of
biological asset.
Fair value is the amount for which an asset could be exchanged, or liability settled, between knowledgeable , willing
parties
in
an
arms length transaction.
Cost to sell are the incremental costs directly attritubutable to the disposal of an asset; examples are commissions to
brokers and
dealers, levies by regulatory agencies and commodity exchanges, and transfer taxes and duties; cost to sell exclude
financing charges, transport and other costs necessary to get assets to a market.
A loss may rise on initial recognition of a purchased biological asset as their fair value less estimated point-of-sale costs
are
likely
to
be less than the purchase price plus any transaction and transportation costs; a gain may arise on initial recognition of a
biological
asset, such as when a calf is born. (PAS 41, par.27)

GUIDELINES IN DETERMINING FAIR VALUE

In deciding on the fair value for a biological asset or agricultural produce, it is possible to group together items
in accordance with, for example, their age or quality.
Entities often contract to sell their biological assets or produce at a future date. These contract prices do not
necessarily represent value. The fair value of a biological asset or agricultural produce is not necessarily
adjusted because of the existence of contract.
If an active market exist for a biological asset or an agricultural produce, the quoted price in that market is
the appropriate basis for determining the fair value of that asset.
If an entity has an access to diferent active markets, the entity uses the most relevant one.
If an active market does not exist, then the following methods can be used to determine fair value:
A.) The most recent market transaction price
B.) Market prices similar for assets with adjustment to reflect diferences; and
C.) Any sector benchmark such as the value of cattle per kilogram or value of a farmland per hectare.
In some cases, the entity can use the present value of expected net cash flow from the asset discounted at a
current market pretax rate.
In some cases, costs may an indicator for fair value , especially where little biological transformation has
taken place or the impact of biological transformation on the price is not expected to be significant.
ABSENCE OF FAIR VALUE
There is a presumption that fair value can be measured reliably for a biological asset
However, this presumption can be rebutted for a biological asset that, when first recognized, does not have a
quoted price in an active market and for which other valuation methods are clearly inappropriate and unreliable.
In this case, the biological asset shall be measured at its cost less any accumulated depreciation and impairment
losses
Unlike a biological asset, agriculture produce is always assumed to have a measurable fair value.

Page 16 of 36

 CHNAGES IN FAIR VALUE.

The fair value less costs to sell of a biological asset can change due to both:
1.) PHYSICAL changes, and
2.) PRICE changes in the market.
An entity is encouraged (but not required) to have separate disclosure of physical and price changes that is useful
in appraising current period performance and future prospect , particularly when there is a production cycle of
more than one year.
Biological transformation results in a number of types of physical change - - growth , degeneration, production,
and procreation , each of which is observable and measurable . Each of those physical changes has a direct
relationship to future economic benefits. A change in fair value of biological asset due to harvesting is also
physical change.
Agricultural activity is often exposed to climatic , disease, and other natural risks. If an event occurs and given
rise to a material item of an income or expense, the nature and amount of that item are disclosed in accordance
with PAS 1 Presentation of Financial Statements. Examples of such an event include an outbreak of a virulent
disease, a flood, a severe drought or frost, and a plague of insects.
GOVERNMENT GRANTS
An unconditional government grant related to a biological asset measured at its fair value less costs to sell shall
be recognized as income when the government grant becomes receivable.
If a government grant related to a biological asset measured at its fair value less costs to sell is c onditional ,
including where a government grant requires an entity not to engaging specified agricultural activity , an entity
shall recognized the government grant as income when the conditions attaching to the government grant are
met.
If a government grant related to biological asset measured at its cost less any accumulated depreciation and
impairment losses, then PAS 20 (Accounting for Government Grants and Disclosure of Government Assistance) is
applied.

An active market is a market where all the following conditions exist:

a.)The items traded within the market are homogenous;
b.) Willing buyers and sellers can normally be found at any time ; and
c.)Prices are available to the public
In a noncurrent biological asset meets the criteria to be classified as held for sale or is included in a disposal group in
accordance
with
PFRS
5,then
it is presumed that the fair value can be measured reliably (PAS 41, par.30)
In determining the cost, accumulated depreciation and accumulated impairment losses, an entity considers PAS 2
Inventories, PAS 16 Property, Plant & Equipment and PAS 36 Impairment of Assets (PAS 41, par.33)

PFRS 3: BUSINESS COMBINATIONS

DEFINITION
A business combination is a transaction or other event in which an acquirer obtains control of one
or more businesses.
ACQUISITION METHOD
An entity shall account for each business combination by applying the acquisition method . Applying
the acquisition method requires.
Identifying the acquirer
Determining acquisition date
Recognizing and measuring the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in
the acquiree ; and
Recognizing and measuring goodwill or a gain from a bargain purchase.
RECOGNITION PRINCIPLE.
On the acquisition date, the acquirer shall recognize, separately from goodwill, the identifiable
assets acquired , the liabilities assumed and any non-controlling interest in the acquiree. Contrary to
PAS 37 (see related notes on page 9) , PFRS 3 requires that an acquirer shall recognize a contingent
liability assumed in a business combination if it is a present obligation that arises from the past
events (even if it is not probable that an outflow of resources embodying economic benefits will be
required to settle the obligation and its fair value can measured reliably.
MEASURMENT PRINCIPLE

Page 17 of 36

The acquirer shall measurer the identifiable assets acquired and the liabilities assumed at their
acquisition
date
FAIR
VALUES. Few exemptions are:
The acquire shall measure an acquired non-current asset or disposal group that is classified as
held for sale at the acquisition date at their fair value less costs to sell in accordance with PFRS
5 (see related notes on page 6).
The acquire shall measure the value of a reacquired right recognizes as an intangible asset on
the basis of the remaining contractual term of the related contract regardless o whether market
participants would consider potential contractual renewals in determining its fair value.
GOODWILL.
On the acquisition date, the acquirer shall recognize GOODWILLmeasured as the excess of
consideration
transferred
over
the
net of acquisition date amounts of the identifiable assets acquired and liabilities assumed.
BUSINESS COMBINATION ACHIEVED IN STAGES
An acquirer sometimes obtains control of an acquiree in which it was held an equity interest
immediately
before
the
acquisition date. PFRS refers to such a transaction as a business combination achieved in stages ,
sometimes
also
referred
to
as a STEP ACQUISITION.
In a business combination achieved in stages, the acquirer shall measure its previously held equity
interest
in
the
acquirer
at its acquisition-date fair value and recognize the resulting gain or loss, if any , in profit or loss.
BUSINESS COMBINATION ACHIEVED WITHOUT THE TRANSFER OF CONSIDERATION.
The acquisition method of accounting for a business combination applies to business combinations
where
an
acquirer
obtains
control of an acquiree without transferring consideration or where business combinations are
achieved
by
contract
alone
in
stapling arrangement.
An acquirer is the entity that obtains control of the acquiree; the acquiree is the business or
businesses
that
the
acquirer
contains control of an business combination.
Control is the power to govern the financial and operating policies of an entity or business so as to
obtain
benefits
from
its
activities. Control is presumed to exist when an entity acquires more than one-half of another
entitys voting rights.
Business is an integrated set of activities and assets that is capable of being conducted and managed
for
purpose
of
providing
return in the form of dividends , lower costs or other economic benefits directly to investors or other
owners,
members
or
participants.
Acquisition method of business combination is previously known as the purchase method.
Acquisition date is the date on which the acquirer obtains control of the acquiree.
Under paragraph 32 of PFRS 3, GOODWILL is equal to the excess of (A) over (B) below;
(A) The aggregate (total) of:
The consideration transferred, which shall be calculated as the sum of 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
include
cash,
other
assets, contingent consideration , ordinary or preference equity instruments)
The amount of any non-controlling interest in the acquiree
In a business combination achieved in stages, the acquisition date fair value of the
acquirers previously held equity interest in the acquiree
(B)The net of acquisition of the identifiable assets acquired and the liabilities assumed.
Occasionally, an acquirer makes a BARGAIN PURCHASE, which is a business combination in which
(B)
exceeds
(A)
above
.
In
which case, the acquirer shall recognize the resulting GAIN in profit or loss on the acquisition date,
after
making
reassessment whether it has correctly identified all of the assets acquired and liabilities assumed.
(PFRS 3,par.3)

PAS 27: CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS

Page 18 of 36

1.

