PFRS 1 – FIRST TIME ADOPTION TO PFRS

FIRST TIME ADOPTER

 An entity that presents for the first time its financial statements in conformity with Philippine
Financial Reporting Standards (PFRS).
 An entity, for the first time makes an explicit an unreserved statement that its general-purpose
financial statements comply with Philippine Financial Reporting Standards (PFRS).
Note:

 GAAP is used first.

 PFRS 1 is adopted in Philippines on July 1, 2009.
 Full PFRS – 6 components of FS
 Now Income Statement and Statement of Comprehensive Income is combined.
 Additional: Statement of Financial Position in the beginning of the earliest period for which an
entity presents full comparative information under PFRS in its first PFRS financial statements.
 Application is in retrospective, and use retrospective application.
 Conduct size test to know what PFRS is to use. (Large Public Entity, Medium Size Entity, small
entity)

FIRST PFRS FINANCIAL STATEMENTS

 First annual statements in which an entity adopts PFRS by an explicit and unreserved statement
of compliance with PFRS.
(Note: a change in accounting policy must have retrospective effect.)

FINANCIAL STATEMENTS PRESENTED BY ENTITY IN CURRENT YEAR WOULD

QUALIFY AS FIRST PFRS FINANCIAL STATEMENTS UNDER THE FOLLOWING
CONDITIONS:
1. When an entity presented its most recent previous financial statements:
a. Under National GAAP inconsistent with PFRS in all respects.
b. In conformity with PFRS in all respects but these statements did not contain an explicit
and unreserved statements of compliance with some but not all PFRS.
c. Containing an explicit statement of compliance with some but not all PFRS.
d. Under National GAAP with a reconciliation of selected figures to amounts determined
under PFRS.
2. When an entity prepared financial statements in the previous period under PFRS but the financial
statements were for internal use only.
3. When an entity prepared financial statements in the previous period under PFRS for consolidation
purposes without preparing a complete set of financial statements.

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 4. When an entity did not present financial statements in the previous period.

DATE OF TRANSITION TO PFRS

 It refers to the beginning of the earliest period for which an entity presents full comparative
information under PFRS in its first PFRS financial statements.
 The date of transition to PFRS depends on two factors:
a. The date of adoption of PFRS
b. The number of years of comparative information that an entity decides to present
together with the financial statements in the year of adoption.

ILLUSTRATION
An entity presented its most recent financial statements under previous GAAP on December 31,
2020. The entity decided to adopt PFRS on December 31, 2021 and to present a one-year comparative
information for 2020.
The beginning of the earliest period for which the entity should present full comparative
information would be January 1, 2020.
In this case, the opening PFRS statement of financial position would be dated January 1, 2020.
However, if the entity decided to present two-year comparative information for 2019 and 2020,
the beginning of the earliest period for which the entity should present full comparative information
would be January 1, 2019.
In this case, the opening PFRS statement of financial position would be January 1, 2019.

OPENING PFRS STATEMENT OF FINANCIAL POSITION

 It is the statement of financial position prepared by a first-time adopter on the date of transition to
PFRS.
 Is the starting point for accounting in accordance with PFRS.
In preparing opening statement of financial position, an entity is required to:
a. Recognize all assets and liabilities required by PFRS.
b. Derecognize assets and liabilities not permitted by PFRS.
c. Reclassify items that is recognize under previous GAAP as one type of asset, liability or equity
but a different type of asset, liability, or equity under PFRS.
d. Measure all recognized assets and liabilities in compliance with PFRS.

 Any adjustments required to present an opening PFRS statement of financial position should be
recognized in retained earnings or if appropriate, in another component of equity.

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FIRST PFRS FINANCIAL STATEMENTS

 If an entity adopts PFRS for the first time in the current year, its first PFRS financial statements
include the following:
a. Three statements of financial position at the end of current year, at the end of prior year
and at the date of transition to PFRS.
b. Two statements of comprehensive income for the current year and prior year.
c. Two separate income statements for the current year and prior year.
d. Two statements of changes in equity for the current year.
e. Two statements of cash flows for the current year and prior year.
f. Notes to financial statements including comparative information.

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 PFRS 2 – SHARE BASED PAYMENTS

Scope of PFRS 2
1. Equity-settled share-based payment transaction – is a transaction whereby an entity acquires
goods or services and instead of paying in cash the entity issues its own shares of stock or share
options; or (Note: The equity is used to settle the transaction)
2. Cash-settled share-based payment transaction – is a transaction whereby an entity acquires
goods or services and incurs an obligation to pay cash at an amount that is based on the fair value
of equity instruments; or (Note: Transaction is settled through cash but on the basis of fair value
of equity instruments.)
3. Choice between equity-settled and cash-settled

 Equity instrument is a contract that evidences a residual interest in the assets of an after
deducting all of its liabilities.

