Theory of Accounts LECTURE NOTES THE CONCEPTUAL FRAMEWORK OF ACCOUNTING 1. The Conceptual Framework deals with the concepts used in the preparation and presentation of financial statements (FS). 2. The Conceptual Framework is not a PFRS¹; it does not define standards for any particular measurement or disclosure issue. Nothing in the Framework overrides any specific PFRS. In case of conflict, PFRS prevails over the Framework. 3. The purpose of the Framework is to: A.) Assist FRSC² in the developing GAAP and its review and adoption of existing International Financial Reporting Standards (IFRS). B.) Assist preparers of FS in applying PFRS C.) Assist auditors in forming an opinion as to whether FS conforms to GAAP. D.) Assist users in interpreting the FS E.) Provide interested parties with information about PFRS formulation by FRSC 4. The scope of the Framework covers the following: A.) C APITAL CONCEPTS: the concept of capital and capital maintenance B.) O BJECTIVE: the objective of FS C.) Q UALITIVE CHARACTERISTICS: the qualities or attributes that make FS useful to the users. D.) E LEMENTS: the definition, recognition and measurement of the elements of FS. 5. The objective of FS is to provide information about the financial position, performance and changes in financial position of an entity that is useful to a wide range of users in making economic decisions. The FS also shows the results of the stewardship of management- - the accountability of management for the resources entrusted to it; the management of an entity has the primary responsibility for the preparation and presentation of FS. 6. The framework is concerned with general-purpose financial statements (including consolidated financial statements) of all commercial, industrial and business reporting public or private entities. 7. Special purpose financial reports (e.g., prospectuses and computations prepared for taxation purposes) are outside the scope of this Framework. 8. Underlying assumptions on FS preparation and presentation : (1) Accrual basis (2) Going Concern 9. The users of financial statements include (1) present and potential investors, (2) employees and their representative groups, (3) lenders, (4) suppliers and other trade creditors , (5) customers, (6) governments and their agencies and (7) The public. 10. The qualitative characteristics of FS: PRESENTATION C – Comparability: inter-period comparability; intercompany comparability. U- Understandability: compliance with PFRS to make information understandable to users CONTENT (Primary) R- Relevance: predictive value; feedback /confirmatory value; timeliness Ry – Reliability: faithful representation; substance over form; prudence; neutrality; completeness 11. Constraints on relevant and reliable information: (1) On timeliness: if there is undue delay in the reporting of information, it may lose its relevance (2) On cost-benefit: the benefits derived from information should exceed the cost of providing it (3) On qualitative characteristics: the aim is to achieve an appropriate balance among characteristics in order to meet the objective of FS. 12. Information is material if its omission or misstatement could influence economic decisions of users taken on the basis of the financial statements. Materiality provides a threshold or cut-of point rather than being a primary qualitative characteristic which information must have if it is to be useful. 13. The elements of FS: On financial position: (1) Assets (2) Liabilities (3) Equity On performance: (4) Income ( includes revenue and gains) (5) Expenses (include losses) 14. An item that meets the definition of an element should be recognized if: A.) PROBABLE : it is probable that any future economic benefit associated with the item will flow to or from the entity, AND B.) MEASURABLE: the item has a cost or value that can be measured with reliability. Four diferent measurement bases are used to measure the elements of FS: Historical cost (this is considered as the most common valuation basis) Current cost Realizable value (or settlement value , in the case of liabilities ) Present value (this is also known as discounted value)
¹ Philippine Financial Reporting Standards (PFRS) replaces SFAS (Statements of Financial Accounting Standards) as the main source of Generally Accepted Accounting Principles (GAAP) in the Philippines. Based on PAS 1, par.7, the term’ PFRS’ shall be composed of (a) PFRS (b) Philippine Accounting Standards (PAS), and (c) Interpretations.
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² The FRSC (Financial Reporting Standards Council) replaces ASC (Accounting Standards Council). FRSC currently issues PFRSC as ASC, in the past, issued SFAS. Refer to page 10 of the TA Lecture Notes for further details. ³ The financial position of any entity is afected by the economic resources it control, its financial structure, its liquidity and solvency, and its capacity to adapt changes in the environment in which the entity operates.
15. Two capital concepts: 1.) Financial concept (most common) and 2.) Physical concept. The concept of capital maintenance provides the linkage between the concepts of profit since it provides the point of reference by which profit is measured: A.) Under the concept of financial capital maintenance, a profit is earned only if the financial amount of ending net assets exceeds beginning net assets, excluding any contributions from and distributions to owners during the period. This concept does not require the use of a particular basis of measurement. B.) Under the concept of physical capital maintenance, a profit is earned only if the physical productive capacity (operating capability) at the end of periods exceeds the physical productive capacity at the beginning of period, excluding any contributions from and the distributions to owners during the period. This concept requires the adoption of the CURRENT COST basis of measurement. PAS 1: PRESENTATION OF FINANCIAL STATEMENTS 1. COMPONENTS OF FINANCIAL STATEMENTS (FS). A complete set of FS is composed of: A.) Statement of financial position (balance sheet) – as at the end of the period B.) Statement of comprehensive income⁴- for the period C.) Statement of cash flows –for the period D.) Statement of changes in equity –for the period E.) Notes, comprising a summary of significant accounting policies & other explanatory information. F.) Statement of financial position – as at the beginning of the earliest comparative period when an entity applies an accounting policy retrospectively⁵ or makes a retrospective restatement of items in its FS. 2. HEADING AND TITLES. An entity may use other titles for the statements other than those used in PFRS and shall present with equal prominence all of the FS and distinguish them from other information in the same published document. In addition, the following information shall be displayed prominently: A.) The name of reporting entity B.) Whether the financial statements cover the individual entity or a group of entities C.) The date at the end of reporting period or the period covered by the set of financial statements D.) The presentation currency (as defined under PAS 21) E.) The level rounding (also known as ‘ truncation’) used in presenting amounts in the FS 3. GENERAL FEATURES in the presentation of FS. FAIR PRESENTATION. The application of PFRS is presumed to result in financial statements (FS) that achieve a fair presentation. FS that comply with PFRS should include in the notes to FS an explicit and unreserved statement of such compliance⁶ GOING CONCERN. An entity shall prepare FS on a going concern basis unless management either intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so. ACCRUAL BASIS OF ACCOUNTING. An entity shall prepare its FS, except for cash flow information, using the accrual basis of accounting. ⁴ The term “Comprehensive Income’ refers to all changes in equity other than changes resulting from contributions from and distribution to owners; hence, the Statement of Comprehensive Income shall include: 1. Components of profit or loss- these are income and expense accounts usually found in the traditional income statement. As a Minimum requirement, the line items to be presented are: (PAS 1, par.82) Revenue Finance costs Share in the income or loss of associates and joint venture accounted for using the equity method Tax expense Post-tax profit or loss on discontinued operations Profit or loss 2. Components of other comprehensive income-these are income and expense accounts are recognized in profit or loss and are usually required by PFRS to be recognized directly in the equity section of the statement of financial position (balance sheet). Examples include: (PAS 1, par. 7) Unrealized gain or loss on available –for-sale-securities(PAS 39) Gain or loss from translating the financial statements of a foreign operation (PAS 21)
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Change in revaluation surplus (PAS 16 and 38) Unrealized gain or loss on from derivative contracts designated as cash flow hedge (PAS 39) Accrual gain or loss on defined benefit pension plans (PAS 19, par.93A) An entity has two options of presenting comprehensive income: (PAS 1, par.81) Option 1: SINGLE STATEMENT The components of profit or loss and components of other comprehensive income are shown in a single statement of comprehensive income. Option 2: TWO STATEMENTS An income statement showing components of profit or loss A statement of comprehensive income beginning with profit or loss as shown in the income statement plus or minus the components of other comprehensive income. ⁵ Retrospective application of a change in accounting policy is covered by PAS 8. Refer to page 5 of the TA Lecture Notes. ⁶Inappropriate accounting policies are not rectified either by disclosure of the accounting policies used or by explanatory note.(PAS 1, par.18)
MATERIALITY and AGGREGATION. An entity shall present separately each material class of similar items and shall present separately items of dissimilar nature or function unless they are immaterial. OFFSETTING. An entity shall not ofset assets and liabilities or income and expenses, unless ofsetting is required or permitted by PFRS. COMPARATIVE INFORMATION. An entity shall include comparative information for narrative and descriptive information when it is relevant to an understanding the current period FS. FREQUENCY OF REPORTING. An entity shall present a complete set of FS at least annually. When an entity presents FS for a period longer or shorter than one year, an entity shall disclose: (A) the period covered by FS, (B) the reasons for using a longer or shorter period; and (C) the fact that comparative amounts for FS are not entirely comparable. CONSISTENCY OF PRESENTATION. An entity shall retain the presentation and classification of items in the FS from one period to the next unless: (A) it is apparent , following a change in the nature of the entity’s operations or a review of its FS, which another presentation or classification would be more appropriate ; or( B) a standard requires a change in presentation. 4. INCOME STATEMENT PRESENTATION. When items of income and expenses are material, an entity shall disclose their nature and amount separately. In addition, an entity shall present an analysis of expenses using a classification based on either the (1) nature of expense method or (2) function of expense method, whichever provides more reliable and more relevant information. 5. BALANCE SHEET(BS) PRESENTATION. An entity shall present current and non-current assets, and current and non-current liabilities , except when a presentation based on liquidity provides more reliable and relevant information. When the exception applies, all assets and liabilities shall be presented broadly in order of liquidity. 6.CURRENT vs. NONCURRENT ASSETS. An entity shall classify an asset as current when: A.) The asset is a cash or a cash equivalent (unless restricted for at least 12 months after BS date) B.) It holds the assets primarily for the purpose of trading. C.) It expects to realize the asset within 12 months after the reporting period (BS date) D.) It expects or intends to realize or consume it within the entity’s normal operating cycle⁸ An entity shall classify all other assets as non-current. 7. CURRENT vs. NONCURRENT LIABILITIES. An entity shall classify a liability as current when: A.) The liability is due to be settled within 12 months after the reporting period (BS date) B.) It holds the liability primarily for the purpose of trading. C.) It expects to settle the liability within the entity’s normal operating cycle. D.) The entity does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period (BS date). An entity shall classify all other liabilities as non-current. 8. BALANCE SHEET LINE ITEMS. As a minimum requirement, the face of the statement of financial position shall include
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line items that present the following amounts: A.) Property, plant and equipment B.) Investment property C.) Intangible assets D.) Financial Assets¹⁰(excluding amounts shown under E,H and I) E.) Investments accounted for using the equity method. F.) Biological assets (defined as “living animals or plants” under PAS 41) G.) Inventories H.) Trade and other receivables I.) Cash and cash equivalents. J.) Total assets held for sale (including assets of disposal groups held for sale under PFRS 5) K.) Trade and other payables L.)Provisions (defined as the “liabilities of uncertain timing of amount” under PAS 37) M.) Financial liabilities¹¹(excluding amounts shown under J and K) N.) Liabilities and assets for current tax. O.) Deferred tax liabilities and deferred tax assets, not to be presented as current (PAS 1, par.56) P.) Minority (non-controlling) interest, presented within equity¹² Q.) Issued capital and reserves attributable to equity holders of the parent. ⁷An entity that uses the function of expense method (a.k.a ‘cost of sales’ method) shall disclose additional information on the nature of expense , including depreciation and amortization expense and employee benefits expense. (PAS1, par 104) ⁸The operating cycle of an entity is the time between the acquisition of assets for processing and their realization in cash or cash equivalents . When the entity’s normal operating cycle is not clearly identifiable , its duration is assumed to be twelve months. (PAS,par.68) ⁹An investment property is a property (land or building) held by the owner or by the lessee under a finance lease to earn rentals or for capital appreciation or both, rather than for use or sale (PAS 40) ¹⁰A financial asset is any asset that is a cash , an equity instrument of another entity , a contractual right to receive cash or another financial asset from another entity. (PAS 32) ¹¹ A financial liability is any liability that is a contractual obligation to deliver cash or another financial asset to another entity. (PAS 32) ¹²Non-controlling interests, which is previously known as minority interest, shall be presented in the consolidated balance sheet within equity, separately from the parent shareholders’ equity.(PAS 27, par 27)
9. FINANCIAL LIABILITIES .An entity classifies its financial liabilities as current when they are due to be settled
within twelve months after the balance sheet date , even if: A.) The original term was for a period longer than twelve months; and B.) An agreement to refinance, or to reschedule payments, on a long –term basis is completed after the reporting period (BS date) and before the FS are authorized for issue¹³ 10. EFFECTS OF BREACHES. When an entity breaches a provision of a long-term loan agreement on or before the end of reporting period (BS date) with the efect that the liability becomes payable on demand, the liability is classified as current, even if the lender has agreed not to demand payment as a consequence of the breach.¹⁴ 11. STATEMENT OF CHANGES IN EQUITY (SCE). An entity shall present a statement of changes in equity showing: A.) Total comprehensive income for the period, showing separately the total amounts attributed to owners of the parent and to non-controlling (minority) interest. B.) For each component of equity , the efects of retrospective application / restatement under PAS 8. C.) The amount of transactions with owners in their capacity as owners , showing separately contributions by and distributions to owners. D.) For each component of equity , a reconciliation of the between the carrying amount at the beginning and the end of the period , disclosing each change separately. 12. DIVIDENDS. An entity shall present either in the statement of changes in equity or in the notes , the amount of dividends
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recognized as contributions to the owners and the related amount per share. 13. NOTES TO THE FS. The notes are normally presented in the following order, which assists users in understanding the FS and comparing them with FS of other entities: A.) A statement of compliance with PFRS B.) A summary of significant accounting policies applied¹⁵, which shall include: The measurement bases used in preparing FS The other accounting policies used that are relevant to an understanding of the FS C.) Supporting information for an items shown on the face of each FS, in the order in which each statement and each line item is presented. D.)Other disclosures, including: Contingent liabilities and unrecognized contractual commitments Non-financial disclosures (e.g., the entity’s financial risk under PFRS 7) THE ACCOUNTING PROCESS 1. JOURNAL a chronological records of transactions; also called as the ‘book of original entry’ General Journal- used to record (1) transactions not covered in special journals and (2) adjusting, closing , and revising entries. Special Journal: CRJ – cash receipts journal SJ- sales journal CDJ – cash disbursements journal PJ- purchase journal 2. LEDGER(general or subsidiary ) a group of accounts; also called as the ‘ book of final entry’; ACCOUNT – summarizes the efect of transactions on each asset, liability , equity, income & expenses. Nominal(temporary) accounts- subject to closing entries, mainly found in income statement Real (permanent) accounts – not subject to closing entries , mainly found in the balance sheet Contra Accounts- an account that is deducted from another account .(e.g., sales discounts) Adjunct accounts- an account that is added to another account .(e.g., freight-in) 3. WORKSHEET(optional)- a tool that typically contains columns for trial balance (unadjusted and adjusted), adjustments , income statement and balance sheet; it is used to facilitate FS preparation. 4. ADJUSTING ENTRIES- to update amount of certain accounts A.) Accrued revenue- revenue already earned but not yet collected B.) Accrued expense- expense already incurred but not yet paid ACCRUA C.) Unearned revenue – revenues already collected but not yet earned D.) Prepaid expense – expense already paid but not yet incurred DEFERRA E.) Others(e.g., depreciation, amortization, depletion, impairment , bad debts) 5. CLOSING ENTRIES- to bring all nominal accounts to zero balance ; Income Summary account is used to close both income and expense accounts. 6.REVERSING ENTRIES(optional)- to simplify recording of certain recurring transactions . The following adjusting entries may be subject to reversing entries: A.) ACCRUALS : accrued revenue and accrued expense B.) DEFERRALS: prepaid expense (expense method) and unearned revenue (income method) ¹³ If an entity expects, and has the discretion, to refinance or roll over an obligation for at least twelve months after the balance sheet under an existing loan facility, it classifies the obligation as non-current , even if it would otherwise be due within a shorter period . (PAS 1, par. 73) ¹⁴The liability is classified as non-current if the lender agreed by the balance sheet date to provide a grace period ending at least 12 months after the balance sheet date , within which the entity can rectify the breach and during which the lender cannot demand immediate payment.(PAS 1, par 75) ¹⁵An entity is required to disclose the judgments that management has made in the process of applying the entity’s accounting policies and that have the most significant efect on the amounts recognized in the FS .(PAS 1, par 122). In addition, the notes shall contain key assumptions concerning the future and other key sources of estimation that will pose a significant risk of causing a material adjustment to the amount of assets and liabilities within the nest period. In such a case, the notes shall include nature, amount and other details of such assets and liabilities.(PAS 1, par 125)
