Notes to

Philippine Financial Reporting Standards

And

Philippine Accounting Standard

By:
Rachelle Mae P. Nayles
ACCM451 AC42

Marcial C. Paglinawan, CPA

September 2018

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 Table of Contents
NOTES TO PHILIPPINE FINANCIAL REPORTING STANDARDS
PFRS 1 First-Time Adoption of Philippine Financial Reporting Standards ........................................................................3
PFRS 2 Share-Based Payment ......................................................................................................................................6
PFRS 3 Business Combinations.....................................................................................................................................8
PFRS 4 Insurance Contracts ....................................................................................................................................... 10
PFRS 5 Non-Current Assets Held For Sale and Discontinued Operations ....................................................................... 11
PFRS 6 Exploration For and Evaluation of Mineral Resources ....................................................................................... 13
PFRS 7 Financial Instruments: Disclosures .................................................................................................................. 14
PFRS 8 Operating Segments ...................................................................................................................................... 18
PFRS 9 Financial Instruments..................................................................................................................................... 19
PFRS 10 Consolidated Financial Statements................................................................................................................ 21
PFRS 11 Joint Arrangements...................................................................................................................................... 23
PFRS 12 Disclosure of Interests In Other Entities......................................................................................................... 24
PFRS 13 FAIR VALUE MEASUREMENT ......................................................................................................................... 26
PFRS 14 Regulatory Deferral Accounts ....................................................................................................................... 28
PFRS 15 REVENUE FROM CONTRACTS WITH CUSTOMERS ........................................................................................... 29
PFRS 16 Leases ......................................................................................................................................................... 31

PHILIPPINE ACCOUNTING STANDARD

PAS 1 Presentation of Financial Statements................................................................................................................ 36
PAS 2 INVENTORIES .................................................................................................................................................. 41
PAS 7 STATEMENT OF CASH FLOWS........................................................................................................................... 42
PAS 10 EVENTS AFTER THE REPORTING PERIOD.......................................................................................................... 47
PAS 11 CONSTRUCTION CONTRACTS.......................................................................................................................... 49
PAS 12 INCOME TAXES.............................................................................................................................................. 51
PAS 16 ..................................................................................................................................................................... 53
PROPERTY, PLANT AND EQUIPMENT.......................................................................................................................... 53
PAS 17 LEASES .......................................................................................................................................................... 55
PAS 18 REVENUE ...................................................................................................................................................... 58
PAS 19 EMPLOYEE BENEFITS...................................................................................................................................... 60
PAS 20 ACCOUNTING FOR GOVERNMENT GRANTS AND DISCLOSURE OF GOVERNMENT ASSISTANCE ........................... 63
PAS 23 BORROWING COSTS ...................................................................................................................................... 68

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PAS 26 ACCOUNTING AND REPORTING BY RETIREMENT BENEFIT PLANS...................................................................... 70
PAS 27 SEPARATE FINANCIAL STATEMENTS................................................................................................................ 71
PAS 28 INVESTMENTS IN ASSOCIATES AND JOINT VENTURES ...................................................................................... 72
PAS 29 FINANCIAL REPORTING IN HYPERINFLATIONARY ECONOMIES .......................................................................... 74
PAS 31 INTERESTS IN JOINT VENTURES ...................................................................................................................... 78
PAS 32 Financial Instruments: Presentation................................................................................................................ 81
PAS 36 IMPAIRMENT OF ASSETS ................................................................................................................................ 83
PAS 37 PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS ................................................................... 87
PAS 39 FINANCIAL INSTRUMENTS: RECOGNITION AND MEASUREMENT...................................................................... 92
PAS 40 INVESTMENT PROPERTY ................................................................................................................................ 94
PAS 41 AGRICULTURE ............................................................................................................................................... 96

PFRS 1 First-Time Adoption of Philippine Financial Reporting Standards

Sets out the procedures that an entity must follow when it adopts IFRSs for the first time as the basis for preparing its
general purpose financial statements

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SCOPE
This IFRS shall be applied by a company in its first IFRS financial statements and each interim financial report.
This IFRS does not apply when an entity:
o Stops presenting financial statements in accordance with national requirements,
o Presented financial statements in the previous year in accordance with national requirements but contains an
explicit and unreserved statement of compliance with PFRS
o Presented financial statements in the previous year that has explicit and unreserved statement of complian ce
with IFRSs, even if a qualified opinion was issued by auditors on those financial statements

IMPLEMENTATION
o Opening IFRS balance sheet at the date of transition. Opening balance sheet prepared in accordance with IFRSs
effective at the end of reporting period.
o The entity recognizes all assets and liabilities in accordance with the requirements of the IFRSs and derecognizes
assets and liabilities that do not qualify for recognition under IFRS.
o All adjustments above are adjusted to opening retained earning (date of transition).
o Estimates on the date of transition under IFRS should be consistent with estimates made for the same date
under previous GAAP.
o An entity’s first IFRS financial statements include at the least
 Three statement of financial position including one at the date of the transition
 Two statements of comprehensive income,
 two income statements (if presented),
 two statements of cash flows, and  two statements of changes in equity

PRESENTATION & DISCLOSURE REQUIREMENT

o Complete compliance with PAS 1 Presentation of Financial Statements requirements
o Explanation of the transition to IFRS by providing reconciliations as at the date of transition and for the periods
covered by the financial statements- equity reconciliations and comprehensive income (Profit) reconciliations
o Interim reporting
o Comparative financial statements

TRANSITION CHALLENGES
o GAAP differences
 Revenue recognition
 Fair value measurement liasion
 Financial instruments
 Business combinations
 Share based compensation
 Property, plant and equipment
o Significant investments in systems, processes and people
o Regulatory amendments to Companies Act and Income tax Act
RECOGNITION AND MEASUREMENT

Mandatory exceptions
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IFRS 1 prohibits retrospective application in relation to the following:
o Estimates ·
o Derecognition of financial assets and financial liabilities
o Hedge accounting
o Non-controlling interests
Optional Exempions
IFRS 1 does not permit these to be applied by analogy to other items

An entity may elect to use one or more of the following

exemptions, which provide specific relief, on adoption of IFRSs:
o Business combinations
o Share-based payment transactions
o Insurance contracts
o Fair value or revaluation as deemed cost
o Use of revalued amount as deemed cost for event driven fair
o values’ between transition date and date of the first IFRSs
o reporting period
o Deemed cost for assets used in operations subject to rate regulation
o Leases
o Cumulative translation differences
o Investments in subsidiaries, jointly controlled entities and associates
o Assets and liabilities of subsidiaries, associates and joint ventures
o Compound financial instruments
o Designation of previously recognized financial instruments
o Fair value measurement of financial assets/liabilities at initial recognition
o Decommissioning liabilities included in the cost of property, plant and equipment
o Extinguishing financial liabilities with equity instruments
o Financial Liabilities with Equity Instruments
o Joint arrangements
o Severe hyperinflation
o Government loans

Accounting Policies
o Use the same accounting policies in the opening IFRS statement of financial position and throughout all periods
presented in the first IFRS financial statements
o Those accounting policies have to comply with each IFRS effective at the end of the first IFRS reporting period.

Changes in accounting policies during first year of PFRS

If, between the date of an entity’s interim financial report and the issue of its first annual PFRS financial statements, and
entity changes accounting policies and/or adopts exemptions: ·
o The requirements of PAS 8 Accounting Policies, Changes in Accounting Estimates and Errors do not apply
o The reconciliation between PFRSs and previous GAAP has to be updated.
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Presentation and Disclosure
An entity’s first set of financial statements are required to present at least three statements of financial position and two
statements each of statements of comprehensive income, income statements, statements of cash flows and statements
of changes in equity, related notes and in relation to the adoption of IFRSs, the following:
o A reconciliation of equity reported under previous accounting framework to equity under IFRSs: -
 At the date of transition to IFRSs
 At the end of the latest period presented in the entity’s most recent annual financial statements under
previous accounting framework.
o Any errors made under the previous accounting framework must be separately distinguished ·
o Additional disclosure requirements are set out in PFRS 1

PFRS 2 Share-Based Payment

It requires an entity to reflect in its profit or loss and financial position the effects of share-based payment transactions,
including expenses associated with transactions in which share options are granted to employees

SCOPE
AN ENTITY SHALL APPLY THIS STANDARD in accounting for all share-based payment transactions including:
a) equity-settled share-based payment transactions
b) cash-settled share-based payment transactions
c) transactions in which the entity receives or acquires goods or services

HOWEVER, THIS STANDARD DOES NOT APPLY

a) Transactions involving an employee or other party holding an equity instrument of the entity
b) Transaction where the entity acquires goods as part of the net assets acquired in the business
combination(PFR3)
c) share-based payment transactions in which the entity receives or acquires goods or services (p. 8-10 of IAS 32
Financial Instruments: Disclosure and Presentation or p. 5-7 of IAS 39 Financial Instruments: Recognition and
Measurement)

RECOGNITION
 Recognize the goods or services received or acquired in a share based payment transactions upon receipt
 An increase in equity if equity-settled share-based payment
Increase in liability if a cash-settled share-based payment transaction
 If unqualified as an asset, the goods or services received shall be recognized as expenses.

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MEASUREMENT
EQUITY-SETTLED SHARE-BASED PAYMENT
a) FAIR VALUE of the goods or services received
b) If the entity cannot estimate reliably the fair value, measure it based to the FAIR VALUE of the equity
instruments granted
c) In case of transactions involving employees and others providing similar services, measure it based on FAIR
VALUE of the equity instruments granted
Transactions in which services are received
 vest immediately
- The counterparty is not required to complete a specified period of service before becoming unconditionally
entitled to those equity instruments. In the absence of evidence to the contrary, the entity shall presume that
services rendered by the counterparty as consideration for the equity instruments have been received.
 do not vest until the counterparty completes a specified period of service
-the entity shall presume that the services to be rendered by the counterparty as consideration for those equity
instruments will be received in the future, during the vesting period

CASH-SETTLED SHARE-BASED PAYMENT

a) The fair value of the liability
b) Until the liability is settled, the entity shall remeasure the fair value of the liability at each reporting date and at
the date of settlement, with any changes in fair value recognized in profit or loss for the period

SHARE-BASED PAYMENT TRANSACTIONS WITH CASH ALTERNATIVES

Measurement is provided as follows:

Non-employees – equity component is computed as the difference between the fair value of goods or services
and the fair value of the debt component at the date of the goods or services received

Employees and other providing similar services
– if the fair value of one settlement alternative is the same as the other, the fair value of the equity instrument
is zero. If the fair value of the settlement alternatives differs, the fair value of the equity component will be
greater than zero.

On settlement date, liability shall be remeasured to fair value. If equity-settled, liability shall be transferred directly to
equity, as consideration for the issuance. If cash-settled, payment shall be applied to settle the liability in full.
 Entity has the right of choice
Entity has not granted a compound instrument. In this case, the entity shall determine whether it has a present
obligation to settle in cash and

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 PFRS 3 Business Combinations
Outlines the accounting when an acquirer obtains control of a business

Such business combinations are accounted for using the 'acquisition method', which generally requires assets acquired
and liabilities assumed to be measured at their fair values at the acquisition date

SCOPE
This PFRS shall be applied to a transaction or other event that meets the definition of a business combination
This standard does not apply to:
 The formation of a joint venture
 The acquisition of an asset or group of assets that is not a business
 Combinations of entities or businesses under common control
 Acquisitions by an investment entity of a subsidiary that is required to be measured at fair value through profit or
loss
Determining whether a transaction is a business combination
Business combinations can
 occur in various ways, such as by transferring cash, incurring liabilities, issuing equity instruments
 be structured in various ways to satisfy legal, taxation or other objectives, including one entity becoming a
subsidiary of another, the transfer of net assets from one entity to another or to a new entity
 must involve the acquisition of a business, which generally has three elements:
Inputs – an economic resource that creates outputs when one or more processes are applied to it
Process – a system, standard, protocol, convention or rule that when applied to an input or inputs, creates
outputs
Output – the result of inputs and processes applied to those inputs
ACQUISITION METHOD
 IDENTIFY THE ‘ACQUIRER’
Acquirer- the entity that transfers cash or other assets where the business combination is effected in this
manner
 DETERMINE THE 'ACQUISITION DATE'
Acquisition Date- the date on which it obtains control of the acquire
 RECOGNIZEAND MEASURE THE ACQUIRED ASSETS AND LIABILITIES
Recognition principle: Identifiable assets acquired, liabilities assumed, and non-controlling interests in the
acquiree, are recognised separately from goodwill
Measurement principle: All assets acquired and liabilities assumed in a business combination are measured
at acquisition-date fair value

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Exceptions to the recognition principle
1) Contingent Liabilities (PAS 37)
Exceptions to the recognition and measurement principle
2) Income Taxes (PAS 12)
3) Employee Benefits (PAS 19)
4) Indemnification Assets
Exceptions to the measurement principle
5) Reacquired Rights
6) Share-based payment transactions(PFRS 2)
7) Assets held for sale (PFRS 5)

MEASUREMENT PERIOD
 If the initial accounting for a business combination can be determined only provisionally by the end of the first
reporting period, the business combination is accounted for using provisional amounts
 The measurement period cannot exceed one year from the acquisition date and no adjustments are permitted
after one year except to correct an error in accordance with PAS 8

DISCLOSURE
 Disclosure of information about current business combinations
An acquirer is required to disclose information that enables users of its financial statements to evaluate the nature and
financial effect of a business combination that occurs either during the current reporting period or aft er the end of the
period but before the financial statements is authorized for issue
 Disclosure of information about adjustments of past business combinations
An acquirer is required to disclose information that enables users of its financial statements to evaluate the financial
effects of adjustments recognized in the current reporting period that relate to business combinations that occurred in
the period or previous reporting periods.

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 PFRS 4 Insurance Contracts
Applies with limited exceptions, to all insurance contracts that an entity issues and to reinsurance contracts that it holds
This standard provides a temporary exemption from the requirements of some other PFRSs, including the requirement to
consider is Accounting Policies, Changes in Accounting Estimates and Errors when selecting accounting policies for
insurance contracts

Insurance Contracts
 contract under which one party accepts significant insurance risk from another party by agreeing to compensate
the policyholder if a specified uncertain future event adversely affects the policyholder

SCOPE
This PFRS shall be applied to:
a) all insurance contracts, including reinsurance contracts that an entity issues and to reinsurance contracts that it
holds
b) Financial instruments that it issues with a discretionary participation feature
This standard does not apply to:
a) product warranties issued directly by a manufacturer, dealer or retailer
b) employers’ assets and liabilities under employee benefit plans
c) contractual rights or contractual obligations that are contingent on the future use of, or right to use, a non-
financial item
d) financial guarantee contracts unless the issuer has previously asserted explicitly that it regards such contracts as
insurance contracts and has used accounting applicable to insurance contracts
e) contingent consideration payable or receivable in a business combination
f) direct insurance contracts that the entity holds

ACCOUNTING POLICIES
-The standard exempts an insurer temporarily from some requirements of other standards. However, it
o prohibits provisions for possible claims under contracts that are not in existence at the reporting date
o requires a test for the adequacy of recognized insurance liabilities and an impairment test for reinsurance
assets
o requires an insurer to keep insurance liabilities in its balance sheet until they are discharged or cancelled, or
expire, and prohibits offsetting insurance liabilities against related reinsurance assets and income or expense
from reinsurance contracts against the expense or income from the related insurance contract

CHANGES IN ACCOUNTING POLICIES

This standard permits an insurer to change its accounting policies for insurance contracts only if,

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 o its financial statements present information that is more relevant and no less reliable, or more reliable and no
less relevant

REMEASURING INSURANCE LIABILITIES

The IFRS permits the introduction of an accounting policy that involves remeasuring designated insurance liabilities
consistently in each period to reflect current market interest rates

DISCLOSURES
The standard requires disclosure of:
o information that helps users understand the amounts in the insurer's financial statements that arise from
insurance contracts
o Information that helps users to evaluate the nature and extent of risks arising from insurance contracts
o the information about credit risk, liquidity risk and market risk
o information about exposures to market risk arising from embedded derivatives

PFRS 5 Non-Current Assets Held For Sale and Discontinued Operations

It specifies the accounting treatment for assets (or disposal groups) held for sale, and

It sets the presentation and disclosure requirements for discontinued operations.

SCOPE
o This standard is applicable to non-current assets held for sale and held for distribution to owners acting in their
capacity as owners.
o This PFRS shall be applied to all recognized non-current assets and disposal groups except:
1. Deferred tax assets
2. Assets arising from employee benefits
3. Financial assets
4. Non-current assets
5. Non-current assets that are measured at fair value less costs to sell
6. Contractual rights under insurance contracts

CRITERIA
Held for sale classification:
 management is committed to a plan to sell
 the asset is available for immediate sale
 an active program to locate a buyer is initiated
 the sale is highly probable, within 12 months of classification as held for sale
 the asset is being actively marketed for sale at a sales price reasonable in relation to its fair value

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  actions required to complete the plan indicate that it is unlikely that plan will be significantly changed or withdrawn

Held for distribution to owner’s classification:

 The entity must be committed to the distribution
 the assets must be available for immediate distribution and the distribution must be highly probable

Measurement
The following principles apply:
 At the time of classification as held for sale
Immediately before the initial classification of the asset as held for sale, the carrying amount of the asset will be
measured in accordance with applicable PFRS.
 After classification as held for sale
Non-current assets or disposal groups that are classified as held for sale are measured at the lower of carrying
amount and fair value less costs to sell
 Impairment. Impairment must be considered both at the time of classification as held for sale and subsequently:
 At the time of classification as held for sale. Any impairment loss is recognized in profit or loss unless the asset
had been measured at revalued amount under PAS 16 or PAS 38, in which case the impairment is treated as a
revaluation decrease.
 After classification as held for sale.
Calculate any impairment loss based on the difference between the adjusted carrying amounts of the
asset/disposal group and fair value less costs to sell

 Assets carried at fair value prior to initial classification.

For such assets, the requirement to deduct costs to sell from fair value may result in an immediate charge to
profit or loss
 Subsequent increases in fair value
A gain for any subsequent increase in fair value less costs to sell of an asset can be recognized in the profit or
loss to the extent that it is not in excess of the cumulative impairment loss

 No depreciation
Non-current assets or disposal groups that are classified as held for sale are not depreciated.
DISCLOSURES
PFRS 5 requires the following disclosures about assets (or disposal groups) that are held for sale:
 description of the non-current asset or disposal group
 description of facts and circumstances of the sale (disposal) and the expected timing
 impairment losses and reversals, if any, and where in the statement of comprehensive income they are
recognized
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  if applicable, the reportable segment in which the non-current asset (or disposal group) is presented in
accordance with PFRS 8: Operating Segments

PFRS 6 Exploration For and Evaluation of Mineral Resources

Provides guidance on accounting for exploration and evaluation expenditures, including the recognition of exploration
and evaluation assets

SCOPE
PFRS 6 EXPLORATION FOR AND EVALUATION OF MINERAL RESOURCES is:
 limited to the recognition, measurement and disclosure of expenditure incurred in the phase covering the E&E of
mineral resources
 Although the term used is ‘mineral resources’, the definitions clarify that this extends to cover minerals, oil,
natural gas and other similar non regenerative resources meaning that it applies across the extractives industry
sector
AN ENTITY SHALL NOT APPLY THIS STANDARD to:
 Expenditures incurred BEFORE legal rights of exploration are obtained
 Expenditures incurred AFTER the technical feasibility and commercial viability of extracting a mineral resource are
demonstrable

MEASUREMENT
 The exploration and evaluation assets should initially be measured AT COST in the statement of financial position
 After recognition, either the cost or revaluation model of PAS 16/PAS 38 may be applied
 Impairment tests are required when circumstances suggest that the carrying amount of the assets may exceed
their recoverable amount.