Core Principle

 An entity shall recognize in profit or loss and financial position the effects of share-based
payment transaction, including expenses associated with transactions in which share options are
granted to employees. (Note: The liability is the priority since it is an obligation and the residual
will be for the equity)
Recognition

 Goods and services received in share-based payment transactions are recognized when the goods
are received or as the services are received. Goods or services received that do not qualify as
assets are recognized as expenses.
 The entity shall recognize:
o A corresponding increase in equity if the goods or services were received in an equity-
settled share-based payment transaction, or (Note: Upon issuance of shares the equity
will increase)
o A liability if the goods or services were acquired in a cash-settled share-based payment
transaction. (Note: You used cash to pay the obligation but on the basis of fair value of
company’s equity)
Equity-Settled Share-Based Payment Transactions

Summary of Initial Measurement

Transactions with Non-Employees Transactions with Employees and Others
Providing Similar Services
Goods or services acquired from non-employees Goods or services acquired from employees and
are measured using the following order of others providing similar services are measured
priority: using the following order of priority:
1. Fair value of goods or services received at 1. Fair value of equity instruments granted

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 measurement date. at grant date.
2. Fair value of equity instruments granted 2. Intrinsic value
at measurement date

 “Equity instrument granted” is the right (conditional or unconditional) to an equity instrument of

the entity conferred by the entity on another party under a share-based payment arrangement.
 “Measurement date” is the date at which the fair value of the equity instruments granted is
measured for the purposes of PFRS 2.
a. For transactions with non-employees, the measurement date is the date when the entity
received the good or service.
b. For transactions with employees and others providing similar services, the measurement
date is grant date.
 “Grant date” is the date at which the entity and the counterparty agree to a share-based payment
arrangement, being when the entity and the counterparty have a shared understanding of the
terms and conditions of the arrangement. (Note: Perfection of the contract/Meeting of the minds
of both parties)
 “Intrinsic value” is the difference between the fair value of the shares to which the counterparty
has the conditional or unconditional right to subscribe or the right to receive and the subscription
price (if any) that the counterparty is required to pay for those shares.
Share-Based Compensation Plans

 Share-based compensation plan is an arrangement whereby an employee is given compensation

in return for services rendered in the form of the entity’s equity instruments or cash based on the
fair value of the entity’s equity instruments or a choice of settlement between equity instrument
and cash. Examples:
1. Employee share options (equity-settled)
2. Employee share appreciation rights (cash settled)
3. Compensation plans with a choice of settlement between (1) and (2) above
Employee Share Option Plans – Equity Settled

 Share option is a contract that gives the holder (employee) the right, but not the obligation, to
subscribe to the entity’s shares at a fixed or determinable price for a specified period of time .
Some share options given to employees may not require any subscription price, meaning shares
will be issued to the employees in consideration merely for services rendered.
 Note:
 You can let the employee pay for the subscription or consider it as
payment to service he rendered
 It is a form of tax avoidance.
 It is still your choice whether to exercise your right or just buy in the
market because of much cheaper price.
Measurement of Compensation

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  Since employee share option plan is a transaction with an employee, the following order of
priority shall be used to measure the services received (salaries expense):
1. Fair value of equity instruments granted at grant price
2. Intrinsic value

Recognition of Equity-Settled Share-Based Compensation Plans

1. If the share options granted vest immediately, salaries expense shall be recognized in full with a
corresponding increase in equity at grant date. (right-away without conditions)
2. If the share options granted do not vest until the employee completes a specified period of
service, the entity shall recognize the related compensation expense as the services are rendered
by the employee over the vesting period. (with condition to fulfill, such us you must be 3 years in
company to received share base compensation plan)
In the absence of evidence to the contrary, it shall be presumed that the share options vest immediately.
(If silent problem, vest immediately)
Cash-Settled Share-Based Payment Transactions

 A cash-settled based payment transaction is one whereby an entity acquires goods or services
and incurs an obligation to pay cash at an amount that is based on the fair value of equity
instruments. (Note: Use cash to settle payment, but not ordinary cash since it is based in fair value
of equity instruments)
 The goods or services acquired and the liability incurred on cash-settled share-based payment
transactions are measured at the fair value of the liability.
 At the end of each reporting period and even on settlement date, the liability shall be remeasured
to fair value. Changes in fair value are recognized in profit or loss.
Employee Share Appreciation Rights (SARS) – Cash-Settled

 A share appreciation right is a form of compensation given to an employee whereby the

employee is entitled to future cash payment (rather than an equity instrument), based on the
increase in the entity’s share price from a specified level over a specified period of time.
Measurement of Compensation

 The liability for the future cash payment on share appreciation rights shall be measured, initially
and at the end of each reporting period until settled, at the fair value of the share appreciation
rights. Changes in fair value are recognized in profit or loss.
Recognition of Cash-Settled Share-Based Compensation Plans
a. If the share appreciation rights granted vest immediately, the entity shall recognize the related
compensation expense on the services received in full with a corresponding increase in liability at
grant date.
b. If the share options granted do not vest until the employee completes a specified period of
service, the entity shall recognize the services received, and a liability to pay for them, as the
employee renders service during that period.