PAS 8: ACCOUNTING POLICIES , CHANGES IN ACCOUNTING ESTIMATES & ERRORS
OBJECTIVE . The objective of PAS 8 is to prescribe the criteria for selecting and changing ACCOUNTING POLICIES¹⁶ changes in ACCOUNTING ESTIMATES and CORRECTION OF ERRORS to enhance relevance, reliability and comparability of FS of an entity over time as well as with FS of other entities. SELECTION OF ACCOUNTING POLICIES. When a standard specifically applies to a transaction, the accounting policy applied to an afected account shall be determined by applying the standard. In the absence of a standard that applies to a transaction, management shall use its judgement¹⁷ in developing and applying accounting policy that is relevant and reliable. CONSISTENCY OF ACCOUNTING POLICIES. Once selected, accounting policies must be applied consistently for similar transactions, unless a standard specifically requires otherwise. An entity shall change an accounting policy if the change (1) is required by a standard or (2) results in the FS providing more relevant financial information. CHANGES IN ACCOUNTIONG POLICIES. A change in accounting policy that is required by a standard shall be applied in accordance with the transitional provisions therein. If a standard contains no transitional provisions or if an accounting policy is changed voluntarily, the change
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shall be applied retrospectively (as if the policy had always been applied)as adjustment to the opening balance of each afected component of equity(e.g., retained earnings) for the earliest prior period presented. For purposes of PAS 8, the following are NOT considered as changes in accounting policies: 1. Application of accounting policies for events that difer in substance from those previously occurring. 2. Application of new accounting policy prospectively from the start of the earliest period practicable. EXCEPTION to the RULE. When it is impracticable¹⁸ for an entity to apply new accounting policy retrospectively (i.e., it cannot determine the cumulative efect of applying the policy to all prior periods), the entity applies the new policy prospectively from the start of the earliest period practicable. APPLICATION of NEW STANDARDS. When an entity has not applied a new standard that been issued but not yet efective, the entity shall disclose this fact, and the reasonably estimable information relevant for assessing the possible impact that application of the new standard will have on the entity’s FS in the period of initial application. CHANGES in ESTIMATES¹⁹. The efect of a change in an accounting estimate shall be recognized prospectively by including it in the profit or loss during the periods( if the change afects that period only) or the period of the change and the future periods (if the change afects both). EXAMPLES of CHANGES in ESTIMATES. Due to uncertainties inherent in business activities, many items in FS cannot be measured with the precision but can only be estimated. Estimation involves judgments based on the latest available, reliable information. Common examples of accounting estimates include: 1. Bad debts and inventory obsolescence 2. Fair value of financial assets or financial liabilities 3. Useful lives of depreciable assets; and 4. Provision for warranty obligations A change in the measurement basis applied is a change in an accounting policy, it is not a change in an accounting estimate. When it is difficult to distinguish a change in an accounting policy from a change in an accounting policy from a change in an accounting estimate , the change is treated as a change in an accounting estimate. CORRECTION OF ERRORS.²⁰An entity shall correct material prior period errors retrospectively as an adjustment to the opening balances of retained earnings and afected assets and liabilities. If comparative statements are presented, the FS of prior period shall be restated to reflect the retrospective application of the prior period errors. If the error occurred before the earliest period presented, the opening balances of assets, liabilities and equity for the earliest period presented shall be restated. MATERIALITY²¹. In applying the concept of materiality: 1. Accounting policies in the PFRSs need not to be applied when the efect of applying them is immaterial. 2. FS do not comply with PFRSs if they contain material errors, whether due to omissions or misstatements. 3. Material prior period errors should be corrected retrospectively in the first set of FS authorized for issue after their discovery.
¹⁶Accounting policies are the specific principles, bases, convention, rules and practice adopted by an entity in preparing and presenting financial statements. ¹⁷In making judgments, management shall refer to the following sources in descending order: 1.) The requirements and guidance in standards dealing with similar and related issues. 2.) The definition, recognition criteria and measurement concepts set forth in the Conceptual Framework. In the making the judgment, management may also consider the most recent pronouncements of other standard-setting bodies that use similar conceptual framework to develop accounting standards, other accounting literature and accepted industry practices, to the extent that these do not conflict with PFRS and the Conceptual Framework. ¹⁸Applying a requirement is impracticable when the entity cannot apply it after making every reasonable efort to do so. ¹⁹A change in accounting estimates results from a new information or developments and, hence, are not correction of errors. ²⁰The concept of ‘fundamental error’ has been eliminated .Instead, PAS 8 uses and defines term ‘ prior period prior’. Prior period errors are omission and misstatements in the FS for one or more periods; they are committed in prior periods but are discovered only in the current period. ²¹ Omissions or misstatements of items are material, if they could, individually or collectively, influence the economic decisions of users taken on the basis of the FS. Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstances.
PFRS 5: NON-CURRENT ASSETS HELD
FOR
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NON-CURRENT ASSETS HELD FOR SALE An entity shall classify separately from other assets a non-current asset (or disposal group²²) as held for sale if its carrying amount will be recovered principally through a sale²³ transaction rather than through continuing use. The following conditions must be met for a non-current asset to be classified as held for sale: 1. Management is committed to a plan to sell the asset or disposal group. 2. An active program to locate a buyer and complete the plan must have been initiated. 3. The asset must be available for immediate sale. 4. The sale is highly probable within one year from the date of classification as held for sale. 5. The asset is being actively marketed for sale at price that is reasonable in relation to its fair value. 6.Actions required to complete the plan indicate that it is unlikely that the plan will be significantly changed or withdrawn. An entity shall measure a non-current asset classified as held for sale at the lower of its carrying amount or fair value less costs to sell²⁴. Non-current assets held for sale is NOT be depreciated form the date classified as such. An entity shall present a non-current asset classified as held for sale and the assets of a disposal group classified as held for sale separately from other assets in the balance sheet. The liabilities of disposal group classified as held for sale shall be presented as a single amount. The major classes of assets and liabilities classified as held for sale shall be separately disclosed either on the face of the balance sheet or in the notes. An entity shall measure a non-current assets that ceases to be classified as held for the sale at the lower of its carrying amount ²⁵before the asset was classified as held for sale ) and its recoverable amount²⁶ (at the date of the subsequent decision not to sell). DISCOUNTED OPERATIONS. A discounted operation is a component of an entity ²⁷that either has been disposed of , or is classified as held for sale, and 1. Represents a separate major line of business or geographical area of operations. 2.Is a part of a single coordinated plan to dispose a separate major line of business or geographical area of operations, or 3.Is a subsidiary acquired exclusive with a view to resell (for resale) A component of an entity is classified as discounted operation at the date entity has actually disposed of the operation or when the operation meets the criteria to be classified as held for sale. An entity shall disclose a SINGLE amount²⁸ on the face of income statement comprising the total of: 1. The post-tax profit or loss of discounted operations and 2. The post-tax gain or loss recognized: A.) On the measurement to ‘ fair value less costs to sell²⁹ OR B.) On the disposal of the assets constituting the discontinued operations ²² A group of assets possibly to disposed of, by sales or otherwise, together as a group in a single transaction, and liabilities directly associated with those assets that will be transferred in the transaction. ²³The asset (or disposal group) must be available for immediate sale in its present condition and the sale must be highly probable. ‘Highly probable’ means that the probability of the future sale is higher than ‘more likely than not’. An entity shall not classify as held for sale a non-current asset(disposal group) that is to be abandoned. ²⁴ If anon-current asset within the scope of PFRS 5 is a part of a disposal group, the measurement requirements of PFRS 5 apply to the group as a whole, so that the group is measured at lower of its carrying amount and fair value less costs to sell. The write down to fair value less cost to sell is treated as an impairment loss. ²⁵The carrying amount is adjusted for depreciation, amortization or revaluations that would have been recognized had the asset not been classified as held for sale. ²⁶Recoverable amount is measured as the higher of an asset’s fair value less costs to sell and its value in use. This is well emphasized in PAS 36 on impairment of assets. ²⁷A component of an entity may be a subsidiary, major line business or geographical segment whose operations and cash flows can be clearly distinguished , operationally and for financial reporting purposes, from the rest of the entity.
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²⁸ The results of discontinued operations, net of tax, should be shown as a single amount in the income statement separately from the income from continuing operations. To explain the details of this single amount, the following should be disclosed in the notes to the FS: 1. The amount of revenue, expenses and income or loss attributable to the discontinued operation during the current period and the related income tax. 2. Any impairment loss( as the fair value less cost to sell of the net assets of the discontinued operations is lower than their carrying amounts).If the carrying amount is lower , the expected gain is not recognized but only disclosed. 3. The termination cost of employees and other costs that are directly incurred as a result of the discontinuance. 4. Any gain or loss from the actual disposal of the assets and settlement of liabilities of a discontinued operation. ²⁹’ Cost to sell’ is the incremental costs directly attributable to the disposal of an asset (or disposal group ), excluding finance costs and income tax expense.
PAS 24: RELATED PARTY DISCLOSURES PURPOSE. Related party relationships are a normal feature of commerce and business. Related parties may enter into transactions that unrelated parties would not. Also, transactions between related parties may not be made at the same time amounts as between in related parties. (e.g., an entity that sells goods to its parent company at cost might not sell on those terms to another customer). For these reasons, knowledge of related party transactions, outstanding balances and relationships any afect assessments f an entity’s operations by users of financial statements, including assessments of the risks and opportunities facing the entity; hence, related party disclosures are necessary. RELATED PARTY. A party is related to any entity if: A.) Directly, on indirectly through one or more intermediaries, the party: has the ability to control ³⁰, is controlled by, or is under common control with, the entity(this includes parents, subsidiaries and fellow subsidiaries) has an interest in the entity that gives it significant influence³¹over the entity has joint control ³² over entity B.) The party is an associate of the entity C.) The party is the joint venture in which the entity is a venture D.) The party is a member of the key management personnel³³ of the entity or its parent E.) The party is a close family member o any individual referred in A or D F.)The party is an entity that is controlled, jointly controlled or significantly influenced by any individual referred to in D or E G.) The party is a post-employment benefit plan for the benefit of employees of the entity , or of an entity that is related party of the entity. NOT NECESSARILY RELATED PARTIES. Under PAS 24, the following are NOT necessarily related parties: A.) Two entities simply because they have common director or other common member of key management personnel. B.) Two ventures simply because they share joint control over a joint venture. C.)Providers of finance, trade unions, public utilities, government department and agencies, simply by virtue of their normal dealings with an entity. D.) A customer, supplier, franchisor, distributor, or general agent with whom an entity transacts significant volume of business , merely by virtue of the resulting economic dependence. CLOSE FAMILY MEMBERS OF AN INDIVIDUAL. Close family members of an individual are those family members who may be expected to influence, or be influenced by that individual, in their dealings with the entity. They may include: A.)The individual’s domestic partner and children B.) Children of the individual’s domestic partner C.) Dependents of the individual’s domestic partner PARENT & SUBSIDIARIES. Relationship between parents and subsidiaries shall be disclosed irrespective of whether there have been transactions between those related parties. An entity shall disclose the name of the entity’s parent and if diferent, the ultimate controlling party. COMPENSATION³⁴. An entity shall disclose key management personnel compensation in total and for each of the following categories: A.) Short –term employee benefits (e.g., wages, social security contributions, paid leaves, bonuses) B.) Post-employment benefits (e.g., pension, retirement benefits) C.) Other long-term benefits (e.g., long service leave, long term disability benefits) D.) Termination benefits
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E.) Equity compensation benefits RELATED PARTY DISCLOSURES. If there have been transactions between related parties, an entity shall disclose the nature of the related party relationship as a well as information about the transactions and outstanding balances necessary for the understanding of the potential efect of the relationship on the FS. At the minimum, disclosures shall include: A.) The amount of the transactions B.) The amount of the outstanding balances and Their terms and conditions , and whether they are secured or unsecured. The nature of settlement consideration , and details of guarantees given or received C.) Provisions for bad debts related to the amount of the outstanding balances D.)Expenses recognized in respect of bad debts due from related parties. ³⁰ ‘ Control’ is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. (PAS 27) ³¹ ‘ Significant influence’ is the power to participate in the financial and operating policy decisions of an entity, but is not control over those policies. Significant influence may be gained by share of ownership, statute or agreement (PAS 28) ³² ‘ Joint Control’ is a contractually agreed sharing of control over an economic activity. (PAS 31) ³³’Key management personnel’ refer to those persons having authority and responsibility for planning, directing, and controlling the activities of an entity, directly or indirectly include directors (executive or otherwise) of the entity. ³⁴’ Compensation’ includes all employee benefits, which include all forms of consideration paid, payable or provided by the entity, or on behalf of the entity, in exchange for services rendered to the entity . (PAS 19)
EXAMPLES OF RELATED PARTY TRANSACTIONS REQUIRING DISCLOSURES The following are examples of transactions that are disclosed if they are made with a related party:
A.) Purchases or sales of goods |(finished or unfinished) B.) Purchases or sales of property and other assets C.) Rendering or receiving of services D.) Leases E.) Transfers of research and development F.)Transfers of license agreements G.) Transfers under finance arrangements (including loans and equity contributions in cash or in kind) H.) Provision of guarantees or collateral I.) Settlement of liabilities on behalf of the entity or by the entity on behalf of another party Items of similar nature may be disclosed in aggregate except when separate disclosure is necessary for an understanding of the efects of related party transactions on the FS of the entity.