PRESENTATION
 An entity shall classify exploration and evaluation assets as TANGIBLE OR INTANGIBLE according to the nature of
the assets acquired and apply the classification consistently.
 To the extent that a tangible asset is consumed in developing an intangible asset, the amount reflecting that
consumption is part of the cost of the intangible asset
 However, using a tangible asset to develop an intangible asset does not change a tangible asset into an
intangible asset.

DISCLOSURES
PFRS 6, paragraph 23-24 requires disclosure of information that identifies and explains the amounts recognized in its
financial statements arising from the exploration for and evaluation of mineral resources, including:
 its accounting policies for exploration and evaluation expenditures including the recognition of exploration and
evaluation assets
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  the amounts of assets, liabilities, income and expense and operating and investing cash flows arising from the
exploration for and evaluation of mineral resources

PFRS 7 Financial Instruments: Disclosures

Requires disclosure of information about the significance of financial instruments to an entity, and the nature and extent
of risks arising from those financial instruments, both in qualitative and quantitative terms

SCOPE
This IFRS shall be applied by an entity to all types of financial instruments, except:
 those interests in subsidiaries, associates and joint ventures
 employers’ rights and obligations arising from employee benefit plans
 contracts for contingent consideration in a business combination(PFRS 3) This exemption applies only to the
acquirer
 Insurance contracts (PFRS 4) However, this IFRS applies to derivatives that are embedded in insurance contracts if
PAS 39 requires the entity to account for them separately
 financial instruments, contracts and obligations under share-based payment transactions

DISCLOSURE REQUIREMENTS OF PFRS 7

The two main categories of disclosures required by IFRS 7 are:
 information about the significance of financial instruments
 information about the nature and extent of risks arising from financial instruments

INFORMATION ABOUT THE SIGNIFICANCE OF FINANCIAL INSTRUMENTS

Statement of financial position
 Disclose the significance of financial instruments for an entity's financial position and performance which includes:
 financial assets measured at fair value through profit and loss, showing separately those held for trading and those
designated at initial recognition
 held-to-maturity investments
 loans and receivables
 available-for-sale assets
 financial liabilities at fair value through profit and loss, showing separately those held for trading and those
designated at initial recognition
 financial liabilities measured at amortized cost

 Other balance sheet-related disclosures:

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  special disclosures about financial assets and financial liabilities designated to be measured at fair value through
profit and loss, including disclosures about credit risk and market risk, changes in fair values attributable to these
risks and the methods of measurement
 reclassifications of financial instruments from one category to another
 information about financial assets pledged as collateral and about financial or non-financial assets held as collateral
 reconciliation of the allowance account for credit losses (bad debts) by cl ass of financial assets
 information about compound financial instruments with multiple embedded derivatives
 breaches of terms of loan agreements

Statement of comprehensive income

 Items of income, expense, gains, and losses, with separate disclosure of gains and losses from:
 financial assets measured at fair value through profit and loss, showing separately those held for trading and those
designated at initial recognition
 held-to-maturity investments
 loans and receivables
 available-for-sale assets
 financial liabilities measured at amortised cost

 Other income statement-related disclosures:

 total interest income and total interest expense for those financial instruments that are not measured at fair value
through profit and loss
 fee income and expense
 amount of impairment losses by class of financial assets
 interest income on impaired financial assets
 Other disclosures
 Accounting policies for financial instruments
 Information about hedge accounting, including:
 description of each hedge, hedging instrument, and fair values of those instruments, and nature of risks being
hedged
 if a gain or loss on a hedging instrument in a cash flow hedge has been recognized in other comprehensive
income, an entity should disclose the following:
 the amount that was so recognized in other comprehensive income during the period
 the amount that was removed from equity and included in profit or loss for the period
 the amount that was removed from equity during the period and included in the initial measurement of the
acquisition cost or other carrying amount of a non-financial asset or non-financial liability in a hedged highly
probable forecast transaction.
 For fair value hedges, information about the fair value changes of the hedging instrument and the hedged item

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  Hedge ineffectiveness recognised in profit and loss
 Information about the fair values of each class of financial asset and financial liability, along with :
 comparable carrying amounts
 description of how fair value was determined
 the level of inputs used in determining fair value
 reconciliations of movements between levels of fair value measurement hierarchy additional disclosures for
financial instruments whose fair value is determined using level 3 inputs including impacts on profit and loss,
other comprehensive income and sensitivity analysis
 information if fair value cannot be reliably measured
 The fair value hierarchy introduces 3 levels of inputs based on the lowest level of input significant to the overall
fair value :
 Level 1 – quoted prices for similar instruments
 Level 2 – directly observable market inputs other than Level 1 inputs
 Level 3 – inputs not based on observable market data

Nature and extent of exposure to risks arising from financial instruments

Qualitative disclosures
The qualitative disclosures describe:
 risk exposures for each type of financial instrument
 management's objectives, policies, and processes for managing those risks
 changes from the prior period

Quantitative disclosures
 The quantitative disclosures provide information about the extent to which the entity is exposed to risk, based
on information provided internally to the entity's key management personnel. These disclosures include:
 summary quantitative data about exposure to each risk at the reporting date
 disclosures about credit risk, liquidity risk, and market risk and how these risks are managed as
 concentrations of risk
Credit risk
 Credit risk is the risk that one party to a financial instrument will cause a loss for the other party by failing to pay
for its obligation
 Disclosures about credit risk include:
 maximum amount of exposure (before deducting the value of collateral), description of collateral,
information about credit quality of financial assets that are neither past due nor impaired, and information
about credit quality of financial assets whose terms have been renegotiated
 for financial assets that are past due or impaired, analytical disclosures are required
 information about collateral or other credit enhancements obtained

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 Liquidity risk
 Liquidity risk is the risk that an entity will have difficulties in paying its financial liabilities
 Disclosures about liquidity risk include:
 a maturity analysis of financial liabilities
 description of approach to risk management
Market risk
 Market risk is the risk that the fair value or cash flows of a financial instrument will fluctuate due to changes in
market prices. Market risk reflects interest rate risk, currency risk and other price risks

 Disclosures about market risk include:

 a sensitivity analysis of each type of market risk to which the entity is exposed
 additional information if the sensitivity analysis is not representative of the entity's risk exposure
Transfers of financial assets
An entity shall disclose information that enables users of its financial statements:
 to understand the relationship between transferred financial assets that are not derecognised in their entirety and
the associated liabilities
 to evaluate the nature of, and risks associated with, the entity's continuing involvement in derecognised financial
assets
Transferred financial assets that are not derecognised in their entirety
 Required disclosures include description of the nature of the transferred assets, nature of risk and rewards as well
as description of the nature and quantitative disclosure depicting relationship between transferred financial assets
and the associated liabilities
Transferred financial assets that are derecognised in their entirety
 Required disclosures include the carrying amount of the asse ts and liabilities recognized, fair value of the assets
and liabilities that represent continuing involvement, maximum exposure to loss from the continuing involvement
as well as maturity analysis of the undiscounted cash flows to repurchase the derecognised financial assets.
 Additional disclosures are required for any gain or loss recognized at the date of transfer of the assets, income or
expenses recognize from the entity's continuing involvement in the derecognised financial assets as well as details
of uneven distribution of proceed from transfer activity throughout the reporting period.

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 PFRS 8 Operating Segments
An entity shall disclose information to enable users of its financial statements to evaluate
The nature and financial effects of the business activities in which it engages and the economic environments in which it
operates
SCOPE
This standard applies to the separate or individual financial statements of an entity :
 whose debt or equity instruments are traded in a public market
 that files, or is in the process of filing, its (consolidated) financial statements with a securities commission or other
regulatory organisation for the purpose of issuing any class of instruments in a public market
However, when both separate and consolidated financial statements for the parent are presented in a single financial
report, segment information need be presented only on the basis of the consolidated financial statements
Criteria
Operating segment is a component of an entity:
 that engages in business activities from which it may earn revenues and incur expenses (including revenues and
expenses relating to transactions with other components of the same entity)
 whose operating results are reviewed regularly by the entity’s chief operating decisi on maker to make decisions
about resources to be allocated to the segment and assess its performance
 for which discrete financial information is available
Note: Not all operations of an entity will necessarily be an operating segment
An entity shall report separately information about each operating segment that:
 Management uses in making decisions about operating matters or those which results from aggregating two or
more of those segments
 Qualify under the quantitative threshold
Reportable Segments
Quantitative thresholds and aggregation
Segment information is required to be disclosed about any operating segment that meets any of the following
quantitative thresholds:
 its reported revenue, from both external customers and intersegment sales or transfers, is 10% or more of the
combined revenue, internal and external, of all operating segments
 the absolute measure of its reported profit or loss is 10% or more of the greater, in absolute amount, of
(i) the combined reported profit of all operating segments that did not report a loss
(ii) the combined reported loss of all operating segments that reported a loss
 its assets are 10% or more of the combined assets of all operating segments
Disclosure
An entity must disclose:

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• general information about how the entity identified its operating segments and the types of products and services
from which each operating segment derives its revenues
• information about the reported segment profit or loss, including certain specified revenues and expenses included in
segment profit or loss, segment assets and segment liabilities and the basis of measurement;
• reconciliations of the totals of segment revenues, reported segment profit or loss, segment assets, segment liabilities
and other material items to corresponding items in the entity’s financial statements.

PFRS 9 Financial Instruments

Establishes the principle for the financial reporting of financial assets and financial liabilities to further promote releva nce
and usefulness of the information as users try to assess the amounts, timing and uncertainty of an entity’s future cash
flows

SCOPE
This IFRS is intended to be applied to all items within the scope of PAS 39 Financial Instruments: Recognition and
Measurement

MEASUREMENT
Initial Measurement
 For financial asset and liability not at FVPL, fair value plus or minus transaction cost that are directly attributable to
the acquisition or issuance
Subsequent Measurement
 Subsequent to initial recognition, all assets within the scope of IFRS 9 are measured at:
• amortized cost
• fair value through other comprehensive income (FVTOCI)
• fair value through profit or loss (FVTPL)
Note: *The FVTOCI classification is mandatory for certain debt instrument assets unless the option to FVTPL (‘the fair
value option’) is taken
*For debt instruments the FVTOCI classification is mandatory for certain assets unless the fair value option is
elected
Financial Asset at Amortized Cost
A debt instrument that meets the following two conditions must be measured at amortized cost:
 Business model test: The objective of the entity's business model is to hold the financial asset to coll ect the
contractual cash flows
 Cash flow characteristics test: The contractual terms of the financial asset give rise on specified dates to cash
flows that are solely payments of principal and interest on the principal amount outstanding
* All other debt instruments must be measured at fair value through profit or loss (FVTPL)
Financial Liability

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All financial liabilities shall be classified as subsequently measured at amortized cost using the effective interest method,
except for the following:
 Financial liabilities at fair value through profit or loss
 Financial Liabilities that arise when a transfer of a financial asset does not qualify for derecognit ion or when the
continuing involvement approach applies
 Financial guarantee contracts
 Commitments to provide a loan at a below-market interest rate
 Contingent consideration of an acquirer in a business combination
** However, an entity may irrevocably designate a financial asset at fair value through profit or loss at initial
recognition, if such action will result to an elimination or reduction for a measurement or recognition inconsistency

DERECOGNITION
The basic premise for the derecognition model is to determine whether the asset under consideration for derecognition
is:
 an asset in its entirety or
 specifically identified cash flows from an asset
 a fully proportionate share of the cash flows from an asset
 a fully proportionate share of specifically identified cash flows from a financial asset
Once the asset under consideration for derecognition has been determined, an assessment is made as to whether the
asset has been transferred, and if so, whether the transfer of that asset is subsequently eligible for derecognition.
An asset is transferred if the entity the contractual rights to receive the cash flows when it meet the following three
conditions:
 the entity has no obligation to pay amounts to the eventual recipient unless it collects equivalent amounts on
the original asset
 the entity is prohibited from selling or pledging the original asset
 the entity has an obligation to remit those cash flows without material delay
**Once an entity has determined that the asset has been transferred, it then determines whether or not it has
transferred substantially all of the risks and rewards of ownership of the asset
**If substantially all the risks and rewards have been transferred, the asset is derecognised
**If substantially all the risks and rewards have been retained, derecognition of the asset is precluded
**If the entity has neither retained nor transferred substantially all of the risks and rewards of the asset, then the entity
must assess whether it has relinquished control of the asset or not
** If the entity does not control the asset then derecognition is appropriate;
However if the entity has retained control of the asset, then the entity continues to recognise the asset to the extent to
which it has a continuing involvement in the asset.

RECLASSIFICATION
Only when an entity changes its business model for managing financial assets, otherwise, reclassification is prohibited.
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 PFRS 10 Consolidated Financial Statements
establish principles for the presentation and preparation of consolidated financial statements when an entity controls
one or more other entities

OBJECTIVE
This standard:
 requires a parent entity to present consolidated financial statements
 defines the principle of control, and establishes control as the basis for consolidation
 set out how to apply the principle of control to identify whether an investor controls an investee and therefore
must consolidate the investee
 sets out the accounting requirements for the preparation of consolidated financial statements
 defines an investment entity and sets out an exception to consolidating particular subsidiaries of an investment
entity

SCOPE
When a parent controls a subsidiary, then it should consolidate.
However, the following are exceptions from consolidation:

1. A parent does not need to present consolidated financial statements if it meets all of the following conditions:
o It is a wholly-owned subsidiary or is a partially-owned subsidiary of another entity and its other owners
agree;
o Its debt or equity instruments are not traded in a public market;
o It did not file, nor is it in the process of filing, its financial statements with a securities commission or
other regulatory organization for the purpose of issuing any class of instruments in a public market, and
o Its ultimate or any intermediate parent of the parent produces consolidated financial statements
available for public use that comply with IFRSs.
2. Post-employment benefit plans or other long-term employee benefit plans
3. Investment entities

CONTROL
The basic rule is:

 If an investor controls its investee => investor must consolidate;

 If an investor does NOT control its investee =>; investor does NOT consolidate.
An investor controls an investee when the investor:

 Is exposed to, or has right to variable returns from its involvement with the investee;

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  Has the ability to affect those returns
 Through its power over the investee

ASSESSMENT OF CONTROL

3 basic elements inherent in control: power, ability to use this power and variable returns
Power is the existing rights that give the current ability to direct the relevant activities. Let’s break it down a bit:

 The rights must be substantive, not only some minor rights;

 The ability must be current, exercisable in the present time;
 The relevant activities must be significant and related to major activities of investee.
When assessing whether an investor controls an investee, more than one factor need to be considered.

CONSOLIDATION PROCEDURES

1. Combine like items of assets, liabilities, equity, income, expenses and cash flows of the parent with those of its
subsidiaries;
2. Offset (eliminate):
o The carrying amount of the parent’s investment in each subsidiary; and
o The parent’s portion of equity of each subsidiary;
3. Eliminate in full intragroup assets and liabilities, equity, income, expenses and cash flows relating to
transactions between entities of the group.

Other accounting requirements

Other rules for preparing consolidated financial statements are:

 Presentation of non-controlling interests: in equity, but separately from the equity of owners of the parent;
 Uniform accounting policies shall be used by both parent and subsidiary;
 The financial statements of the parent and the subsidiary shall have the same reporting date;
 How to deal when the parent loses its control over subsidiary,
 and number of other rules dealing with the specific circumstances.

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 PFRS 11 Joint Arrangements
To establish principles for financial reporting by entities those have an interest in arrangements that are controlled jointly

SCOPE
This IFRS shall be the standard to be applied by all entities that are a party to a joint arrangement

To meet the objective, PFRS 11:

1. Defines joint control;

2. Requires determining the type of joint arrangement;
3. Account for the interest in a joint arrangement based on the type.
CRITERIA
Three Elements of Joint control:

1) Contractual arrangement must be present – often in writing in the form of contract or some documented
decisions of the parties involved. Sometimes law or other statutory mechanisms are sufficient to create
contractual arrangement.
2) Sharing of control: This condition or element is met when all parties, or group of parties, considered collectively,
are able to direct the relevant decisions of the arrangement.
‘no single party can decide on its own’
3) Unanimous consent: Unanimous consent means that every party of the joint arrangement must agree with the
decision and no one can block it.
CLASSIFICATION OF JOINT ARRANGEMENT
Once the investor acquires an interest in joint arrangement, then she must classify this arrangement correctly and apply
the appropriate accounting method.
There are 2 types of joint arrangements:

 Joint venture: In a joint venture, the parties having joint control have rights to the net assets of the
arrangement. These parties are called “joint venturers”.
 Joint operation: In a joint operation, the parties having joint control have rights to the assets and obligations for
the liabilities relating to the arrangement. These parties are called “joint operators”.

Accounting for interest in joint venture

PFRS 11 requires accounting for the investment in a joint venture using the equity method according to PAS 28
Investments in Associates and Joint Ventures.

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Accounting for interest in joint operation
When an investor classifies its investment as a joint operation, then you should recognize in the financial statements:

 Its assets, including its share of any assets held jointly;

 Its liabilities, including its share of any liabilities incurred jointly;
 Its revenue from the sale of its share of the outputarising from the joint operation;
 Its share of the revenue from the sale of the output by the joint operation; and
 Its expenses, including its share of any expenses incurred jointly.

PFRS 12 Disclosure of Interests In Other Entities

Require the disclosure of information which enables users of financial statements to evaluate:
 The nature of, and risks associates with, its interests in other entities, and
 The effects of those interests on its financial position, financial performance and cash flows

SCOPE
This standard shall be applied by an entity that has an interest in ANY of the following:
 Subsidiaries
 Joint arrangements (joint operations or joint ventures)
 Associates
 Unconsolidated structured entities.
This standard does not apply to:
 Post-employment benefit plans or other long-term employee benefit plans to which IAS 19 Employee Benefits
applies
 An entity’s separate financial statements to which IAS 27 Separate Financial Statements applies.
 An interest held by an entity that participates in, but does not have joint control or significant influence over a
joint arrangement.
 An interest accounted for in accordance with PFRS 9 Financial Instruments, except for:
- Interest in an associate or joint venture measured at fair value through profit or loss
- Interest in an unconsolidated structured entity

DISCLOSURE
The entity shall disclose:
 The significant judgements and assumptions it has made in determining:
 The nature of its interest in another entity or arrangement
 The type of joint arrangement in which it has an interest
 That it meets the definition of an investment entity if applicable
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  Information about its interests in: -
 Subsidiaries
 Joint arrangements and associates;
 Structured entities that are not controlled by the entity

AGGREGATION
PFRS 12 emphasizes that it’s necessary for financial statement preparers to strike a balance be tween burdening financial
statements with excessive detail that may not assist users of financial statements and obscuring information as a result
of too much aggregation.
An entity shall present information separately for the following interests (i.e. aggregation is not allowed):
 Subsidiaries
 Joint ventures
 Joint operations
 Associates
 Unconsolidated structured entities
An entity shall consider the following when determining whether to aggregate information:
 Quantitative and qualitative information about the risk and return characteristics of each entity considered for
possible aggregation;
 The significance of each entity to the reporting entity.
Examples of aggregation levels that may be appropriate are:
 Nature of activities
 Industry classification
 Geography

SIGNIFICANT JUDGEMENTS AND ASSUMPTIONS

Information about significant judgements and assumptions made by an entity in determining the following should be
disclosed:
 That it has control of another entity
 That it has joint control of an arrangement or significant influence over another entity
 The type of joint arrangement (joint operation or joint venture) when it has been structured through a separate
vehicle.