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Share-Based Payment Transactions with Cash Alternatives

 If the counterparty (employee or non-employee) has the right to choose settlement between cash
(or other assets) or equity instruments, the entity has granted a compound instrument.
(Debt component and Equity component = compound)
 For transactions with non-employees, the equity component is computed as the difference
between the fair value of goods or services received and the fair value of the debt component at
the date of goods or services are received.
FV of goods received – 1,000
FV of debt component – 700 (priority to deduct first)
FV of equity component – 300 (residual after deducting liability)
 For transactions with employees and others providing similar services, the entity shall measure
the fair value of the compound instrument and its components as follows:
a. If the fair value of one settlement alternative is the same as the other, the fair value of the
equity component is zero, and hence the fair value of the compound financial instrument
is the same as the fair value of the debt component.
(Cash settled = Equity settled, FV of Equity Component will be 0, thus, FV of
Compound Financial Instrument = FV of Debt Component)
b. If the fair values of the settlement alternatives differ, the fair value of the equity
component will be greater than zero, in which case, the fair value of the compound
financial instrument will be greater than the fair value of the debt component.
(Cash Settled ≠ Equity Settled, FV of Equity Component > FV of Debt
Component)
 If the entity has the right to choose settlement between cash (or other assets) or equity
instruments, the entity has not granted a compound instrument. (There will be no compound
instrument)
 In such case, the entity shall determine whether it has a present obligation to settle in cash and
shall account for the share-based payment transaction accordingly.
 If the entity has a present obligation to settle in cash, it shall account for the transaction as a cash-
settled share-based payment transaction.
 If the entity has no present obligation to settle in cash, it shall account for the transaction as an
equity-settled share-based payment transaction.

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 PFRS 3 – BUSINESS COMBINATIONS

 A revised version of IFRS 3 was issued in January 2008

 Applied to business combinations in an entity's first annual period beginning on or after 1 July
2009.
OBJECTIVE

 To improve the relevance, reliability and comparability of the information about a business
combination and its effects.
CORE PRINCIPLE

 An acquirer recognizes the net assets of the acquiree at their acquisition date fair values.
PFRS 3 DOES NOT APPLY TO
1. Joint ventures
2. Acquisition of an asset that does not constitute a business
3. Business combination under common control
4. Investment entity at fair value through profit or loss
5. Not profit organizations/NGOs (non-government organization)

% OWNED RELATIONSHIP APPLICABLE ACCOUNTING STANDARD

0 to >20% N/A PAS 32 – Financial instruments: Disclosure and Presentation;
PAS 39 - Financial instruments: Recognition and
Measurement;
PFRS 9 – Financial Instruments, etc.
20% to >50% Significant influence PAS 28 – Investment in Associates
50% (may Joint Control PFRS 11 – Joint Arrangements
kahati w/
sharing)
<50% Control PFRS 3 – Business Combination
PAS 27 – Separate Financial Statement
PFRS 10 – Consolidated Financial Statement

DEFINITION OF A BUSINESS COMBINATION

 A business combination is “a transaction or other event in which an acquirer obtains control

of one or more businesses”
(Note:
1. IS 28/PAS 28 – Investment in associates and joint venture
 Hierarchy of influence of an entity over the other
 Around 20% - 50% - investment in associate (significant influence)
 Below 20% - held for trading/ordinary investor or stockholder PFRS 9

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  51% and up – business combination under PFRS 3 and PFRS 10 (consolidated
financial statements) (with total control)
CONTROL

 An investor controls and investee when the investor is exposed, or has rights, to variable returns
from its involvement with the investee and has the ability to affect those returns through its
power over the investee.
 Control is normal presumed to exist when the ownership interest acquired in the voting rights
of the acquiree is more than 50% (or 51% or more).
(Note:
1. Look for the voting rights/ordinary shares meaning with influence 51% or more
2. majority ownership of 51% in the voting rights, has more influence

 Control may exist even if the acquirer holds less than 50% interest in the voting rights of
acquiree, such as in the following cases:
1. The acquirer has the power to appoint or remove the majority of the board of
directors of the acquiree; or
2. The acquirer has the power to cast the majority of votes at board meetings or
equivalent bodies within the acquiree; or
3. The acquirer has power over more than half of the voting rights of the acquiree because
of an agreement with other investors; or (thru trust agreement, combine shares to have
control)
4. The acquirer has power to control the financial and operating policies of the acquiree
because of a law or an agreement.

ACCOUNTING FOR BUSINESS COMBINATIONS

 Business combinations are accounted for using the acquisition method. This method requires the
following:
1. Identifying the acquirer.
2. Determining the acquisition date; and
3. Recognition of assets, liabilities and NCI
4. Recognizing and measuring of goodwill. This requires recognizing and measuring the
following:
a. Consideration transferred
b. Non-controlling interest in the acquiree
c. Previously held equity interest in the acquiree
d. Identifiable assets acquired and liabilities assumed on the business combination

1. IDENTIFYING THE ACQUIRER

 The acquirer is the entity that obtains control of the acquiree. The acquiree is the
business that the acquirer obtains control of in a business combination.
 The acquirer is normally the entity that:
o Transfers cash or other assets and incurs liabilities;

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 o Issues its equity interest (except in reverse acquisition); (can issue shares to
acquire)
o Receives the largest portion of the voting rights;

o Has the ability to elect or appoint or to remove a majority;

o Dominates the management of the combined entity;

(Note:
 Merger – two or more companies come together to combine forces
where the company taking over is left as the existing company
A + B = A/B
 Consolidation – two different ventures come together, combine forces,
and join into one completely new venture.
A+B=C
o Significantly larger of the combining entities;
o Initiated the combination

(Note:

 Acquirer = Parent
Acquiree = Subsidiary
 A parent can have many subsidiary
 Acquirer buys control over the acquiree.
 Consideration transferred – it is the cash/other assets, liabilities, and equity interest used to
obtain control
 Its is paid to the previous owners of the acquiree.