PAS 10: EVENTS AFTER PERIOD)
THE
BALANCE SHEET DATE (EVENTS AFTER THE REPORTING
EVENTS AFTER THE BALANCE SHEET DATE³⁵ are favorable and unfavorable events that occur between the balance sheet and the date when the FS are authorized for issue; FS shall be disclose the date when the FS were authorized for issue , and who gave that authorization³⁶ ADJUSTING EVENTS after a balance date sheet (i.e., those that provide evidence of conditions that existed at the balance sheet date) should be recognized in the FS. Examples are (among others): a.) Resolution or settlement after BS date of a court case that confirms that the entity had a present obligation at the BS date. b.) Bankruptcy of a customer that occurs after BS date, confirming that a loss existed at the BS date on a trade receivable. c.) Sale of inventories after the BS date that may give evidence on net realizable value (NRV) at the BS date. d.) Determination after the BS date of the cost of the assets purchased; or the proceeds from the assets sold , before the BS date. e.) Determination after the BS date of the profit sharing or bonus payment if the enterprise had the present obligation at the BS date to make such payment. f.)The discovery of fraud or errors that show the FS are incorrect. An entity shall adjust the amounts recognized in its FS to reflect the adjusting events after the BS date . If an entity receives an information after the BS date about conditions that existed at the BS date , it shall update disclosures that relate to those conditions, in the light of the new information. NON-ADJUSTING EVENTS³⁷ after the balance sheet date (i.e., those that are indicative of conditions that arose after the balance sheet date) are not recognized but are disclosed in the notes to the FS. Examples are( among others) : a.) Major business combination or disposing a major subsidiary after the BS date
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b.) Announcement of the plan to discontinue an operation c.) Major purchase and disposal of assets, or expropriation of major assets by government d.) Destruction of major production plant by a fire after the BS date e.) Announcement of a major restructuring³⁸ f.) Major ordinary share transactions and potential ordinary share transactions after the BS date. g.) Abnormally large changes after BS date in asset prices or foreign exchange rates. h.) Changes in tax rates or tax laws enacted or announced after the BS date. i.) Entering into significant commitments or contingent liabilities, for example , by issuing guarantees. j.)Commencing major litigation arising solely from events the occurred after the BS date. k.)Decline in market value of investments between the BS date and the date when the FS are authorized for issue. DIVIDENDS . Dividends on equity shares declared after the balance sheet date should not be recognized as a liability at the balance sheet date. Such dividends are disclosed in the notes to the FS (i.e., a non-adjusting subsequent event). GOING CONCERN. Deterioration in operating results and financial position after the balance sheet date may indicate a need to consider whether the going concern is still appropriate; an entity should not prepare its financial statements on a going concern basis if management determines after the balance sheet date either that it intends to liquidate the entity or cease trading, or that it has no realistic alternative but to do so.
³⁵ This is previously called as ‘subsequent events’. Subsequent events , as defined previously , are events that happened after the BS date until the date of FS issuance. ³⁶If the entity’s owners (or other parties) have the power to amend the FS after issue, the entity shall disclose this fact. The process involved in authorizing the FS for issue will vary depending upon the management structure, statutory requirements and procedures followed in preparing and finalizing the FS. ³⁷An entity shall disclose the following for each material category of non-adjusting event after the BS date: The nature of event An estimate of its financial efect , or statement that such an estimate cannot be made. ³⁸ A restructuring is a program, planned and controlled by management, that materially changes either the scope of a business undertaken by an enterprise or the manner in which that business is conducted. (PAS 37)
PAS 37: PROVISIONS , CONTIGENT LIABILITIES & CONTIGENT ASSETS 1. PROVISIONS are liabilities of uncertain timing or amount. A provision should be recognized when: AN enterprise has a present obligation (legal or constructive) as a result of a past event, It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation , and The amount of obligation can be measured reliably. Provision should not be recognized for future operating losses. If an enterprise has a contract that is onerous³⁹, the present obligation under the contract should be recognized as a provision. 2. An OBLIGATION EVENT is an event that creates a legal or constructive obligation that results in an enterprise having no realistic alternative but to settle the obligation created by the event. 3. A LEGAL OBLIGATION is an obligation that is derived from a contract , legislation, or other operation of law. 4. A CONSTRUCTIVE OBLIGATION is an obligation that derives from an enterprise’s actions where: A.) The enterprise has indicated to other parties that it will accept certain responsibilities, and B.) The enterprise had created a valid expectation on the part of other parties that will discharge certain responsibilities 5. A CONTIGENT LIABILITY is either: A possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non- occurrence of one or more uncertain further events not wholly within the control of the enterprise , OR A present obligation that arises from past events but is not recognized because it is not probable that an outflow of
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resources embodying economic benefits will be required to settle obligation or the amount of the obligation cannot be measured with sufficient reliability. Hence, an enterprise should be recognize a contingent liability on the face of FS. A contingent liability is required to be disclosed in the notes to the FS , unless the possibility of an outflow of economic benefit is remote. 6. A CONTIGENT ASSET is a possible asset that arises from the past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise. Hence, an enterprise should be recognize a contingent asset. A contingent liability is required to be disclosed in the notes to the FS , where an inflow of economic benefit is probable. However, when the realization of income is virtually certain , then the related asset is not a contingent asset and is therefore recognized. Consider the following: CONTIGENT LIABILITY PROBABLE POSSIBLE REMOTE
Recognize (as Provision) Disclose ( in the Notes) No requirement
CONTIGENT ASSET Disclose ( in the Notes) No requirement No requirement
7. MEASUREMENT OF PROVISION. The amount recognized as a provision should be the BEST ESTIMATE of the expenditure required to settle the present obligation at the balance sheet date , taking into account the risks and uncertainties surrounding the circumstances that relate to the provision. Where the provision being measured involves a large population in terms, the obligation is estimated by weighing all possible outcomes by their associated probabilities. This statistical method of estimation is known as the EXPECTED VALUE. Where there is a continuous range of possible outcomes, and each point in the range is a s likely as any other, the the MID-POINT of the range is used. Where the efect of the time value of money is material, the amount of provision should be the PRESENT VALUE of the expenditures expected to be required to settle the obligation .⁴⁰ 8. REIMBURSEMENT. Where some or all of the expenditures required in settling a provision is expected to be reimbursed by another party, the reimbursement should be recognized as a separate asset when it is virtually certain that reimbursement will be received if the enterprise settles an obligation. The amount recognized for the reimbursement should not exceed the amount of the provision. In the incomes statement, the expense relating to a provision may be presented net of the amount recognized for a reimbursement. 9. RESTRUCTURING⁴¹. A provision for restructuring costs is recognized only when the general criteria for a provision are met (see item no.1). A restructuring provision should not be associated with ongoing activities of the enterprise and should not include costs such as retraining or relocating continuing staf, marketing or investment in new system and distribution networks. ³⁹ An onerous contract is a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits to be received under it. The term ‘onerous’ is literally to mean burdensome. ⁴⁰ The discount rate should a pre-tax that reflects the current market assessments of the time value of money and the risks specific to the liability. The discount rate should not reflect risks for which future cash flow estimates have been adjusted.(PAS 37, par 47) ⁴¹ A restructuring is a program , planned and controlled by movement , that materially changes either the scope of a business undertaken by an enterprise or the manner in which that business is conducted.
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EXCERPTS ON PHILIPPINE ACCOUNTANCY ACT REGULATIONS (IRR)
OF
2004’S IMPLEMENTING RULES AND
HISTORICAL BACKGROUND Republic Act NO. 9298 or otherwise known as the Philippine Accountancy Act of 2004 repeals Presidential Decree No. 692 or otherwise known as the Revised Accountancy Law. The new Act was passed during the 3 rd regular session of the 12 th Philippine Congress form the Consolidation of Senate Bill No. 2748 (passed 6 February 2004) and House Bill No. 6678 (passed 7 February 2004). President Arroyo signed and approved it on 13 May 2004, the day the consolidated bill became a law. RATIONALE The Philippine Accountancy Act provides for the set of rules governing the practice of accountancy in the Philippines. The Professional Regulatory Board of Accountancy (BoA), , one of the professional boards under the Professional Regulatory Board (PRC), is mandated by law to promulgate rules pertaining to “the supervision , control and regulation of the practice of accountancy in the Philippines”. In November 2004, BoA issued and approved a set of rules and regulation implementing RA 9298, known as Implementing Rules and Regulations (IRR) FINANCIAL REPORTING STANDARDS COUNCIL Within 90 days from the efectivity of the IRR for the Philippine Accountancy Act of 2004, the Financial Reporting Standards Council (FRSC) shall be created. The FRSC replaces the ACS and will study and evaluate the IAS and IFRS that will be adopted locally. Other than the chairman⁴², the FRSC shall be composed of 14 members representing the following organizations: Professional Regulatory Board of Accountancy (BoA) 1 member Securities and Exchange Commission (SEC) 1 member Bangko Central ng Plilipinas (BSP) 1 member Bureau of Internal Revenue (BIR)* 1 member A major organization composed of FS preparers and users 1 member Commission on Audit (CoA) 1 member Accredited Professional Organization (APO) 8 members *NOTE: BIR and COA were not part of the old council (Accounting Standards Council). The 8 representatives From Accredited Professional Organization (APO) shall be equally divided among the accounting sectors: Public practice 2 members Commerce and industry 2 members Education 2 members Government 2 members ACCOUNTING STANDARDS COUNCIL (ASC). The ASC was the ‘ author’ of what is used to be known as SFAS (Statements of Financial Accounting Standards). Formed to establish the generally accepted accounting principles in the Philippines, the ASC had performed its function since November 1981 until it was replaced by the Financial Reporting Standards Council, pursuant to the IRR of the new accountancy law.ASC was composed of eight members, nominated by the following organizations: Philippine Institute of Certified Public Accountants 4 members Securities and Exchange Commission 1 member Bangko Central ng Pilipinas 1 member Board of Accountancy 1 member Financial Executives Institute of the Philippines 1 member In 1997, the ASC made a decision to harmonize accounting standards in the Philippines with International Accounting Standards (IAS), which later evolved into International Financial Reporting Standards (IFRS)⁴³. Consequently, IFRS becomes the basis of the Philippine Financial Reporting Standards (PFRS)⁴⁴.
⁴²The FRSC Chairman, who had been or presently as senior accounting practitioner in any scope of accounting practice, shall be appointed by the PRC upon the recommendation of BoA in coordination with PICPA as the accredited professional organizations. The Chairman and members of FRSC shall have a term of three (3) years renewable for another term. ⁴³IFRSs are standards issued by the International Accounting Standards Board (IASB); the IASB replaced the International Accounting Standards Committee (IASC). ⁴⁴Based on paragraph 7 of PAS 1, the term ‘ PFRS’ shall composed of (a) PFRS (b) Philippine Accounting Standards (c) Interpretations. PFRS sets out the recognition, measurement, presentation and disclosure requirements dealing with transactions and events that are important in general purpose of FS. A PFRS is developed through a due process that normally involves the following: (a)Consideration of the pronouncement of IASB.
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(b) Formation of task force, when deemed necessary, to give advice to FRSC. (c) Issuing for comment an exposure draft approved by at least eight (8) FRSC members; comment period will be at least 60days unless a shorter period (not less than 30 days) is considered appropriate by FRSC. (d) Consideration of all comments received within the comment period and when appropriate, preparing the comment letter to the IASB. (e) Approval of standard by at least eight (8) FRSC members.
PAS 34: INTERIM REPORTING
ENTITIES COVERED BY INTERIM REPORTING STANDARDS 1. Certain companies required by Securities Exchange and Commission (SEC) & the Philippine Stock Exchange (PSE) to publish interim FS⁴⁵ 2. Certain companies that elect to publish an interim financial report. INTERIM FINANCIAL REPORT An interim financial report means a financial report containing either a complete set of FS or set of condensed FS for an interim period ⁴⁶. As a minimum requirement, an interim financial report should include the following components: 1. Condensed balance sheet 2. Condensed income statement 3. Condensed statement showing either all changes in equity or ‘comprehensive income’⁴⁷ 4. Condensed cash flow statement 5. Selected explanatory notes Basic and diluted earnings per share should be presented on the face of an income statement , complete or condensed , for an interim period. SELECTED EXPLANATORY NOTES⁴⁸ An enterprise should include the following information, a minimum, in the notes to its interim FS, if material and if not disclosed elsewhere in the interim financial report: 1. A statement that the same accounting policies and methods of computation are followed in the interim FS as compared with the most recent annual FS or, if those policies or methods have been changed , a description of the nature and efect of the change. 2. Explanatory comments about the seasonality or cyclicality of interim operations 3. The nature and amount of items afecting assets, liabilities, equity , net income or cash flow as that are unusual because of their nature, size and incidence. 4. The nature of amount of changes in estimates of amounts reported in prior interim periods of the current financial year or changes in the estimates of amounts reported prior financial years if those changes have current interim period. 5. Issuances, repurchase and repayments of debt and equity securities 6. Dividend paid (aggregate or per share) separately for ordinary shares and other shares 7. Segment revenue and segment result for business segments or geographical segments, whichever is the primary basis of segment reporting. 8. Material events subsequent to the end interim period that have not been reflected in the FS for the interim period 9. The efect on changes in composition of the enterprise during the interim period , including business combinations, acquisitions or disposal of subsidiaries and long-term investments, restructurings , and discontinued operations. 10. changes in contingent liabilities or contingent assets since that last annual BS date. PERIODS for which INTERIMS FS are REQUIRED to be PRESENTED. Interim reports should include interim FS for periods as follows: 1. Balance sheet as of the end of the current interim period and a comparative BS as of the end of the immediately preceding financial year. 2. Income statements for the current interim period and cumulatively for the current financial year to date , with comparative income statements for the comparable interim periods (current and year-to –date) of the immediately preceding financial year.