Consolidated financial statements are the financial statements of a group presented as those of a single
economic
entity; consolidated FS shall include all subsidiaries of the parent.
2. A group is parent and all of its companies while a parent is an entity that has one or more subsidiaries.
3. A subsidiaryis an entity that is controlled by another entity (parent).
4. Control is presumed to exist even when the parent owns half or less of the voting power of an entity but has
the power:
over more than half of the voting rights by virtue of an agreement with other investors.
to govern the financial and operating policies of entity under a statute or an agreement .
to appoint or remove the majority of the members of the board of directors or equivalent
governing body.
to cast majority of votes at meetings of the board of directors or equivalent governing body.
The existence and efect of potential voting rights currently exercisable or convertible (e.g., share warrant,
share
call
options, convertible securities to ordinary shares) are considered when assessing whether an entity has the
power
to
govern the financial and operating policies of another entity.
5. Consolidated FS shall include all domestic and foreign subsidiariesof then parent , even if subsidiaries are
engaged
in business activities dissimilar from those of other entities within the group.
6. A parent need not present consolidated FS if and only if:
The parent itself is a wholly-owned subsidiary, or partially-owned subsidiary and its other owners
do not object to the parent not presenting consolidate FS.
The parents debt and equity instruments are not traded in a public market- a domestic or foreign
stock exchange or an over-the-counter market.
Then parent did not file or is not in the process of filling its FS with a securities and exchange
commission or other regulatory body for the purpose of issuing any class of instruments in a
public market.
The ultimate or any intermediate parent of the parent produces consolidated FS available for
public use that comply with PFRS.
A parent that is exempted from presenting consolidated FS may present separate FS as its only FS
7. In preparing consolidated FS, the following consolidation procedures are normally followed:
The FS of the parent and its subsidiaries are combined in on a line by line basis by adding together
like items of assets, liabilities, equity , income, and expenses.
Intergroup balances and transactions including income and expenses , are eliminated in full.
When FS used in consolidation are drawn up from diferent reporting dates, adjustments should be
made for the efects of significant transactions or other events that occur between those dates and
the date of the parents FS.In any case, the diference between reporting dates should be no more
than three months.
Consolidated FS should be prepared using uniform accounting policies for like transactions and
other events similar circumstances.
Non-controlling interest shallbe presented in the consolidated statement of financial position
within equity , separately from parent shareholders equity. Non-controlling interests in the profit
or loss of the group should also be separately presented.
Changes in a parents ownership interest in a subsidiary that do not result in a loss of controlare
accounted for a equity transactions (i.e., transactions with owners in their capacity as owners.)
8. In the parent separate FS, investments in subsidiaries (including investments in jointly controlled entities
and associates ) shall be accounted for either:
At cost, or
In accordance with PAS 39 on financial instruments
The same accounting (policy) shall be applied for each category of investment; investments in
subsidiaries , jointly
controlled entities and associates that are classified as held for sale shall be accounted for under PFRS 5.
(see
related
notes on page 6)

The definition of subsidiary under PAS 27 includes unincorporated entities like partnerships.
Under SIC Interpretations 12, special purpose entities shall be consolidated when the substance of the
relationship
between
an entity and the special purpose entities are controlled by that entity. A subsidiary are classified as held for
sale
if
control
is likely to be temporary with the view of the disposal within twelve months form acquisition and management
is
actively
seeking buyer.
Separate financial statements are these presented by parent in which the investments are accounted for on
the
basis
of
the
direct equity interest rather than on the basis of the reported and net assets of subsidiary.
Non-contorlling interest is used to be known as minority interest.
A parent can lose control of subsidiary with or without a change in absolute or relative ownership levels. This
could
occur
as result of a contractual agreement or in two or more arrangements.
PAS 27 (as amended May 2008) states that an entity shall recognize a dividend form a subsidiary , jointly
controlled
entity,
associate in profit or loss in its separate financial statements when its right to receive the dividend is

Page 19 of 36

established.
Consequently, the requirement to separate the retained earnings of an entity into pre-acquisition and postacquisition
components as a method for assessing whether a dividend is a recovery of its associated has been removed

PAS 21: THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES

1. The objective of PAS 21 is to prescribe how to include foreign currency transactions and foreign
operations
on
the
financial
statements of an entity and how to translate financial statements from a certain functional
currencyinto
the
presentation
currency -- the principal issues are:
Which exchange rate(s) to use, and
How to report the efects of changes in exchange ratesin the financial statements
2. FOREIGN CURRENCY TRANSACTIONS
Initial Recognition
A foreign currency transaction should be recorded initially at the exchange rate at the date of
the transaction. The use of averages is permitted if they are a reasonable estimate of actual.
Reporting on Subsequent Balance Sheet Dates

Foreign currency monetary amounts should be reported using the CLOSING RATE

Non-monetary items carried at historical cost should be reported using the exchange rate
at the date of transaction.

Non-monetary items carried at fair value should be reported at the rate that existed when
the fair values were determined.
Recognition of Exchange Diferences

Exchange diferences arising when monetary itemsare settled or when monetary items
are translated at rates diferent from those at which they were translated when initially
recognized are reported in profit or loss in the period.

Exchange diferences arising on the monetary items that form part of the reporting
entitys net investment in a foreign operation, in a separate component of equity; upon
disposal of the net investment, they will be recognized in profit or loss.
If gain or loss on a non- monetary item is recognized directly in equity (for example, a
property revaluation under PAS 16), any foreign exchange component of that gain or loss
is also recognized directly in equity.

An exchange loss on foreign currency debt used to finance the acquisition of an asset
could no longer be added to the carrying amount of the asset even if the loss resulted
from a severe devaluation of a currency which there against which there was no practical
means of hedging.
3. FOREIGN CURRENCY FINANCIAL STATEMENTS TRANSLATION
The results and financial position of an entityare translated into a diferent presentation currency
using the following
procedures:

Assets and liabilities for each balance sheet presented are translated at the CLOSING RATE
at
the
date
of
that
balance sheet
Income and expenses for each income statement are translated at exchange rates at the
dates of the transactions

All resulting exchange diferences are recognized as a separate component of equity.

PAS 21 excludes from its scope foreign currency derivatives that are within the scope of PAS 39
Financial
Instruments
Recognition and Measurement. Similarly, the material on hedge accounting has been moved to PAS
39.
Functional currency is the currency of the primary economic environment 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.
Presentation currency is the currency in which financial statements are presented by the reporting
entity.
Exchange rate is the ratio of exchange for two currencies.
A foreign currency transaction that is denominated or requires settlement in a foreign currency,
including transactions arising
when an entity:

buy or sells goods or services whose prices is denominated in a foreign currency.

borrows or lends funds when the amounts payable or receivable are denominated in a foreign
currency

Page 20 of 36

acquires and disposes of assets, or incurs or settles liabilities, denominated in a foreign

currency
Closing rate is the spot exchange rate at the balance sheet date.
Exchange difference is the diference resulting from translating a given number of units of one
currency
into
another
currency
at diferent exchange rates.
Monetary items are unit of currency held and assets and liabilities to be received and paid in a fixed
or
determinable
number
of units of currency.
Net investment in a foreign operation is the amount of the reporting entitys interest in the net assets
of that operation.
Foreign operation is an entity that is subsidiary, associate, joint venture or branch of a reporting
entity,
whose
activities
are based in a country other than of the reporting entity.
This refers to an entity whose functional currency of a hyperinflationary economy.
This would include any good will arising on the acquisition of a foreign operation and any fair value
adjustments
to
the
carrying amounts of assets and liabilities arising on the acquisition of that foreign operation are
treated
as
part
of
the
assets
and liabilities of the foreign operation.
For practical reasons, the use of average rate for the period may be used as translation basis.
However,
if
the
exchange
rates fluctuate significantly, the use of the average rate for a period is inappropriate.

4. DISPOSAL OF A FOREIGN OPERATION

When a foreign operation is disposed, the cumulative amount of the exchange diferences deferred
in
the
separate
component of equity relating to that foreign operation shall be recognized in profit or loss when the
gain
or
loss
on
disposal
is recognized.
5. CONVENIENCE TRANSLATIONS.
Sometimes, an entity displays its financial statements or other financial information in a currency
that is diferent from either
its functional currency or its presentation currency simply by translating all amounts at end-ofperiod
exchange
rates.
This
is
sometimes called a convenience translation. A result of making a convenience translation is that the
resulting
information
to
distinguish it from the PFRS. In this case, the following disclosures are required:

Clearly identify the information as supplementary information to distinguish it from the

information
that
complies
with PFRS.