2. DETERMINING THE ACQUISITION DATE

 The acquisition date is the date on which the acquirer obtains control of the acquiree.
 It can be earlier, later or same as “closing date”
i. Closing date is when the acquirer legally transfers the consideration, acquires
the assets and assumes the liabilities of the acquiree (stated in the contract)
 Measurement period – 1 year to adjust “provisional amounts”
i. On the acquisition date it must be in fair value but fair value is not always
available so you are given time of 1 year to fair value all the net assets, where
you can adjust all the provisional amounts assigned to net assets acquired.

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 3. RECOGNIZE ASSETS, LIABILITIES AND NCI

Identifiable net assets acquired = fair value

✓ intangibles
Only recognize identifiable assets acquired, and for
✕ previous goodwill
it to be identifiable assets you can sell it separately
✕ prepaid expenses
You can not sell goodwill and prepayment
separately because its indispensable with the entity
being acquired so it is not included in the fair value
Liabilities assumed = fair value of assets acquired

Non-controlling interest = fair value (full

good will)
= proportionate share of net assets (partial goodwill)

4. RECOGNIZING AND MEASURING GOODWILL

@ FV, incl Contingent consideration → Consideration transferred xxx
Either at (a) FV/full goodwill, or → Non-controlling interest in the acquiree (NCI) xxx
(b) proportionate share/partial
Goodwill

At acquisition date fair value → Previously held equity interest in the acquiree xxx
(binayad) Total xxx
(binili) At acquisition date fair value → Less: Fair value of net identifiable assets acquired (xxx)
Goodwill/(Gain on a bargain purchase) xxx

 On acquisition date, the acquirer recognizes a resulting:

a. Goodwill as an asset;
b. Gain on a bargain purchase as a gain in profit or loss.
(Note:

 If positive = recognize as asset = Goodwill

If negative = recognize as income (P&L) = Gain on bargain purchase

 Internally generated goodwill = hindi nirerecognize

Externally generated goodwill/nabili = nirerecognize as asset

CONSIDERATION TRANSFERRED

 The consideration transferred in a business combination is measured at fair value.

 Examples of potential forms of consideration include|:
a. Cash;

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 b. Other assets;
c. A business or a subsidiary of the acquirer;
d. Contingent consideration;
e. Ordinary or preference equity instruments, options, warrants and member interests of
mutual entities.
NON-CONTROLLING INTEREST IN THE ACQUIREE

 Non-controlling interest (NCI) is the equity in a subsidiary not attributable, directly or

indirectly, to a parent.
 NCI is measured either at:
a. Fair value, (the basis is the consideration transferred) Should exclude
“control premium”

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 (Note:

 Control premium refers to an amount that a buyer is willing to pay in excess of

the fair market value of shares in order to gain a controlling ownership interest
in a publicly traded company.

b. The NCI’s proportionate share of the acquiree’s identifiable net assets. (the basis is the
fair value of net assets acquired)

 Controlling interest = acquired by acquirer

Non-controlling interest = remaining interest not acquired by acquirer
 Let’s say you purchase 100% control in the acquiree, the NCI is 0.
 But if you purchase 75% ownership, the NCI is 25%.
a. NCI is the other investors, that have interest in the company but due to the percentage
they don’t have controlling interest.
b. Not enough to have control, because the control is with you.

PREVIOUSLY HELD EQUITY INTEREST IN THE ACQUIREE

 Previously held equity interest in the acquiree pertains to any interest held by the acquirer
before the business combination
 It happens in step acquisition/business combination achieved in stages
o Let’s say you have 10% ownership in company, and decided to acquire 50% more, so you
will have control to the acquiree with 60%.
o So, the previously held equity interest in the acquiree is 10%, and you will measure the fair
value of that 10% and that is the previously held equity interest in the acquiree.
o Previously held equity interest is all interest acquired before the date of acquisition for the
same company

REVERSE ACQUISITION
o Occurs when the entity that issues securities (the legal acquirer) is identified as the acquiree
for accounting purposes.
o E.g. “backdoor listing”

(Note:
o Private entity its equity securities is not traded in a stock exchange

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 o Publicly listed company/public company its shares or equity instruments are traded in stock
exchange

o Private companies wanted to be publicly

listed but it is time consuming and costly,
hence, backdoor listing is an alternative
instead of directly publicly listing you
shares.
o Backdoor listing – you acquired a
company that is already listed and let that
company acquire you