Examples of situations that require disclosure

The entity:
 Does not control another entity even though it holds more than half of the voting rights
 Controls another entity even though it holds less than half of the voting rights
 Is a principal or an agent
 Does not have a significant influence even though it holds 20% or more of the voting rights.
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 PFRS 13 Fair Value Measurement
Defines fair value on the basis of an 'exit price' notion and uses a 'fair value hierarchy', which results in a market -based,
rather than entity specific, measurement
SCOPE
This standard applies when another IFRS requires or permits fair value measurements or disclosure s about fair value
measurements such as :
 fair value less costs to sell
 fair value or disclosures about those measurements
This standard does not apply to:
 share-based payment transactions within the scope of PFRS 2 Share-based Payment
 leasing transactions(PAS 17-Leases)
 measurements that have some similarities to fair value but that are not fair value, (Net Realizable value-PAS 2 &
Value in Use in Impairment of Assets-PAS 36)
 Additional exemptions apply to the disclosures required by PFRS 13

MEASUREMENT
FAIR VALUE is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date.
A fair value measurement is for a particular asset or liability. Therefore, when measuring fair value an entity shall take
into account the characteristics of the asset or liability if market participants would take those characteristics into
account when pricing the asset or liability at the measurement date.
Such characteristics include the following:
(a) the condition and location of the asset
(b) restrictions, if any, on the sale or use of the asset
The asset or liability measured at fair value might be either of the following:
(a) a stand-alone asset or liability
(b) a group of assets, a group of liabilities or a group of assets and liabilities
**Whether the asset or liability is a stand-alone asset or liability, a group of assets, a group of liabilities or a group of
assets and liabilities for recognition or disclosure purposes depends on its unit of account.

TRANSACTION
Transaction is assumed to take place in the
 Principal market-greatest volume and level of activity for the asset/liability
 The most advantageous market maximizes the amount for an asset or minimizes the amount for a liability, after
transaction and transport costs.
MARKET PARTICIPANTS
 Fair value is measured using the assumptions that market participants would use when pricing the asset or
liability

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  Market participants do not need to be identified
 Assumed market participants act in their own economic best interest

FAIR VALUE HEIRARCHY

 Level 1 unadjusted quoted prices for identical assets and liabilities in active markets.
 Level 2 other observable inputs for the asset or liability such as quoted prices in active markets for similar assets or
liabilities or quoted prices for identical assets or liabilities in markets which are not active.
 Level 3 unobservable inputs. Using the best information available’

NON-FINANCIAL ASSETS
Fair Value must value at highest and best use for market participants
Considerations:
 Physically possible
 Legally permissible
 Financially feasible

VALUATION TECHNIQUES
 Market approach-prices from market transactions
 Cost approach-current replacement cost
 Income approach-discounted future cash flows
 FV estimate

DISCLOSURES
 Fair value at reporting date
 Fair value hierarchy levels used for valuation
 Valuation technique used, inputs, changes
 Recurring and non-recurring FV measurements
 Any transfers between Level 1 and 2

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 PFRS 14 Regulatory Deferral Accounts
Specify the financial reporting requirements for regulatory deferral account balances' that arise when an entity provides
good or services to customers at a price or rate that is subject to rate regulation

SCOPE
An entity is permitted but not required to apply the requirements of this Standard in its first IFRS financial statements if
and only if it:
(a) Conducts rate-regulated activities
(b) Recognized amounts that qualify as regulatory deferral account balances in its financial statements in accordance
with its previous GAAP
When applied, the requirements of PFRS 14 must be applied to all regulatory deferral account balances arising from an
entity's rate-regulated activities

RECOGNITION AND MEASUREMENT

Initial Recognition And Measurement
As the regulatory deferral account balances to be recognized are restricted to the incremental amounts from what
would otherwise be recognized as assets and liabilities under IFRS and the conceptual framework
The measurement of these balances effectively entails a two-step process:
 An entity would first determine the carrying amount of its assets and liabilities
 These amounts would then be compared with the assets and liabilities determined under the entity’s previous
GAAP
**The differences would represent the regulatory deferral debit or credit account balances to be recognized by the
entity.
Subsequent Periods
An entity that elects to adopt PFRS 14 must
 continue to apply its previous GAAP accounting policies for the recognition, measurement, impairment and
derecognition of regulatory deferral account balances
 apply the accounting policies consistently in subsequent periods
 may also need to use estimates and assumptions in the recognition and measurement of its regulatory deferral
account balances

DISCLOSURES
PFRS 14 sets out disclosure objectives to allow users to assess:
 the nature of, and risks associated with, the rate regulation that establishes the price(s) the entity can charge
customers for the goods or services it provides
 the effects of rate regulation on the entity's financial statements - including the basis on which regulatory
deferral account balances are recognized

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 PFRS 15 Revenue from Contracts with Customers
Establish the principles that an entity shall apply to report useful information to users of financial statements about the
nature, amount, timing, and uncertainty of revenue and cash flows arising from a contract with a customer
SCOPE
This standard applies to all contracts with customers except:
 Leases(PAS 17)
 financial instruments and other contractual rights or obligations (PFRS 9-Financial Instruments
 PFRS 10 Consolidated Financial Statements
 PFRS 11 Joint Arrangements
 PAS 27 Separate Financial Statements and
 PAS 28 Investments in Associates and Joint Ventures
 insurance contracts within the scope of PFRS 4 Insurance Contracts; and
 Non-monetary exchanges between entities in the same line of business to facilitate sales to customers or
potential customers
ACCOUNTING REQUIREMENTS FOR REVENUE
The five-step model framework
(a) Identify the contract(s) with a customer
A contract with a customer will be within the scope of IFRS 15 if all the following conditions are met:
 the contract has been approved by the parties to the contract;
 each party’s rights in relation to the goods or services to be transferred can be identified;
 the payment terms for the goods or services to be transferred can be identified;
 the contract has commercial substance; and
 it is probable that the consideration to which the entity is entitled to in exchange for the goods or services will
be collected.
**If a contract with a customer does not yet meet all of the above criteria, the entity will continue to re -assess the
contract going forward to determine whether it subsequently meets the above criteria.
(b) Identify the performance obligations in the contract
At the inception of the contract, the entity should assess the goods or services that have been promised to the
customer, and identify as a performance obligation:
 a good or service (or bundle of goods or services) that is distinct; or
 a series of distinct goods or services that are substantially the same and that have the same pattern of transfer
to the customer
A series of distinct goods or services is transferred to the customer in the same pattern if both of the following criteria
are met:
 each distinct good or service in the series that the entity promises to transfer consecutively to the customer
would be a performance obligation that is satisfied over time
 a single method of measuring progress would be used to measure the entity’s progress towards complete
satisfaction of the performance obligation to transfer each distinct good or service in the series to the customer

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A good or service is distinct if both of the following criteria are met:
 the customer can benefit from the good or services on its own or in conjunction with other readily available
resources; and
 the entity’s promise to transfer the good or service to the customer is separately idenitifable fro m other
promises in the contract
Factors for consideration as to whether a promise to transfer goods or services to the customer is not separately
identifiable include, but are not limited to:
 the entity does provide a significant service of integrating the goods or services with other goods or services
promised in the contract
 the goods or services significantly modify or customise other goods or se rvices promised in the contract
 the goods or services are highly interrelated or highly interdependent
(c) Determine the transaction price
The transaction price is the amount to which an entity expects to be entitled in exchange for the transfer of goods and
services.
Where a contract contains elements of variable consideration, the entity will estimate the amount of variable
consideration to which it will be entitled under the contract.
(d) Allocate the transaction price to the performance obligations in the contract
PFRS 15 suggests various methods that might be used, including:
 Adjusted market assessment approach
 Expected cost plus a margin approach
 Residual approach
**Any overall discount compared to the aggregate of standalone selling prices is allocated between performance
obligations on a relative standalone selling price basis.
(e) Recognise revenue when (or as) the entity satisfies a performance obligation
Revenue is recognized as control is passed, either over time or at a point in time.
The benefits related to the asset are the potential cash flows that may be obtained directly or indirectly. These include,
but are not limited to:
 using the asset to produce goods or provide services
 using the asset to enhance the value of other assets
 using the asset to settle liabilities or to reduce expenses
 selling or exchanging the asset
 pledging the asset to secure a loan
 holding the asset
An entity recognizes revenue over time if one of the following criteria is met:
 the customer simultaneously receives and consumes all of the benefits provided by the entity as the entity
performs
 the entity’s performance creates or enhances an asset that the customer controls as the asset is created
 the entity’s performance does not create an asset with an alternative use to the entity and the entity has an
enforceable right to payment for performance completed to date
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DISCLOSURE
An entity should disclose qualitative and quantitative information about all of the following:
 its contracts with customers
 the significant judgments, and changes in the judgments, made in applying the guidance to those contracts
 any assets recognized from the costs to obtain or fulfill a contract with a customer

PFRS 16 Leases
Establishes principles for the recognition, measurement, presentation and disclosure of leases, with the objective of
ensuring that lessees and lessors provide relevant information that faithfully represents those transactions
SCOPE
This standard applies to all leases, including subleases, except for:
 leases to explore for or use minerals, oil, natural gas and similar non-regenerative resources;
 leases of biological assets held by a lessee (PAS Agriculture)
 service concession arrangements
 licenses of intellectual property granted by a lessor (PFRS 15 Revenue from Contracts with Customers)
 rights held by a lessee under licensing agreements for items such as films, videos, plays, manu scripts, patents
and copyrights within the scope of PAS 38 Intangible Assets

ACCOUNTING FOR LEASES BY LESSEES

Note: Lessees do NOT classify the leases as finance or operating anymore!
No classification!
Instead, lessees account for all the leases in the same way.
Initial recognition
At lease commencement, a lessee accounts for two elements:

1. Right-of-use asset: Initially, a right-of-use asset is measured in the amount of the lease liability and initial direct
costs. Then it is adjusted by the lease payments made before or on commencement date, lease incentives
received, and any estimate of dismantling and restoration costs (PAS 37).
2. Lease liability: The lease liability is in fact all payments not paid at the commencement date discounted to
present value using the interest rate implicit in the lease
Outline of the journal entries

1. Lessee takes an asset under the lease:

o Debit Right-of-use asset
o Credit Lease liability
2. Lessee pays the legal fees for negotiating the contract:
o Debit Right-of-use asset
o Credit Suppliers

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 3. The estimated cost of removal, discounted to present:
o Debit Right-of-use asset
o Credit Provision for asset removal (under PAS 37)

Subsequent measurement
After commencement date, lessee needs to take care about both elements recognized initially:

1. Right-of-use asset

Normally, a lessee needs to measure the right-of-use asset using a cost model under PAS 16 Property, Plant and
Equipment. It basically means to depreciate the asset over the lease term:
o Debit Profit or loss – Depreciation charge
o Credit Accumulated depreciation of right-of-use asset
2. Lease liability
A lessee needs to recognize an interest on the lease liability:
o Debit Profit or loss – Interest expense
o Credit Lease liability
Also, the lease payments are recognized as a reduction of the lease liability:
o Debit Lease liability
o Credit Bank account (cash)
If there is a change in the lease term, lease payments, discount rate or anything else, then the lease liability must be re -
measured to reflect all the changes.

ACCOUNTING FOR LEASES BY LESSORS

CLASSIFICATION OF LEASES
There are 2 types of leases :

1. A finance lease is a lease that transfers substantially all the risks and rewards incidental to ownership of an
underlying asset.
2. An operating lease is a lease other than a finance lease.
PFRS 16 par. 63 (IFRS 16, par. 63) outlines examples of situations that would normally lead to a lease being classified as a
finance lease
 The lease transfers ownership of the asset to the lessee by the end of the lease term.
 The lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the
fair value at the date of the option exercisability. It is reasonably certain, at the inception of the lease, that
the option will be exercised.
 The lease term is for the major part of the economic life of the asset even if the title is not transferred.
 At the inception of the lease the present value of the lease payments amounts to at least substantially all of
the fair value of the leased asset.
 The leased assets are of such a specialized nature that only the lessee can use them without major
modifications.
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ACCOUNTING FOR FINANCE LEASES BY LESSORS
Initial Recognition
At the commencement of the lease term,
 lessor should recognize lease receivable in his statement of financial position
 The amount of the receivable should be equal to the net investment in the lease.
Net investment in the lease equals to the payments not paid at the commencement date discounted to present value
plus the initial direct costs.
The journal entry is as follows:
 Debit Lease receivable
 Credit PPE (underlying asset)
Subsequent Measurement
The lessor should recognize:

1. A finance income on the lease receivable:

o Debit Lease receivable
o Credit Profit or loss – Finance income
2. A reduction of the lease receivable by the cash received:
o Debit Bank account (Cash)
o Credit Lease receivable
Finance income shall be recognized based on a pattern reflecting constant periodic rate of return on the lessor’s net
investment in the lease.

ACCOUNTING FOR FINANCE LEASES BY LESSORS

Lease income from operating leases shall be recognized as an income on a straight-line basis over the lease term, unless
another systematic basis is more appropriate.
Here you can see that the accounting for operating leases is asymmetrical: both lessees and lessors recognize an asset in
their financial statements
SALE AND LEASEBACK TRANSACTIONS

1. If a transfer is a sale:
o The seller (lessee) accounts for the right-of-use asset at the proportion of the previous carrying amount related
to the right-of-use retained. Gain or loss is recognized only to the extend related to the rights transferred.
o The buyer (lessor) accounts for a purchase of an asset under applicable standards and for the lease under PFRS
16
2. If a transfer is NOT a sale:
o The seller (lessee) keeps recognizing transferred asset and accounts for the cash received as for a financial
liability
o The buyer recognizes a financial asset under PFRS 9 amounting to the cash paid.

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 PFRS 17 Insurance Contracts
Ensure that an entity provides relevant information that faithfully represents those contracts. This information gives a
basis for users of financial statements to assess the effect that insurance contracts have on the entity's financial position,
financial performance and cash flows
This standard shall be applied to:
 Insurance contract, including reinsurance contracts, it issues
 Reinsurance contracts it holds
 Investment contracts with discretionary participation features is issues, provided the entity also issues insurance
contracts.
Some contracts meet the definition of an insurance contract but have their primary purpose the provision of services fo r
a fixed fee. Such issued contracts are in the scope of the Standard, unless an entity chooses to apply to them PFRS 15
Revenue from Contracts with Customers and provided the following conditions are met:
a) the entity does not reflect an assessment of the risk associated with an individual
b) customer in setting the price of the contract with that customer
c) the contract compensates customers by providing a service, rather than by making cash payments to the
customer
d) d) the insurance risk transferred by the contract arises primarily from the customer’s use of service rather than
from uncertainty over the cost of those services

RECOGNITION AND MEASUREMENT

An entity shall recognize a group of insurance contracts it issues from the earliest of the following:
a) the beginning of the coverage period
b) the date when the first payment from a policyholder becomes due
c) when the group becomes onerous
On initial recognition, an entity shall measure a group of contracts at the total of:
a) the amount of fulfilment cash flows (“FCF”), which comprise:
i. estimates of future cash flows
ii. an adjustment to reflect the time value of money (“TVM”) and the financial risks associated with the
future cash flows
iii. a risk adjustment for non-financial risk b) the contractual service margin (“CSM”)
An entity shall include all the cash flows within the boundary of each contract in the group. The entity may estimate the
future cash flows at a higher level of aggregation and then allocate the resulting fulfilment cash flows to individual
groups of contracts.
Subsequent measurement
On subsequent measurement, the carrying amount of a group of insurance contracts at the end of each reporting period
shall be the sum of:
a) the liability for remaining coverage comprising:
i) the FCF related to future services
ii) the CSM of the group at that date
b) the liability for incurred claims, comprising the FCF related to past service allocated to the group at that date.

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PRESENTATION IN THE STATEMENT OF FINANCIAL POSITION
An entity shall present separately in the statement of financial position the carrying amount of groups of:
a) insurance contracts issued that are assets
b) insurance contracts issued that are liabilities
c) reinsurance contracts held that are asset
d) reinsurance contracts held that are liabilities

RECOGNITION AND PRESENTATION IN THE STATEMENT(S) OF FINANCIAL PERFORMANCE

An entity shall disaggregate the amounts recognised in the statement(s) of financial performance into
a) an insurance service result, comprising insurance revenue and insurance service expenses
b) insurance finance income or expenses. Income or expenses from reinsurance contracts held shall be
presented separately from the expenses or income from insurance contracts issued

DISCLOSURE
An entity shall disclose qualitative and quantitative information about:
a) the amounts recognised in its financial statements that arise from insurance contracts
b) the significant judgements, and changes in those judgements
c) the nature and extent of the risks that arise from insurance contracts

35
 PAS 1 Presentation of Financial Statements
sets out the overall requirements for the presentation of financial statements, guidelines for their structure and minimum
requirements for their content
Standards for recognizing, measuring, and disclosing specific transactions are addressed in other Standards and
Interpretations.
SCOPE
PAS 1 applies to:
 All general purpose FINANCIAL STATEMENTS based on International Financial Reporting Standards
 GENERAL PURPOSE FINANCIAL STATEMENTS are those intended to serve users who are not in a position to
require financial reports tailored to their particular information needs
PAS 1 does not apply to:
 Interim Financial Statements
 Consolidated Financial Statement
FINANCIAL STATEMENT
Objective of General Purpose Financial Statements is to provide information about the:

 financial position
 financial performance
 cash flows of an entity

that is useful to a wide range of users in making economic decisions

To meet that objective, financial statements provide information about an entity's
 assets
 liabilities
 equity
 income and expenses, including gains and losses
 contributions by and distributions to owners
 cash flows

Components
 a statement of financial position at the end of the period
 a statement of comprehensive income for the period
 a statement of changes in equity for the period
 a statement of cash flows for the period
 notes, comprising a summary of accounting policies and other explanatory notes

General features
 Fair presentation and compliance
 Going concern
 Accrual basis of accounting
 Materiality and aggregation
 Offsetting
 Frequency of reporting
 Comparative Information

36
  Consistency of presentation

Fair Presentation and compliance

 Fair statements shall present fairly the financial position, financial performance and cash flows of the entity
 Faithful representation of the effects of transactions, other events and condition in accordance PFRSs, with
additional disclosure when necessary

Going Concern

 An entity preparing IFRS financial statements is presumed to be a going concern.