Disclose the currency in which the supplementary information displayed.

Disclose the entitys functional currency and the method of translation used to determine the
supplementary information.
When an entity presents its financial statements in a currency in that is diferent from its
functional
currency,
it
may
describe those financial statements as complying with PFRS only if they comply with all the
requirements
of
each
applicable
Standard and Interpretation.
6. DISCLOSURE REQUIREMENTS.

The net amount of exchange diferences recognized in profit or loss.

Net exchanges diferences classified in a separate component of equity and reconciliation of

the
amount
of
such
exchange diferences at the beginning and end of the period.

When the presentation currency is diferent from the functional currency, disclose that fact
together with the functional currency and the reason for using a diferent presentation
currency.

A change in the functional currency of either the reporting entity or a significant foreign
operation and the reason therefore

PAS 29: FINANCIAL REPORTING IN HYPERFLATIONARY ECONOMIES

1.

The objective of PAS 29 is to establish specific standards for enterprises reporting in the currency
of
a
hyperflationary
economy, so that the financial information provided is meaningful.

Page 21 of 36

2.

3.

4.

5.

RESTATEMENT OF FINANCIAL STATEMENTS.

The basic principle in PAS 29 is that financial statements of an entity that reports in the
currency of a hyperinflationary economy should be stated in terms of the measuring unit
current at the balance sheet date.

Restatements are made by applying a general price index. Items such monetary items that are
already stated at the measuring unit at the balance sheet date are not restated. Other items
acquired or incurred and the balance sheet date.

A gain or loss on the net monetary position is included in net income .It should be disclosed
separately.

The Standard does not establish an absolute rate at which hyperinflation is deemed to arise - but allows judgment
as to when restatement of financial statements becomes necessary. Characteristics of the
economic
environment
of a country which indicate the existence of hyperinflation include:

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.

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;

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 ; and

The cumulative inflation rate over three years approaches, or exceeds , 100%
When an economy ceases to be hyperinflationary and an enterprise discontinues the preparation
and presentation of financial statements in accordance with PAS 29, it should treat the amounts
expressed
on
the
measuring
unit
current
at the end of the previous reporting period as the basis for the carrying amounts in its
subsequent financial statements.
DISCLOSURE REQUIREMENTS

Gain or loss on monetary items

The fact that financial statements and other period data have been restated for changes
in
the
general
purchasing power of the reporting currency

Whether the financial statements are based on historical cost or current cost approach

Identity and level of the price index at the balance sheet date and moves during the
current and previous reporting period.

PAS 7: STATEMENT OF CASH FLOWS

SCOPE
All entities regardless of the nature of activities should prepare a cash flows statement and
present
it
as
an
integral
part
its financial statements.
BENEFITS
A cash flow statement, when in conjunction with rest of the financial statements, provides
additional
information
to
users of FS:
1. A better insight into the financial structure of an entity , including its liquidity and solvency ,
and its ability to afect the amounts and timing of cash flows in order to adapt to changing
circumstances and opportunities.
2. Enhanced information for purposes of evaluating changes in assets, liabilities, and equity of
an entity.
3. The statement enhances the comparability of reporting operating performance by diferent
entities because it eliminates the efects of using diferent accounting treatments for similar
transactions.
4. The statement serves as indicator of the amount, timing and reasonable certainty of future
cash flows.
PRESENTATION
The cash flow statement shall report cash flows during the period classified by operating,
investing
and
financing
activities:
1. OPERATING ACTIVITIES are the principal revenue producing activities of an entity and other
activities
that are not investing or financing activities. Cash flows from operating activitiesgenerally

Page 22 of 36

results
from
the
transactions and other events those enter into the determination of profit or loss
2. INVESTING ACTIVITES- are the acquisition and disposal of long-term assets and other
investments
not
include
in
cash
equivalents. Investing cash flows represent the extent to which expenditures have been
resources
intended
to
generate future income and cash flows.
3. FINANCING ACTIVITIES-are activities that result in changes in size and composition of
contributed equity and borrowings of the entity.
An entity shall disclose the components of cash and cash equivalents and shall present a
reconciliation of the amounts
in its cash flows statement with the equivalent items reported on the balance sheet.
DIRECT vs. INDIRECT METHOD
An entity shall report cash flows from operating activities using either direct or indirect method:
1. DIRECT METHOD- major classes of gross cash receipts and gross cash payments are disclosed.
2. INDIRET METHOD- profit or loss is adjusted for the efects of the transactions of a non-cash
nature ,any deferrals
and accruals of past or future operating cash receipts or payments, and items of income and
expense associated with investing or financing cash flows.
INTERESTS and DIVIDENDS.
Cash flows from interest s and dividends received and paid shall each be disclosed separately
each shall be classified in a consistent manner from period to period using the following
guidelines:
1. INTEREST PAID. Interest paid is usually classified as operating cash flows because it enters
into the determination of profit or loss .Alternatively it may be classified as financing cash
flows because it is a cost of obtaining financial resources.
2. INTEREST and DIVIDENDS RECEIVED. Interest and dividends received are usually classified as
operating cash flows because they enter into the determination of profit or loss. Alternatively,
both may be classified as investing cash flows because they are both represent returns on
investments.
3. DIVIDENDS PAID. Dividends are paid usually classified as financing cash flows because they
represent costs of obtaining financial resources. Alternatively, dividends paid may be
classified a s a component of cash flows from operating activities in order to assist users to
determine the ability of man entity to pay dividends out of operating cash flows.
NON-CASH TRANSACTIONS
Investing and financing transactions that do not require the use of cash or cash equivalents shall
be excluded from a cash flow statement. Such transactions shall be disclosed elsewhere in the
financial statements (e.g., notes to the financial statements) in a way that provides all the
relevant information about these investing and financing activities. Examples are:
1. The acquisition of assets either by assuming directly related liabilities or by means of a
finance lease.
2. The acquisition of an entity by means of an equity issue , and
3. The conversion of debt to equity

Cash flows are inflows and outflows of cash and cash equivalents .Cash comprises of cash on hand and demand
deposits.
Cash equivalents are short-term l, highly liquid investment that are readily convertible to known amounts of cash
and
which
are subject to a significant risk of change in value.
An entity may hold securities and loans for trading purposes, in which case they are similar to inventory acquired
specially for
resale. Therefore, cash flows arising from the purchase and sale of trading securities are classified as operating
activities.
Similarly
cash
and loans made by financial institutions are usually classified as operating activities since they relate to the main
revenue-producing
activity of that entity.
Some transactions, such as the sale of an item of plant give rise to gain or loss that is included in the
determination
of
profit
or
loss
However, the flows relating to such transactions are cash flows from investing activities. Cash flows arising from
taxes
on
income
shall be classified as cash flows from operating activities unless they can be specifically identified with financing
and investing activities.
Alternatively, the net cash flow from operating activities may be presented under the indirect method by showing
the
revenue
expenses disclosed in the income statement and the changes during the period in inventories and operating
receivables and payables.

PAS 33: EARNINGS

PER

SHARE (EPS)

OBJECTIVE.