ACQUISITION-RELATED COST

 Acquisition-related costs are costs the acquirer incurs to effect a business combination.
 Examples are finder’s fee, advisory, legal, accounting, valuation & other professional/consulting
fees; GAE, international acquisitions department; & cost of registering and issuing debt & equity
securities
 Acquisition-related costs are recognized as expenses in the periods which they are incurred,
except for the following:
a. Costs to issue debt securities measured at amortized cost – included in the initial
measurement of the resulting financial liability.
b. Cost to issue equity securities – are accounted for as deduction from share premium. If
share premium is insufficient, the issue costs are deducted from retained earnings.
(Note: APIC – additional paid in capital; PIC – Philippine Interpretation Committee)

NET IDENTIFIABLE ASSETS ACQUIRED

o On acquisition date, the acquirer shall recognize, separately from goodwill, the identifiable
assets acquired, the liabilities assumed and any non-controlling interest in the acquiree.
o Any unidentifiable assets of the acquiree (e.g. any recorded goodwill by the acquiree) shall not
be recognized.
o The identifiable assets acquired and the liabilities assumed are measured at their acquisition-
date fair values.

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 IFRS 4 – INSURANCE CONTRACTS

 (Amendments to IAS 39 and IFRS 4), Financial Guarantee Contracts issued in August 2005
o An entity shall apply those amendments for annual period beginning on or after 1 January
2006. Earlier application is encouraged.
o If an entity applies those amendments for an earlier period, it shall disclose that fact and
apply the related amendments to IAS 39 and IAS 32 at the same time.
o It is revised to IFRS 17 effective beginning on or after 1 January 2023.
o Earlier application is permitted if both IFRS 15 Revenue from Contracts with
Customers and IFRS 9 Financial Instruments have also been applied.
Objective

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  To specify financial reporting for insurance contracts by any entity that issues such contracts:
o In particular, it requires:
1. Limited improvements to accounting by insurers for insurance contracts
2. Disclosure that identifies and explains the amounts in an insurer’s financial
statements arising from insurance contracts and helps users of those financial
statements to understand:
i. The amount;
ii. Timing; and
iii. Uncertainty of future cash flows from insurance contracts
Scope

 an entity shall apply this to:

o insurance contracts (including reinsurance contracts) that it issues and reinsurance
contracts that it holds
o financial instruments that it issues with a discretionary participation feature including
financial instruments that contain such features
 it does not address other aspects of accounting by insures, such as accounting for financial assets
held by insurers and financial liabilities issued by, except in the transitional provisions
 an entity shall not apply this to:
o product warranties issued directly by a manufacturer, dealer or retailer
o employers’ assets and liabilities under employee benefit plans
o retirement benefit obligation reported by defined benefit retirement plans.
o Contractual rights
o Contingent consideration payable or receivable in a business combination
o Direct insurance contracts that the entity holds

 For ease of reference, this IFRS describes any entity that issues an insurance contract as an
insurer, whether or not the issuer is regarded as an insurer for legal or supervisory purposes
 A reinsurance contract is a type of insurance contract. Accordingly, all references in this IFRS to
insurance contracts also apply to reinsurance contracts.
Embedded derivates

 IAS 39 requires an entity to separate some embedded derivates from their host contract,
measure them at fair value and include changes in their fair value in profit or loss.
 IAS 39 applies to derivates embedded in an insurance contract unless the embedded derivate
is itself an insurance contract.
Unbundling of deposit components

 Some insurance contracts contain both an insurance component and a deposit component. In
some cases, an insurer is required or permitted to unbundle those components:
o Unbundling is required if both the following conditions are met:

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 a) The insurer can measure the deposit component (including any embedded
surrender options) separately (i.e. without considering the insurance
component)
b) The insurer’s accounting policies do not otherwise require it to recognize all
obligations and rights arising from the deposit component

o Unbundling is permitted, but not required, if the insurer can measure the deposit
component separately as in
(a) (i) but its accounting policies require it to recognize all obligations and rights
arising from the deposit component, regardless of the basis used to measure those
rights and obligations.
o Unbundling is prohibited if an insurer cannot measure the deposit component
separately as in (a) (i)
Recognition and Measurement
Temporary exemption from some other IFRSs
o This IFRS exempts an insurer from applying those criteria to its accounting policies for:
a) Insurance contracts that it issues (including related acquisition costs and related
intangible assets); and
b) Reinsurance contracts that it holds

Liability adequacy test

o An insurer shall assess at the end of each reporting period whether its recognized
insurance liabilities are adequate, using current estimates of future cash flows under its
insurance contracts.
o If that assessment shows that the carrying amount of its insurance liabilities (less related
deferred acquisition costs and related intangible assets) is inadequate in the light of the
estimated future cash flows, the entire deficiency shall be recognized in profit or loss.