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3. Statement showing changes in equity cumulatively for the current financial year to date , with comparative statement for the comparable year-to-date period of the immediately preceding the financial year. 4. Cash flow statement cumulatively for the current financial year to date , with a comparative statement for the comparable year-to-date period of the immediately preceding financial year.
⁴⁵ The SEC and PSE require companies covered by the reportorial requirements of Revised Securities A ct to file quarterly interim financial reports within 45 days after the end of each of the first three quarters. Also, the SEC requires companies covered by the Rules on Commercial Papers and Financing Act to file quarterly financial reports within 45 days after each year-end. ⁴⁶An interim period is a financial reporting period shorter than a full financial year . Interim financial reports may be presented monthly, quarterly, or semiannually. ⁴⁷Comprehensive income is to include all changes in equity , except contributions from and distributions to owners. ⁴⁸ An example of kinds of disclosures as required by PAS 34, par 17 are as follows: (a) write-down of inventories to net realizable value and the reversal of such write-down (b) recognition of loss from the impairment of PPE and intangibles and the reversal of such an impairment loss (c) reversal of any provision for the costs of restructuring (d) acquisitions and disposals of items of PPE (e) commitments for the purchase of PPE (f) litigations settlements (g) corrections of fundamental errors in previously reported financial data (h) any debt default or breach of a debt covenant that has not been corrected subsequently (i) related party transactions.
PFRS 8 : OPERATING SEGMENTS
RATIONALE (CORE PRINCIPLE) An entity shall disclose information to enables the users of FS to evaluate the nature and financial efects of the business activities In which it engages and the economic environments in which it operates. ENTITIES REQUIRED TO APPLY SEGMENT REPORTING STANDARDS (SCOPE) 1. Entities whose equity or debt securities in public securities market. 2. Entities that are group of companies (i.e., parent and subsidiaries ), PFRS 8 applies to the consolidated financial statements of the Group only. OPERATING SEGMENTS An operating segment is a component of an entity: A.) That engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same entity). B.) Whose operating results are regularly reviewed by the entity’s chief operating decision maker⁴⁹ to make decisions about resources to be allocated to then segment and assess its performance, and C.) For which discrete financial information is available. REPORTABLE SEGMENTS An entity shall report separately information about an operating segment that meets any of the following quantitative thresholds: A.) Its reported revenue , including both sales to external customers and intersegment sales or transfers , is 10% or more of the combined revenue , internal and external, of all operating segments. B.) The absolute amount of its reported profit or loss is 10% or more the greater, in absolute amount , of (1) combined and reported profit of all operating segments that did not report a loss and (2) combined reported loss of all operating segments that reported a loss. C.)Its assets are 10% or more of the combined assets of all operating segments. If the total external revenue reported by operating segments is less than 75 % of the entity’s revenue, additional operating segments should, be identified as reportable segments , even if they do not meet the 10% thresholds , until at least 75% of entity’s revenue is included in reportable segments. AGGREGATION OF OPERATING SEGMENTS Two or more operating segments may be aggregated into a single operating segment if aggregation is consistent with core principle of PFRS 8, the segments have similar economic characteristics, and the segments are similar in each of the following respects: A.) The nature of the products and services B.) The nature of the production processes C.) The type or class of customer for their products and services. D.)The methods used to distribute their products or provide their services E.) If applicable, the nature of regulatory environment, for example, banking , insurance or public utilities. DISCLOSURE OF OPERATING SEGMENT INFORMATION An entity shall disclose the following for each period for which an income statement is presented: A.) General information⁵⁰about the reporting segment B.) Information about segment profit or loss⁵¹, segment assets⁵²and segment liabilities. C.) Reconciliations of the totals of segment revenue , segment profit or loss, segment assets , segment liabilities and other material
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segment items to corresponding entity accounts. ENITY –WIDE DISCLOSURES Entity wide disclosure is additional information that is required to be disclosed by all entities if such information is not provided as part of the reportable segment information. An entity shall report information about: 1.) products and services, 2.) geographical areas and 3.) major customers.
⁴⁹The chief operating decision maker identifies a function , not necessarily a manager with a specific title. That function is to allocate resources to and assess the performance of the operating segments of an entity. (PFRS 8, par.7) ⁵⁰An entity shall disclose the following general information about an operating segment: (PFRS 8,par.22) 1. Factors used to identify the reportable segments , including the basis of organization .(e.g., whether the management has chosen to organize the entity around diferences in products and services have been aggregated.) 2.)Types of products and services from which each reportable segment drives its revenue. ⁵¹ An entity shall disclose the following about each reportable segment if the specified amounts are included in the measure of profit or loss: (PFRS 8, par.23) (a.)Revenues from external customers and transactions with other operating segments of the same entity (b.)Interest revenue and interest expense (c.)Depreciation and amortization (d.)Material times of income and expenses and material noncash items other than depreciation and amortization (e.)Interest in profit or loss of associates and joint venture accounted for by the equity method. (f.) Income tax expense ⁵²An entity shall disclose the following about each reportable segment if the specified amounts are included in the measure of segment assets reviewed by chief operating officer: (PFRS 8, par.24) (a.) The amount of investments in associates and joint venture accounted for the equity method, and (b.)The amounts of additions to non-current assets other financial instruments , deferred tax assets, post – employment benefit asset and rights arising under insurance contracts.
PAS 41: AGRICULTURE
SCOPE & COVERAGE. PAS 41 applies the following items, when they relate to agricultural activity: 1. Biological assets⁵³ 2. Agricultural produce ⁵⁴at the point of harvest⁵⁵ 3. Government grants⁵⁶ related to biological asset
PAS 41 does not apply to: Land related to agricultural activity , which are covered by PAS 16 (Property , Plant and Equipment ) and PAS 40 (Investment Property). Intangible assets related to agricultural activity , which are covered by PAS 38 (Intangible Assets). PAS 41 applies agricultural produce only at the point of harvest. Thereafter , PAS 2 Inventories or another standard shall be applied ; PAS 41 does not deal with the processing of agricultural activity , and the events taking place may bear some similarity to biological transformation , processing of agricultural produce is not within the definition of agricultural activity ⁵⁷in PAS 41. EXAMPLES Products that are the result of processing after harvest Biological assets Agricultural produce Sheep Wool Yarn , carpet Trees in a plantation Logs ( Felled trees) Lumber forest Cotton Thread, clothing Plants Harvested cane Sugar Dairy cattle Pigs Bushes
Milk Carcass Leaf
Cheese Sauges,cured hams Tea, curred tobacco
Vines Grapes Wine Fruit Trees Picked Fruit Processed fruit RECOGNITION CRITERIA An entity shall recognize a biological asset or agriculture produce when: A.) The entity control the asset as a result of past events; B.) It is probable that the future economic benefits associated with the asset will flow to the entity ; and
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C.) The fair value or cost of the asset can be measured reliably MEASUREMENT BASIS. A BIOLOGICAL ASSET shall be measured on initial recognition and at each balance sheet date (reporting period ) at fair value ⁵⁸ less cost to sell ⁵⁹. AGRICULTURAL PRODUCE harvested from an entity’s biological assets shall be measured at the point of harvest at its fair value less estimated costs to sell. Any gain or loss⁶⁰on the initial recognition of biological assets at fair value less costs to sell and any changes in the fair value less costs to sell of biological assets during the reporting period is included in profit or loss for the period. All costs related to biological assets that are measured at fair value are recognized in profit or loss when incurred to purchase biological assets. Any gain on the initial recognition of agricultural produce at fair value less costs to sell will be included in the profit or loss for the period to which it relates.
⁵³Biological assets are living animals and plants. ⁵⁴Agricultural produce is the harvested product of the entity’s biological assets. ⁵⁵Harvest is the detachment of produce form biological assets or the cessation of a biological asset’s life processes. ⁵⁶Government grants are assistance by government in the form of transfers of resources to an entity in return for past or future compliance with certain conditions relating to the operating activities of the entity. (PAS 20) ⁵⁷Agricultural activity is the management by an entity of the biological transformation of biological assets for sale, into agricultural produce , or into additional biological assets(Examples of agricultural activity are raising livestock, annual or perennial cropping, cultivating orchards and plantation , floriculture , aquaculture , including fish farming); biological transformation relates to the processes of growth, degeneration, production, and procreation that can cause changes in qualitative or quantitative nature of biological asset. ⁵⁸Fair value is the amount for which an asset could be exchanged, or liability settled, between knowledgeable , willing parties in an arm’s length transaction. ⁵⁹Cost to sell are the incremental costs directly attritubutable to the disposal of an asset; examples are commissions to brokers and dealers, levies by regulatory agencies and commodity exchanges, and transfer taxes and duties; cost to sell exclude financing charges, transport and other costs necessary to get assets to a market. ⁶⁰A loss may rise on initial recognition of a purchased biological asset as their fair value less estimated point-of-sale costs are likely to be less than the purchase price plus any transaction and transportation costs; a gain may arise on initial recognition of a biological asset, such as when a calf is born. (PAS 41, par.27)
GUIDELINES IN DETERMINING FAIR VALUE In deciding on the fair value for a biological asset or agricultural produce, it is possible to group together items in accordance with, for example, their age or quality. Entities often contract to sell their biological assets or produce at a future date. These contract prices do not necessarily represent value. The fair value of a biological asset or agricultural produce is not necessarily adjusted because of the existence of contract. If an active market⁶¹ exist for a biological asset or an agricultural produce, the quoted price in that market is the appropriate basis for determining the fair value of that asset. If an entity has an access to diferent active markets, the entity uses the most relevant one. If an active market does not exist, then the following methods can be used to determine fair value: A.) The most recent market transaction price B.) Market prices similar for assets with adjustment to reflect diferences; and C.) Any sector benchmark such as the value of cattle per kilogram or value of a farmland per hectare. In some cases, the entity can use the present value of expected net cash flow from the asset discounted at a current market pretax rate. In some cases, costs may an indicator for fair value , especially where little biological transformation has taken place or the impact of biological transformation on the price is not expected to be significant. ABSENCE OF FAIR VALUE There is a presumption that fair value can be measured reliably for a biological asset⁶² However, this presumption can be rebutted for a biological asset that, when first recognized, does not have a quoted price in an active market and for which other valuation methods are clearly inappropriate and unreliable. In this case, the biological asset shall be measured at its cost less any accumulated depreciation and impairment losses⁶³ Unlike a biological asset, agriculture produce is always assumed to have a measurable fair value.
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CHNAGES IN FAIR VALUE. The fair value less costs to sell of a biological asset can change due to both: 1.) PHYSICAL changes, and 2.) PRICE changes in the market. An entity is encouraged (but not required) to have separate disclosure of physical and price changes that is useful in appraising current period performance and future prospect , particularly when there is a production cycle of more than one year. Biological transformation results in a number of types of physical change - - growth , degeneration, production, and procreation , each of which is observable and measurable . Each of those physical changes has a direct relationship to future economic benefits. A change in fair value of biological asset due to harvesting is also physical change. Agricultural activity is often exposed to climatic , disease, and other natural risks. If an event occurs and given rise to a material item of an income or expense, the nature and amount of that item are disclosed in accordance with PAS 1 Presentation of Financial Statements. Examples of such an event include an outbreak of a virulent disease, a flood, a severe drought or frost, and a plague of insects. GOVERNMENT GRANTS An unconditional government grant related to a biological asset measured at its fair value less costs to sell shall be recognized as income when the government grant becomes receivable. If a government grant related to a biological asset measured at its fair value less costs to sell is c onditional , including where a government grant requires an entity not to engaging specified agricultural activity , an entity shall recognized the government grant as income when the conditions attaching to the government grant are met. If a government grant related to biological asset measured at its cost less any accumulated depreciation and impairment losses, then PAS 20 (Accounting for Government Grants and Disclosure of Government Assistance) is applied.
⁶¹An active market is a market where all the following conditions exist: a.)The items traded within the market are homogenous; b.) Willing buyers and sellers can normally be found at any time ; and c.)Prices are available to the public ⁶²In a noncurrent biological asset meets the criteria to be classified as held for sale or is included in a disposal group in accordance with PFRS 5,then it is presumed that the fair value can be measured reliably (PAS 41, par.30) ⁶³In determining the cost, accumulated depreciation and accumulated impairment losses, an entity considers PAS 2 Inventories, PAS 16 Property, Plant & Equipment and PAS 36 Impairment of Assets (PAS 41, par.33)
PFRS 3: BUSINESS COMBINATIONS
DEFINITION A business combination is a transaction or other event in which an acquirer⁶⁴ obtains control of one or more businesses. ACQUISITION METHOD An entity shall account for each business combination by applying the acquisition method . Applying the acquisition method requires. Identifying the acquirer Determining acquisition date Recognizing and measuring the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree ; and Recognizing and measuring goodwill or a gain from a bargain purchase. RECOGNITION PRINCIPLE. On the acquisition date, the acquirer shall recognize, separately from goodwill, the identifiable assets acquired , the liabilities assumed and any non-controlling interest in the acquiree. Contrary to PAS 37 (see related notes on page 9) , PFRS 3 requires that an acquirer shall recognize a contingent liability assumed in a business combination if it is a present obligation that arises from the past events (even if it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation and it’s fair value can measured reliably. MEASURMENT PRINCIPLE
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The acquirer shall measurer the identifiable assets acquired and the liabilities assumed at their acquisition date FAIR VALUES. Few exemptions are: The acquire shall measure an acquired non-current asset or disposal group that is classified as held for sale at the acquisition date at their fair value less costs to sell in accordance with PFRS 5 (see related notes on page 6). The acquire shall measure the value of a reacquired right recognizes as an intangible asset on the basis of the remaining contractual term of the related contract regardless o whether market participants would consider potential contractual renewals in determining its fair value. GOODWILL. On the acquisition date, the acquirer shall recognize GOODWILL⁶⁹measured as the excess of consideration transferred over the net of acquisition –date amounts of the identifiable assets acquired and liabilities assumed. BUSINESS COMBINATION ACHIEVED IN STAGES An acquirer sometimes obtains control of an acquiree in which it was held an equity interest immediately before the acquisition date. PFRS refers to such a transaction as a business combination achieved in stages , sometimes also referred to as a STEP ACQUISITION. In a business combination achieved in stages, the acquirer shall measure its previously held equity interest in the acquirer at its acquisition-date fair value and recognize the resulting gain or loss, if any , in profit or loss. BUSINESS COMBINATION ACHIEVED WITHOUT THE TRANSFER OF CONSIDERATION. The acquisition method of accounting for a business combination applies to business combinations where an acquirer obtains control of an acquiree without transferring consideration or where business combinations are achieved by contract alone in stapling arrangement. ⁶⁴ An acquirer is the entity that obtains control of the acquiree; the acquiree is the business or businesses that the acquirer contains control of an business combination. ⁶⁵Control is the power to govern the financial and operating policies of an entity or business so as to obtain benefits from its activities. Control is presumed to exist when an entity acquires more than one-half of another entity’s voting rights. ⁶⁶Business is an integrated set of activities and assets that is capable of being conducted and managed for purpose of providing return in the form of dividends , lower costs or other economic benefits directly to investors or other owners, members or participants. ⁶⁷Acquisition method of business combination is previously known as the purchase method. ⁶⁸Acquisition date is the date on which the acquirer obtains control of the acquiree. ⁶⁹Under paragraph 32 of PFRS 3, GOODWILL is equal to the excess of (A) over (B) below; (A) The aggregate (total) of: The consideration transferred, which shall be calculated as the sum of the sum of the acquisition-date fair values of the assets transferred by the acquirer, the liabilities incurred by the acquirer to former owners of the acquiree and the equity interests issued by the acquirer. (Examples of potential forms of consideration include cash, other assets, contingent consideration , ordinary or preference equity instruments) The amount of any non-controlling interest in the acquiree In a business combination achieved in stages, the acquisition date fair value of the acquirer’s previously held equity interest in the acquiree (B)The net of acquisition of the identifiable assets acquired and the liabilities assumed. Occasionally, an acquirer makes a BARGAIN PURCHASE, which is a business combination in which (B) exceeds (A) above . In which case, the acquirer shall recognize the resulting GAIN in profit or loss on the acquisition date, after making reassessment whether it has correctly identified all of the assets acquired and liabilities assumed. (PFRS 3,par.3)
PAS 27: CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
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1.