Page 23 of 36

The objective of PAS 33 is to prescribe principles for the determination and presentation of EPS, so
as to improve comparisons of performance among diferent entities in the same reporting period
and among diferent reporting periods for the same entity.
SCOPE.
The EPS standards shall be applied by:
1. Entities whose ordinary sharesor potential ordinary sharesare publicly traded.
2. Entities that are in the process of issuing ordinary shares or potential ordinary shares in public
markets.
3. Entities that voluntarily elect to disclose on EPS in financial statements.
PRESENTATION.
An entity should present on the face of the income statement both basis and diluted EPS. Basic
and diluted EPS must be presented with equal prominence for all periods presented, even if the
amounts are negative (i.e., loss per share).
BASIC EARNINGS PER SHARE.
Basic EPS is calculated by dividing profit or loss attributable to ordinary equity holders (the
numerator) by the weighted average number of ordinary shares outstanding (the
denominator)during the period.
1. EARNINGS.
For the purpose of calculating basic EPS, the amounts attributable to ordinary equity holders
shall
be
adjusted
for
the
tax amount of preference dividendsand other similar efects of preference shares classified as
equity.
2. SHARES.
For the purpose of calculating basic EPS, the number of ordinary shall be the weighted average
number
of
ordinary
shares outstanding for the period. The weighted average number of ordinary shares
outstanding
during
the
period
is
the number of ordinary outstanding at the beginning of the period, adjusted by the number of
ordinary
shares
issued and bought back during the period multiplied by a time-weighting factor
In this case of ordinary shares issued or reduce without a corresponding changes in resources
,
the
number
of
ordinary shares is adjusted for the proportionate change in the number or ordinary shares
outstanding
if
the
event
had
occurred at the beginning of the earliest period presented (i.e., the calculation of the basic and
diluted
EPS
for
all
periods presented shall be adjusted retrospectively).
DILUTED EARNINGS PER SHARE.
1. EARNINGS.
For the purpose of calculating diluted EPS, the earnings used in computing basic EPS shall be
adjusted by the after tax-efect of:
a.) any dividends related to diltutivepotentila ordinary shares deducted from the earnings
b.) any interest recognized in the period related to dilutive potential ordinary shares
c.) any change in earnings that would result from the conversion of dilutive potential ordinary
shares
2. SHARES
In computing diluted EPS, the ordinary shares shall be the weighted average number of
ordinary shares outstanding for the plus the weighted average number of ordinary shares that
would have been issued on the conversion of all the dilutive sharesinto ordinary shares.

An ordinary shares are an equity instrument that is a subordinate to all other classes of equity
instruments.
It
is
usually
known
as common stock under the Philippine Corporation Code.
A potential ordinary share is a financial instrument or other contract that may entitle its holder to
ordinary
shares.
Examples
include convertible bonds, convertible preferences shares, options and warrants. Options and
warrants
are
financial
instruments that give the holder the right to purchase ordinary shares.
Earnings are calculated after all expenses including taxes and if, any minority interest.
The after-tax amount of preference dividends that is deducted from the earnings are:
a.) the preference dividends on non-cumulative preference shares declared for the period and
b.) the preference dividends on cumulative preference shares for the period whether or not
dividends have been declared.
Contingently issuable shares treated as outstanding and are included in the calculation of the basic
EPS
only
from
the
date
necessary conditions are satisfied .Contingently issuable ordinary shares are ordinary shares
issuable
for
free
or
little
consideration upon the satisfaction of specified conditions in a contingent share agreement. A
contingent
share
agreement
is
an agreement to issue shares that is dependent on the satisfaction of specified conditions.
Time-weighted factor is the number of days of shares are outstanding as a proportion of total
number
of
days
for
the
period.

Page 24 of 36

Ordinary shares may be issued, or the number of ordinary shares outstanding may be reduced ,
without corresponding change in resources .Examples include: (a) capitalization or bonus issue (i.e.,
stock dividend) and (b) a share split or reverse split share (consolidation of shares).
In addition, basic and diluted EPS of all periods presented shall be adjusted for the efects of errors
and
adjustments
resulting from changes in accounting policies accounted for prospectively.
Dilution is a reduction of EPS or an increase in loss per share resulting from the assumption that
convertible
instruments
are converted, options and warrants are exercised, or ordinary shares are issued upon fulfillment of
certain conditions
Contract that require the entity to repurchase own shares , such written put option, which give the
holder
the
contractual
right to sell ordinary shares at a specified price, are reflected in the calculation of diluted EPS if the
efect is dilutive.

Accounting for BOT transactions

Build/operate/transfer transactions (commonly called BOT transactions) give the guarantee
right
to
construct or to buy and operate certain public work. BOT transactions typically occur under a long
term contract to construct
infrastructure projects such as roads, rail roads, bridges, viaducts, dams, airports, tunnels, etc.,
which
take
several
years
to
complete.
These transactions are usually entered to as a means for the government to finance the
construction
of
a
public
work.
The grantee receives from the grantor the right to carry out the specific project and be suitably
remunerated.
In
this
case,
the remuneration received normally comprises the payment for the construction costs incurred and
a profit margin.
Sometimes the grantee is entitled to operate the public works projected after its completion in
order
to
generate
income .The operating incomes enables the grantee recover the construction costs and the
operating
and
maintenance
expenses and to earn profit margin. The grantee normally would also be allowed to recover any
amount
that
was
paid
to
the government for the cession rights. At the end of the term of the cession the project assets and
operating
rights
are
transferred to the grantor.
the

Costs
Costs incurred for the construction of public works might include:
(A) Materials used in the construction of the project, depreciation of fixed assets used in the work
(B) Labor cist related directly to the specific contract, i.e. costs of labor on the construction site,
including supervision
(C) Indirect costs such as insurance, technical assistance, and indirect construction expenses
(D) General or overhead costs such as administrative expenses or financial costs.
Accounting for income earned form a concession
The operating revenues earned under BOT contract should be recognized when it is possible to
generate income through
the provision of services, usually to third parties, and when the related costs and expenses have
been
incurred
or
can
be
estimated. Otherwise, payments received from the governments and others should be deferred
liabilities
(deferred
or
unearned income) and revenues should not be accrued into the profit and loss accounts for the
accounting period.
When the grantee has the right to receive income from the operation of public work after it
construction,
the
construction costs incurred should be charged to fixed assets accounts (e.g., road construction
where
the
income
is
generated form the right to collect tolls. In one of the largest BOT transactions in history, the
grantees
responsible
for
the
construction of the tunnel which links the United Kingdom and France have until the year 2041 to
recover their investment
through the operations before they to turn the operations back to the grantors of the operating
rights.
Income for the construction of public should be recognized using the percentage of completion
method of accounting for

Page 25 of 36

construction projects if the amounts earned can be reasonably accurately estimated during the
period
of
construction.
As
alternative, if the amounts earned can reasonably accurately, the grantee may use the complete
method
of
accounting,
which would mean that construction earrings would be recognized upon the conclusion of the
construction
phase
of
the
contract when the work has been completed to satisfaction for the government. These two
methods
of
accounting
are
accrual methods, which mean that recording of income, would be made when the earned
according
to
the
principles
described in this paragraph regardless of when accounts become billable to the government for
cash flow purposes either
on an interim basis or on completion of the project.
To achieve proper matching of costs incurred and revenues earned, all preconstruction and
construction
costs
should
be capitalized when incurred (meaning paid or an obligation incurred to make payments at a later
date) into asset accounts
in the records of the grantee. Such amount would then be transferred to accounting period profit or
loss
accounts
when
the
related income is earned on the accrual basis. If this method of accounting is followed, the profit
and
loss
in
the
years
of
concession operations might show only the expenses incurred, and thus losses; and the year in
which revenues are received
in cash would show the earnings, which might not have been earned exclusively in that year. Of
course,
if
all
of
the
construction is completed and the revenues are earned in the same accounting period, there
would
be
no
violation
of
the
generally accepted concept of the matching principle of accounting.
In applying the percentage of completion method of construction accounting, there are two
ways which may used
to estimate the revenues earned during accounting periods:
(a) Cost incurred during the year as a percentage of the total estimated costs of the project;
and.
(b) Revenue recognized on the basis of a technical report on the extent of the project
completion.
The percentage of the proportion of completion in method (b) should be applied to the amount of total
revenue set forth in the concession agreement. Also, related pre-construction and construction period
cost s should be charged to the same accounting period s profit or loss accounts, whether or not such
costs
have
been
actually
paid
in
cash.
However,
for
large
and
complex public works, particularly those with sub-projects of variable durations, it may be difficult to
use one single percentage of completion with respect to the entire project. In this situation the ratio of
costs incurred over year total costs of the works is the best method to applied to the total agreed
revenues
for
the
construction
phase.
The
use
of
either
these
two
method permits the income to be distributed among the periods in which the work is performed, or the
costs are incurred, and
results in a more accurate economic measurement overtime of net income.