Impairment of reinsurance assets

o If a cedant’s reinsurance asset is impaired, the cedant shall reduce its carrying amount
accordingly and recognize that impairment loss in profit or loss. A reinsurance asset is
impaired if, and only if:
1. There is objective evidence, as a result of an event that occurred after initial
recognition of the reinsurance asset, that the cedant may not receive all amounts
due to it under the terms of the contract; and
2. That event has a reliability measurable impact on the amounts that the cedant will
receive from the reinsurer
Changes in accounting policies

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 o An insurer may change its accounting policies for insurance contracts if, and only if, the
change makes the financial statements more relevant to the economic decision-making
needs of users and no less reliable, or more reliable and no less relevant to those needs.
An insurer shall judge relevance and reliability by the criteria is IAS 8.
o To justify changing its accounting policies for insurance contracts, an insurer shall show
that the change brings its financial statements closer to meeting the criteria in IAS 8, but
the change need not achieve full compliance with those criteria. The following specific
issues are discussed below:
1. Current interest rates
2. Continuation of existing practices
3. Prudence
4. Future investment margins
5. Shadow accounting
Disclosure
o Explanation of recognized amounts
o An insurer shall disclose information that identifies and explains the amounts in its
financial statements arising from insurance contracts, nature and extent of risks arising
from insurance contracts.
o An insurer shall disclose information that enables users of its financial statements to
evaluate the nature and extent of risks arising from insurance contracts

Comparability of IFRS 4 and IFRS 17

IFRS 4—A LACK OF COMPARABILITY IFRS 17—A CONSISTENT FRAMEWORK

COMPARABILITY AMONG COMPANIES ACROSS COUNTRIES
Accounting for insurance contracts varies Companies will apply consistent accounting
significantly between companies operating for all insurance contracts.
in different countries.
COMPARABILITY AMONG INSURANCE CONTRACTS
Some multinational companies consolidate A multinational company will measure
their subsidiaries using different insurance contracts consistently within the
accounting policies for the same type of group, making it easier to compare results
insurance contracts written in different by product and geographical area.
countries.

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 COMPARABILITY AMONG INDUSTRIES
Some companies present cash or Revenue will reflect the insurance coverage
deposits received as revenue. This differs provided, excluding deposit components, as it
from accounting practice in other would in any other industry.
industries,
in particular, banking and
investment management.

Changes between IFRS 4 and IFRS 17

IFRS 4—LITTLE TRANSPARENT IFRS 17—MORE TRANSPARENT

OR USEFUL INFORMATION AND USEFUL INFORMATION
INFORMATION ABOUT THE VALUE OF INSURANCE
OBLIGATIONS
Some companies measure insurance contracts Companies will measure insurance contracts at
using out-of-date information. current value.
Some companies do not consider the time Companies will reflect the time value of
value of money when measuring liabilities for money in estimated payments to settle
claims. incurred claims.
Some companies measure insurance contracts Companies will measure their insurance contracts
based on the value of their investment portfolios. based only on the obligations created by these
contracts.
INFORMATION ABOUT PROFITABILITY
Some companies do not provide consistent Companies will provide consistent information about
information about the sources of profit components of current and future profits from
recognised from insurance contracts. insurance contracts.
Many companies provide alternative performance Companies and users of financial statements will
measures—non-GAAP measures—to supplement use fewer non-GAAP measures; supplementary
IFRS 4 information, such as embedded value information will enable more meaningful
information. comparisons.

PFRS 5 – NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED

OPERATIONS

 IFRS 5 was issued in March 2004 and applies to annual periods beginning on or after 1 January
2005.
 Its objective is to specify the accounting for assets held for sale, and the presentation and
disclosure of discontinued operations.

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CORE PRINCIPLE

 A non-current asset is presented in the classified statement of financial position as current asset
only when it qualifies to be classified as “held for sale” in accordance with PFRS 5.
SCOPE

 PFRS 5 applies to the following non-current assets:

1. Property, plant and equipment
2. Investment property measured under cost model
3. Investment in associate or subsidiary or joint venture
4. Intangible assets
CLASSIFICATION OF NON-CURRENT ASSETS (OR DISPOSAL GROUPS) AS HELD FOR
SALE

 A non-current asset (or disposal group) is classified as held for sale or held for distribution to
owners if its carrying amount will be recovered principally through a sale of transaction rather
than through continuing use.
CONDITIONS FOR CLASSIFICATIONS AS HELD FOR SALE

 A non-current asset (or disposal group) is classified as “held for sale” if all of the following
conditions are met:
1. The asset or disposal group is available for immediate sale in its present condition
subject only to terms that are usual and customary; and
2. The sale is highly probable (i.e., significantly more likely that not)
i. The management is committed to a plan to sell the asset;
ii. An active program to locate a buyer has been initiated;
iii. The sale price is reasonable in relation to its current fair value
iv. The sale is expected to be completed within one year; and
v. It is unlikely that the plan of sale will be withdrawn.
EXCEPTION TO THE ONE-YEAR REQUIREMENT

 An extension of the period required to complete a sale does not preclude an asset (or disposal
group) from being classified as held for sale if:
1. The delay is attributable to events or circumstances beyond the entity’s control; and
2. There is sufficient evidence that the entity remains committed to its plan to sell the asset
(or disposal program)
EVENT AFTER THE REPORTING PERIOD

 If the criteria for classification as held for sale are met after the reporting period, an entity shall
not classify a non-current asset (or disposal group) as held for sale in those financial statements
when issued.
NON-CURRENT ASSETS THAT ARE TO BE ABANDONED

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  An entity shall not classify as held for sale a non-current asset (or disposal group) that is to be
abandoned since the asset’s carrying amount will be recovered through continuing use rather than
principally through a sale.
 An entity shall not account for non-current asset that has been temporarily taken out of use as if it
had been abandoned.
INITIAL AND SUBSEQUENT MEASUREMENT

 Lower of carrying amount and fair value less cost to sell.