Consolidated financial statements are the financial statements of a group presented as those of a single economic entity; consolidated FS shall include all subsidiaries of the parent. 2. A group is parent and all of its companies while a parent is an entity that has one or more subsidiaries. 3. A subsidiary⁷⁰is an entity that is controlled by another entity (parent). 4. Control is presumed to exist even when the parent owns half or less of the voting power of an entity but has the power: over more than half of the voting rights by virtue of an agreement with other investors. to govern the financial and operating policies of entity under a statute or an agreement . to appoint or remove the majority of the members of the board of directors or equivalent governing body. to cast majority of votes at meetings of the board of directors or equivalent governing body. The existence and efect of potential voting rights currently exercisable or convertible (e.g., share warrant, share call options, convertible securities to ordinary shares) are considered when assessing whether an entity has the power to govern the financial and operating policies of another entity. 5. Consolidated FS shall include all domestic and foreign subsidiaries⁷¹of then parent , even if subsidiaries are engaged in business activities dissimilar from those of other entities within the group. 6. A parent need not present consolidated FS if and only if: The parent itself is a wholly-owned subsidiary, or partially-owned subsidiary and its other owners do not object to the parent not presenting consolidate FS. The parent’s debt and equity instruments are not traded in a public market- a domestic or foreign stock exchange or an over-the-counter market. Then parent did not file or is not in the process of filling its FS with a securities and exchange commission or other regulatory body for the purpose of issuing any class of instruments in a public market. The ultimate or any intermediate parent of the parent produces consolidated FS available for public use that comply with PFRS. A parent that is exempted from presenting consolidated FS may present separate FS as it’s only FS⁷² 7. In preparing consolidated FS, the following consolidation procedures are normally followed: The FS of the parent and its subsidiaries are combined in on a line by line basis by adding together like items of assets, liabilities, equity , income, and expenses. Intergroup balances and transactions including income and expenses , are eliminated in full. When FS used in consolidation are drawn up from diferent reporting dates, adjustments should be made for the efects of significant transactions or other events that occur between those dates and the date of the parent’s FS.In any case, the diference between reporting dates should be no more than three months. Consolidated FS should be prepared using uniform accounting policies for like transactions and other events similar circumstances. Non-controlling interest ⁷³shallbe presented in the consolidated statement of financial position within equity , separately from parent shareholder’s equity. Non-controlling interests in the profit or loss of the group should also be separately presented. Changes in a parent’s ownership interest in a subsidiary that do not result in a loss of control⁷⁴are accounted for a equity transactions (i.e., transactions with owners in their capacity as owners.) 8. In the parent’ separate FS, investments in subsidiaries (including investments in jointly controlled entities and associates ) shall be accounted for either: At cost⁷⁵, or In accordance with PAS 39 on financial instruments The same accounting (policy) shall be applied for each category of investment; investments in subsidiaries , jointly controlled entities and associates that are classified as held for sale shall be accounted for under PFRS 5. (see related notes on page 6)
⁷⁰The definition of ‘subsidiary’ under PAS 27 includes unincorporated entities like partnerships. ⁷¹Under SIC Interpretations 12, special purpose entities shall be consolidated when the substance of the relationship between an entity and the special purpose entities are controlled by that entity. A subsidiary are classified as ‘ held for sale’ if control is likely to be temporary with the view of the disposal within twelve months form acquisition and management is actively seeking buyer. ⁷²Separate financial statements are these presented by parent in which the investments are accounted for on the basis of the direct equity interest rather than on the basis of the reported and net assets of subsidiary. ⁷³Non-contorlling interest is used to be known as’ minority’ interest. ⁷⁴A parent can lose control of subsidiary with or without a change in absolute or relative ownership levels. This could occur as result of a contractual agreement or in two or more arrangements. ⁷⁵PAS 27 (as amended May 2008) states that “an entity shall recognize a dividend form a subsidiary , jointly controlled entity, associate in profit or loss in its separate financial statements when its right to receive the dividend is
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established”. Consequently, the requirement to separate the retained earnings of an entity into pre-acquisition and postacquisition components as a method for assessing whether a dividend is a recovery of its associated has been removed
PAS 21: THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES⁷⁶ 1. The objective of PAS 21 is to prescribe how to include foreign currency transactions and foreign operations on the financial statements of an entity and how to translate financial statements from a certain functional currency⁷⁷into the presentation currency⁷⁸ -- the principal issues are: Which exchange rate(s) to use, and How to report the efects of changes in exchange rates⁷⁹in the financial statements 2. FOREIGN CURRENCY TRANSACTIONS⁸⁰ Initial Recognition A foreign currency transaction should be recorded initially at the exchange rate at the date of the transaction. The use of averages is permitted if they are a reasonable estimate of actual. Reporting on Subsequent Balance Sheet Dates Foreign currency monetary amounts should be reported using the CLOSING RATE⁸¹ Non-monetary items carried at historical cost should be reported using the exchange rate at the date of transaction. Non-monetary items carried at fair value should be reported at the rate that existed when the fair values were determined. Recognition of Exchange Diferences⁸² Exchange diferences arising when monetary items⁸³are settled or when monetary items are translated at rates diferent from those at which they were translated when initially recognized are reported in profit or loss in the period. Exchange diferences arising on the monetary items that form part of the reporting entity’s net investment⁸⁴ in a foreign operation, in a separate component of equity; upon disposal of the net investment, they will be recognized in profit or loss. If gain or loss on a non- monetary item is recognized directly in equity (for example, a property revaluation under PAS 16), any foreign exchange component of that gain or loss is also recognized directly in equity. An exchange loss on foreign currency debt used to finance the acquisition of an asset could no longer be added to the carrying amount of the asset even if the loss resulted from a severe devaluation of a currency which there against which there was no practical means of hedging. 3. FOREIGN CURRENCY FINANCIAL STATEMENTS TRANSLATION The results and financial position of an entity⁸⁶are translated into a diferent presentation currency using the following procedures: Assets and liabilities for each balance sheet presented are translated at the CLOSING RATE at the date of that balance sheet⁸⁷ Income and expenses for each income statement are translated at exchange rates at the dates of the transactions⁸⁸ All resulting exchange diferences are recognized as a separate component of equity. ⁷⁶PAS 21 excludes from its scope foreign currency derivatives that are within the scope of PAS 39 Financial Instruments Recognition and Measurement. Similarly, the material on hedge accounting has been moved to PAS 39. ⁷⁷Functional currency is the currency of the primary economic environment which the entity operates. The primary economic environment in which an entity operates is normally the one in which it primarily generates and expends cash. ⁷⁸Presentation currency is the currency in which financial statements are presented by the reporting entity. ⁷⁹Exchange rate is the ratio of exchange for two currencies. ⁸⁰A foreign currency transaction that is denominated or requires settlement in a foreign currency, including transactions arising when an entity: buy or sells goods or services whose prices is denominated in a foreign currency. borrows or lends funds when the amounts payable or receivable are denominated in a foreign currency
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acquires and disposes of assets, or incurs or settles liabilities, denominated in a foreign currency ⁸¹Closing rate is the spot exchange rate at the balance sheet date. ⁸²Exchange difference is the diference resulting from translating a given number of units of one currency into another currency at diferent exchange rates. ⁸³Monetary items are unit of currency held and assets and liabilities to be received and paid in a fixed or determinable number of units of currency. ⁸⁴Net investment in a foreign operation is the amount of the reporting entity‘s interest in the net assets of that operation. ⁸⁵Foreign operation is an entity that is subsidiary, associate, joint venture or branch of a reporting entity, whose activities are based in a country other than of the reporting entity. ⁸⁶This refers to an entity whose functional currency of a hyperinflationary economy. ⁸⁷This would include any good will arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition of that foreign operation are treated as part of the assets and liabilities of the foreign operation. ⁸⁸For practical reasons, the use of average rate for the period may be used as translation basis. However, if the exchange rates fluctuate significantly, the use of the average rate for a period is inappropriate.
4. DISPOSAL OF A FOREIGN OPERATION When a foreign operation is disposed, the cumulative amount of the exchange diferences deferred in the separate component of equity relating to that foreign operation shall be recognized in profit or loss when the gain or loss on disposal is recognized. 5. CONVENIENCE TRANSLATIONS. Sometimes, an entity displays its financial statements or other financial information in a currency that is diferent from either its functional currency or its presentation currency simply by translating all amounts at end-ofperiod exchange rates. This is sometimes called a convenience translation. A result of making a convenience translation is that the resulting information to distinguish it from the PFRS. In this case, the following disclosures are required: Clearly identify the information as supplementary information to distinguish it from the information that complies with PFRS. Disclose the currency in which the supplementary information displayed. Disclose the entity’s functional currency and the method of translation used to determine the supplementary information. When an entity presents its financial statements in a currency in that is diferent from its functional currency, it may describe those financial statements as complying with PFRS only if they comply with all the requirements of each applicable Standard and Interpretation. 6. DISCLOSURE REQUIREMENTS. The net amount of exchange diferences recognized in profit or loss. Net exchanges diferences classified in a separate component of equity and reconciliation of the amount of such exchange diferences at the beginning and end of the period. When the presentation currency is diferent from the functional currency, disclose that fact together with the functional currency and the reason for using a diferent presentation currency. A change in the functional currency of either the reporting entity or a significant foreign operation and the reason therefore
PAS 29: FINANCIAL REPORTING IN HYPERFLATIONARY ECONOMIES 1.
The objective of PAS 29 is to establish specific standards for enterprises reporting in the currency of a hyperflationary economy, so that the financial information provided is meaningful.
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2.
3.
4.
5.
RESTATEMENT OF FINANCIAL STATEMENTS. The basic principle in PAS 29 is that financial statements of an entity that reports in the currency of a hyperinflationary economy should be stated in terms of the measuring unit current at the balance sheet date. Restatements are made by applying a general price index. Items such monetary items that are already stated at the measuring unit at the balance sheet date are not restated. Other items acquired or incurred and the balance sheet date. A gain or loss on the net monetary position is included in net income .It should be disclosed separately.
The Standard does not establish an absolute rate at which hyperinflation is deemed to arise - but allows judgment as to when restatement of financial statements becomes necessary. Characteristics of the economic environment of a country which indicate the existence of hyperinflation include: The general population prefers to keep its wealth in non-monetary assets or in a relatively stable foreign currency. Amounts of local currency held are immediately invested to maintain purchasing power. The general population regards monetary amounts not in terms of the local currency but in terms of a relatively stable foreign currency. Prices may be quoted in that currency; Sales and purchases on credit take place at prices that compensate for the expected loss of purchasing power during the credit period ,even if the period is short ; and The cumulative inflation rate over three years approaches, or exceeds , 100% When an economy ceases to be hyperinflationary and an enterprise discontinues the preparation and presentation of financial statements in accordance with PAS 29, it should treat the amounts expressed on the measuring unit current at the end of the previous reporting period as the basis for the carrying amounts in its subsequent financial statements. DISCLOSURE REQUIREMENTS Gain or loss on monetary items The fact that financial statements and other period data have been restated for changes in the general purchasing power of the reporting currency Whether the financial statements are based on historical cost or current cost approach Identity and level of the price index at the balance sheet date and moves during the current and previous reporting period.