Accounting for advance payments

Cash advances received for services to be performed in the future should recorded as liabilities
since
payments
represent
an
obligation of an enterprise to perform services at a later date. If for some reason this is not possible,
the advances would have to be returned under normal circumstances. Advances received which
exceed
the
income
earned
in
the
period
should
remain
under the liabilities section of the accounts until the services are rendered or the advance payments
have been returned.
Provision for losses
When a loss is incurred under a contract, whether from construction or from operation of the project,
it should be immediately recognized by the grantee as an expense in the current accounting period.
Transfer to the public works assets to the grantor following the termination of the concession
agreement
When the agreement states the grantee should not fully or partially reimbursed for the assets
transferred to the government at the end of the contract period, the grantees compensation is the
revenues from the operation of the concession .In this case, the assets should be depreciated down to

Page 26 of 36

their net realizable value, if any at the conclusion of the contract .Generally, the net book value upon
disposal will be equal to the amount of the repayment since the rate of depreciation must take into
account the residual value of the concession assets. Any diference from what was the recorded would
be recognized as a gain
or loss from the revision of an estimate in the accounting period when determinable. If the contract
state that the asset should be transferred at fair value any diference between that amount and the
net book value is recorded in the profit and loss account.
Disclosures
In addition to the appropriate disclosures referred to in previous paragraphs, the notes to financial
statements of concessions
for the construction of public works should include the total value of the assets, the stage of
completion at the balance sheet date, and the method adopted recognize revenues.

IFRIC 12: Service Concession Arrangements

Service concessions arrangements are arrangements whereby a government or other body grants
contract for the supply of public services - - such as roads, energy distribution, prisons or hospitals to
private operators. The objective of this project IFRIC is to clarify how certain aspects of existing IASB
literature are to be applied to service concession arrangements.
Two Types of Service Concession Arrangements
IFRIC 12 draws a distinction between two types of service concession arrangement:
1.) The operator receives a financial asset, specifically an unconditional contractual right to
receive cash or other financial asset from the government in return for constructing or
upgrading the public sector asset.
2.) The operator receives an intangible assets a right to charge for use of the public sector asset
that it constructs or upgrades .A right to charge users is not an unconditional right to receive
cash because the amounts are contingent on the extent to which the public uses the service.
IFRIC 12 allows for the possibility that both types of arrangement may exist within a single contract: to
the extent that the government has given an unconditional guarantee of payment for the construction
of the public sector asset, the operator has financial asset; to the extent that the operator has to rely
on the public using the service in order to obtain payment, the operator has an intangible asset.
Accounting Financial asset model
The operator recognizes a financial asset to the extent that it has an unconditional contractual right to
receive cash or another financial asset from or at the direction of the grantor for the construction
services. The operator has an unconditional right to receive cash if the grantor contractually
guarantees to pay the operator
(a) specified or determinable amounts or
(b) the shortfall, if any, between amounts received from the users of the public service and
specified or determinable amounts received from the users of the public service and specified
or determinable amounts, even if payments is contingent on the operator ensuring that the
infrastructure meets specified quality or efficiency requirements.
The operators measure the financial asset at fair value.
Accounting- Intangible asset model
The operator recognized intangible assets to the extent that it receives a right (a license) to charge
users of the public service. A right to charge users to the public is not an unconditional right to receive
cash because the amounts are contingent on the extent that the public uses the service.
The operator measures the intangible asset at fair value.
Operating revenue
The operator of a service concession arrangement recognizes and measures revenue in accordance
with PASs 11 and 18 for the services it performs.
Efective Date
IFRIC 12 is efective for annual periods beginning on or after 1 January 2008.

PRFS for Small & Medium Entities (SMEs)

HISTORICAL BACKGROUND
The Philippine Financial Reporting Standards for Small & Medium Entities (PFRS for SMEs) is the
answer to the long-felt need for the standards of financial reporting for small and medium-size entities,
which a consequence do not have to comply with full PFRS. Many of the principles in full PFRS for
recognizing and measuring assets, liabilities, income and expenses have been simplified, topics that

Page 27 of 36

are not relevant to small and medium entities (SMEs) have been omitted , and the required disclosure
have been significantly reduced.
In the Philippines, FRSC (Financial Reporting Standards Council) and SEC (Securities and Exchange
Commission) set the rules
and regulations pertinent o financial reporting SMEs:
13 October 2009 FRSC adopts PFRS for SMEs form IFRS for SMEs issued in July 2009 by
IASB.
3 December 2009 Philippine SEC adopts PFRS for SMEs as a part of its rules and regulation.
1 January 2010 Efective date of application of PFRS for SMEs in the Philippines.
WHAT ARE SMALL & MEDUIM ENTITIES?
This common question of someone studying PFRS for SMEs for the first time. SMEs are known by
variety of terms, including small & medium-sized entities (SMEs), private entities, and non-publicly
accountable entities (NPAEs). Consider the following definition provided by Section 1 of the PFRS for
SMEs:
SMALL & MEDUIM ENTITIES ARE ENTITIES THAT:
(a) Do not have public accountability
(b) Publish general purpose financial statement for external users
An entity has public accountability if:
(a) Its debts or equity instruments are traded in a public market or it is in the process of issuing such
instruments for trading in a public market ( a domestic or foreign stock exchange or an over-thecounter market , including local and regional markets ),or
(b) It holds the assets in a fiduciary capacity for a broad group of outsiders as one of its primary
businesses. This is typically the case for banks, credit unions, insurance companies, securities
brokers/dealers mutual funds and investment banks.
The Securities and Exchange Commission, in its En Banc Resolution dated August 13, 2009, adopted a
definition of small & medium entities that includes a size criterion:
An entity is an SME if:
(a) The entity has total assets of between P 3 million and 350 million or total liabilities of between P
3million and 250 million.
(b) It is not required to file financial statements under SRC Rule 68.1;
(c) It is not the process of filling its financial statements for the purpose of issuing any class of
instruments in a public market;
(d) It is not a holder of secondary license issued by a regulatory agency , such as bank (all types of
bank), an investment house ; a finance company, an insurance company , a securities broker/
dealer, a mutual fund and a pre-need company ; and
(e) It is not a public utility
PRFS for SMEs vs. FULL PRFS
With the adoption of PFRS for SMEs, the term PFRS shall now be composed of two groups of
financial reporting standards:

PRFS

FULL
PFRS
PRFS for

The PRFS for SMEs was developed by:

extracting fundamental concepts in the Conceptual Framework and principles from full PFRS

considering modifications appropriate on the basis of users needs and cost benefit
consideration
It is important to note that while the PFRS for SMEs is mainly patterned after full PRFS. PFRS for SMEs is
completely stand-alone set of standards .The only fallback option to full PFRS is the option to use PAS
39 instead of the financial instruments sections of PFRS for SMEs. There are certain standards in full
PFRS that were not include as part of PFRS for SMEs: segment reporting, interim reporting, earnings
per share and assets held for sale
The PFRS for SMEs has a total of 35 sections, organized by topic. No bold front was used (unlike full
PFRS) and it is simplified.

Page 28 of 36

NOTES TO THE REVIEWEES

The following section of lecture notes is not exhaustive enumeration of the standards
contained in the PFRS for SMEs; they are mere highlights of each of the thirty-five 35 sections
of the PFRS for SMEs.
Variations and deviations from full PFRS as well as exclusive or unique standards for SMEs are
highlighted boxes.

SECTION 1: Small & Medium Sized and Entities

SMEs are used as a financial reporting standards council is entities that are not publicly
accountable, and publish general purpose financial statements for external users.

Listed companies may not used PFRS for SMEs no matter what how small they are.

If publicly accountable entity uses PFRS for SMEs, its financial statements shall not be described as
conforming to the PFRS for SMEs even if law or regulation in its jurisdiction permits or requires
PFRS for SMEs to be used publicly accountable entities.

A subsidiary whose parent uses full PFRS is not prohibited from using this PFRS for SMEs in its own
FS if that subsidiary by itself does not have public accountability.

If a subsidiarys FS are described as conforming to the PFRS for SMEs, it must comply with all the
provisions of this PFRS.
SECTION 2: Concepts and Pervasive Principles

The objective of FS is to provide information about the financial position , performance and cash
flows of an entity

Financial statements also show the results of stewardship of management- the accountability of
management resources entrusted to it.