 A write-down to fair value less cost to sell, and related reversal thereof, is recognized in profit or
loss.
 Reversal of impairment is recognized as gain to the extent of cumulative impairment loss that
has been recognized.
 Depreciation (amortization) ceases during the period an asset is classified as held for sale.
CHANGES TO A PLAN OF SALE

 A non-current asset that ceases to be classified as held for sale shall be measured at the lower of
the asset’s:
1. Carrying amount before it was classified as held for sale, adjusted for any depreciation,
amortization or revaluation that would have been recognized had the asset not been
classified as held for sale, and;
2. Recoverable amount at the date of subsequent decision not to sell.
DISCONTINUED OPERATIONS

 A discontinued operation is a component of an entity that either has been disposed of or is

classified as held for sale, and
1. Represents a major line of business or geographical area of operations;
2. Is part of a single coordinated plan to dispose of a separate major line of business or
geographical area of operations; or
3. It is a subsidiary acquired exclusively with a view to resale.
COMPONENT OF AN ENTITY

 A component of an entity comprises operations and cash flows that can be clearly distinguished,
operationally and for financial reporting purposes, from the rest of the entity. It can be cash
generating unit or group of cash generating units.

CLASSIFICATION ASSET(S) BEING SOLD PRESENTATION

1. Non-current asset held for A single non-current asset Statement of Financial Position
sale (e.g., equipment)
2. Disposal group held for A group of assets (e.g., Statement of Financial Position
sale equipment and inventories
and payables directly related
to the equipment and
inventories)
3. Discontinued operation A component of an entity Statement of Financial Position and
(e.g., a branch) Statement of Profit or Loss and

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 Other Comprehensive Income

PRESENTATION OF DISCONTINUED OPERATIONS

 The results of operations of the discontinue operations, including impairment losses and actual
gain on disposal, is presented as a single amount, net of tax, after profit or loss from continuing
operations.
 If a component of an entity qualified as discontinued operation during the year, all of its results o
operations, before and after classification date, shall be classified as discontinue operations.
 It is listed separately on the income statement because its important that the investors can clearly
distinguish the profits and cash flows from continuing operations from those activities that have
ceased.
DIRECT COSTS ASSOCIATED TO DECISION TO DISPOSE A COMPONENT

 Costs or adjustments directly associated with the decision to dispose a component should be
recognized and shown as part of discontinued operations. Examples of such costs include:
1. Such items as severance pay or employee termination costs;
2. Additional pension costs;
3. Employee relocations expenses; and
4. Future rentals on long-term leases
COMPARATIVE INFORMATION

 If, in the current year, a component of an entity is classified as discontinued operation, and entity
shall re-present the disclosures for prior periods presented in the financial statements so that the
disclosures relate to all operations that have been discontinued by the reporting period for the
latest period presented.

EVENTS AFTER THE REPORTING PERIOD

 If the criteria for classification as discontinued operation are met after the reporting period but
before the financial statements are authorized for issue, the entity shall disclose the information in
the notes as non-adjusting event after the reporting period.
CESSATION OF CLASSIFICATION AS HELD FOR SALE: EFFECT ON COMPARATIVE
STATEMENT OF FINANCIAL POSITION

 The cessation of classification as discontinued operation is accounted for retrospectively; while

 The cessation of classification as held for sale (non-current assets and disposal groups that are
not components of an entity) is accounted for prospectively.

FINANCIAL STATEMENTS PRESENTATION

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  Non-current assets held for sale and assets and liabilities of disposal groups are presented as
current assets (current liabilities) but separately from the other assets and liabilities in the
statement of financial position.
 An entity shall not offset the assets and liabilities of a disposal group.

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 PFRS 6 – EXPLORATION FOR AND EVALUATION OF MINERAL
RESOURCES

 IFRS 6 was issued in December 2004 and applies to annual periods beginning on or after 1
January 2006.
 Its objective is to specify the financial reporting for an exploration and evaluation of mineral
resources.

MAIN FEATURES OF IFRS 6

 to permit an entity adopting IFRS 6 to continue to use the accounting policies applied
immediately before adopting the IFRS without requiring major changes,
 to require an impairment test of exploration and evaluation assets when facts and circumstances
suggest that the carrying amount of the assets may exceed their recoverable amount,
 to require disclosures that identify and explain the amounts arising from the exploration for and
evaluation of mineral resources.
SCOPE

 An entity shall apply the IFRS to exploration and evaluation expenditures that it incurs.