 If management has significant concerns about the entity's ability to continue as a going concern, the
uncertainties must be disclosed
 If management concludes that the entity is not a going concern, the financial statements should not be
prepared on a going concern basis, in which case PAS 1 requires a series of disclosures

Accrual Basis of Accounting

 entity is required to prepare its financial statements, except for cash flow information, using the accrual basis
of accounting.

Materiality and Aggregation

 Each material class of similar items must be presented separately in the financial statements.
 Dissimilar items may be aggregated only if they are individually immaterial.
 An entity need not provide a specific disclosure required by an PFRS if the information is not material

Offsetting

 Assets and liabilities, and income and expenses, shall not be offset unless required or permitted by PFRS

Frequency of reporting

 An entity shall present a complete set of financial statements at least annually

 When an entity changes the end of its reporting period and presents financial statements for a period longer
or shorter than one year, an entity shall disclose
----Reason for using a longer or shorter period
----Fact that amounts presented in the financial statements are not entirely comparable

Comparative Information

 PAS 1 requires that comparative information shall be disclosed in respect of the previous period for all
amounts reported in the financial statements, both face of financial statements and notes
 Except when IFRSs permit or require otherwise.
 If comparative amounts are changed or reclassified, various disclosures are required.

Consistency of Presentation

37
  The presentation and classification of items in the financial statements shall be retained from one period to the
next unless:
--- A change is justified either by a change in circumstances
--- Requirement of a new IFRS
STATEMENT OF FINANCIAL POSITION
An entity must normally present a classified statement of financial position, separating current and noncurrent assets
and liabilities.

Current assets are cash; cash equivalent; assets held for collection, sale, or consumption within the entity's normal
operating cycle; or assets held for trading within the next 12 months. All other assets are noncurrent.

Current liabilities are those to be settled within the entity's normal operating cycle or due within 12 months, or those
held for trading, or those for which the entity does not have an unconditional right to defer payment beyond 12 months.
Other liabilities are noncurrent.

Minimum items on the face of the statement of financial position

 property, plant and equipment
 investment property
 intangible assets
 financial assets
 investments accounted for using the equity method
 biological assets
 Inventories
 trade and other receivables
 cash and cash equivalents;
 total of assets classified as held for sale
 trade and other payables
 Provisions
 financial liabilities
 liabilities and assets for current tax
 deferred tax liabilities and deferred tax assets
 non-controlling interest, presented within equity
 issued capital and reserves attributable to owners of the parent

***An entity shall present current and non-current assets, and current and non-current liabilities, as separate
classifications in its statement of financial position

***except when a presentation based on liquidity provides information then an entity shall present all assets and
liabilities in order of liquidity

STATEMENT OF COMPREHENSIVE INCOME

Comprehensive income for a period includes profit or loss for that period plus other comprehensive income recognized
in that period.

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

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Statement of comprehensive income shall include:
 Revenue
 Finance costs
 share of the profit or loss of associates and joint ventures
 tax expense
 profit or loss
 component of other comprehensive income classified by nature
 share of the other comprehensive income of associates and joint ventures
 total comprehensive income.

Statement of Cash Flows

Separate standards for presenting the cash flow statement, is discussed in PAS 7 Statement of Cash Flows

Statement of Changes in Equity

PAS 1 requires an entity to present a statement of changes in equity as a separate component of the financial
statements. The statement must show:

 total comprehensive income for the period, showing separately amounts attributable to owners of the
parent and to non-controlling interests
 the effects of retrospective application, when applicable, for each component
 reconciliations between the carrying amounts at the beginning and the end of the period for each
component of equity, separately disclosing:
o profit or loss
o each item of other comprehensive income
o transactions with owners, showing separately contributions by and distributions to owners and
changes in ownership interests in subsidiaries that do not result in a loss of control

The following amounts may also be presented on the face of the statement of changes in equity, or they may be
presented in the notes:

 amount of dividends recognised as distributions, and

 the related amount per share

Notes to the Financial Statements

The notes must:

 present information about the basis of preparation of the financial statements and the specific accounting
policies used
 disclose any information required by IFRSs that is not presented elsewhere in the financial statements and
 provide additional information that is not presented elsewhere in the financial statements but is relevant to
an understanding of any of them

Notes should be cross-referenced from the face of the financial statements to the relevant note.

PAS 1 suggests that the notes should normally be presented in the following order:

 a statement of compliance with PFRSs

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  a summary of significant accounting policies applied, including:
o the measurement basis used in preparing the financial statements
o the other accounting policies used that are relevant to an understanding of the financial statements
 supporting information for items presented on the face of the statement of financial position, statement of
comprehensive income, statement of changes in equity and statement of cash flows, in the order in which
each statement and each line item is presented
 other disclosures, including:
o contingent liabilities and unrecognized contractual commitments
o non-financial disclosures, such as the entity's financial risk management objectives and policies

DISCLOSURE

An entity shall disclose in the summary of significant accounting policies

 the measurement basis used in preparing the financial statements

 the other accounting policies used that are relevant to an understanding of the financial statements

40
 PAS 2 Inventories
prescribe the accounting treatment for inventories
provides guidance for determining the cost of inventories and for subsequently recognizing an expense, including any
write-down to net realisable value.
provides guidance on the cost formulas that are used to assign costs to inventories

SCOPE
This PAS includes:
 Inventories include assets held for sale in the ordinary course of business
 assets in the production process for sale in the ordinary course of business
 materials and supplies that are consumed in production
This PAS excludes:
 work in process arising under construction contracts
 financial instruments
 biological assets related to agricultural activity and agricultural produce at the point of harvest
Also, while the following are within the scope of the standard, PAS 2 does not apply to the measurement of inventories
held by:
 producers of agricultural and forest products, agricultural produce after harvest, and minerals and mineral
products, to the extent that they are measured at net realizable value in accordance with well-established
practices in those industries.
 commodity broker-traders who measure their inventories at fair value less costs to sell

INVENTORIES– assets that are:

 held for sale in the ordinary course of business
 in the process of production for such sale
 in the form of materials or supplies to be consumed in the production process or in the rendering of services

NET REALIZABLE VALUE

 is the estimated selling price in the ordinary course of business less the estimated cost of completion and the
estimated costs necessary to make the sale
COST OF INVENTORIES
 all costs incurred in bringing the inventories to their present location and condition, including the costs of
purchase and conversion

FAIR VALUE
 is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing
parties in an arm’s length transaction

MEASUREMENT
 Inventories shall be stated at the lower of cost and net realizable value
 To the extent that service providers have inventories, they measure them at the costs of their production.

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  The cost of inventories of items that are ordinarily interchangeable and have not been produced and
segregated for specific projects is determined by using the first-in, first-out (FIFO) or weighted average cost
formula
 Inventories are usually written down to NRV on an item by item basis, unless it is more appropriate to group
similar or related items

DISCLOSURE
• The accounting policies adopted in measuring inventories, including the cost of formula used,
• The total carrying amount of inventories and the carrying amount in classifications appropriate to the entity,
• the carrying amount of inventories carried at fair value less costs to sell,
• the amount of inventories recognized as an expense during the period,
• the amount of any write-down of inventories recognized as an expense in the period,
• the amount of any reversal of any write-down that is recognized as a reduction, in the amount of inventories
recognized as expense,
• the circumstances or events that led to the reversal of a write-down of inventories,
• the carrying amount of inventories pledged as security for liabilities.

PAS 7 Statement of Cash Flows

Require the presentation of information about the historical changes in cash and cash equivalents of an entity by means
of a statement of cash flows
SCOPE
All entities must present a statement of cash flows for each presented peri od of financial statements
CASH
 Cash on hand and demand deposits
CASH EQUIVALENTS
 Short-term, highly liquid investments
 Readily convertible to known amounts of cash − Subject to an insignificant risk of changes in value
 Most importantly, used to meet day-to-day cash needs, and not for investing or longer term funding
CASH FLOWS
 Inflows and outflows of cash and cash equivalents
CLASSIFICATION
Cash Flows from Operating Activities
Operating activities are the main revenue –producing activities of the enterprises that are not investing or financial
activities

Some example of operating activities:

 Cash received from customers from sale of goods or service provided
 Cash paid to suppliers towards purchase of goods or services
 Cash paid to employees towards salary wages and for others claims
 Interest/Dividend paid

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  Taxes paid (unless they can be specifically identified with Financing or investing activities)

TWO METHODS
Direct Method
 Major classes of gross cash receipts and gross cash payments are disclosed

Indirect Method
 Profit or loss is adjusted for:
• effects of transactions of a non-cash nature
• deferrals/ accruals of past or future operating cash receipts or payments
• items of income/expense associated with investing and financing cash flows

Cash Flows from Investing Activities

Investing activities are the acquisition and disposal of long term assets and other investments that are not considered to
be cash & cash equivalents.

Some example of investing activities:

 Sale /Purchase of fixed assets
 Investing in long term investments
 Investment /acquisition/disposal of subsidiaries/JVs/ Associates
 Interest /dividends received on deposits/investments

Cash Flows from Financing Activities

Financing activities are the activities that alter the equity capital and borrowing structure of the enterprise.

Financing cash flows change the capital structure of the firm and affect the relative interests of those with claims to
future cash flows of the entity

Some examples of financing activities:

 Issue of shares/debentures
 Buy back of equity shares
 Redemption of preference shares/debenture
 Long term loans which are not Cash & cash Equivalent and payment thereof
 Interest/dividends paid on Loans/ to shareholders

DISCLOSURE
Interest, dividends and income taxes

 Disclose separately in the statement of cash flows:

 Interest and dividends received and paid
- Classify consistently as operating, investing or financing activities

43
  Taxes on income
- Classify as operating activities unless specifically identified with financing and investing activities
- Disclose total amount of taxes paid if allocated over more than one class

Acquisitions and disposals of subsidiaries and other businesses

 Disclose separately the aggregate cash flows from acquisitions and from disposals of subsidiaries and other
businesses
 Classify as investing activities

 Disclose, in aggregate, in respect of both acquisitions and disposals during the period:
 Consideration paid or received
 Portion of the consideration paid or received settled by means of cash and cash equivalents
 Amount of cash/cash equivalents acquired/disposed
 Amount of the assets and liabilities other than cash/ cash equivalents acquired/disposed (summarised)

Other disclosures
 Non-cash transactions
 Investing and financing activities not requiring the use of cash and cash equivalents
 Not part of the statement of cash flows

 Cash and cash equivalents

 Components of cash and cash equivalents
 A reconciliation of the amounts in the statement of cash flows with the equivalent items reported in the
statement of financial position
 The amount of significant cash and cash equivalents not available for use

PAS 8
ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS
Prescribes the criteria for: Selection of accounting policies, Changes in accounting policies, accounting tre atment,
Disclosure of changes in accounting policies, Changes in accounting estimates and Correction of errors

SELECTION AND APPLICATION OF ACCOUNTING POLICIES

For a specific transaction or event -

 First, look to the IFRS that deals specifically with that situation:
o Financial Reporting Standards,
o International Accounting Standards
o Interpretations developed by IFRIC or predecessor SIC
 Appendices and implementation guidance attached to these are an integral part of each only if stated on the
specific standard
 IFRS standards and interpretations - top of the GAAP hierarchy

44
  When applied – information is assumed to be relevant and reliable
 If no specific IFRS that applies:
o Use judgment
o Develop a policy that results in relevant and reliable information
o Hierarchy of sources to use
 Other IFRS with similar situations and issues
 Conceptual framework basics
 If not in conflict with above, use other sources:
 Pronouncements of other standard setters with similar frameworks, accounting literature,
accepted industry practice, etc.

CHANGES IN ACCOUNTING POLICIES

 Accounting policies -
– “specific principles, bases, conventions, rules and practices applied by an entity in preparing and
presenting financial statements”
 Source of changes in accounting policy:
– required by a new or revised IFRS (most common)
– voluntary change to reliable and more relevant information
 If change due to:
– different economic conditions
– new events or conditions
– previously immaterial effects
 Then NOT a change in accounting policy
 Initial application of an IFRS
– if transitional accounting method provided – follow it
– if no transitional method – retrospective application
 Voluntary change in policy
– retrospective application
 Retrospective application
– means apply new policy as if it had always been applied
– change past amounts
 Retrospective application:
– for the earliest prior period presented
– adjust opening balance of equity affected
– adjust opening balance of other comparative amounts disclosed
 Unless
– impracticable to determine effects on specific prior periods or cumulative effect of change
 If impracticable to apply full retrospective treatment, then
– apply the change to A, L, and equity accounts at beginning of earliest possible period for which effects
are known
 If impracticable to determine cumulative effect even on current period opening balances, then
– apply new policy prospectively
 Disclose
– nature of the change
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 – amounts of adjustments to all F/S items, EPS, and to prior periods
– if judged impracticable to apply retrospectively, explain why, and how applied
 If on application of a new/revised IFRS, also report
– name of IFRS, that transitional provisions are applied, any likely future effects
 Also disclosures about new IFRS released but not yet effective

CHANGES IN ACCOUNTING ESTIMATES

 Change in accounting estimate – adjustment to carrying amount of an A/L or amount of asset consumed in
period resulting from its present status and the expected future benefits/obligations associated with it.
– Results from new information or new developments
– If uncertain whether a change in policy or a change in estimate, account for it as a change in estimate
 Estimates are fundamental to the accounting process
 Changes are expected and recurring
 Therefore, account for prospectively
 Prospective application – recognize effect of change in current and future periods
 Disclose
– Nature of the change
– Amount of the change, unless effect on future periods impracticable to estimate

CORRECTION OF ERRORS
 Prior period error – an omission or misstatement in previously reported financial statements from failing to
use/misuse of reliable information that
– Was available when F/S were authorized, and
– Could reasonably be expected to have been used in preparing those F/S
 Accounting for correction of an error –
– Retrospective restatement
– As if error had never been made
– If impracticable to determine period-specific adjustments, use partial retrospective application, or even
prospective treatment
 Disclose
– Nature of the error
– Amount of correction for each F/S item, EPS, and to prior periods
– If judged impracticable to apply retrospectively, explain why, how applied and date from which error is
corrected

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 PAS 10 Events after the Reporting Period
Prescribes when an entity should adjust its financial statements for events after the reporting period and the disclosures
that should be given about the date when the financial statements were authorized for issue and about the events after
the reporting date

SCOPE
This PAS shall be applied in the accounting for, and disclosure of, events after the reporting period

Events after the reporting period are those events, favorable and unfavorable, that occur between the end of the
reporting period and the date when the financial statements are authori zed for issue.
Adjusting events are events occurring after the reporting date that provide evidence of conditions that existed at the
end of the reporting period
Examples of adjusting events include:
 events that indicate that the going concern assumption in relation to the whole or part of the entity is not
appropriate
 settlements after reporting date of court cases that confirm the entity had a present obligation at reporting date
 receipt of information after reporting date indicating that an asset was impaired at reporting date
 bankruptcy of a customer that occurs after reporting date that confirms a loss existed at reporting date on trade
receivables
 sales of inventory after reporting date that give evidence about their net realizable value at reporting date
 discovery of fraud or errors that show the financial statements are incorrect

Non-adjusting events are events occurring after the reporting date that do NOT provide evidence of conditions that
existed at the end of the reporting period.
Examples of non-adjusting events that would generally result in disclosure include:
major business combinations or disposal of a major subsidiary
 major purchase or disposal of assets, classification of assets as held for sale or expropriatio n of major assets by
government
 destruction of a major production plant by fire after reporting date
announcing a plan to discontinue operations;
announcing a major restructuring after reporting date
major ordinary share transactions
abnormally large changes, after the reporting date. in asset prices or foreign exchange rates
 changes in tax rates or tax law
entering into major commitments such as guarantees
commencing major litigation arising solely out of events that occurred after the reporting date

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RECOGNITION AND MEASUREMENT
Adjusting events
---shall adjust the amounts recognised in its financial statements and/or relevant disclosures to reflect such events.

Non - adjusting events

---shall not adjust the amounts recognised in its financial statements to reflect non-adjusting events after the reporting
period

Dividends
--- shall not recognise those dividends that are declared after reporting date as a liability at the end of the reporting
period.

Going concern
---- shall not prepare its financial statements on a going concern basis if management determines after the reporting
date that either: (a) it intends to liquidate the entity or to cease trading; or (b) that it has no realistic alternative but to
do so.

PRESENTATION AND DISCLOSURE

An entity shall present and disclose information that enables users of the financial statements in the Notes to the
financial statement:
(a) An entity shall disclose the date when the financial statements were authorized for issue and who gave that
authorization. If the entity’s owners or others have the power to amend the financial statements after issue, the
entity shall disclose that fact
(b) If an entity receives information after the reporting period about conditions that existed at the end of the
reporting period, it shall update disclosures that relate to those conditions, in the light of the additional
information
(c) In some cases, an entity needs to update the disclosures in its financial statements to reflect information received
after the reporting period, even when the information does not affect the amounts that it recognizes in its
financial statements
(d) If non-adjusting events after the reporting period are material, non-disclosure could influence the economic
decisions that users make on the basis of the financial statements. Accordingly, an entity shall disclose the
following for each material category of non-adjusting event after the reporting period:
(i) the nature of the event
(ii) an estimate of its financial effect, or a statement that such an estimate cannot be made

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 PAS 11 Construction Contracts
Provide accounting treatment of contract revenue and cost associated with the construction contracts, particularly the
allocation of contract costs and contract revenues over different accounting periods as the construction activity starts
and completed in different accounting periods.

SCOPE
This PAS should be applied in accounting for construction contracts in the financial statements of contractors
PAS 11 does not apply to customer.