Qualitative characteristics of FS: under stability, relevance, materiality, reliability substance over
form, prudence, completeness, comparability, timeliness, and balance between benefit and cost.

use

Elements of financial position: asset, liability and equity

Elements of performance : income and expenses
Recognition criteria : probable and measurable
An entity shall not recognize a contingent asset as asset. however, when the flow of future
economic benefits to entity is virtually certain, then the related asset is not a contingent asset,
and its recognition is appropriate.
A contingent liability is either a possible but uncertain obligation present obligation that is not
contingent liability as a liability as a liability, except for contingent liabilities of an acquire in
business combination (based on section 19 Business Combinations and Goodwill).
Two measurement bases : historical cost and fair value
Amortized historical cost is the historical cost of an asset or liability plus or minus that portion
of its historical cost previously recognized as expense or income.
The requirement for recognizing and measuring assets, liabilities, income and expenses in
PFRS for SMEs are based on pervasive principles that are derived from the Conceptual
Framework of Accounting and from full PFRS.
An entity shall prepare it financial statements , except for cash flow information , using the
accrual basis of accounting
An initial recognition, an entity shall measure assets and liabilities at historical cost unless a PFRS
for SMEs requires initial measurement on another basis such as fair value.
An entity measures basic financial assets and basic financial liabilities (as defined in Section 11 on
Basic Financial Statements) at amortized cost less impairment except for investments in nonconvertible and non-puttable preference and ordinary shares at the publicly traded or whose fair
value can otherwise be measured reliably, which are measured at fair value with changes in fair
value recognized in profit or loss.
An entity generally, measures all other financial assets and financial liabilities at fair value, with
changes in fair value recognized in profit or loss, unless PFRS for SMEs requires or permits
measurement on another basis such as cost or amortized cost.
Most non-financial assets that an entity recognized at historical cost are subsequently measured
on other measurement bases. For example:
(a) An entity measures property, plant and equipment at the lower of depreciated cost and
recoverable amount.
(b) An entity measures inventories at the lower of cost selling price is less cost to complete and
sell.
(c) An entity recognized an impairment loss relating to non-financial assets that are use or held
for sale.
Measurement of assets at those lower amounts is intended to ensure that an asset that are in
or held for sale
amount greater than the entity expects to recover from the sale or use of that asset.

Page 29 of 36

For the following types of financial assets, PFRS for SMEs permits or requires measurement at fair
value :
(a) Investments in associates and joint ventures that an entity measures at fair value ( based on
Section 14 and 15 respectively)
(b) Investments property that an entity measures at fair value (based on Section 16)
(c) Agricultural assets (biological assets and agricultural produce at point of harvest) that an
entity measures at fair value less estimated costs to sell (based on Section 34)
An entity not ofset assets and liabilities, or income and expenses, unless required or permitted by
PFRS for SMEs.

SECTION 3: Financial Statement Presentation

The application of PFRS for SMEs with additional disclosures when necessary is presumed to result
in FS that achieve a fair presentation of then financial position, financial performance and cash
flows of SMEs.

Financial statements shall not be described as complying with PFRS for SMEs unless they comply
with all the requirements of this PFRS.

A complete set of FS shall include of the following :

(a) Statement of Financial Position (balance sheet)
(b) Either a singles Statement of Comprehensive Income (showing profit or loss and items of
other comprehensive income) or two statements : income statements & statement
comprehensive income
(c) Statement of Changes in Equity
(d) Statement of Cash Flows
(e) Notes, comprising summary of significant accounting policies and other explanatory
information

If an entity has no items of other comprehensive income (OCI), it can present only an Income
Statement, it may present a Statement of Comprehensive Income in which the bottom line is
profit or loss.

If only changes to equity arises from profit or loss payments of dividends , corrections of prior
period errors and changes in accounting policy , the entity may present a single Statement of
Income and Retained Earnings .(See Section 6)

The only OCI items under PFRS for SMEs are:

Some foreign exchange translation gain and losses (See Section 30)
Some changes in fair values of hedging instruments (See Section 12)
Some actuarial gains and losses (See Section 28)
SECTION 4: Statement of Financial Position

PFRS for SMEs allows this report to be called the Balance Sheet.

The minimum lines items for SMEs are basically the same as full PFRS, except that non-current
assets held for sale is not among the minimum line items of the balance sheet for SMEs.

Current/non-current distinction is not required if entity concludes liquidity approach (ascending or

descending) is better.

If an entitys normal operating cycle is not clearly determinable its duration is assumed to be 12
months

PFRS for SMEs does not prescribe sequence or format in which items are to be presented; it simply
provides a list of minimum items that are sufficiently diferent in nature or function to warrant
separate presentation in the statement of financial position.
SECTION 5: Statement of Comprehensive Income and Income Statements

Single statement approach : Statement of Comprehensive Income shall include all items of
income and expenses recognized for the period

Two statement approach: The Income Statement shall display items considered in determining
profit or loss and the Statement of Comprehensive Income shall begin with profit or loss as its first
line and shall displays items of OCI (See SECTION 4) with the total comprehensive income as its
bottom line.

A change from the single statement approach to the tow-statement approach , or vice-versa, is a
change in accounting policy to which Section 10 applied.

SECTION 6: Statement of Changes in Equity and Statement Income and Retained Earnings

Page 30 of 36

Section 3 permits an entity to present a statement of income and retained earnings in place of
statement of comprehensive income and a statement of changes in equity if the only changes in
equity arise from:
Profit or loss
Payment of dividends
Correction of prior period errors
Changes in accounting policy
An entity shall present in the statement of income and retained earnings of the following
information:
Retained earnings (at the beginning of reporting period)
Dividends declared and paid or payable (during the period)
Restatement of retained earnings for corrections of prior period errors
Restatement of retained earnings for changes in accounting policy.
Retained earnings (at the end of the reporting period)

SECTION 7: Statement of Cash Flows

Cash flows must be classified according to operating ,investing and financing activities

An entity shall present cash flows from operating activities using either the direct or indirect
method.
SECTION 8: Notes to Financial Statements

An entity normally presents the notes in the following order:

(a) A statement that the FS have been prepared in compliance with the PFRS for SMEs
(b) A summary of significant accounting policies applied (including the measurement basis used
in preparing the Fsand other accounting policies used that are relevant to an understanding of
the FS)
(c) Supporting information for items presented in the FS
(d) Any other disclosures

An entity shall disclose information about judgments that management has made in the process
of applying accounting policies, key assumptions concerning future, and other key sources of
estimation uncertainties.
SECTION 9: Consolidated and Separate Financial Statements

A parent entity shall present consolidated financial statements in which it consolidates its
investment in subsidiaries ; consolidated financial statements shall include all subsidiaries of
the parent.

Consolidation of FS required when there is a parent subsidiary relationship ; except when :

The subsidiary was acquired with intent to sell or to dispose within one year
The parent itself is subsidiary and the ultimate or intermediate parent produces
consolidated FS that comply with full PFRS or PFRS for SMEs

An entity shall prepare consolidated FS that include the entity and any Special Purpose
Entities* that are controlled by that entity.
*SPECIAL PURPOSE ENTITIES (SPEs) are created to accomplish a narrow objective (e.g.,to efect
a lease , indertake research and development activities or securitize financial assets); SPEs
may take the form of a corporation, trust, partnership or unincorporated entity. SMEs are
created with the legal arrangements that impose strict requirements over the operations of the
SPE.

An entity shall present non-controlling interest in the consolidated statements of financial

position within equity, separately form the equity of the owners of then parent

PFRS for SMEs does not acquire presentation of separate financial statements for the parent
entity or for the individual subsidiaries; If parent prepares separate FS and describes them as
conforming to PFRS for SMEs.

In the separate FS, the parent shall adopt a policy of accounting for its investment in
subsidiaries either at:
(a) Cost less impairment or
(b) Fair value with changes in fair value recognized in profit or loss.
SECTION 10: Accounting Policies, Estimates and Errors

An entity need not to follow a requirement in PFRS for SMEs if the efect of doing so would not
be material.

If PFRS for SMEs does not address an issue, an entity shall use judgment in developing an
accounting policy that results inn most relevant and reliable information. In making judgment,
an entity shall refer to the:
(1) Requirements and guidance in PFRS for SMEs dealing with similar and related issues
(2) Concepts and pervasive principles in Section 2
(3) Requirements and guidance in full PFRS dealing with similar and related issues (not
required)

Change in accounting policy:

If mandated , follow the transitional provisions
If voluntary, efect retrospective application
Change in accounting estimates is accounted for prospectively

Correction of prior period error:

Page 31 of 36

By restating the comparative amounts for the prior period (s) presented which the error
occurred,
By adjusting the retained earnings at the beginning of the year of discovery of the error.

SECTION 11: Basic Financial Instruments

In contrast to Section 12, Section 11 applies to basic financial instruments and is relevant to all
entities. Section 12 applies to other , more complex financial instruments and transactions; if an
entity enters into only basic financial instruments transactions then Section 12 is not applicable.