 The IFRS does not address other aspects of accounting by entities engaged in the exploration for
and evaluation of mineral resources.

 An entity shall not apply the IFRS to expenditures incurred:

a) before the exploration for and evaluation of mineral resources, such as expenditures
incurred before the entity has obtained the legal rights to explore a specific area.

b) after the technical feasibility and commercial viability of extracting a mineral resource
are demonstrable.

EXPLORATION AND EVALUATION EXPENDITURES

 Exploration for and evaluation of mineral resources is the search for mineral resources,
including minerals, oils, natural gas and similar non-regenerative resources after the entity has
obtained legal rights to explore in a specific area, as well as the determination of the technical
feasibility and commercial viability of extracting the mineral resource.
 Exploration and evaluation expenditures are expenditures incurred by an entity in connection
with the exploration for and evaluation of mineral resources before the technical feasibility and
commercial viability of extracting a mineral resource are demonstrable.

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After obtaining legal Before technical
rights to explore feasibility

PFRS 6

ACCOUNTING FOR EXPLORATION AND EVALUATION EXPENDITURES

 PFRS 6 permits to develop their own accounting policy for exploration and evaluation assets
which results in relevant and reliable information based entirely on management’s judgment and
without the need to consider the hierarchy of standards in PAS 8.
 This means that the entity may recognize exploration and evaluation expenditures either as
expense or asset depending on the entity’s own accounting policy.

 FULL COST METHOD

o All costs in acquiring, exploring, and developing within a broadly defined cost center are
capitalized and amortized.
o Under this method, costs are capitalized even if a specific project in the cost center was a
failure.

 SUCCESSFUL EFFORTS METHOD

o Many costs are capitalized and amortized
o Costs of unsuccessful acquisition and exploration activities are charged to expense
o Costs whose outcome is unknown are either expensed or capitalized

Note: Change in Accounting Policies (Accounting Policies, Changes in Accounting Estimates

and Errors)

 If problem is silent, used Successful Efforts Method

MEASUREMENT
INITIAL MEASUREMENT

 IFRS 6 requires the entity to measure the asset initially at cost

 Some expenditures might be included:
o Acquisition of rights to explore;
o Topographical, geological, geochemical and geophysical studies;
o Exploratory drilling;

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 o Trenching;
o Sampling;
o Activities in relation to evaluating the technical feasibility and commercial viability of
extracting a mineral resource;
o General and administrative and overhead costs directly attributable (in some cases)

Note: Expenditures related to the development of mineral resources (i.e., preparations for
commercial production, such as building roads and tunnels) cannot be recognized as an
exploration and evaluation asset. Property, plant and equipment used to develop or maintain
exploration or evaluation assets also cannot be recognized as exploration and evaluation assets.

SUBSEQUENT MEASUREMENT

 Entity classifies and Exploration and Evaluation Asset either as:

o Tangible Asset, IAS 16 (ex. Vehicles and Drilling Rigs)
o Intangible Asset, IAS 38 (ex. Drilling Rights)
 After initial recognition, an entity applies one of two measurement models to exploration and
evaluation assets:
o The cost model
o The revaluation model

CHANGES IN ACCOUNTING POLICY

 An entity may change its accounting policies for exploration and evaluation expenditures if the
change makes the financial statements more relevant to the economic decision-making needs of
users and no less reliable, or more reliable and no less relevant to those needs. An entity shall
judge relevance and reliability using the criteria in IAS 8.

 To justify changing its accounting policies for exploration and evaluation expenditures, an entity
shall demonstrate that the change brings its financial statements closer to meeting the criteria
in IAS 8, but the change need not achieve full compliance with those criteria.

IMPAIRMENT

 IFRS 6 requires exploration and evaluation assets to be assessed for impairment when facts and
circumstances suggest that the carrying amount of an exploration asset may exceed its
recoverable amount.

SPECIFYING THE LEVEL AT WHICH EXPLORATION AND EVALUATION ASSETS ARE

ASSESSED FOR IMPAIRMENT

 An entity shall determine an accounting policy for allocating exploration and evaluation assets to
cash-generating units or groups of cash-generating units for the purpose of assessing such assets
for impairment. Each cash-generating unit or group of units to which an exploration and

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 evaluation asset is allocated shall not be larger than an operating segment determined in
accordance with IFRS 8 Operating Segments.

 The level identified by the entity for the purposes of testing exploration and evaluation assets for
impairment may comprise one or more cash-generating units.

PRESENTATION AND DISCLOSURE

 An entity treats exploration and evaluation assets as a separate class of assets and make the
disclosures required by either IAS 16 Property, Plant and Equipment or IAS 38 Intangible
Assets consistent with how the assets are classified. [IFRS 6.25]

 IFRS 6 requires disclosure of information that identifies and explains the amounts recognized in
its financial statements arising from the exploration for and evaluation of mineral resources,
including: [IFRS 6.23–24]
a) its accounting policies for exploration and evaluation expenditures including the
recognition of exploration and evaluation assets
b) the amounts of assets, liabilities, income and expense and operating and investing cash
flows arising from the exploration for and evaluation of mineral resources.

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