TYPES OF CONTRACT
CONSTRUCTION CONTRACT
• contract specifically negotiated for the construction of an asset or a combination of assets that are closely
interrelated or interdependent in terms of their design, technology and function or their ultimate purpos e or use
FIXED PRICE CONTRACT
• construction contract in which contractors agrees to a fixed contract price, or a fixed rate per unit of output, which
in some cases is subject to cost escalation clauses
COST-PLUS CONTRACT
• construction contract in which the contractor is reimbursed for allowable or otherwise defined costs, plus a
percentage of these costs or a fixed price
•
COMBINING AND SEGMENTING CONSTRUCTION CONTRACTS
When a construction contract covers a number of assets, each asset will be treated as separate construction contract
when:
a) Separate proposals have been submitted for each asset
b) Each asset has been subject to separate negotiation and contractor and customer have been able to accept or
reject that part of the contract relating to each asset
c) The costs and revenues of each asset can be identified
A group of contracts, whether with a single customer or with several costumers shall be treated as a single contract
when:
a) The group of contracts negotiated as a single contract
b) The contracts are so closely interrelated that they are in effect part of a single project with an overall profit
margin
c) The contracts are performed concurrently or in a continuous sequence
A contract may include an additional asset at the option of the customer, the construction of additional asset shall be
treated as a separate construction contract when:
a) The asset differs significantly in design, technology or function from the asset or assets covered by the original
contract;
b) The price of the asset is negotiated without regard to the original contract price

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CONTRACT REVENUE
 is measured at the fair value of the consideration received or receivable

Contract revenue shall comprise:

(a) the initial amount of revenue agreed in the contract
(b) variations in contract work, claims and incentive payments:
(i) to the extent that it is probable that they will result in revenue
(ii) they are capable of being reliably measured

CONTRACT COST
Contract costs are:
(a) costs specifically related to the contract
(b) general costs attributable to the contract
(c) such other costs specifically chargeable to the customer under the terms of the contract
Examples of specific costs are:
(a) site labor costs, including site supervision
(b) costs of materials used in construction
(c) depreciation of plant and machinery used on the contract
(d) costs of moving plant, equipment and materials to or from the site
(e) costs of hiring plant and equipment
(f) costs of design and technical assistance that is directly related to the contract
(g) the estimated costs of rectification and guarantee work, including expected warranty costs
(h) claims from third parties

Examples of general costs are:

(a) insurance
(b) costs of design and technical assistance that are not directly related to a specific contract
(c) construction overheads
(d) depreciation of idle plant and machinery that is not used on a particular contract

Recognition of contract revenue and expenses

 When the outcome of a construction contract can be measured reliably, contract revenues and associated
contract costs will be recognized as revenue and expenses by reference to the stage of completion of the
contract at the balance sheet date.
 Any expected loss on the contract shall be recognized as an expense immediately

Recognition of contract revenue under various methods

Contract revenue is generally recognized under the following methods:
(a) The proportion the contract costs incurred for work performed to date bear to the estimated total costs
(b) Survey of work performed
(c) Completion of physical proportion of the contract work

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DISCLOSURE
The following disclosures to be made:
(a) the amount of contract revenue recognized during the period
(b) the method used to determine the contract revenue
(c) the method used to determine the stage of completion
The following further disclosures to be made for each contract in progress:
(a) the aggregate amount of costs incurred and recognized
(b) the amount of advances received; and c) the amount of retentions
An entity shall present:
(a) the gross amount due from customers for contract work as asset, for all contracts where costs incurred plus
profit recognized (loss) exceeds the progress
(b) the gross amount due to customers for contract work as liability for all contracts where the progress billings
exceeds costs incurred plus profit recognized (loss)

PAS 12 Income Taxes

Prescribe the accounting treatment for income taxes

SCOPE
PAS 12 covers the general principles of accounting for tax. Income tax consists of three elements:
 Current tax expense
 Over/Under provision of tax charged the previous period
 Deferred tax
Current tax
 the amount of income tax payable/recoverable in respect of the taxable profit/loss for the period
 Current tax for current and prior periods should, to the extent unpaid, be recognised as a liability
 Dr. Income tax expense
Cr. Income tax liability

Over/Under Provision

 In the following accounting period the income tax will be paid

 At this point, it will normally be discovered that the estimate was over or under the actual amount paid

 Any over or under provision will then be recorded in this following accounting period as an adjustment to the
income tax expense in the income statement

 When preparing the financial statement income tax reported will be as follows

o Income statement= current estimate+ under provision- over provision

o Statement of financial position=current estimate

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Deferred Tax

 The estimated future tax consequences of transactions and events recognized in the financial statements of the
current and previous periods.
 Deferred tax is an accounting measurement and does not represent the tax payable to the tax authorities.
 The key to deferred tax lies in the two quite differentconcepts of profit
• the accounting profit
•the taxable profit
Tax bases

PAS 12 provides the following guidance on determining tax bases:

 Assets. The tax base of an asset is the amount that will be deductible against taxable economic benefits from
recovering the carrying amount of the asset.

 Revenue received in advance. The tax base of the recognized liability is its carrying amount, less revenue that will
not be taxable in future periods

 Other liabilities. The tax base of a liability is its carrying amount, less any amount that will be deductible for tax
purposes in respect of that liability in future periods

 Unrecognised items. If items have a tax base but are not recognised in the statement of financial position, the
carrying amount is nil.

 Tax bases not immediately apparent. If the tax base of an item is not immediately apparent, the tax base should
effectively be determined in such as manner to ensure the future tax consequences of recovery or settlement of
the item is recognised as a deferred tax amount

 Consolidated financial statements. In consolidated financial statements, the carrying amounts in the
consolidated financial statements are used, and the tax bases determined by reference to any consolidated tax
return

DISCLOSURE

PAS 12.80 requires the following disclosures:

major components of tax expense (tax income)
Examples include:
• current tax expense (income)
• any adjustments of taxes of prior periods
• amount of deferred tax expense (income) relating to the origination and reversal of temporary differences
• amount of deferred tax expense (income) relating to changes in tax rates or the imposition of new taxes
• amount of the benefit arising from a previously unrecognized tax loss, tax credit or temporary difference of a
prior period
• write down, or reversal of a previous write down, of a deferred tax asset
• amount of tax expense (income) relating to changes in accounting policies and corrections of errors

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PAS 12.81 requires the following disclosures:

 aggregate current and deferred tax relating to items recognized directly in equity
 tax relating to each component of other comprehensive income
 explanation of the relationship between tax expense (income) and the tax that would be expected by applying the
current tax rate to accounting profit or loss
 changes in tax rates
 amounts and other details of deductible temporary differences, unused tax losses, and unused tax credits
 temporary differences associated with investments in subsidiaries, branches and associates, and interests in joint
arrangements
 tax relating to discontinued operations
 tax consequences of dividends declared after the end of the reporting period
 information about the impacts of business combinations on an acquirer's deferred tax assets
 recognition of deferred tax assets of an acquiree after the acquisition date.

Other required disclosures:

 details of deferred tax assets
 tax consequences of future dividend payments

PAS 16 Property, Plant and Equipment

Prescribe the accounting treatment for property, plant, and equipment

The principal issues are the recognition of assets, the determination of their carrying amounts, and the depreciation
charges and impairment losses to be recognized in relation to them

SCOPE

This Standard shall be applied in accounting for property, plant and equipment except when another Standard requires
or permits a different accounting treatment.

This Standard does not apply to:

 property, plant and equipment classified as held for sale in accordance with IFRS 5 Non -current Assets Held for
Sale and Discontinued Operations.

 biological assets related to agricultural activity other than bearer plants (see IAS 41 Agriculture). This Standard
applies to bearer plants but it does not apply to the produce on bearer plants.

 the recognition and measurement of exploration and evaluation assets

 mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative resources.

However, this Standard applies to property, plant and equipment used to develop or maintain the assets described
in (b)–(d).

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 An entity using the cost model for investment property in accordance with PAS 40 Investment Property shall use the
cost model in this Standard for owned investment property.

RECOGNITION OF PROPERTY, PLANT AND EQUIPMENT

 RECOGNITION CRITERIA
1. probable future economic benefits will flow
2. cost of item can be measured reliably

 COST include
1.costs incurred initially
2. subsequent costs to add to, replace, or service PPE

 spare parts, stand-by equipment, servicing equipment

→ PPE when it meets recognition criteria
→ otherwise, inventory

 Judgment
– used when applying recognition criteria

 It may be appropriate to
aggregate individually significantitems

Initial recognition of indirect costs

 Items of property, plant and equipment may be acquired for safety or environmental reasons.
 The acquisition of property, plant and equipment, although not directly increasing the future economic benefits
of any particular existing item of property, plant and equipment, may be necessary for an entity to obtain the
future economic benefits from its other assets

Measurement subsequent to initial recognition

IAS 16 permits two accounting models:
 Cost model. The asset is carried at cost less accumulated depreciation and impairment.
 Revaluation model. The asset is carried at a revalued amount, being its fair value at the date of revaluation less
subsequent depreciation and impairment, provided that fair value can be measured reliably.

DISCLOSURE
Information about each class of property, plant and equipment

For each class of property, plant, and equipment, disclose:

 basis for measuring carrying amount
 depreciation method(s) used
 useful lives or depreciation rates
 gross carrying amount and accumulated depreciation and impairment losses
 reconciliation of the carrying amount at the beginning and the end of the period, showing:
o additions
o disposals

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 o acquisitions through business combinations
o revaluation increases or decreases
o impairment losses
o reversals of impairment losses
o depreciation
o net foreign exchange differences on translation
o other movements

Additional disclosures
The following disclosures are also required:
 restrictions on title and items pledged as security for liabilities
 expenditures to construct property, plant, and equipment during the period
 contractual commitments to acquire property, plant, and equipment
 compensation from third parties for items of property, plant, and equipment that were impaired, lost or given
up that is included in profit or loss

Revalued property, plant and equipment

If property, plant, and equipment is stated at revalued amounts, certain additional disclosures are required:
 the effective date of the revaluation
 whether an independent valuer was involved
 for each revalued class of property, the carrying amount that would have been recognised had the assets been
carried under the cost model
 the revaluation surplus, including changes during the period and any restrictions on the distribution of the
balance to shareholders

PAS 17 Leases
Prescribe, for lessees and lessors, the appropriate accounting policies and disclosures to apply in relation to finance and
operating leases

SCOPE
PAS 17 applies to all leases other than lease agreements for minerals, oil, natural gas, and similar regenerative resources
and licensing agreements for films, videos, plays, manuscripts, patents, copyrights, and similar items
However, PAS 17 does not apply as the basis of measurement for the following leased assets:
 property held by lessees that is accounted for as investment property for which the lessee uses the fair value
model set out in PAS 40
 investment property provided by lessors under operating leases (PAS 40)
 biological assets held by lessees under finance leases (PAS 41)
 biological assets provided by lessors under operating leases(PAS 41)

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CLASSIFICATION OF LEASES
A lease is an agreement in which a lessor conveys the right to use an asset for an agreed time to a lessee in return for
payment(s).

 Lease classification
o finance lease
o operating lease
 Decision
o whether risks and rewards of ownership are transferred from lessor to lessee
 Risk and rewards incidental to ownership transferred = finance lease
 Risks and rewards not transferred = operating lease
 Use judgment to evaluate individual circumstances and conditions
 Classification as a finance lease supported by
o ownership transferred by end of lease term – could be by bargain purchase option
o lessee receives most of economic benefit of asset
o lessor obtains a return of investment in asset and a return on investment
o asset is specialized to lessee’s needs, costly to modify for other use
 Might lead to classification as a finance lease
o lessee bears lessor’s losses from lease cancellation
o changes in asset’s fair value accrue to lessee at end of lease
o lease term extendible at much less than market rate at end of lease
 If not a finance lease, then is an operating lease
 Special issues when land and building are leased together and title is not transferred:
o land lease cannot be a finance lease; building lease can be
o if value of leased interest in land is immaterial, treat as building
o if material, allocate payments between land and building based on relative values of leased interests in
each
 If not a finance lease, then is an operating lease
 Special issues when land and building are leased together and title is not transferred:
o land lease cannot be a finance lease; building lease can be
o if value of leased interest in land is immaterial, treat as building
o if material, allocate payments between land and building based on relative values of leased interests in
each
 Minimum lease payments (MLP) –lessee’s definition
o payments over the lease term that the lessee is required to make, excluding contingent rent, costs for
services and taxes to be paid by and reimbursed to the lessor
o if applicable, the payment required to exercise a “bargain purchase” option
o amounts guaranteed by the lessee or party related to the lessee

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RECOGNITION AND MEASUREMENT BY THE LESSEE
 Finance lease accounting
o recognize as acquisition of an asset and incurring of a liability
o after acquisition, asset depreciation policies are those in IAS 16 or IAS 38
o lease payments are split between interest, principal and operating-type costs, if applicable
 Finance lease disclosures
o net carrying amount by class of asset
o MLP and the PV of MLP due within 1 year; between years 2 and 5; and beyond 5 years from B/S date
o reconciliation of total of MLP to the PV of the MLP
o contingent rents expensed in period;
o sublease payments expected in future
o information about leasing arrangements, purchase options, contingent rents, restrictions
RECOGNITION AND MEASUREMENT BY THE LESSOR
 Classification decision
– same as for lessee, but using lessor definition of MLP
– if risks and rewards of ownership are transferred to lessee – remove asset from lessor’s accounts
– if risks and rewards retained by lessor, asset remains in lessor’s accounts
 Lessor uses different definition of minimum lease payments (MLP)
– the payments over the lease term that the lessee is required to make, excluding contingent rent, costs
for services and taxes to be paid by and reimbursed to the lessor
– if applicable, the payment required to exercise a “bargain purchase” option
– any residual value guaranteed by a party not related to the lessor
 Lease receivable = gross investment in the lease:
– undiscounted total of MLP + bargain purchase option, if applicable, + guaranteed and unguaranteed
residual values by non-related parties, if applicable
– Present value of Lease Receivable = net investment in lease
 Unearned finance income
= gross investment minus net investment
= finance income to be earned over lease term
 Disclosures by lessors for finance leases
– gross investment in lease, PV of MLP due within 1 year, years 2 to 5, and after year 5 from B/S date
– reconciliation between gross investment and PV of MLP at B/S date
– unearned finance income, unguaranteed residual values, allowance for uncollectible MLP receivable
– contingent rent income
– information about material leasing arrangements

SALE AND LEASEBACK TRANSACTIONS

 Entity owns asset
 Sells it and leases it back
 Decision by seller-lessee: finance lease or operating lease?
 Sale and leaseback are interdependent transactions
 Leaseback is a finance lease

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 o Gain on sale is deferred
o Amortized to income over term of lease
 Leaseback is an operating lease
– Sale made at FV - recognize gain or loss in current income
– Sale < FV and lease payments are at FV – recognize loss in current income
– Sale < FV and lease payments are lower to compensate – defer loss & amortize on same basis as lease
payments
– Sale > FV excess over FV is deferred and amortized over period of expected use
– If FV < carrying amount, impairment; recognize loss currently

PAS 18 REVENUE
Prescribe the accounting treatment for revenue arising from certain types of transactions and events

SCOPE
This PAS shall be applied in accounting for revenue arising from the following transactions and events:
 the sale of goods;
 the rendering of services; and
 the use by others of entity assets yielding interest, royalties and dividends
This PAS does not deal with revenue arising from:
 lease agreements (IAS 17);
 dividends arising from investments which are accounted for under the equity method (IAS 28);
 insurance contracts within the scope of IFRS 4, Insurance Contracts;
 changes in the fair value of financial assets and financial liabilities or their disposal (IAS 39)
 changes in the value of other current assets;
 initial recognition and from changes in the fair value of biological assets related to agricultural activity
 initial recognition of agricultural produce (IAS 41)
 the extraction of mineral ores

MEASUREMENT OF REVENUE
 Revenue is measured as the fair value of the consideration received or receivable, taking into account any trade
discounts or volume rebates allowed.

 If the inflow of cash or cash equivalents is deferred and the arrangement effectively constitutes a financing
transaction, the fair value of the consideration is determined by discounting all future receipts using an imputed
rate of interest.

 The difference between the fair value and the nominal amount is recognized as interest revenue in accordance
with PAS 39.

 Amounts received on behalf of other parties are not economic benefits flowing to the entity and do not result in
increases in equity. Therefore, they do constitute revenue.

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SALE OF GOODS

 Revenue from the sale of goods is recognised when all the following conditions have been satisfied:

o the entity has transferred to the buyer the significant risks and rewards of ownership of the goods

o the entity retains neither continuing managerial involvement nor effective control over the goods sold

o the amount of revenue can be measured reliably

o it is probable that the economic benefits associated with the transaction will flow to the entity

o the costs incurred or to be incurred in respect of the transaction can be measured reliably

RENDERING OF SERVICES

When the outcome of services rendered can be estimated reliably, revenue shall be recognised by reference to the stage
of completion at the balance sheet date.
The outcome of a transaction can be estimated reliably when all the following conditions are satisfied:
(a) the amount of revenue can be measured reliably
(b) it is probable that the economic benefits associated with the transaction will flow to the entity
(c) the stage of completion of the transaction at the balance sheet date can be measured reliably
(d) the costs incurred for the transaction and the costs to complete the transaction can be measured reliably.

INTEREST, ROYALTIES AND DIVIDENDS

When the receipt of economic benefits is probable and the amount of revenue can be measured reliably, revenue
should be recognized as follows:
o interest should be recognized using the effective interest method
o royalties should be recognized on an accrual basis in accordance with the substance of the relevant
agreement
o dividends should be recognized when the shareholder's right to receive payment is established.

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 PAS 19 Employee Benefits
Prescribe the accounting and disclosure for employee benefits, requiring an entity to recognize a liability where an
employee has provided service and an expense when the entity consumes the economic benefits of employee service.

SCOPE
PAS 19 applies to
 wages and salaries
 compensated absences
 profit sharing and bonuses
 medical and life insurance benefits during employment
 non-monetary benefits such as houses, cars, and free or subsidized goods or services
 retirement benefits, including pensions and lump sum payments
 post-employment medical and life insurance benefits
 long-service or sabbatical leave
 'jubilee' benefits
 deferred compensation programmes
 termination benefits.
PAS 19 does not apply to employee benefits within the scope of PFRS 2 Share-based Payment or the reporting by
employee benefit plans

SHORT-TERM EMPLOYEE BENEFITS

Recognition and Measurement
PAS 19 requires entities to recognize the undiscounted amount of short term employee benefits:
(a) as a liability (accrued expense), after deducting any amounts already paid,
(b) as an expense, unless another International Accounting Standard (IAS) requires or permits the inclusion of the
benefits in the cost of an asset
These requirements apply to short term compensated absences and profit sharing and bonus p lans.

POST-EMPLOYMENT BENEFITS
Types of Post-employment Benefit Plans
(a) PAS 19 classifies post-employment plans into defined contribution and defined benefit plans
(b) A defined contribution plan is any plan under which an enterprise pays fixed contributions into a separate entity
(fund) and the employer’s legal or constructive obligation is limited to the amount that it agrees to contribute to
the fund.
(c) A defined benefit plan is a post-employment benefit plan that is not a defined contribution plan.

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DEFINED CONTRIBUTIONS PLANS
Recognition and Measurement
PAS 19 requires entities to recognize the contributions payable to a defined contributions plan in exchange for services
rendered by an employee during the period:
(a) in the balance sheet as a liability (accrued expense) after deducting any contributions already paid
(b) If prepayments exceed the contribution due for service before the balance sheet date, the excess should be
recognized as an asset (prepaid expense) to the extent that all prepayments are recoverable
(c) in the income statement as an expense unless another PAS requires or permits inclusion of the contribution in
the cost of an asset

DEFINED BENEFIT PLANS

Background
(a) Defined benefit plans may be funded or unfunded
(b) They may be funded by the employer, and sometimes the employees
(c) making contributions into an entity or fund that is legally separate from the reporting enterprise
(d) Accounting for defined benefit plans is more complex than for defined contributions plans
(e) The payment of benefits when they fall due depends not only on the financial position and in vestment
performance of the fund but also on the enterprise’s ability and willingness to make good any shortfall in the
fund’s assets

RECOGNITION AND MEASUREMENT

Balance sheet
PAS 19 requires entities to recognize in the balance sheet the net total of the following as the defined benefit liability:
(a) the present value (PV) of the defined benefit obligation (gross obligations before deducting the fair value of plan
assets)
(b) plus any actuarial gains(less any actuarial losses) not recognized because of the “corridor” approach
(c) minus any past service cost not yet recognized
(d) minus the fair value at the balance sheet date of plan assets (if any) out of which obligations are to be settled
directly
If the net total calculated in paragraph is negative, the resulting asset recognized in the balance sheet should be the
lower of:
(a) the net total calculated
(b) the net total of:
(i) any actuarial losses and past service costs not recognized as an expense
(ii) the present value of any economic benefits available in the form of refunds from the plan or reductions
in future contributions to the plan
An asset may arise where a defined benefit plan has been overfunded or in certain cases where actuarial gains are
recognized.