PAS 7: STATEMENT OF CASH FLOWS⁸⁹
SCOPE All entities regardless of the nature of activities should prepare a cash flows statement and present it as an integral part its financial statements. BENEFITS A cash flow statement, when in conjunction with rest of the financial statements, provides additional information to users of FS: 1. A better insight into the financial structure of an entity , including its liquidity and solvency , and its ability to afect the amounts and timing of cash flows in order to adapt to changing circumstances and opportunities. 2. Enhanced information for purposes of evaluating changes in assets, liabilities, and equity of an entity. 3. The statement enhances the comparability of reporting operating performance by diferent entities because it eliminates the efects of using diferent accounting treatments for similar transactions. 4. The statement serves as indicator of the amount, timing and reasonable certainty of future cash flows. PRESENTATION The cash flow statement shall report cash flows during the period classified by operating, investing and financing activities: 1. OPERATING ACTIVITIES – are the principal revenue producing activities of an entity and other activities that are not investing or financing activities. Cash flows from operating activities⁹⁰generally
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results from the transactions and other events those enter into the determination of profit or loss⁹¹ 2. INVESTING ACTIVITES- are the acquisition and disposal of long-term assets and other investments not include in cash equivalents. ‘Investing ‘cash flows represent the extent to which expenditures have been resources intended to generate future income and cash flows. 3. FINANCING ACTIVITIES-are activities that result in changes in size and composition of contributed equity and borrowings of the entity. An entity shall disclose the components of cash and cash equivalents and shall present a reconciliation of the amounts in its cash flows statement with the equivalent items reported on the balance sheet. DIRECT vs. INDIRECT METHOD An entity shall report cash flows from operating activities using either direct or indirect method: 1. DIRECT METHOD- major classes of gross cash receipts and gross cash payments are disclosed. 2. INDIRET METHOD- profit or loss is adjusted for the efects of the transactions of a non-cash nature ,any deferrals and accruals of past or future operating cash receipts or payments, and items of income and expense associated with investing or financing cash flows⁹². INTERESTS and DIVIDENDS. Cash flows from interest s and dividends received and paid shall each be disclosed separately each shall be classified in a consistent manner from period to period using the following guidelines: 1. INTEREST PAID. Interest paid is usually classified as operating cash flows because it enters into the determination of profit or loss .Alternatively it may be classified as financing cash flows because it is a cost of obtaining financial resources. 2. INTEREST and DIVIDENDS RECEIVED. Interest and dividends received are usually classified as operating cash flows because they enter into the determination of profit or loss. Alternatively, both may be classified as investing cash flows because they are both represent returns on investments. 3. DIVIDENDS PAID. Dividends are paid usually classified as financing cash flows because they represent costs of obtaining financial resources. Alternatively, dividends paid may be classified a s a component of cash flows from operating activities in order to assist users to determine the ability of man entity to pay dividends out of operating cash flows. NON-CASH TRANSACTIONS Investing and financing transactions that do not require the use of cash or cash equivalents shall be excluded from a cash flow statement. Such transactions shall be disclosed elsewhere in the financial statements (e.g., notes to the financial statements) in a way that provides all the relevant information about these investing and financing activities. Examples are: 1. The acquisition of assets either by assuming directly related liabilities or by means of a finance lease. 2. The acquisition of an entity by means of an equity issue , and 3. The conversion of debt to equity
⁸⁹Cash flows are inflows and outflows of cash and cash equivalents .Cash comprises of cash on hand and demand deposits. Cash equivalents are short-term l, highly liquid investment that are readily convertible to known amounts of cash and which are subject to a significant risk of change in value. ⁹⁰An entity may hold securities and loans for trading purposes, in which case they are similar to inventory acquired specially for resale. Therefore, cash flows arising from the purchase and sale of trading securities are classified as operating activities. Similarly cash and loans made by financial institutions are usually classified as operating activities since they relate to the main revenue-producing activity of that entity. ⁹¹Some transactions, such as the sale of an item of plant give rise to gain or loss that is included in the determination of profit or loss However, the flows relating to such transactions are cash flows from investing activities. Cash flows arising from taxes on income shall be classified as cash flows from operating activities unless they can be specifically identified with financing and investing activities. ⁹²Alternatively, the net cash flow from operating activities may be presented under the indirect method by showing the revenue expenses disclosed in the income statement and the changes during the period in inventories and operating receivables and payables.
PAS 33: EARNINGS
PER
SHARE (EPS)
OBJECTIVE.
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The objective of PAS 33 is to prescribe principles for the determination and presentation of EPS, so as to improve comparisons of performance among diferent entities in the same reporting period and among diferent reporting periods for the same entity. SCOPE. The EPS standards shall be applied by: 1. Entities whose ordinary shares⁹³or potential ordinary shares⁹⁴are publicly traded. 2. Entities that are in the process of issuing ordinary shares or potential ordinary shares in public markets. 3. Entities that voluntarily elect to disclose on EPS in financial statements. PRESENTATION. An entity should present on the face of the income statement both basis and diluted EPS. Basic and diluted EPS must be presented with equal prominence for all periods presented, even if the amounts are negative (i.e., loss per share). BASIC EARNINGS PER SHARE. Basic EPS is calculated by dividing profit or loss attributable to ordinary equity holders (the numerator) by the weighted average number of ordinary shares outstanding (the denominator)during the period. 1. EARNINGS.⁹⁵ For the purpose of calculating basic EPS, the amounts attributable to ordinary equity holders shall be adjusted for the tax amount of preference dividends⁹⁶and other similar efects of preference shares classified as equity. 2. SHARES. For the purpose of calculating basic EPS, the number of ordinary shall be the weighted average number of ordinary shares outstanding for the period. The weighted average number of ordinary shares outstanding during the period is the number of ordinary outstanding at the beginning of the period, adjusted by the number of ordinary shares issued⁹⁷ and bought back during the period multiplied by a time-weighting factor⁹⁸ In this case of ordinary shares issued or reduce without a corresponding changes in resources ⁹⁹, the number of ordinary shares is adjusted for the proportionate change in the number or ordinary shares outstanding if the event had occurred at the beginning of the earliest period presented (i.e., the calculation of the basic and diluted EPS for all periods presented shall be adjusted retrospectively¹⁰⁰). DILUTED EARNINGS PER SHARE. 1. EARNINGS. For the purpose of calculating diluted EPS, the ‘earnings used in computing basic EPS shall be adjusted by the after tax-efect of: a.) any dividends related to diltutive¹⁰¹potentila ordinary shares deducted from the earnings b.) any interest recognized in the period related to dilutive potential ordinary shares c.) any change in earnings that would result from the conversion of dilutive potential ordinary shares 2. SHARES In computing diluted EPS, the ordinary shares shall be the weighted average number of ordinary shares outstanding for the plus the weighted average number of ordinary shares that would have been issued on the conversion of all the dilutive shares¹⁰²into ordinary shares.
⁹³An ordinary shares are an equity instrument that is a subordinate to all other classes of equity instruments. It is usually known as ‘common’ stock under the Philippine Corporation Code. ⁹⁴A potential ordinary share is a financial instrument or other contract that may entitle its holder to ordinary shares. Examples include convertible bonds, convertible preferences shares, options and warrants. Options and warrants are financial instruments that give the holder the right to purchase ordinary shares. ⁹⁵Earnings are calculated after all expenses including taxes and if, any minority interest. ⁹⁶The after-tax amount of preference dividends that is deducted from the earnings are: a.) the preference dividends on non-cumulative preference shares declared for the period and b.) the preference dividends on cumulative preference shares for the period whether or not dividends have been declared. ⁹⁷Contingently issuable shares treated as outstanding and are included in the calculation of the basic EPS only from the date necessary conditions are satisfied .Contingently issuable ordinary shares are ordinary shares issuable for free or little consideration upon the satisfaction of specified conditions in a contingent share agreement. A contingent share agreement is an agreement to issue shares that is dependent on the satisfaction of specified conditions. ⁹⁸’Time-weighted –factor’ is the number of days of shares are outstanding as a proportion of total number of days for the period.
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⁹⁹Ordinary shares may be issued, or the number of ordinary shares outstanding may be reduced , without corresponding change in resources .Examples include: (a) capitalization or bonus issue (i.e., stock dividend) and (b) a share split or reverse split share (consolidation of shares). ¹⁰⁰In addition, basic and diluted EPS of all periods presented shall be adjusted for the efects of errors and adjustments resulting from changes in accounting policies accounted for prospectively. ¹⁰¹Dilution is a reduction of EPS or an increase in loss per share resulting from the assumption that convertible instruments are converted, options and warrants are exercised, or ordinary shares are issued upon fulfillment of certain conditions ¹⁰²Contract that require the entity to repurchase own shares , such written put option, which give the holder the contractual right to sell ordinary shares at a specified price, are reflected in the calculation of diluted EPS if the efect is dilutive.
Accounting for BOT transactions Build/operate/transfer transactions (commonly called “BOT” transactions) give the guarantee right to construct or to buy and operate certain public work. BOT transactions typically occur under a long term contract to construct infrastructure projects such as roads, rail roads, bridges, viaducts, dams, airports, tunnels, etc., which take several years to complete. These transactions are usually entered to as a means for the government to finance the construction of a public work. The grantee receives from the grantor the right to carry out the specific project and be suitably remunerated. In this case, the remuneration received normally comprises the payment for the construction costs incurred and a profit margin. Sometimes the grantee is entitled to operate the public works projected after its completion in order to generate income .The operating incomes enables the grantee recover the construction costs and the operating and maintenance expenses and to earn profit margin. The grantee normally would also be allowed to recover any amount that was paid to the government for the cession rights. At the end of the term of the cession the project assets and operating rights are transferred to the grantor. the
Costs Costs incurred for the construction of public works might include: (A) Materials used in the construction of the project, depreciation of fixed assets used in the work (B) Labor cist related directly to the specific contract, i.e. costs of labor on the construction site, including supervision (C) Indirect costs such as insurance, technical assistance, and indirect construction expenses (D) General or overhead costs such as administrative expenses or financial costs. Accounting for income earned form a concession The operating revenues earned under BOT contract should be recognized when it is possible to generate income through the provision of services, usually to third parties, and when the related costs and expenses have been incurred or can be estimated. Otherwise, payments received from the governments and others should be deferred liabilities (deferred or unearned income) and revenues should not be accrued into the profit and loss accounts for the accounting period. When the grantee has the right to receive income from the operation of public work after it construction, the construction costs incurred should be charged to fixed assets accounts (e.g., road construction where the income is generated form the right to collect tolls. In one of the largest BOT transactions in history, the grantees responsible for the construction of the tunnel which links the United Kingdom and France have until the year 2041 to recover their investment through the operations before they to turn the operations back to the grantors of the operating rights. Income for the construction of public should be recognized using the ‘percentage of completion’ method of accounting for
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construction projects if the amounts earned can be reasonably accurately estimated during the period of construction. As alternative, if the amounts earned can reasonably accurately, the grantee may use the complete method of accounting, which would mean that construction earrings would be recognized upon the conclusion of the construction phase of the contract when the work has been completed to satisfaction for the government. These two methods of accounting are accrual methods, which mean that recording of income, would be made when the earned according to the principles described in this paragraph regardless of when accounts become billable to the government for cash flow purposes – either on an interim basis or on completion of the project. To achieve proper matching of costs incurred and revenues earned, all preconstruction and construction costs should be capitalized when incurred (meaning paid or an obligation incurred to make payments at a later date) into asset accounts in the records of the grantee. Such amount would then be transferred to accounting period profit or loss accounts when the related income is earned on the accrual basis. If this method of accounting is followed, the profit and loss in the years of concession operations might show only the expenses incurred, and thus losses; and the year in which revenues are received in cash would show the earnings, which might not have been earned exclusively in that year. Of course, if all of the construction is completed and the revenues are earned in the same accounting period, there would be no violation of the generally accepted concept of the matching principle of accounting. In applying the ‘percentage of completion’ method of construction accounting, there are two ways which may used to estimate the revenues earned during accounting periods: (a) Cost incurred during the year as a percentage of the total estimated costs of the project; and. (b) Revenue recognized on the basis of a technical report on the extent of the project completion. The percentage of the proportion of completion in method (b) should be applied to the amount of total revenue set forth in the concession agreement. Also, related pre-construction and construction period cost s should be charged to the same accounting period’ s profit or loss accounts, whether or not such costs have been actually paid in cash. However, for large and complex public works, particularly those with sub-projects of variable durations, it may be difficult to use one single percentage of completion with respect to the entire project. In this situation the ratio of costs incurred over year total costs of the works is the best method to applied to the total agreed revenues for the construction phase. The use of either these two method permits the income to be distributed among the periods in which the work is performed, or the costs are incurred, and results in a more accurate economic measurement overtime of net income.
Accounting for advance payments Cash advances received for services to be performed in the future should recorded as liabilities since payments represent an obligation of an enterprise to perform services at a later date. If for some reason this is not possible, the advances would have to be returned under normal circumstances. Advances received which exceed the income earned in the period should remain under the ‘liabilities’ section of the accounts until the services are rendered or the advance payments have been returned. Provision for losses When a loss is incurred under a contract, whether from construction or from operation of the project, it should be immediately recognized by the grantee as an expense in the current accounting period. Transfer to the public works assets to the grantor following the termination of the concession agreement When the agreement states the grantee should not fully or partially reimbursed for the assets transferred to the government at the end of the contract period, the grantee’s compensation is the revenues from the operation of the concession .In this case, the assets should be depreciated down to
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their net realizable value, if any at the conclusion of the contract .Generally, the net book value upon disposal will be equal to the amount of the repayment since the rate of depreciation must take into account the residual value of the concession assets. Any diference from what was the recorded would be recognized as a gain or loss from the revision of an estimate in the accounting period when determinable. If the contract state that the asset should be transferred at fair value any diference between that amount and the net book value is recorded in the profit and loss account. Disclosures In addition to the appropriate disclosures referred to in previous paragraphs, the notes to financial statements of concessions for the construction of public works should include the total value of the assets, the stage of completion at the balance sheet date, and the method adopted recognize revenues.
IFRIC 12: Service Concession Arrangements Service concessions arrangements are arrangements whereby a government or other body grants contract for the supply of public services - - such as roads, energy distribution, prisons or hospitals – to private operators. The objective of this project IFRIC is to clarify how certain aspects of existing IASB literature are to be applied to service concession arrangements. Two Types of Service Concession Arrangements IFRIC 12 draws a distinction between two types of service concession arrangement: 1.) The operator receives a financial asset, specifically an unconditional contractual right to receive cash or other financial asset from the government in return for constructing or upgrading the public sector asset. 2.) The operator receives an intangible assets – a right to charge for use of the public sector asset that it constructs or upgrades .A right to charge users is not an unconditional right to receive cash because the amounts are contingent on the extent to which the public uses the service. IFRIC 12 allows for the possibility that both types of arrangement may exist within a single contract: to the extent that the government has given an unconditional guarantee of payment for the construction of the public sector asset, the operator has financial asset; to the extent that the operator has to rely on the public using the service in order to obtain payment, the operator has an intangible asset. Accounting – Financial asset model The operator recognizes a financial asset to the extent that it has an unconditional contractual right to receive cash or another financial asset from or at the direction of the grantor for the construction services. The operator has an unconditional right to receive cash if the grantor contractually guarantees to pay the operator (a) specified or determinable amounts or (b) the shortfall, if any, between amounts received from the users of the public service and specified or determinable amounts received from the users of the public service and specified or determinable amounts, even if payments is contingent on the operator ensuring that the infrastructure meets specified quality or efficiency requirements. The operators measure the financial asset at fair value. Accounting- Intangible asset model The operator recognized intangible assets to the extent that it receives a right (a license) to charge users of the public service. A right to charge users to the public is not an unconditional right to receive cash because the amounts are contingent on the extent that the public uses the service. The operator measures the intangible asset at fair value. Operating revenue The operator of a service concession arrangement recognizes and measures revenue in accordance with PASs 11 and 18 for the services it performs. Efective Date IFRIC 12 is efective for annual periods beginning on or after 1 January 2008.