An entity has the option PAS 39 instead of Section 11 and 12 ; however , even if PAS 39 is
followed, use Section 11 and 12 for the required disclosures (not PFRS 7).

Examples of basic financial instruments covered by Section 11 include:

Cash
Bank accounts (demand and fixed deposits)
Commercial paper and bills
Accounts, loans and notes receivable
Accounts, loans and notes payable
Bonds and debt instruments where return to the holder is fixed or referenced to an
observable rate
Investments in non-convertible and non-puttable ordinary preferences shares
Commitments to receive a loan if the commitment cannot be net settled in cash

THE AMORTIZED COST model is required for all basic financial instruments , excepts for
investments is non-convertible and non-puttable preferences shares and non-puttable ordinary
shares that are publicly traded or whose fair value can be measured reliably.

When a financial asset or liability is recognized initially , an entity shall measure it at the
transaction price (including transaction cost except in the initial measurement of financial assets
and liabilities that are measured at fair value through profit or loss)

At the end of each reporting period , an entity shall measure financial instruments as follows:
Debt instruments at amortized cost using the effective interest method.
Commitments to receive a loan at cost (which is sometimes nil) less impairment
Investment in non-convertible preference shares and non-puttable ordinary or preference
shares- at fair value (with changes recognized through profit or loss) or cost less impairment
(if fair value cannot be measured reliably)

At the end of each reporting period, an entity shall asses whether there is an objective evidence of
impairment, the entity shall recognize an impairment loss in profit or loss immediately .Reversal
of impairment losses in subsequent periods may be afected as necessary.

SECTION 12: Other Financial Instrument Issues

Examples of financial instruments covered by Section 12 include:

Investments in convertible and puttable ordinary preference shares
Options, rights , warrants , futures contracts, forward contracts and interest rate swaps that
can be settled in cash or by exchanging another financial instrument
Financial instruments that qualify and are designated as hedging instruments
Commitment to make a loan to another entity
Commitments to receive a loan if the commitment cannot be net settled in cash
Asset-backed securities such as mortgage obligations, repurchase agreements and
securitized packages of receivables.

When a financial asset or liability under Section12 is recognized initially, an entity shall measure
at its fair value which is normally transaction price.

At the end of each reporting period , an entity shall measure financial instruments within the
scope of Section 12 at fair value and recognize changes in fair value in profit or loss, except for
equity instruments that are not publicly traded and whose fair value cannot otherwise be
measured reliably shall be measured at cost less impairment.

If reliable measure of fair value is no longer available for an equity instrument that is not publicly
traded but is measured at fair value through profit or loss, its fair value at the last date the
instrument at this cost less impairment until a reliable measure of value becomes available.

If specified criteria are met, an entity may designate a hedging relationship between a hedging
instrument and hedged item in such a way to qualify for hedge accounting.
SECTION 13: Inventories

Measurement principle : Inventories are measured at lower of cost or net realizable value.(Net
realizable value is selling price less cost to complete and sell)

Cost formulas include (a) specific identification method , (b) first-in, first-out (FIFO) method and (c)
weighted average method. Last-in, first-out method (LIFO) is not permitted.
SECTION 14: Investment in Associates

Page 32 of 36

Measurement principle : option use

(a) COST model-cost less impairment [ when there is published price quotation, use
fair value model]
(b) EQUITY method
(c) FAIR VALUE model fair value through profit or loss [ if impracticable , use cost
model]
NOTE: cost model and fair value model are not allowed under PAS 28.
An investor shall classify investments in associates as non-current assets

SECTION 15: Investment of Joint Ventures

A joint venture is a contractual arrangement whereby tow or more parties undertake an economic
activity that is subject to joint control. Joint ventures can take the form of jointly controlled
operations, jointly controlled assets, or jointly controlled entities.

Measurement principle : option use

(d) COST model-cost less impairment [ when there is published price quotation, use fair value model]
(e) EQUITY method
(f) FAIR VALUE model fair value through profit or loss [ if impracticable , use cost model]
NOTE: cost model and fair value model are not allowed under PAS 31. PAS 31 allows the use of either the
equity method or proportionate consolidation method.
SECTION 16: Investment Property

An entity shall measure investment property at its cost at its initial recognition.

Investment property whose fair value can be measured reliably without undue cost or efort shall
be measured at fair value at each reporting date with changes in fair value recognized in profit or
loss.

An entity shall account for all other investment properties as property , plant and equipment using
the cost-depreciation-impairment model in Section 17
SECTION 17: Property, Plant and Equipment (PPE)

An entity shall measure investment property at its cost at its initial recognition at its cost.

An entity shall measure all items of PPE at the BS date at cost less any accumulated depreciation
and any accumulated impairment losses. NOTE: the revaluation model in PAS 16 is not supported by
this section.

An entity shall allocate the depreciable amount of an asset on a systematic basis over its useful
life

Depreciation methods: straight-line method , diminishing balance method, units of production

method.
SECTION 18: Intangible Assets other than Goodwill

An entity shall measure an intangible asset initially at cost

Internally generated intangibles shall not be recognized as intangible assets

An entity shall measure intangibles at the BS date at cost less any accumulated amortization and
any accumulated impairment losses. NOTE: the revaluation model in PAS 38 is not supported by this
section.

An entity shall allocate the amortizable amount of intangible assets on a systematic basis over its
useful life

All intangible assets are considered to have been a finite useful life ; if an entity is unable to make
a reliable estimate of the useful life of an intangible asset, the life shall be presumed to be ten
years.

SECTION 19: Business Combination and Goodwill

All business combinations shall be accounted for by applying the purchase method.
The acquirer shall measure the cost of a business combination as the aggregate of:
(a) The fair values of assets given, liabilities incurred and equity instruments issued by the
acquirer,
in
exchange
for
control of the acquiree, plus
(b) Any costs directly attributable to the business combination.
Any diference between the cost of the business combination and the acquirers interest in the net
fair value of the identifiable assets, liabilities and provisions for contingent liabilities recognized
shall be accounted for as goodwill or negative goodwill.

After initial recognition, the acquirer shall measure goodwill acquired in a business combination at
cost less accumulated amortization and accumulated impairment losses .

If an entity is unable to make a reliable estimate of the useful life of goodwill, the life shall be
presumed to be ten years.

If the acquirers interest in the net fair value of the identifiable assets, liabilities and provisions for
contingent liabilities recognized exceeds the cost of the business combinations (sometimes referred
to as negative goodwill) the acquirer shall:
(a)reassess the identification and measurement of the cost of combination, and
(b) recognize immediately in profit or loss any excess remaining after that reassessment.

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SECTION 20: Leases

Classification of leases into finance and operating lease is similar to PAS 17

A leases is classified as a finance lease if it transfers substantially all the risk and rewards
incidental to ownership: otherwise , it is classified as an operating lease.
Under an operating lease, a lessee shall recognize lease payments under operating leases
(excluding costs for services such as an insurance and maintenance) as an expense on a straightline basis .
Under a finance lease, a leasee shall recognize the leased assets and lease liabilities at lower
amount between the fair value of the leased property and present value of minimum lease
payments. Any initial direct costs of the lessee (incremental costs that are directly attributable to
negotiating and arranging a lease) are added to the amount recognized as an asset.
A lessee shall apportion minimum lease payments between the finance charge and the reduction
of the outstanding liability using the efective interest method.

SECTION 21: Provision and Contingencies

Most provisions of this Section are similar to PAS 36.

An entity shall recognize provision as a liability and shall recognize the amount of the provision as
in expense, unless another section of the PFRS for SMEs requires the cost to be recognized as part
of the cost of an asset such as inventories or property, plant and equipment.

SECTION 22: Liabilities and Equity

Equity is the residual interest in the assets of an entity after deducting all its liabilities
A liability is a present obligation of the resources embodying economic benefits.
An entity shall recognize the issue of shares or equity instruments as equity when it issues those
instruments and another party is obliged to provide cash or other resources to the entity in
exchange for the instruments.
An entity shall account fir the transaction costs of an equity transaction as a deduction for equity,
net of any related income tax benefit.
A capitalization or bonus issue (sometimes referred to as a stock dividend) is the issue of new
shares to shareholders in proportion to their existing holding. For example , an entity may give its
shareholders one dividend or bonus share for every five shares held.
A share split (sometimes referred to as stock split) is the dividing of an entitys existing shares
into multiple shares. For example, in a share split, each shareholder may receive one additional
share for each share held. In some cases, the previously outstanding shares are cancelled and
replaced by new shares.
Capitalization and bonus and issues and share splits do not change total equity.
Treasury shares are the equity instruments of an entity that have been issued and subsequently
reacquired by the entity. An entity shall deduct from equity the fair value of the consideration
given for the treasury shares. The entity shall not recognize a gain or loss in profit or loss on the
purchase, sale, issue or cancellation of treasury shares.