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Income statement
The enterprise should recognize in the income statement the net total of the following as expense except to the extent
that another PAS requires or permits their inclusion in the cost of an asset:
(a) current service cost
(b) interest cost
(c) the expected return on any plan assets and any reimbursement rights
(d) actuarial gains and losses to the extent that they are recognized
(e) past service cost to the extent required
(f) the effect of any curtailment or settlement of the defined benefit plan

Other long term employee benefits

a) Other long term employee benefits includes items such as compensated long service or sabbatical leave, profit
sharing and bonus payments payable 12 months or more after the employee renders the related service and
deferred compensation paid 12 months or more after the period in which it is earned.
b) The recognition and measurement requirements are a simplified version of those applied to post -employment
benefits. All past service costs and actuarial gains and losses are recognized immediately and the corridor
approach is not used

Termination Benefits
a) These include lump sum payments, enhanced retirement benefits or other postemployment benefits and
salaries paid until the end of a specified period even though no service is rendered by the related employee
b) recognized a termination benefit as a provision and an expense immediately when it becomes demonstrably
committed to the termination
Equity compensation benefits
These include benefits in such forms as
a) shares, share options, and other equity instruments issued to employees at less than the fair value at which they
are issued to third parties
b) cash payments the amount of which depend on the future market value of the enterprise’s shares

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 PAS 20 Accounting for Government Grants and Disclosure of Government Assistance
Prescribe the accounting for, and disclosure of, government grants and other forms of government assistance

SCOPE
PAS 20 applies to all government grants and other forms of government assistance.
However, it does not cover:
 government assistance that is provided in the form of benefits in determining taxable income
 government grants covered by PAS 41 Agriculture
 The benefit of a government loan at a below-market rate of interest is treated as a government grant

RECOGNITION OF GOVERNMENT GRANTS

Government grants, including non-monetary grants at fair value
 shall be recognized when there is reasonable assurance that:
a) the entity will comply with the conditions attaching to them
b) the grants will be received
Forgivable loan from government
 A forgivable loan from government is treated as a government grant when there is reasonable assurance that
the entity will meet the terms for forgiveness of the loan
Government loan at a below-market rate of interest
 The benefit of a government loan at a below-market rate of interest is treated as a government grant
 The loan shall be recognized and measured
 The benefit of the below-market rate of interest shall be measured as the difference between the initial carrying
value of the loan and the proceeds received

Capital and Income Approach

 Government grants shall be recognized in profit or loss on a systematic basis over the periods in which the entity
recognizes as expenses the related costs for which the grants are intended to compensate.
It is fundamental to the income approach that government grants should be recognised in profit or loss on a systematic
basis over the periods in which the entity recognises, as expenses, the related costs for which the grant is intended to
compensate.
Therefore:
 grants in recognition of specific expenses are recognised in profit or loss in the same period as the relevant
expenses.
 grants related to depreciable assets are usually recognised in profit or loss over the periods and in the
proportions in which depreciation expense on those assets is recognised
 grants related to non-depreciable assets may also require the fulfilment of certain obligations and would then
be recognised in profit or loss over the periods that bear the cost of meeting the obligations

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Non-monetary government grants
 A government grant may take the form of a transfer of a non-monetary asset for the use of the entity
 In these circumstances, it is usual to assess the fair value of the non-monetary asset and to account for both
grant and asset at that fair value
 An alternative course that is sometimes followed is to record both asset and grant at a nominal amount

MEASUREMENT OF GOVERNMENT GRANTS

Presentation of grants related to assets
 Government grants related to assets, including non-monetary grants at fair value, shall be presented in the
statement of financial position
 setting up the grant as deferred income or by deducting the grant in arriving at the carrying amount of the asset

Presentation of grants related to income

 Grants related to income are presented as part of profit or loss, either separately or under a general heading
such as ‘Other income’;
 Alternatively, they are deducted in reporting the related expense.
Repayment of government grants
A government grant that becomes repayable shall be accounted for as a change in accounting estimate

DISCLOSURE
An entity shall present and disclose information that enables users of the financial statements to evaluate the financial
effects of government grants and other forms of government assistance:
In the Statement of Financial Position:
a) Presentation of grants related to assets
(i) government grants related to assets, including non-monetary grants at fair value
In the Statement of Comprehensive Income
(a) Presentation of grants related to income
(i) grants related to income are presented as part of profit or loss, either separately or under a general
heading such as ‘Other income’; alternatively, they are deducted in reporting the related expense.
In the Statement of Cash Flows:
(a) The purchase of assets and the receipt of related grants can cause major movements in the cash flow of an
entity..
In the Notes to the financial statement:
(a) The following matters shall be disclosed:
(i) the accounting policy adopted for government grants, including the methods of presentation adopted in
the financial statements;
(ii) the nature and extent of government grants recognised in the financial statements and an indication of
other forms of government assistance from which the entity has directly benefited
(iii) unfulfilled conditions and other contingencies attaching to government assistance that has been recognised.

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 PAS 21 The Effects of Changes in Foreign Exchange Rates
Prescribe how to include foreign currency transactions and foreign operations in the financial statements of an entity and
how to translate financial statements into a presentation currency

SCOPE
This PAS includes:
 Accounting for transaction and balances in foreign currencies
 Translating results and financial position of foreign operations (subsidiary, associate or joint venture under
equity method)
 Translating entity’s results and financial position into presentati on currency
This PAS excludes derivatives accounted for under PFRSs 9 (PAS 39)
Three factors, which stem from the entity’s underlying business model and business environment
1. Foreign transactions
2. Foreign operations
3. Presentation currency

TRANSACTIONS AND BALANCES

 Many entities enter into transactions denominated in other currencies as part of their normal day -to-day
business activities
 Any contract that is entered into, which is denominated in another currency and/or requires settlement in
another currency, will be affected by changes in exchange rates

FOREIGN OPERATIONS
 Entities may also own businesses that are located in different countries
 Advantages may include tax incentives, access to raw materials, etc.
 An entity that is a subsidiary, associate, joint venture, or branch of a reporting entity, the activities of which are
based or conducted in a country or currency other than those of the reporting entity

PRESENTATION CURRENCY
 An entity may choose to present its financial statements in a foreign currency
 An entity may do this because it accesses capital markets in another country (multlisted)
o need to make the statements more comparable and understandable to local users

RECOGNITION OF EXCHANGE DIFFERENCES

 Any gains/losses produced on translation are recognized in profit or loss in the period they arise
 Three exceptions
• Hedges
• Non-monetary items, where IFRSs require all related gains/losses to be recorded, for instance, to OCI
o Related foreign exchange gains/losses should also be recorded to OCI
• Monetary item which is treated as part of the investment in the foreign operation,
is recorded to OCI
o Such as a long-term receivable from a foreign operation

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FOREIGN EXCHANGE RATES
 Foreign currencies are traded
o “Over-the-counter” (OTC)
 Made up of commercial, investment banks and currency bureaus
o Exchange rate is the price of one currency against another in the money market

 Foreign exchange deals include

o Spot transaction – exchange takes place within 2 days of a trade agreement; uses the spot rate
o Outright forwards – exchange takes place 3 or more days after the date of a trade agreement; uses
forward rate
o FX swap – one currency is exchanged for another on one date and then swapped back at a future date
o Future – standard agreement to trade currency at a specific price on a specific date
o Option – the right, but not the obligation, to trade foreign currency in the future

PROCEDURE
The process
1: Determine functional currency for the reporting entity (this will be used for measurement)
2: Translate items into the functional currency
3: Identify and translate items into the presentation currency

DETERMINING FUNCTIONAL CURRENCY

Functional currency is the currency in which cash is generated or expended
Factors to consider in making the decision are:
• Sales
• Labour and raw materials
• Financing currency
• Operating currency
• Regulatory and competitive environment
Additional factors for foreign subsidiaries
• Independence
• Relative volume/size of transactions with parent
• Cash management
• Self-sufficiency

ACCOUNTING REQUIREMENTS
Initial recognition
 Foreign currency transactions are initially recognized in the functional currency
 Current exchange rate (known as the spot rate) is used in translating the foreign currency amount

66
  Average weekly or monthly rate can be used
 must be numerous transactions and the exchange rate does not fluctuate significantly
Reporting at the ends of subsequent reporting periods
 In many cases, transactions result in balances that remain at the financial statement date
 Balances are divided into two categories:
 Monetary
 non-monetary

TRANSLATING TO PRESENTATION CURRENCY

 Entity chooses to present its statements in a currency other than the functional currency
 Create the need for additional translation from functional currency to the presentation currency
 Guidance
• Assets and liabilities are recorded at the closing exchange rate
• Income and expenses are recorded at the rate in effect when the transactions occurred
• Resulting translations gains/losses are recorded through OCI
 Translation gains and losses
 Not recognized in profit or loss because they have little or no effect on present or future cash flows from
operations

RE-MEASUREMENT
 Overall direction
 Make all the adjustment to comply with IFRS in the functional currency
 Example inventory
 Lower-of-cost or market values of inventory should be calculated first
 Investment property fair value should be incorporated
 Revaluation of PPE should be effected

DISCLOSURE
 The following should be disclosed
• Exchange gains and losses recorded through profit and loss and
comprehensive income
• Fact that the presentation currency is different from the
functional currency, if this is the case
• Where there has been a change in functional currency
 Additional disclosures are required in certain situations

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 PAS 23 Borrowing Costs
Prescribe the accounting treatment for borrowing costs

Borrowing costs include interest on bank overdrafts and borrowings, finance charges on finan ce leases and exchange
differences on foreign currency borrowings where they are regarded as an adjustment to interest costs.

SCOPE

Two types of assets that would otherwise be qualifying assets are excluded from the scope of IAS 23:

 qualifying assets measured at fair value, such as biological assets accounted for under IAS 41 Agriculture

 inventories that are manufactured, or otherwise produced, in large quantities on a repetitive basis and that take
a substantial period to get ready for sale

RECOGNITION

 Borrowing costs that are directly related to the acquisition, production or construction of qualifying assets are
capitalized.

 All other borrowing costs are expensed out.

MEASUREMENT

Funds are borrowed specifically,

 the actual costs incurred less any income earned on the temporary investment of such borrowings are
capitalized.

Funds are not borrowed specifically and company incurs the cost of production out of many loans

 The capitalization rate will be used for capitalization.

 The capitalization rate will be the weighted average of the borrowing costs applicable to all the loans according
to PAS 23 (Borrowing Costs)..

Capitalization should be suspended for that period in which actual production of the asset is interrupted.
Capitalization should be ceased
 when all the activities necessary to construct or produce the asset are being completed substantially.
 It means that if you are construction a factory building.
 Borrowing cost will cease to be capitalized at the time when building is substantially complete
 No matter interior decoration of the building takes how much time.

If asset is constructed in parts, capitalization of borrowing cost will cease when a particular part is being completed
substantially.
DISCLOSURE
 Accounting policy adopted
 Amount of Borrowings
 Capitalized borrowing cost
 Capitalization Rate
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 PAS 24 Related Party Disclosures
Ensure that an entity's financial statements contain the disclosures necessary to draw attention to the possibility that its
financial position and profit or loss may have been affected by the existence of related parties and by transactions and
outstanding balances with such parties

SCOPE

This Standard shall be applied in:

a. identifying related party relationships and transactions

b. identifying outstanding balances, including commitments, between an entity and its related parties
c. identifying the circumstances in which disclosure of the items above is required
d. determining the disclosures to be made about those items.

A related party is a person or entity that is related to the entity that is preparing its financial statements:
a) A person or a close member of that person's family is related to a reporting entity if that person:
o has control or joint control over the reporting entity
o has significant influence over the reporting entity
o is a member of the key management personnel of the reporting entity or of a parent of the reporting entity.
b) An entity is related to a reporting entity if any of the following conditions applies:
o The entity and the reporting entity are members of the same group (which means that each parent,
subsidiary and fellow subsidiary is related to the others).
o One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member
of a group of which the other entity is a member)
o Both entities are joint ventures of the same third party.
o One entity is a joint venture of a third entity and the other entity is an associate of the third entity.

The following are deemed not to be related:

o two entities simply because they have a director or key manager in common
o two venturers who share joint control over a joint venture
o providers of finance, trade unions, public utilities, and departments and agencies of a government that does not
control, jointly control or significantly influence the reporting entity, simply by virtue of their normal dealings
with an entity

DISCLOSURE
o Relationships between parents and subsidiaries
o Management compensation
o Related Party Transactions

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 PAS 26 Accounting and Reporting by Retirement Benefit Plans
Specify measurement and disclosure principles for the reports of retirement benefit plans.
All plans should include in their reports a statement of changes in net assets available for benefits, a summary of
significant accounting policies and a description of the plan and the effect of any changes in the plan during the period.

SCOPE
This PAS includes:
o Reports to participants as a group
o Pension schemes, superannuation schemes, retirement benefit schemes, defined contribution plans, defined
benefit plans
o Separate entity from employers
o Separate funds managed by trustees
o Group funds managed by insurance companies
This PAS excludes:
o Reports about retirement benefit rights of individual participants
o PAS 19 cost of retirement benefits in FS of employers
o Insurance policies of individuals paid for by the employer
o Other employment benefits

DEFINITIONS
o Retirement benefit plan: An arrangement by which an entity provides benefits to employees after they
terminate from service.
o Defined contribution plan: A retirement benefit plan by which benefits to employees are based on the amount
of funds contributed to the plan plus investment earnings thereon.
o Defined benefit plan: A retirement benefit plan by which employees receive benefits based on a formula usually
linked to employee earnings.
o Defined contribution plans.The report of a defined contribution plan should contain a statement of net assets
available for benefits and a description of the funding policy.

DISCLOSURE
Statement of net assets available for benefit, showing:
o assets at the end of the period
o basis of valuation
o details of any single investment exceeding 5% of net assets or 5% of any category of investment
o details of investment in the employer
o liabilities other than the actuarial present value of plan benefits
Statement of changes in net assets available for benefits, showing:
o employer contributions
o employee contributions
o investment income
o other income
o benefits paid
o administrative expenses
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 o other expenses
o income taxes
o profit or loss on disposal of investments
o changes in fair value of investments
o transfers to/from other plans
Description of funding policy
Other details about the plan
Summary of significant accounting policies
Description of the plan and of the effect of any changes in the plan during the period
Disclosures for defined benefit plans:
o actuarial present value of promised benefit obligations
o description of actuarial assumptions
o description of the method used to calculate the actuarial present value of promised benefit obligations

PAS 27 Separate Financial Statements

Prescribe the accounting and disclosure requirements for investments in subsidiaries, joint ventures and associates when
an entity prepares separate financial statements.

SCOPE
This PAS shall be applied in accounting for
o investments in subsidiaries
o joint ventures
o associates when an entity elects
o required by local regulations, to present separate financial statements

DEFINITIONS
Consolidated financial statements are the financial statements of a group in which the assets, liabilities, equity, income,
expenses and cash flows of the parent and its subsidiaries are presented as those of a single economic entity.
Separate financial statements are those presented by an entity in which the entity could elect, subject to the
requirements in this Standard, to account for its investments in subsidiaries, joint ventures and associate either at cost

RECOGNITION AND MEASUREMENT

When an entity prepares separate financial statements, it shall account for investments in subsidiaries, joint ventures
and associates either:
a) at cost
b) in accordance with IFRS 9 Financial Instruments
c) using the equity method as described in IAS 28 Investments in Associates and Joint Ventures.

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DISCLOSURE
In the Notes to the financial statement:
An entity shall apply all applicable IFRSs when providing disclosures in its separate financial statements,
a) When a parent elects not to prepare consolidated financial statements and instead prepares separate financial
statements,
o it shall disclose in those separate financial statements:
• the fact that the financial statements are separate financial statements
• that the exemption from consolidation has been used
• the name and principal place of business of the entity whose consolidated financial statements that comply
with International Financial Reporting Standards have been produced for public use
• the address where those consolidated financial statements are obtainable
• a list of significant investments in subsidiaries, joint ventures and associates, including:
- the name of those investees
- the principal place of business of those investees
- its proportion of the ownership interest held in those investees
(ii) a description of the method used to account for the investments listed under (i).

PAS 28 Investments in Associates and Joint Ventures

Prescribe the accounting for investments in associates and to set out the requirements for the application of the equity
method when accounting for investments in associates and joint ventures

SCOPE
his PAS shall be applied in accounting for investments in associates.
However, it does not apply to investments in associates held by:
(a) venture capital organizations
(b) mutual funds, unit trusts and similar entities including investment-linked insurance funds
that upon initial recognition are designated as at fair value through profit or loss or are classified as held for trading and
accounted for in accordance with IAS 39 Financial Instruments: Recognition and Measurement.

DEFINITION
 An associate is an entity over which the investor has significant influence.
 Consolidated financial statements are the financial statements of a group in which assets, liabilities, equity,
income, expenses and cash flows of the parent and its subsidiaries are presented as those of a single economic
entity.
 The equity method is a method of accounting whereby the investment is initially recognized at cost and adjusted
thereafter for the post-acquisition change in the investor’s share of the investee’s net assets.
 A joint arrangement is an arrangement of which two or more parties have joint control.
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  Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions
about the relevant activities require the unanimous consent of the parties sharing control.
 A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights
to the net assets of the arrangement.
 Significant influence is the power to participate in the financial and operating policy decisions of the investee but is
not control or joint control of those policies.

BASIC PRINCIPLES OF EQUITY METHOD ARE:

On Initial Recognition
1. The investment in an associate or joint venture is recognized at cost. The journal entry is:

o Debit investments in the statement of financial position,

o Credit cash (bank account, or whatever applies)

2. If there’s a difference between cost and investor’s shareon investee’s net fair value of identifiable assets and liabilities,
then it depends, whether this difference is positive or negative:

o Positive: goodwill and don’t recognize it separately

o Negative: recognize as an income in profit or loss in the period when the investment is acquired

Subsequently, after the initial recognition:

1. The carrying amount of the investment is increased or decreased by the investor’s share on investee’s net profit or
loss after the acquisition date. The journal entry is:
o Debit Investment in the statement of financial position, and
o Credit Income from associate in profit or loss.

Or vice versa when an associate made loss

DISCLOSURE

(a) Fair value of investments in associate for which there are published price quotations
(b) Summarized financial information of associates,
(c) Reasons why an investor have significant influence if it holds less than 20% of voting power
(d) Reasons why an investor does not have significant influence if it holds 20% or more of the voting power
(e) The end of the reporting period of the financial statements of an associate, when such financial statements are used
in applying the equity method and are as of a date or for a period that is different from that of the investor, and the
reason for using a different date ordifferent period
(f) The nature and extent of any significant
restrictions on the ability of associates
to transfer funds to the investor in the
form of cash dividends, or repayment
of loans or advances

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 PAS 29 Financial Reporting in Hyperinflationary Economies
Prescribes the guidelines which are used by the entity whose currency is the currency of the hyperinflationary economy,
to restate its financial statements in the measuring unit current at the end of accounting period

SCOPE

PAS 29 is applied to the individual financial statements, and the consolidated financial statements, of any entity whose
functional currency is the currency of a hyperinflationary economy.