PRFS for Small & Medium Entities (SMEs) HISTORICAL BACKGROUND The Philippine Financial Reporting Standards for Small & Medium Entities (PFRS for SMEs) is the answer to the long-felt need for the standards of financial reporting for small and medium-size entities, which a consequence do not have to comply with full PFRS. Many of the principles in full PFRS for recognizing and measuring assets, liabilities, income and expenses have been simplified, topics that
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are not relevant to small and medium entities (SMEs) have been omitted , and the required disclosure have been significantly reduced. In the Philippines, FRSC (Financial Reporting Standards Council) and SEC (Securities and Exchange Commission) set the rules and regulations pertinent o financial reporting SMEs: 13 October 2009 – FRSC adopts “PFRS for SMEs” form IFRS for SMEs” issued in July 2009 by IASB. 3 December 2009 –Philippine SEC adopts “PFRS for SMEs” as a part of its rules and regulation. 1 January 2010 – Efective date of application of “PFRS for SMEs” in the Philippines. WHAT ARE SMALL & MEDUIM ENTITIES? This common question of someone studying PFRS for SMEs for the first time. SMEs are known by variety of terms, including small & medium-sized entities (SMEs), private entities, and non-publicly accountable entities (NPAEs). Consider the following definition provided by Section 1 of the PFRS for SMEs: “SMALL & MEDUIM ENTITIES” ARE ENTITIES THAT: (a) Do not have public accountability (b) Publish general purpose financial statement for external users An entity has public accountability if: (a) Its debts or equity instruments are traded in a public market or it is in the process of issuing such instruments for trading in a public market ( a domestic or foreign stock exchange or an over-thecounter market , including local and regional markets ),or (b) It holds the assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses. This is typically the case for banks, credit unions, insurance companies, securities brokers/dealers mutual funds and investment banks. The Securities and Exchange Commission, in its En Banc Resolution dated August 13, 2009, adopted a definition of ‘small & medium entities’ that includes a size criterion: “An entity is an SME if: (a) The entity has total assets of between P 3 million and 350 million or total liabilities of between P 3million and 250 million. (b) It is not required to file financial statements under SRC Rule 68.1; (c) It is not the process of filling its financial statements for the purpose of issuing any class of instruments in a public market; (d) It is not a holder of secondary license issued by a regulatory agency , such as bank (all types of bank), an investment house ; a finance company, an insurance company , a securities broker/ dealer, a mutual fund and a pre-need company ; and (e) It is not a public utility” PRFS for SMEs vs. FULL PRFS With the adoption of PFRS for SMEs, the term “PFRS” shall now be composed of two groups of financial reporting standards:
PRFS
FULL PFRS PRFS for
The PRFS for SMEs was developed by: extracting fundamental concepts in the Conceptual Framework and principles from full PFRS considering modifications appropriate on the basis of users ‘ needs and cost –benefit consideration It is important to note that while the PFRS for SMEs is mainly patterned after full PRFS. PFRS for SMEs is completely stand-alone set of standards .The only fallback option to full PFRS is the option to use PAS 39 instead of the financial instruments sections of PFRS for SMEs. There are certain standards in full PFRS that were not include as part of PFRS for SMEs: segment reporting, interim reporting, earnings per share and assets held for sale The PFRS for SMEs has a total of 35 sections, organized by topic. No bold front was used (unlike full PFRS) and it is simplified.
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NOTES TO THE REVIEWEES
The following section of lecture notes is not exhaustive enumeration of the standards contained in the PFRS for SMEs; they are mere highlights of each of the thirty-five 35 sections of the PFRS for SMEs. Variations and deviations from full PFRS as well as exclusive or unique standards for SMEs are highlighted boxes.
SECTION 1: Small & Medium Sized and Entities SMEs are used as a financial reporting standards council is entities that are not publicly accountable, and publish general purpose financial statements for external users. Listed companies may not used PFRS for SMEs no matter what how small they are. If publicly accountable entity uses PFRS for SMEs, its financial statements shall not be described as conforming to the PFRS for SMEs – even if law or regulation in its jurisdiction permits or requires PFRS for SMEs to be used publicly accountable entities. A subsidiary whose parent uses full PFRS is not prohibited from using this PFRS for SMEs in its own FS if that subsidiary by itself does not have public accountability. If a subsidiary’s FS are described as conforming to the PFRS for SMEs, it must comply with all the provisions of this PFRS. SECTION 2: Concepts and Pervasive Principles The objective of FS is to provide information about the financial position , performance and cash flows of an entity Financial statements also show the results of stewardship of management- the accountability of management resources entrusted to it. Qualitative characteristics of FS: under stability, relevance, materiality, reliability substance over form, prudence, completeness, comparability, timeliness, and balance between benefit and cost.
use
Elements of financial position: asset, liability and equity Elements of performance : income and expenses Recognition criteria : probable and measurable An entity shall not recognize a contingent asset as asset. however, when the flow of future economic benefits to entity is virtually certain, then the related asset is not a contingent asset, and its recognition is appropriate. A contingent liability is either a possible but uncertain obligation present obligation that is not contingent liability as a liability as a liability, except for contingent liabilities of an acquire in business combination (based on section 19 Business Combinations and Goodwill). Two measurement bases : historical cost and fair value Amortized historical cost is the historical cost of an asset or liability plus or minus that portion of its historical cost previously recognized as expense or income. The requirement for recognizing and measuring assets, liabilities, income and expenses in PFRS for SMEs are based on pervasive principles that are derived from the Conceptual Framework of Accounting and from full PFRS. An entity shall prepare it financial statements , except for cash flow information , using the accrual basis of accounting An initial recognition, an entity shall measure assets and liabilities at historical cost unless a PFRS for SMEs requires initial measurement on another basis such as fair value. An entity measures basic financial assets and basic financial liabilities (as defined in Section 11 on Basic Financial Statements) at amortized cost less impairment except for investments in nonconvertible and non-puttable preference and ordinary shares at the publicly traded or whose fair value can otherwise be measured reliably, which are measured at fair value with changes in fair value recognized in profit or loss. An entity generally, measures all other financial assets and financial liabilities at fair value, with changes in fair value recognized in profit or loss, unless PFRS for SMEs requires or permits measurement on another basis such as cost or amortized cost. Most non-financial assets that an entity recognized at historical cost are subsequently measured on other measurement bases. For example: (a) An entity measures property, plant and equipment at the lower of depreciated cost and recoverable amount. (b) An entity measures inventories at the lower of cost selling price is less cost to complete and sell. (c) An entity recognized an impairment loss relating to non-financial assets that are use or held for sale. Measurement of assets at those lower amounts is intended to ensure that an asset that are in or held for sale amount greater than the entity expects to recover from the sale or use of that asset.
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For the following types of financial assets, PFRS for SMEs permits or requires measurement at fair value : (a) Investments in associates and joint ventures that an entity measures at fair value ( based on Section 14 and 15 respectively) (b) Investments property that an entity measures at fair value (based on Section 16) (c) Agricultural assets (biological assets and agricultural produce at point of harvest) that an entity measures at fair value less estimated costs to sell (based on Section 34) An entity not ofset assets and liabilities, or income and expenses, unless required or permitted by PFRS for SMEs.
SECTION 3: Financial Statement Presentation The application of PFRS for SMEs with additional disclosures when necessary is presumed to result in FS that achieve a fair presentation of then financial position, financial performance and cash flows of SMEs. Financial statements shall not be described as complying with PFRS for SMEs unless they comply with all the requirements of this PFRS. A complete set of FS shall include of the following : (a) Statement of Financial Position (balance sheet) (b) Either a singles Statement of Comprehensive Income (showing profit or loss and items of other comprehensive income”) or two statements : income statements & statement comprehensive income (c) Statement of Changes in Equity (d) Statement of Cash Flows (e) Notes, comprising summary of significant accounting policies and other explanatory information If an entity has no items of other comprehensive income (OCI), it can present only an Income Statement, it may present a Statement of Comprehensive Income in which the bottom line is “profit or loss”. If only changes to equity arises from profit or loss payments of dividends , corrections of prior period errors and changes in accounting policy , the entity may present a single Statement of Income and Retained Earnings .(See Section 6) The only OCI items under PFRS for SMEs are: Some foreign exchange translation gain and losses (See Section 30) Some changes in fair values of hedging instruments (See Section 12) Some actuarial gains and losses (See Section 28) SECTION 4: Statement of Financial Position PFRS for SMEs allows this report to be called the “Balance Sheet”. The minimum lines items for SMEs are basically the same as full PFRS, except that non-current assets held for sale is not among the minimum line items of the balance sheet for SMEs. Current/non-current distinction is not required if entity concludes liquidity approach (ascending or descending) is better. If an entity’s normal operating cycle is not clearly determinable its duration is assumed to be 12 months PFRS for SMEs does not prescribe sequence or format in which items are to be presented; it simply provides a list of minimum items that are sufficiently diferent in nature or function to warrant separate presentation in the statement of financial position. SECTION 5: Statement of Comprehensive Income and Income Statements Single –statement approach : Statement of Comprehensive Income shall include all items of income and expenses recognized for the period Two –statement approach: The Income Statement shall display items considered in determining profit or loss and the Statement of Comprehensive Income shall begin with profit or loss as its first line and shall displays items of OCI (See SECTION 4) with the total comprehensive income as its bottom line. A change from the single statement approach to the tow-statement approach , or vice-versa, is a change in accounting policy to which Section 10 applied.
SECTION 6: Statement of Changes in Equity and Statement Income and Retained Earnings
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Section 3 permits an entity to present a statement of income and retained earnings in place of statement of comprehensive income and a statement of changes in equity if the only changes in equity arise from: Profit or loss Payment of dividends Correction of prior period errors Changes in accounting policy An entity shall present in the statement of income and retained earnings of the following information: Retained earnings (at the beginning of reporting period) Dividends declared and paid or payable (during the period) Restatement of retained earnings for corrections of prior period errors Restatement of retained earnings for changes in accounting policy. Retained earnings (at the end of the reporting period)
SECTION 7: Statement of Cash Flows Cash flows must be classified according to operating ,investing and financing activities An entity shall present cash flows from operating activities using either the direct or indirect method. SECTION 8: Notes to Financial Statements An entity normally presents the notes in the following order: (a) A statement that the FS have been prepared in compliance with the PFRS for SMEs (b) A summary of significant accounting policies applied (including the measurement basis used in preparing the Fsand other accounting policies used that are relevant to an understanding of the FS) (c) Supporting information for items presented in the FS (d) Any other disclosures An entity shall disclose information about judgments that management has made in the process of applying accounting policies, key assumptions concerning future, and other key sources of estimation uncertainties. SECTION 9: Consolidated and Separate Financial Statements A parent entity shall present consolidated financial statements in which it consolidates its investment in subsidiaries ; consolidated financial statements shall include all subsidiaries of the parent. Consolidation of FS required when there is a parent subsidiary relationship ; except when : The subsidiary was acquired with intent to sell or to dispose within one year The parent itself is subsidiary and the ultimate or intermediate parent produces consolidated FS that comply with full PFRS or PFRS for SMEs An entity shall prepare consolidated FS that include the entity and any Special Purpose Entities* that are controlled by that entity. *SPECIAL PURPOSE ENTITIES (SPEs) are created to accomplish a narrow objective (e.g.,to efect a lease , indertake research and development activities or securitize financial assets); SPEs may take the form of a corporation, trust, partnership or unincorporated entity. SME’s are created with the legal arrangements that impose strict requirements over the operations of the SPE. An entity shall present non-controlling interest in the consolidated statements of financial position within equity, separately form the equity of the owners of then parent PFRS for SMEs does not acquire presentation of separate financial statements for the parent entity or for the individual subsidiaries; If parent prepares separate FS and describes them as conforming to PFRS for SMEs. In the separate FS, the parent shall adopt a policy of accounting for its investment in subsidiaries either at: (a) Cost less impairment or (b) Fair value with changes in fair value recognized in profit or loss. SECTION 10: Accounting Policies, Estimates and Errors An entity need not to follow a requirement in PFRS for SMEs if the efect of doing so would not be material. If PFRS for SMEs does not address an issue, an entity shall use judgment in developing an accounting policy that results inn most relevant and reliable information. In making judgment, an entity shall refer to the: (1) Requirements and guidance in PFRS for SMEs dealing with similar and related issues (2) Concepts and pervasive principles in Section 2 (3) Requirements and guidance in full PFRS dealing with similar and related issues (not required) Change in accounting policy: If mandated , follow the transitional provisions If voluntary, efect retrospective application Change in accounting estimates is accounted for prospectively Correction of prior period error:
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By restating the comparative amounts for the prior period (s) presented which the error occurred, By adjusting the retained earnings at the beginning of the year of discovery of the error.
SECTION 11: Basic Financial Instruments In contrast to Section 12, Section 11 applies to basic financial instruments and is relevant to all entities. Section 12 applies to other , more complex financial instruments and transactions; if an entity enters into only basic financial instruments transactions then Section 12 is not applicable. An entity has the option PAS 39 instead of Section 11 and 12 ; however , even if PAS 39 is followed, use Section 11 and 12 for the required disclosures (not PFRS 7). Examples of basic financial instruments covered by Section 11 include: Cash Bank accounts (demand and fixed deposits) Commercial paper and bills Accounts, loans and notes receivable Accounts, loans and notes payable Bonds and debt instruments where return to the holder is fixed or referenced to an observable rate Investments in non-convertible and non-puttable ordinary preferences shares Commitments to receive a loan if the commitment cannot be net settled in cash THE AMORTIZED COST model is required for all basic financial instruments , excepts for investments is non-convertible and non-puttable preferences shares and non-puttable ordinary shares that are publicly traded or whose fair value can be measured reliably. When a financial asset or liability is recognized initially , an entity shall measure it at the transaction price (including transaction cost except in the initial measurement of financial assets and liabilities that are measured at fair value through profit or loss) At the end of each reporting period , an entity shall measure financial instruments as follows: Debt instruments – at amortized cost using the effective interest method. Commitments to receive a loan – at cost (which is sometimes nil) less impairment Investment in non-convertible preference shares and non-puttable ordinary or preference shares- at fair value (with changes recognized through profit or loss) or cost less impairment (if fair value cannot be measured reliably) At the end of each reporting period, an entity shall asses whether there is an objective evidence of impairment, the entity shall recognize an impairment loss in profit or loss immediately .Reversal of impairment losses in subsequent periods may be afected as necessary.