SECTION 23: Revenue

Most provisions of this Section are similar to PAS 11 and 18.

An entity shall measure revenue at the fair value of the consideration received or receivable.

The percentage-of-completion method is used to recognize revenue from rendering services and
from
construction contracts.

An entity shall recognize revenue on the following bases:

Interest shall be recognized using the efective interest method
Royalties shall be recognized on an accrual basis in accordance with the substance of the
agreement.
Dividends shall be recognized when the shareholders right to receive payment is established.

SECTION 24: Government Grants

Most provisions of this Section are similar to PAS 20.
An entity shall measure grants at the fair value of the asset received or receivable.
An entity shall recognize government grants as follows:
(a) A grant that does not impose specified future performance conditions on the recipient is
recognized in income when the grant proceeds are receivable.
(b) A grant that imposes specified future performance conditions on the recipient is recognized
income only when the performance conditions are met.
(c) Grants received before the revenue recognition criteria are satisfied are recognized as a
liability.

SECTION 25: Borrowing Costs

An entity shall recognize all borrowing costs as an expense in profit or loss in the period in
which they are incurred.

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SECTION 26: Share based Payment

Most provisions of this Section are similar to PFRS 2.

For equity-settled share-based payment transactions, an entity shall measure the goods or services
received , and the corresponding increase in equity , at the fair value of the goods or services
received; if the fair value cannot be estimated reliably, then the entity shall measure the value by
reference to the fair value of the equity instruments granted.

For cash-settled share-based payment transactions, an entity shall measure the goods and services
acquired and liability incurred at the fair value of the liability

Some share-based payment transactions give either the entity or the supplier of those goods or
services with a choice of whether the entity settles the transaction in cash (or other assets) or by
issuing equity instruments. In such a case , the entity shall account for the transaction as a cashsettled share-based payment transaction.
SECTION 27: Impairment of Assets

This section is divided into two: (1) Impairment of inventories (2 ) Impairment of assets other
than Inventories.

Impairment of Inventories:
An entity shall assess at each reporting data whether any inventories are impaired.
An entity measures impairment by comparing the carrying amount of each item of investor
y with its selling price less costs to complete and sell.
If an item of inventory is impaired, the entity shall reduce the carrying amount of the
inventory to its selling price less costs to complete and sell, the reduction is an impairment
loss and it is recognized immediately in profit or loss.

Impairment of assets other than Inventories;

If the recoverable amount of an asst is less than its carrying amount, an entity shall reduce
the carrying amount of the asset to its recoverable amount.
The recoverable amount of an asset or cash-generating unit is the higher of its fair value
less costs to sell and its value in use.
An entity shall recognize an impairment loss immediately in profit or loss.
SECTION 28: Employee benefits

A entity shall recognize the cost of all employee benefits to which its employees have become
entitled as a result of service rendered to the entity during the reporting period:
(a)
As a liability, after deducting amounts that have been paid either directly to the
employees
or
as
a
contribution
to
an
employee benefit fund.
b)
As an expense, unless another section of PFRS for SMEs requires the cost to be
recognized
as
part
of
the
cost
of
an
asset.

Employee benefits are classified as:

(a) Short-term employee benefits (e.g ,wages paid annual leave and short-term non-monetary
benefits)
(b) Post-employment benefits (e.g, defined contribution plans and defined benefit plans)
(c)
Other long-term employee benefits (e.g, long-term compensated absences such as
sabbatical leave)
(d)
Termination benefits

Under defined benefit plans, an entity shall recognize all actuarial gains and losses in the period
in which they occur, as part of either (1) profit or loss or (2) other comprehensive income. As a
consequence, the corridor approach under PAS 19 is not allowed.
SECTION 29: Income Tax

An entity shall recognize a current tax liability for tax payable on taxable profit for the current and
past periods. If the amount paid for the current and past periods exceeds the amount payable for
those periods, the entity shall recognize the excess as a current tax asset.

An entity shall recognize a deferred tax asset or liability for tax recoverable or payable in future
periods as a result of past transaction or events. Such tax arises from the diference between the
amounts recognized for the entitys assets and liabilities and the recognition of those assets and
liabilities by the tax authorities.

Deferred tax assets and liabilities are classified as non-current.

Discounting and ofsetting of current tax assets and liabilities are not allowed.

SECTION 30: Foreign Currency Translation

An entity shall record a foreign currency transaction by applying to the foreign currency amount
the spot exchange rate between the functional currency and the foreign currency at the date of
the transaction.

An entity shall translate its results and financial position into a diferent presentation currency
using the following procedures:
Assets and liabilities shall be translated at the closing rate.

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Income and expenses shall be translated at the exchange rates at the dates of the
transaction.
( The use of average rate is allowed if this approximates the exchange rates at the
transaction dates)
All resulting exchange diferences shall be recognized in other comprehensive income.

SECTION 31: Hyperinflation

All amounts in the financial statements of an entity whose functional currency is the currency of a
hyperinflationary economy shall be stated in term of the measuring unit current at the end of the
reporting period (i.e, an entity shall prepare general price level adjusted financial statements)

The restatement of financial statements requires the use of a general price index that reflects
changes in general purchasing power.

Non-monetary items are restated while monetary items are not restated because they are
expressed in terms of the measuring unit current at the end of the reporting period.
SECTION 32: Events after the End of the Reporting Period

Most provisions of this Section are similar to PAS 10. See page 8 of the TA Lecture Notes

Two types of events after the reporting period:

Type I Events (adjusting) provide evidence of conditions existing at the end of the
reporting period
Type II Events (non-adjusting) indicative of conditions arising after the end of the reporting
period.
SECTION 33: Related Party Disclosures

Most provisions of this Section are similar to PAS 24. See pages 7 and 8 of the TA Lecture
Notes.

In considering each possible related party relationship, an entity shall assess the substance
of the relationship and not merely the legal form.
SECTION 34: Specialized Activities

This section provides guidance on financial reporting by SMEs involved in three types of
specialized activities: (1) agriculture (2) extractive activities (3) service concessions

An entity engaged in agricultural activity shall determine its accounting policy for each class of
its biological assets as follows:
(a) The entity shall use the FAIR VALUE model for those biological assets for which fair value is
readily
determinable
without undue cost or efort.
(b) The entity shall use the COST model for all other biological assets.
Agricultural produce harvested from an entitys biological assets shall be measured at its fair
value
less
costs
to
sell
at
the
point of harvest.

An entity engaged in the exploration for, evaluation or extraction of mineral resources (extractive
activities) shall account for expenditure on the acquisition or development of tangible or
intangible assets for use in extractive activities by applying Section 17 Property , Plant and
Equipment and Section 18 Intangible Assets other than Goodwill, respectively

Under a service concession arrangement, the private operator shall recognize a financial asset to
extent that it has unconditional contractual right to receive cash or another financial asset from or
at the direction of the grantor for the construction services:
The private operator shall measure the financial asset at fair value. Thereafter, it shall follow
Section 11 Basic Financial Instruments and Section 12 Other Financial Instrument Issues in
accounting for the financial asset.
The private operator shall recognize an intangible asset to the extent that it receives a right (a
license to change users of the public service. The operator shall initially measure the
intangible asset at fair value. Thereafter, it shall follow Section 18 in accounting for the
intangible asset.
SECTION 35: Transition to the PFRS for SMEs

A first-time adopter of PFRS for SMEs shall apply this section in its FS that conform to PFRS for
SMEs.
Section 35 requires an entity to prepare comparative FS Covering the current year and at least one
prior year using PFRS for SMEs.
An entitys date of transition to PFRS for SMEs is the beginning of the earliest period for which the
entity present full comparative information in accordance with PFRS for SMEs in its first FS that
conform to PFRS for SMEs
Section 35 cites many exemptions for restating specific items in its first PFRS-for-SME-based FS.

(END OF LECTURE NOTES )

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