RESTATEMENTS OF FINANCIAL STATEMENTS

o In case of hyperinflationary economy, whether the financial statements are prepared on the basis of historical
cost method or current cost method, these are relevant only if these are reflected in terms of currency unit at
the end of the accounting period.
o Therefore, this standard is applicable to the financial statements of entity which prepares its financial
statements in the currency of a hyperinflationary economy as follows:

 This standard requires that the financial statements of such an entity should be restated to the currency unit
current at the end of accounting period,
 The gain or loss on restatement to the net monetary position at the end of reporting period will be reported
to statement of profit or loss

BASIS FOR MEASUREMENT

PAS 29 provides that when an economy where a company belongs experiences hyperinflation, their financial statements
must be stated in terms of measuring unit current at the end of the reporting period, using:

 Constant Peso Accounting – translates financial statements in terms of current purchasing power through the
use of price index from their historical costs

 Current Cost Accounting – translates financial statements in terms of their current costs or the costs to acquire
the items in the financial statements at current purchase price. This involves determination of a holding gain or
loss.

1. HISTORIC COST FINANCIAL STATEMENTS

Statement of Financial Position

The entity will use general price index at reporting date, to restate the items in the statement of financial position to the
currency units current at the end of reporting period as follows:

 All the non-monetary assets and liabilities will be restated from the currency units at the date of purchase to the
currency units current at the end of reporting period using general price index
 However, the non-monetary assets which are already stated at the amounts current at the end of reporting
period, will not be restated
 If some non-monetary assets are stated at the amounts other than the currency units current at the date of
purchase, in this case such assets will be restated from the date of re -measurement to the to the currency units
current at the end of reporting period
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  If the payment of a non-monetary asset is deferred in future without the interest charge, then such asset will be
restated from the date of payment rather than from the date of purchase to the currency units current at the
end of reporting period
 Monetary assets and liabilities such as receivables and payables are not restated as these are already stated at
the currency units current at the end of reporting period
 The restated amount of the non-monetary assets should be not exceed its recoverable value, if this is the case
then the asset will be written down to its recoverable value
 The financial statements of the associate or joint venture which reports in a hyperinflationary econ omy will be
first restated to the currency units current at the end of reporting period before the application of equity
method
 The components of equity are restated from the general price index at the start of the period or at the date
when these components arose if it is later
 If general price index is not available at the end of reporting then the entity will use the estimated movement in
exchange rate between the functional currency and the relatively stable foreign currency
 The general price index should reflect the change in general purchasing power.
 The retained earnings will be taken as a balancing figure
 The restatement of assets and liabilities to the currency units at the end of reporting period may result it
carrying values of such assets and liabilities being different from their respective tax bases, however such
differences will be accounted for as per PAS 12

Statement of Profit or Loss

The entity is required to restate all the income and expenses from the date of relevant transaction to the currency units
current at the end of reporting period.

Statement of cashflows

The cash flows reported by the entity in the statement of cash flows should be the amounts at the end of reporting
period.

1. CURRENT COST FINANCIAL STATEMENTS

Statement of Financial Position

 The items in the statements of financial position stated at current cost at the end of reporting period need not
to be restated.
 All other items will be restated using general price index at the end of reporting period.

Statement of Profit or Loss

 The incomes and expenses in the statement of profit or loss are stated at their current amounts at the date of
transaction
 Therefore, all the incomes and expenses should be restated from the amounts at the date of transaction to the
currency units current at the end of reporting period

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Consolidated Financial Statements

 If a parent has subsidiary which reports in the currency of a hyperinflationary economy, then the financial
statements of such subsidiary will be restated to the currency units at the end of reporting period using the
general price index at reporting period of the country in which it reports before consolidation
 If such a subsidiary is a foreign subsidiary then its financial statements will be first restated to the currency units
at the end of reporting period before translating into the presentation currency of the parent.

Economy ceases to be Hyperinflationary

 If the entity’s economy ceases to be hyperinflationary, then entity will cease the application of the requirements
of this standard for the preparation of its financial statements and it will use the carrying values of the previous
period for subsequent accounting.

DISCLOSURE

o Gain or loss on monetary items

o The fact that financial statements and other prior period data have be en restated for changes in the general
purchasing power of the reporting currency
o Whether the financial statements are based on an historical cost or current cost approach
o Identity and level of the price index at the balance sheet date and moves during th e current and previous
reporting period

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 PAS 30 Disclosures in the Financial Statements of Banks and Similar Financial Institutions
Prescribe appropriate presentation and disclosure standards for banks and similar financial institutions which
supplement the requirements of other Standards.

The intention is to provide users with appropriate information to assist them in evaluating the financial position and
performance of banks, and to enable them to obtain a better understanding of the special characteristics of the
operations of banks

PRESENTATION AND DISCLOSURE

 A bank's income statement should group income and expenses by nature.

 A bank's income statement or notes should report the following specific amounts:
o interest income
o interest expense
o dividend income
o fee and commission income
o fee and commission expense
o net gains/losses from securities dealing
o net gains/losses from investment securities
o net gains/losses from foreign currency dealing
o other operating income
o loan losses
o general administrative expenses
o other operating expenses.
 A bank's balance sheet should group assets and liabilities by nature and list them in liquidity sequence. PAS
30.19 sets out the specific line items requiring disclosure.
 PAS 30.13 and PAS 30.23 include guidelines for the limited circumstances in which income and expense items or
asset and liability items are offset.
 A bank must disclose the fair values of each class of its financial assets and financial liabilities

DISCLOSURE

 Specific contingencies and commitments requiring disclosure (PAS 30.26)

 specified disclosures for the maturity of assets and liabilities (PAS 30.30)
 concentrations of assets, liabilities and off-balance sheet items (PAS 30.40)
 losses on loans and advances (PAS 30.43) general banking risks (PAS 30.50)
 assets pledged as security (PAS 30.53)

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 PAS 31 Interests in Joint Ventures
Sets out the accounting for an entity's interests in various forms of joint ventures: jointly controlled operations, jointly
controlled assets, and jointly controlled entities

SCOPE

PAS 31 applies to :

 accounting for all interests in joint ventures

 reporting of joint venture assets, liabilities, income, and expenses in the financial statements of venturers and
investors
 Regardless of the structures or forms under which the joint venture activities take place
PAS 31 does not apply to:

 investments held by a venture capital organisation, mutual fund, unit trust, and similar entity that are accounted
for as under PAS 39 at fair value with fair value changes recognised in profit or loss

DEFINITIONS

Joint venture: a contractual arrangement whereby two or more parties undertake an economic activity that is subject to
joint control.

Venturer: a party to a joint venture and has joint control over that joint venture.

Investor in a joint venture: a party to a joint venture and does not have joint control over that joint venture.

Control: the power to govern the financial and operating policies of an activity so as to obtain benefits from it.

Joint control: the contractually agreed sharing of control over an economic activity. Joint control exists only when the
strategic financial and operating decisions relating to the activity require the unanimous consent of the venturers.

Jointly controlled operations

 involve the use of assets and other resources of the venturers rather than the establishment of a separate entity
 Each venturer uses its own assets, incurs its own expenses and liabilities, and raises its own finance
 PAS 31 requires that the venturer should recognise in its financial statements the assets that it controls, the
liabilities that it incurs, the expenses that it incurs, and its share of the income from the sale of goods or services
by the joint venture.
Jointly controlled assets

 involve the joint control, and often the joint ownership, of assets dedicated to the joint venture
 Each venturer may take a share of the output from the assets and each bears a share of the expenses incurred.
 PAS 31 requires that the venturer should recognise in its financial statements its share of the joint assets, any
liabilities that it has incurred directly and its share of any liabilities incurred jointly with the other venturers,
income from the sale or use of its share of the output of the joint venture, its share o f expenses incurred by the
joint venture and expenses incurred directly in respect of its interest in the joint venture.

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Jointly controlled entities

 corporation, partnership, or other entity in which two or more venturers have an interest, under a contra ctual
arrangement that establishes joint control over the entity
 Each venturer usually contributes cash or other resources to the jointly controlled entity
 Those contributions are included in the accounting records of the venturer and recognised in the ven turer's
financial statements as an investment in the jointly controlled entity
 PAS 31 allows two treatments of accounting for an investment in jointly controlled entities – except as noted
below:
o proportionate consolidation
o equity method of accounting
Proportionate consolidation

 The balance sheet of the venturer includes its share of the assets that it controls jointly and its share of the
liabilities for which it is jointly responsible
 The income statement of the venturer includes its share of the income and expenses of the jointly controlled
entity
 PAS 31 allows for the use of two different reporting formats for presenting proportionate consolidation:

o The venturer may combine its share of each of the assets, liabilities, income and expenses of the jointly
controlled entity with the similar items, line by line, in its financial statements
o The venturer may include separate line items for its share of the assets, liabilities, income and expenses
of the jointly controlled entity in its financial statements.
Equity method

 Procedures for applying the equity method are the same as those described in IAS 28 Investments in Associates.

Separate financial statements of the venturer

 In the separate financial statements of the venturer, its interests in the joint venture should be:
o accounted for at cost
o accounted for under PAS 39 Financial Instruments: Recognition and Measurement

Transactions between a venturer and a joint venture

 If a venturer contributes or sells an asset to a jointly controlled entity, while the assets are retained by the joint
venture, provided that the venturer has transferred the risks and rewards of ownership, it should recognise only
the proportion of the gain attributable to the other venturers
 The venturer should recognise the full amount of any loss incurred when the contribution or sale provides
evidence of a reduction in the net realisable value of current assets or an impairment loss
 The requirements for recognition of gains and losses apply equally to non-monetary contributions unless the
gain or loss cannot be measured, or the other venturers contribute similar assets
 Unrealised gains or losses should be eliminated against the underlying assets or against the investment

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Financial statements of an investor

 An investor in a joint venture who does not have joint control should report its interest in a joint venture in its
consolidated financial statements either:
o in accordance with PAS 28 Investments in Associates – only if the investor has significant influence in the
joint venture
o in accordance with PAS 39 Financial Instruments: Recognition and Measurement.
Partial disposals of joint ventures

 If an investor loses joint control of a jointly controlled entity, it derecognises that investment and recognises in
profit or loss the difference between the sum of the proceeds received and any retained interest, and the
carrying amount of the investment in the jointly controlled entity at the date when joint control is lost.

DISCLOSURE

A venturer is required to disclose:

 Information about contingent liabilities relating to its interest in a joint venture.

 Information about commitments relating to its interests in joint ventures.
 A listing and description of interests in significant joint ventures and the proportion o f ownership interest held in
jointly controlled entities
 A venturer that recognises its interests in jointly controlled entities using the line -by-line reporting format for
proportionate consolidation or the equity method shall disclose the aggregate amoun ts of each of current
assets, long-term assets, current liabilities, long-term liabilities, income, and expenses related to its interests in
joint ventures.
 The method it uses to recognise its interests in jointly controlled entities

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 PAS 32 Financial Instruments: Presentation
enhance the understanding of the users of the way in which financial instruments affect an entity’s financial
performance, financial position and cash flows.

sets out the presentation requirements for financial instruments and their related interest or dividends, and specifies the
circumstances in which they should be offset.

SCOPE

PAS 32 applies to all entities and to all types of financial instruments except where another standard is more specific.
Examples of areas which are outside the scope of PAS 32 are:

 Subsidiaries accounted
 Associates accounted
 Joint ventures

PRESENTATION OF EQUITY AND LIABILITIES

• When an entity issues a financial instrument, it should classify it according to the substance of the contract
under which it has been issued. It should be classified as:
• A financial asset
• A financial liability
• An equity instrument.
• The characteristics of the financial instrument should be considered to ensure that it is appropriately classified.
• The classification should be made at the time the financial instrument is issued and not changed subsequently.
• The classification of an instrument as a financial liability will potentially have an adverse effect on the gearing
ratio of a company and may reduce its ability to obtain further debt funding

COMPOUND FINANCIAL INSTRUMENTS

-contains both a liability component and an equity component. As an example, an issuer of a convertible bond has:

1. The obligation to pay annual interest and eventually repay the capital – the liability component.
2. The possibility of issuing equity, should bondholders choose the conversion option – the equity component.
In substance the issue of such a bond is the same as issuing separately a non-convertible bond and an option to
purchase shares.

TREASURY SHARES
Equity instruments reacquired by the entity which issued them are known as treasury shares.
The treatment of these treasury shares is that:
• They should be deducted from equity
• No gain or loss should be recognized in profit or loss on thei r purchase, sale, issue or cancellation
• Consideration paid or received should be recognized directly in equity
The amount of treasury shares held should be disclosed either in the statement of financial position or in the notes to
the financial statements
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INTEREST, DIVIDENDS, LOSSES AND GAINS

 These shall be recognized as income or expense in profit or loss.

 Distributions to holders of an equity instrument shall be recognized by the entity directly in equity.
 Transaction costs of an equity transaction shall be accounted for as deduction from equity.
OFFSETTING A FINANCIAL ASSET AND A FINANCIAL LIABILITY

Offset is possible when and only when an entity:

1. Currently has a legally enforceable right to set off the recognized amounts
2. Intends either to settle on a net basis or to realize the asset and settle the liability simultaneously.

PAS 33 Earnings per Share

Prescribe principles for the determination and presentation of earning per share
SCOPE
This PAS shall apply to the entities (Individual or Group), al ready listed on the stock exchanges or in the process of
listing.
DEFINITION
Ordinary share is an equity instrument that is subordinate to all other classes of equity instruments.
Potential ordinary share is a financial instrument or other contract that may entitle its holder to ordinary shares.
Dilution is a reduction in earnings per share or an increase in loss per share resulting from the
 assumption that convertible instruments are converted
 that options or warrants are exercised
 ordinary shares are issued upon the satisfaction of specified conditions
Anti-dilution is an increase in earnings per share or a reduction in loss per share resulting from the

 assumption that convertible instruments are converted,

 that options or warrants are exercised
 ordinary shares are issued upon the satisfaction of specified conditions
MEASUREMENT
Basic Earnings per share (EPS)

 An entity shall calculate basic earnings per share amounts for profit or loss attributable to ordinary equity
holders of the parent entity and, if presented, profit or loss from continuing operations attributable to those
equity holders
 Basic earnings per share shall be calculated by dividing profit or loss attributable to ordinary equity holders of
the parent entity (the numerator) by the weighted average number of ordinary shares outstanding (the
denominator) during the period

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Diluted earnings per share (DEPS)

 An entity shall adjust profit or loss attributable to ordinary equity holders of the parent entity, and the weighted
average number of ordinary shares outstanding, for the effects of all dilutive potential ordinary shares.
Retrospective adjustments

 If the number of shares increases as a result of a capitalization, bonus issue or share spilt, or decreases as a
result of a reverse share split – the calculation of the basic and diluted earnings per share for all periods
presented shall be adjusted retrospectively.
DISCLOSURE

PAS33 requires an entity to disclose:

 the amounts used as the numerators in calculating basic and diluted earnings per share, and a reconciliation of
those amounts to profit or loss
 the weighted average number of ordinary shares used as the denominator in calculating basic and diluted
earnings per share, and a reconciliation of these denominators to each other
 a description of any other instruments that could potentially dilute basic earnings per share in the future, but
that were not included in the calculation of diluted earnings per share
 a description of ordinary share transactions that occur after the reporting period and that could have changed
the EPS calculations significantly if those transactions had occurred before the end of the reporting period

PAS 36 Impairment of Assets

Ensure that assets are carried at no more than their recoverable amount, and to define how recoverable amount is
determined

SCOPE

PAS 36 applies to:

 land
 buildings
 machinery and equipment
 investment property carried at cost
 intangible assets
 goodwill
 investments in subsidiaries, associates, and joint ventures carried at cost
 assets carried at revalued amounts under IAS 16 and IAS 38
PAS 36 does not apply to:

 inventories (PAS 2)
 assets arising from construction contracts (PAS 11)
 deferred tax assets (PAS 12)
 assets arising from employee benefits (PAS 19)
 financial assets (PAS 39)
 investment property carried at fair value (PAS 40)
 agricultural assets carried at fair value (PAS 41)
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  insurance contract assets (PFRS 4)
 non-current assets held for sale (PFRS 5)

DEFINITION

 An impairment loss is the amount by which the carrying amount of an asset or a cash generating unit exceeds its
recoverable amount.

 A cash generating unit is the smallest identifiable group of assets that generates cash inflows that are largely
independent of the cash inflows from other assets or group of assets.

 The carrying amount is the amount at which an asset is recognized after deducting any accumulated
depreciation (amortization) and accumulated impairment losses thereon.

 The recoverable amount is the higher of an asset’s or cash generating unit fair value less costs of disposal and its
value in use

 An assets value in use is the present value of the future cash flows expected to be derived from an asset or cash
generating unit.

 Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.

 Useful life is:

(a) the period of time over which an asset is expected to be used by an entity

(b) the number of production or similar units expected to be obtained from the asset by an entity

IDENTIFYING WHEN AS ASSET MAY BE IMPAIRED

An entity shall assess at the end of each reporting period whether there is any indication that an asset may be impaired.

If any such indication exists, the entity shall estimate the recoverable amount of the asset.

Irrespective of whether there is any indication of impairment, an entity shall also:

(a) test an intangible asset with an indefinite useful life or an intangible asset not yet available
for use for impairment annually by comparing its carrying amount with its recoverable amount

(b) test goodwill acquired in a business combination for impairment annually.

MEASURING RECOVERABLE AMOUNT

 As stated, the recoverable amount is the higher of an asset’s or cash-generating unit’s fair value less costs of
disposals and its value in use.
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  It is not always necessary to determine both an asset’s fair value less costs of disposal and its value in use.
 If either of these amounts exceeds the asset’s carrying amount, the asset is not impaired and it is not necessary
to estimate the other amount.
 The recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows
that are largely independent of those from other assets or groups of assets.
 If this is the case, recoverable amount is determined for the cash-generating unit to which the asset belongs
unless either:
(a) the asset’s fair value less costs of disposal is higher than its carrying amount

(b) the asset’s value in use can be estimated to be close to its fair value less costs of disposal and fair value
less costs of disposal can be measured

VALUATION

Impairment loss

 When the recoverable amount of an asset is in the amount less than its carrying amount, the carrying amount of
the asset shall be reduced to its recoverable amount and that reduction shall be treated as an impairment loss.
 An impairment loss shall be recognized immediately in profit or loss, unless the asset is carried at its revalued
amount.
 Any impairment loss of a revalued asset shall be treated as a revaluation decrease.
 An impairment loss on a non-revalued asset is recognized in profit or loss.
 However, an impairment loss on a revalued asset is recognized in other comprehensive income to the extent
that the impairment loss does not exceed the amount in the revaluation surplus for that same asset.
 Such an impairment loss on a revalued asset reduces the revaluation surplus for that asset.
 When the amount estimated for an impairment loss is greater than the carrying amount of the asset to which it
relates, an entity shall recognize a liability if, and only if, that is required by another standard.
 After the recognition of an impairment loss, the depreciation (amortization) charge for the asset shall be
adjusted in future periods to allocate the asset’s revised carrying amount, less its residual value (if any), on a
systematic basis over its remaining useful life.
Reversal of Impairment Loss

 At each end of reporting period, an assessment must be done to determine whether there is any indication that an
impairment loss recognized in prior periods for an asset other than goodwill may no longer exist or ma y have
decreased.
 If any such indication exists, the entity shall estimate the recoverable amount of that asset.