SECTION 12: Other Financial Instrument Issues
Examples of financial instruments covered by Section 12 include: Investments in convertible and puttable ordinary preference shares Options, rights , warrants , futures contracts, forward contracts and interest rate swaps that can be settled in cash or by exchanging another financial instrument Financial instruments that qualify and are designated as hedging instruments Commitment to make a loan to another entity Commitments to receive a loan if the commitment cannot be net settled in cash Asset-backed securities such as mortgage obligations, repurchase agreements and securitized packages of receivables. When a financial asset or liability under Section12 is recognized initially, an entity shall measure at its fair value which is normally transaction price. At the end of each reporting period , an entity shall measure financial instruments within the scope of Section 12 at fair value and recognize changes in fair value in profit or loss, except for equity instruments that are not publicly traded and whose fair value cannot otherwise be measured reliably shall be measured at cost less impairment. If reliable measure of fair value is no longer available for an equity instrument that is not publicly traded but is measured at fair value through profit or loss, its fair value at the last date the instrument at this cost less impairment until a reliable measure of value becomes available. If specified criteria are met, an entity may designate a hedging relationship between a hedging instrument and hedged item in such a way to qualify for hedge accounting. SECTION 13: Inventories Measurement principle : Inventories are measured at lower of cost or net realizable value.(Net realizable value is selling price less cost to complete and sell) Cost formulas include (a) specific identification method , (b) first-in, first-out (FIFO) method and (c) weighted average method. Last-in, first-out method (LIFO) is not permitted. SECTION 14: Investment in Associates
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Measurement principle : option use (a) COST model-cost less impairment [ when there is published price quotation, use fair value model] (b) EQUITY method (c) FAIR VALUE model – fair value through profit or loss [ if impracticable , use cost model] NOTE: cost model and fair value model are not allowed under PAS 28. An investor shall classify investments in associates as non-current assets
SECTION 15: Investment of Joint Ventures A joint venture is a contractual arrangement whereby tow or more parties undertake an economic activity that is subject to joint control. Joint ventures can take the form of jointly controlled operations, jointly controlled assets, or jointly controlled entities. Measurement principle : option use (d) COST model-cost less impairment [ when there is published price quotation, use fair value model] (e) EQUITY method (f) FAIR VALUE model – fair value through profit or loss [ if impracticable , use cost model] NOTE: cost model and fair value model are not allowed under PAS 31. PAS 31 allows the use of either the equity method or proportionate consolidation method. SECTION 16: Investment Property An entity shall measure investment property at its cost at its initial recognition. Investment property whose fair value can be measured reliably without undue cost or efort shall be measured at fair value at each reporting date with changes in fair value recognized in profit or loss. An entity shall account for all other investment properties as property , plant and equipment using the cost-depreciation-impairment model in Section 17 SECTION 17: Property, Plant and Equipment (PPE) An entity shall measure investment property at its cost at its initial recognition at its cost. An entity shall measure all items of PPE at the BS date at cost less any accumulated depreciation and any accumulated impairment losses. NOTE: the revaluation model in PAS 16 is not supported by this section. An entity shall allocate the depreciable amount of an asset on a systematic basis over its useful life Depreciation methods: straight-line method , diminishing balance method, units of production method. SECTION 18: Intangible Assets other than Goodwill An entity shall measure an intangible asset initially at cost Internally generated intangibles shall not be recognized as intangible assets An entity shall measure intangibles at the BS date at cost less any accumulated amortization and any accumulated impairment losses. NOTE: the revaluation model in PAS 38 is not supported by this section. An entity shall allocate the amortizable amount of intangible assets on a systematic basis over its useful life All intangible assets are considered to have been a finite useful life ; if an entity is unable to make a reliable estimate of the useful life of an intangible asset, the life shall be presumed to be ten years.
SECTION 19: Business Combination and Goodwill •
All business combinations shall be accounted for by applying the purchase method. The acquirer shall measure the cost of a business combination as the aggregate of: (a) The fair values of assets given, liabilities incurred and equity instruments issued by the acquirer, in exchange for control of the acquiree, plus (b) Any costs directly attributable to the business combination. Any diference between the cost of the business combination and the acquirer’s interest in the net fair value of the identifiable assets, liabilities and provisions for contingent liabilities recognized shall be accounted for as goodwill or negative goodwill. After initial recognition, the acquirer shall measure goodwill acquired in a business combination at cost less accumulated amortization and accumulated impairment losses . If an entity is unable to make a reliable estimate of the useful life of goodwill, the life shall be presumed to be ten years. If the acquirer’s interest in the net fair value of the identifiable assets, liabilities and provisions for contingent liabilities recognized exceeds the cost of the business combinations (sometimes referred to as negative goodwill) the acquirer shall: (a)reassess the identification and measurement of the cost of combination, and (b) recognize immediately in profit or loss any excess remaining after that reassessment.
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SECTION 20: Leases
Classification of leases into finance and operating lease is similar to PAS 17 A leases is classified as a finance lease if it transfers substantially all the risk and rewards incidental to ownership: otherwise , it is classified as an operating lease. Under an operating lease, a lessee shall recognize lease payments under operating leases (excluding costs for services such as an insurance and maintenance) as an expense on a straightline basis . Under a finance lease, a leasee shall recognize the leased assets and lease liabilities at lower amount between the fair value of the leased property and present value of minimum lease payments. Any initial direct costs of the lessee (incremental costs that are directly attributable to negotiating and arranging a lease) are added to the amount recognized as an asset. A lessee shall apportion minimum lease payments between the finance charge and the reduction of the outstanding liability using the efective interest method.
SECTION 21: Provision and Contingencies
Most provisions of this Section are similar to PAS 36. An entity shall recognize provision as a liability and shall recognize the amount of the provision as in expense, unless another section of the PFRS for SMEs requires the cost to be recognized as part of the cost of an asset such as inventories or property, plant and equipment.
SECTION 22: Liabilities and Equity
Equity is the residual interest in the assets of an entity after deducting all it’s liabilities A liability is a present obligation of the resources embodying economic benefits. An entity shall recognize the issue of shares or equity instruments as equity when it issues those instruments and another party is obliged to provide cash or other resources to the entity in exchange for the instruments. An entity shall account fir the transaction costs of an equity transaction as a deduction for equity, net of any related income tax benefit. A capitalization or bonus issue (sometimes referred to as a stock dividend) is the issue of new shares to shareholders in proportion to their existing holding. For example , an entity may give its shareholders one dividend or bonus share for every five shares held. A share split (sometimes referred to as stock split) is the dividing of an entity’s existing shares into multiple shares. For example, in a share split, each shareholder may receive one additional share for each share held. In some cases, the previously outstanding shares are cancelled and replaced by new shares. Capitalization and bonus and issues and share splits do not change total equity. Treasury shares are the equity instruments of an entity that have been issued and subsequently reacquired by the entity. An entity shall deduct from equity the fair value of the consideration given for the treasury shares. The entity shall not recognize a gain or loss in profit or loss on the purchase, sale, issue or cancellation of treasury shares.
SECTION 23: Revenue Most provisions of this Section are similar to PAS 11 and 18. An entity shall measure revenue at the fair value of the consideration received or receivable. The percentage-of-completion method is used to recognize revenue from rendering services and from construction contracts. An entity shall recognize revenue on the following bases: Interest shall be recognized using the efective interest method Royalties shall be recognized on an accrual basis in accordance with the substance of the agreement. Dividends shall be recognized when the shareholder’s right to receive payment is established.
SECTION 24: Government Grants Most provisions of this Section are similar to PAS 20. An entity shall measure grants at the fair value of the asset received or receivable. An entity shall recognize government grants as follows: (a) A grant that does not impose specified future performance conditions on the recipient is recognized in income when the grant proceeds are receivable. (b) A grant that imposes specified future performance conditions on the recipient is recognized income only when the performance conditions are met. (c) Grants received before the revenue recognition criteria are satisfied are recognized as a liability.
SECTION 25: Borrowing Costs
An entity shall recognize all borrowing costs as an expense in profit or loss in the period in which they are incurred.
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SECTION 26: Share based Payment Most provisions of this Section are similar to PFRS 2. For equity-settled share-based payment transactions, an entity shall measure the goods or services received , and the corresponding increase in equity , at the fair value of the goods or services received; if the fair value cannot be estimated reliably, then the entity shall measure the value by reference to the fair value of the equity instruments granted. For cash-settled share-based payment transactions, an entity shall measure the goods and services acquired and liability incurred at the fair value of the liability Some share-based payment transactions give either the entity or the supplier of those goods or services with a choice of whether the entity settles the transaction in cash (or other assets) or by issuing equity instruments. In such a case , the entity shall account for the transaction as a cashsettled share-based payment transaction. SECTION 27: Impairment of Assets This section is divided into two: (1) Impairment of inventories (2 ) Impairment of assets other than Inventories. Impairment of Inventories: An entity shall assess at each reporting data whether any inventories are impaired. An entity measures impairment by comparing the carrying amount of each item of investor y with its selling price less costs to complete and sell. If an item of inventory is impaired, the entity shall reduce the carrying amount of the inventory to its selling price less costs to complete and sell, the reduction is an impairment loss and it is recognized immediately in profit or loss. Impairment of assets other than Inventories; If the recoverable amount of an asst is less than it’s carrying amount, an entity shall reduce the carrying amount of the asset to it’s recoverable amount. The recoverable amount of an asset or cash-generating unit is the higher of it’s fair value less costs to sell and it’s value in use. An entity shall recognize an impairment loss immediately in profit or loss. SECTION 28: Employee benefits A entity shall recognize the cost of all employee benefits to which it’s employees have become entitled as a result of service rendered to the entity during the reporting period: (a) As a liability, after deducting amounts that have been paid either directly to the employees or as a contribution to an employee benefit fund. b) As an expense, unless another section of PFRS for SME’s requires the cost to be recognized as part of the cost of an asset. Employee benefits are classified as: (a) Short-term employee benefits (e.g ,wages paid annual leave and short-term non-monetary benefits) (b) Post-employment benefits (e.g, defined contribution plans and defined benefit plans) (c) Other long-term employee benefits (e.g, long-term compensated absences such as sabbatical leave) (d) Termination benefits Under defined benefit plans, an entity shall recognize all actuarial gains and losses in the period in which they occur, as part of either (1) profit or loss or (2) other comprehensive income. As a consequence, the corridor approach under PAS 19 is not allowed. SECTION 29: Income Tax An entity shall recognize a current tax liability for tax payable on taxable profit for the current and past periods. If the amount paid for the current and past periods exceeds the amount payable for those periods, the entity shall recognize the excess as a current tax asset. An entity shall recognize a deferred tax asset or liability for tax recoverable or payable in future periods as a result of past transaction or events. Such tax arises from the diference between the amounts recognized for the entity’s assets and liabilities and the recognition of those assets and liabilities by the tax authorities. Deferred tax assets and liabilities are classified as non-current. Discounting and ofsetting of current tax assets and liabilities are not allowed.
SECTION 30: Foreign Currency Translation An entity shall record a foreign currency transaction by applying to the foreign currency amount the spot exchange rate between the functional currency and the foreign currency at the date of the transaction. An entity shall translate it’s results and financial position into a diferent presentation currency using the following procedures: Assets and liabilities shall be translated at the closing rate.
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Income and expenses shall be translated at the exchange rates at the dates of the transaction. ( The use of average rate is allowed if this approximates the exchange rates at the transaction dates) All resulting exchange diferences shall be recognized in other comprehensive income.
SECTION 31: Hyperinflation All amounts in the financial statements of an entity whose functional currency is the currency of a hyperinflationary economy shall be stated in term of the measuring unit current at the end of the reporting period (i.e, an entity shall prepare general price level adjusted financial statements) The restatement of financial statements requires the use of a general price index that reflects changes in general purchasing power. Non-monetary items are restated while monetary items are not restated because they are expressed in terms of the measuring unit current at the end of the reporting period. SECTION 32: Events after the End of the Reporting Period Most provisions of this Section are similar to PAS 10. See page 8 of the TA Lecture Notes Two types of events after the reporting period: Type I Events (adjusting) – provide evidence of conditions existing at the end of the reporting period Type II Events (non-adjusting) – indicative of conditions arising after the end of the reporting period. SECTION 33: Related Party Disclosures Most provisions of this Section are similar to PAS 24. See pages 7 and 8 of the TA Lecture Notes. In considering each possible related party relationship, an entity shall assess the substance of the relationship and not merely the legal form. SECTION 34: Specialized Activities This section provides guidance on financial reporting by SMEs involved in three types of specialized activities: (1) agriculture (2) extractive activities (3) service concessions An entity engaged in agricultural activity shall determine it’s accounting policy for each class of it’s biological assets as follows: (a) The entity shall use the FAIR VALUE model for those biological assets for which fair value is readily determinable without undue cost or efort. (b) The entity shall use the COST model for all other biological assets. Agricultural produce harvested from an entity’s biological assets shall be measured at it’s fair value less costs to sell at the point of harvest. An entity engaged in the exploration for, evaluation or extraction of mineral resources (extractive activities) shall account for expenditure on the acquisition or development of tangible or intangible assets for use in extractive activities by applying Section 17 Property , Plant and Equipment and Section 18 Intangible Assets other than Goodwill, respectively Under a service concession arrangement, the private operator shall recognize a financial asset to extent that it has unconditional contractual right to receive cash or another financial asset from or at the direction of the grantor for the construction services: The private operator shall measure the financial asset at fair value. Thereafter, it shall follow Section 11 Basic Financial Instruments and Section 12 Other Financial Instrument Issues in accounting for the financial asset. The private operator shall recognize an intangible asset to the extent that it receives a right (a license to change users of the public service. The operator shall initially measure the intangible asset at fair value. Thereafter, it shall follow Section 18 in accounting for the intangible asset. SECTION 35: Transition to the PFRS for SMEs
A first-time adopter of PFRS for SMEs shall apply this section in it’s FS that conform to PFRS for SMEs. Section 35 requires an entity to prepare comparative FS Covering the current year and at least one prior year using PFRS for SMEs. An entity’s date of transition to PFRS for SMEs is the beginning of the earliest period for which the entity present full comparative information in accordance with PFRS for SMEs in it’s first FS that conform to PFRS for SMEs Section 35 cites many exemptions for restating specific items in it’s first PFRS-for-SME-based FS.
(END OF LECTURE NOTES )
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