Indications for reversal of impairment loss:

1. External sources of information

 the asset’s market value has increased significantly during the period

 significant changes with a favorable effect on the entity have taken place during the period

 market interest rates or other market rates of return on investments have decreased during the period,

2. Internal sources of information

 significant changes with a favorable effect on the entity have taken place during the period, or are expected to
take place in the near future, in the extent to which, or manner in which, the asset is used or is expected to be
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 used.
 These changes include costs incurred during the period to improve or enhance the asset’s performance or
restructure the operation to which the asset belongs.
 evidence is available from internal reporting that indicates that the economic performance of the asset is, or will
be, better than expected

 Reversal of impairment loss shall be done if and only if, there has been a change in the estimate used to determine
the asset’s recoverable amount since the last impairment loss was recognized.

 In effect, the carrying amount of that asset shall be increased to its recoverable amount and recognized as reversal
of an impairment loss.

 The increased carrying amount of an asset other than goodwill shall not exceed the carrying amount that would
have been determined had no impairment loss been recognized for the asset in prior years.

 Reversal of an impairment loss for an asset other than goodwill shall be recognized immediately in profit or loss,
unless carried at revalued amount.
 Any reversal of impairment loss of a revalued asset shall be treated as a revaluation increase.

 After reversal has been made, depreciation or amortization charge for the asset shall be adjusted in future periods
to allocate the asset’s revised carrying amount, less its residual value (if any), on a systemat ic basis over its
remaining useful life.

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 PAS 37 Provisions, Contingent Liabilities and Contingent Assets
Sets out the required accounting treatment and disclosures for provisions, contingent liabilities and contingent assets

These are linked by their commonality as areas that require judgment at the end of an accounting period. In all three
cases, the correct treatment in terms of making accounting adjustments or making disclosure comes down to careful
examination of the definitions therein

SCOPE

This Standard shall be applied by all entities in accounting for provisions, contingent liabilities and contingent assets,
except:

(a) those resulting from executory contracts, except where the contract is onerous

(b) those covered by another Standard

When another Standard deal with a specific type of provision, contingent liability or contingent asset, an entity applies
that Standard instead of this Standard

DEFINITION

A liability is a present obligation of the entity arising from past events which i s expected to be settled by the outflow of
economic benefits.

A provision is a liability of uncertain timing or amount.

A contingent asset is a possible asset that arises from 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 entity.

An obligating event gives rise to a present obligation. This Standard sets out the following guidance on the identification
of obligating events, the salient features of which include:

 A present obligation exists where the entity has no realistic alternative but to make the transfer of economic
benefits
 A present obligation may take the form of a legal obligation if, and only if, settlement of the obligation can be
enforced by the law
 A present obligation may take the form of a constructive obligation.

A constructive obligation is an obligation that derives from an entity’s actions where:

 The entity has indicated to other parties that it will accept certain responsibilities
 As a result, the entity has created in the other parties a valid expectation it will discharge those responsibilities.
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A contingent liability either a:

 possible obligation arising from past events whose existence will be confirmed only by the occurrence or non-
occurrence of some uncertain future event not wholly within the entity’s control
 present obligation that arises from a past event but is not recognized because either:
(i) it is not probable that an outflow of resources embodying economic benefits will be required to settle the
obligation
(ii) the amount of the obligation cannot be measured with sufficient reliability.

RECOGNITION

An entity must recognize a provision if, and only if:

(a) a present obligation (legal or constructive) has arisen as a result of a past event

(b) an outflow of economic benefit to settle the obligation is probable

(c) the amount of the obligation can be estimated reliably.

A contingent liability, being a possible obligation, is not recognized but is disclosed unless the possibility of an outflow of
economic benefits is remote. A contingent asset should not be recognized but should be disclosed where an inflow of
economic benefits is probable.

DISCLOSURE

Reconciliation for each class of provision:

 opening balance
 additions
 used (amounts charged against the provision)
 unused amounts reversed
 unwinding of the discount, or changes in discount rate
 closing balance
A prior year reconciliation is not required.

For each class of provision, a brief description of:

 nature
 timing
 uncertainties
 assumptions
 reimbursement, if any.

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 PAS 38 Intangible Assets
Prescribe the accounting treatment for intangible assets that are not dealt with specifically in another Standard. This
Standard requires an entity to recognize an intangible asset if, and only if, specified criteria are met. The Standard also
specifies how to measure the carrying amount of intangible assets and requires specified disclosures about intangible
assets.

SCOPE
This Standard shall be applied in accounting for intangible assets, except:
(a) intangible assets that are within the scope of another Standard
(b) financial assets
(c) the recognition and measurement of exploration and evaluation assets
(d) expenditure on the development and extraction of, mineral s, oil, natural gas and similar non-regenerative
resources.
If another Standard prescribes the accounting for a specific type of intangible asset, an entity applies that Standard
instead of this Standard.

DEFINITION
An intangible asset is an identifiable, non-monetary item without physical substance, which is within the control of the
entity and is capable of generating future economic benefits for the entity.
An active market is a market in which the items traded are homogenous, willing buyers and sellers can be found at any
time and prices are available to the public.
An asset is identifiable if it is either:
(a) separable, i.e. is capable of being separated or divided from the entity and sold, transferred, licensed, rented or
exchanged, either individually or together with a related contract, identifiable asset or liability, regardless of
whether the entity intends to do so
(b) arises from contractual or other legal rights, regardless of whether those rights are transferable or separable
from the entity or from other rights and obligations.
Residual value is the estimated amount that an entity would currently obtain from disposal of the asset, after deducting
the estimated costs of disposal, if the asset were already of the age and in the condition expe cted at the end of its useful
life.

Useful life is either:

(a) the period over which an asset is expected to be available for use by an entity
(b) the number of production or similar units expected to be obtained from the asset by an entity.
Research is the original planned investigation undertaken with the prospect of gaining new scientific or technical
knowledge and understanding.

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Development is the application of research findings or other knowledge to a plan or design for the production of new or
substantially improved materials, devices, products, processes or services before the start of commercial production.
Amortization refers to the systematic allocation of the depreciable amount of an intangible asset over its useful life

RECOGNITION AND INITIAL MEASUREMENT

An intangible asset shall be recognised if, and only if:

(a) it is probable that future economic benefits that are attributable to the asset will flow to the entity
(b) the cost of the asset can be measured reliably
An entity shall assess the probability of expected future economic benefits using reasonable and supportable
assumptions that represent management’s best estimate of the set of economic conditions that will exist over the useful
life of the asset.
An intangible asset shall be measured initially at cost.
Separate acquisition
The cost of a separately acquired intangible asset can usually be measured reliably. This is w hen the purchase
consideration is in the form of cash or other monetary assets.
The cost of a separately acquired intangible asset comprises:
(a) its purchase price, including import duties and non-refundable purchase taxes, after deducting trade
discounts and rebates
(b) any directly attributable cost of preparing the asset for its intended use

Subsequent expenditure on an acquired in-process research and development project

Research or development expenditure that:
(a) relates to an in-process research or development project acquired separately or in a business combination and
recognized as an intangible asset
(b) is incurred after the acquisition of that project shall be accounted for in terms of this Standard.
Government grant
Initially recognition at either fair value or normal value plus direct expenses to prepare for use.
Internally generated goodwill
Internally generated goodwill shall not be recognized as an asset

MEASUREMENT AFTER RECOGNITION

An entity shall choose either the cost model or the revaluation model as its accounting policy. If an intangible asset is
accounted for using the revaluation model, all the other assets in its class shall also be accounted for using the same
model, unless there is no active market for those assets.

Cost model

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After initial recognition, an intangible asset shall be carried at its cost less any accumulated amortization and any
accumulated impairment losses.

Revaluation model
After initial recognition, an intangible asset shall be carried at a revalued amount, being its fair value at the date of the
revaluation less any subsequent accumulated amortization and any subsequent accumulated impairment losses. For the
purpose of revaluations under this Standard, fair value shall be measured by reference to an active market.

Revaluations shall be made with such regularity that at the end of the reporting period the carrying amount of the asset
does not differ materially from its fair value.

DISCLOSURE

For each class of intangible asset, disclose:

 useful life or amortization rate

 amortization method
 gross carrying amount
 accumulated amortization and impairment losses
 line items in the income statement in which amortization is included
 reconciliation of the carrying amount at the beginning and the end of the period showing:
• additions (business combinations separately)
• assets held for sale
• retirements and other disposals
• revaluations
• impairments
• reversals of impairments
• amortization
• foreign exchange differences
• other changes
 basis for determining that an intangible has an indefinite life
 description and carrying amount of individually material intangible assets
 certain special disclosures about intangible assets acquired by way of government grants
 information about intangible assets whose title is restricted
 contractual commitments to acquire intangible assets

Additional disclosures are required about:

 intangible assets carried at revalued amounts

 the amount of research and development expenditure recognised as an expense in the current period

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 PAS 39 Financial Instruments: Recognition and Measurement

SCOPE

PAS 39 applies to all types of financial instruments except for the following, which are scoped out of PAS 39:

 interests in subsidiaries, associates, and joint ventures accounted for under PAS 27 Consolidated and Separate
Financial Statements, PAS 28 Investments in Associates, or PAS 31 Interests in Joint Ventures (or, for periods
beginning on or after 1 January 2013, PFRS 10 Consolidated Financial Statements, PAS 27 Separate Financial
Statements or PAS 28 Investments in Associates and Joint Ventures); however PAS 39 applies in cases where
under those standards such interests are to be accounted for under PAS 39. The standard also applies to most
derivatives on an interest in a subsidiary, associate, or joint venture
 employers' rights and obligations under employee benefit plans
 forward contracts between an acquirer and selling shareholder to buy or sell an acquiree that will result in a
business combination at a future acquisition date
 rights and obligations under insurance contracts, except PAS 39 does apply to financial instruments that take the
form of an insurance (or reinsurance) contract but that principally involve the transfer of financial risks and
derivatives embedded in insurance contracts
 financial instruments that meet the definition of own equity

CLASSIFICATION

PAS 39 classifies financial assets into 4 main categories

1. Financial asset at fair value through profit or loss: a financial asset that is either
o classified as held for trading, or
o upon initial recognition it is designated by the entity as at fair value through profit or loss
2. Held-to-maturity financial investments: non- derivative financial assets with fixed or determinable payments and
fixed maturity that an entity has the positive intention to hold to maturity, other than:
o those designated at fair value through profit or loss upon initial recognition
o those designated as available for sale and
o those that meet the definition of loans and receivables
3. Loans and receivables: non-derivative financial assets with fixed or determinable payments that are not quoted
in an active market other than:
o those that entity intends to sell immediately or in the near term (held for trading)
o those designated at fair value through profit or loss upon initial recognition
o those designated as available for sale
o those for which the holder may not recover substantially all of its investment, other than
because of credit deterioration
4. Available-for-sale financial assets: non-derivative financial assets designated as available for sale or are not
classified in any other of 3 above categories.
Financial liabilities are classified into 2 main categories:
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 1. Financial liabilities at fair value through profit or loss:a financial liability that is either
o classified as held for trading, or
o upon initial recognition it is designated by the entity as at fair value through profit or loss
2. Other financial liabilities measured at amortized cost using the effective interest method
However, no matter how the financial instrument would be initially classified, PAS 39 permits entities to initially
designate the instrument at fair value through profit or loss
Initial classification of financial assets and financial liabilities is criti cal due to their subsequent measurement.
RECOGNITION
Initial Recognition
An entity shall recognize a financial asset or liability when and only when the entity becomes a party to the contractual
provisions of the instrument.

Derecognition of a Financial Asset

When and only when:
1. The contractual rights to the cash flows from the financial asset expire
2. It transfers the financial asset and the transfer qualifies for derecognition.

The difference between the carrying amount and the sum of the considerati on received shall
be recognized in profit or loss.
Derecognition of Financial Liability

 Only when the liability is extinguished.

 The difference between the carrying amount of a financial liability and the consideration paid shall be
recognized in profit or loss.

MEASUREMENT
Initial Measurement
An entity shall measure financial asset and financial liability at its fair value plus transaction costs that are directly
attributable to the acquisition or issue of the financial asset or financial liability.

Subsequent Measurement – Financial Assets

An entity shall measure financial assets, including derivatives that are assets at their fair
values without any deduction for transaction costs it may incur on sale or disposal. This
applicable except for:
1. Loans and receivables
2. Held-to-maturity investments
3. Investment in equity instruments that do not have a quoted market price in an active market and whose fair
value cannot be reliably determined
Subsequent Measurement – Financial Liabilities
An entity shall measure all financial liabilities at amortized cost using the effective interest method, except for:

1. Financial liabilities at fair value through profit or loss

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 2. Financial liabilities that arise when a transfer of a financial asset does not qualify for derecognition or when the
continuing involvement approach applies.

3. Financial guarantee contracts

4. Commitments to provide a loan at below-market interest rate.

PAS 40 Investment Property

Prescribes the accounting treatment and disclosure with respect to investment property

SCOPE
This Standard does not deal with matters covered in PAS 17 Leases, including:
(a) classification of leases as finance leases or operating leases;
(b) recognition of lease income from investment property
(c) measurement in a lessee’s financial statements of property interests held under a lease accounted for as an
operating lease
(d) measurement in a lessor’s financial statements of its net investment in a finance lease
(e) accounting for sale and leaseback transactions
(f) disclosure about finance leases and operating leases

This Standard does not apply to:

(a) biological assets related to agricultural activity
(b) mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative resources.

DEFINITION
o Investment property is property to earn rentals or for capital appreciation or both.
o Owner-occupied property is property held for use in the production or supply of goods or services or for
administrative purposes.

Examples of investment property:

o land held for long-term capital appreciation
o land held for a currently undetermined future use
o building leased out under an operating lease
o vacant building held to be leased out under an operating lease
o property that is being constructed or developed for future use as i nvestment property

MEASUREMENT
Initial measurement
o at cost, including the transaction cost.
The cost of investment property includes:
o Its purchase price and

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 o Any directly attributable expenditure, such as legal fees or professional fees, property taxes, etc.
It should NOT include:

 Start-up expenses whatsoever.

However, if these start-up expenses are directly attributable to the item of investment property, then you can
include them. But do NOT include any general start-up expenses.
 Operating losses that you incur before planned occupancy level is achieved,
 Abnormal waste of material, labor or other resources incurred at construction
When payment for investment property is deferred, then you need to discount it to its present value in order to set
the cash price equivalent.
Let me just mention that actually, you can classify assets held under finance lease as investment property and in this
case, it’s initial cost is calculated in line with PAS 17.

Subsequent measurement
After initial recognition, you have 2 choices for measuring your investment property

Option 1: Fair value model

o Under fair value model, an investment property is carried at fair value at the reporting date.
o A gain or loss from re-measurement to fair value shall be recognized in profit or loss.
Sometimes, the fair value cannot be reliably measurable after initial recognition. This can happen in absolutely rare
circumstances (e.g. active marked ceased existing) and in this case, IAS 40 prescribes (IAS 40.53):

 To measure your investment property at cost, if it’s not yet completed and is under construction; or
 To measure your investment property using cost model, if it’s completed.

Option 2: Cost model

The second choice for subsequent measurement of investment property is a cost model.
Here, PAS 40 does not describe it in details, but refers to the standard PAS 16 Property, Plant and Equipment. It needs to
take the same methodology as in PAS 16.

Derecognition of investment property

The derecognition rules in PAS 40 are similar to the rules in PAS 16.
You can derecognize your investment property in two circumstances:
(a) On disposal
(b) When the investment property is permanently withdrawn from use and no future economic benefits are
expected.
You need to calculate gain or loss on disposal as a difference between:

o Net disposal proceeds, and

o Asset’s carrying amount.
Gain or loss on disposal is recognized in profit or loss.

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 PAS 41 Agriculture
Establish standards of accounting for agricultural activity – the management of the biological transformation of
biological assets into agricultural produce

SCOPE

This Standard shall be applied to account for the following when they relate to agricultural activity: biological assets,
except for bearer plants

a) agricultural produce at the point of harvest

b) conditional or unconditional grants relating to a biological asset measured at its fair value less costs to sell.

This Standard does not apply to:

a) land related to agricultural activity

b) bearer plants related to agricultural activity. However, this Standard applies to the produce on those bearer
plants
c) government grants related to bearer plants
d) intangible assets related to agricultural activity
e) right-of-use assets arising from a lease of land related to agricultural activity.

RECOGNITION

An entity shall recognize a biological asset or agricultural produce when, and only when:

a) the entity controls the asset as a result of past events

b) it is probable that future economic benefits associated with the asset will flow to the entity
c) the fair value or cost of the asset can be measured reliably

MEASUREMENT

Biological assets:

o shall be measured on initial recognition and at the end of each reporting period
o at its fair value less costs to sell, except where the fair value cannot be measured reliably.
Agricultural assets:

o Agricultural produce harvested from an entity’s biological assets shall be measured at its fair value le ss costs to
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 sell at the point of harvest
o Such measurement is the cost at that date when applying IAS 2 Inventories or another applicable Standard

SUBSEQUENT GAINS OR LOSSES

Biological assets:

o A gain or loss arising on initial recognition of a biological asset at fair value less costs to sell and from a change in
fair value less costs to sell of a biological asset shall be included in profit or loss for the period in which it arises
o A loss may arise on initial recognition of a biological asset, because costs to sell are deducted in determining fair
value less costs to sell of a biological asset. A gain may arise on initial recognition of a biological asset, such as
when a calf is born.
Agricultural assets:

o A gain or loss arising on initial recognition of agricultural produce at fair value less costs to sell shall be included
in profit or loss for the period in which it arises.
o A gain or loss may arise on initial recognition of agricultural produce as a result of harvesting.

DISCLOSURE

Disclosure requirements in PAS 41 include:

o aggregate gain or loss from the initial recognition of biological assets and agricultural produce and the change in
fair value less costs to sell during the period
o description of an entity's biological assets, by broad group
o description of the nature of an entity's activities with each group of biological assets and non -financial measures
or estimates of physical quantities of output during the period and assets on hand at the end of the period
o information about biological assets whose title is restricted or that are pledged as security
o commitments for development or acquisition of biological assets
o financial risk management strategies
o reconciliation of changes in the carrying amount of biological assets, showing separately changes in value,
purchases, sales, harvesting, business combinations, and foreign exchange differences

If fair value cannot be measured reliably, additional required disclosures include:

o description of the assets

o an explanation of why fair value cannot be reliably measured
o if possible, a range within which fair value is highly likely to lie
o depreciation method
o useful lives or depreciation rates
o gross carrying amount and the accumulated depreciation, beginning and ending

If the fair value of biological assets previously measured at cost subsequently becomes available, certain additional
disclosures are required.

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