Professional Documents
Culture Documents
LECTURE NOTES
THE CONCEPTUAL FRAMEWORK OF ACCOUNTING
1. The Conceptual Framework deals with the concepts used in the preparation and presentation of
financial statements (FS).
2. The Conceptual Framework is not a PFRS; it does not define standards for any particular
measurement or disclosure issue. Nothing in the Framework overrides any specific PFRS. In case
of conflict, PFRS prevails over the Framework.
3. The purpose of the Framework is to:
A.) Assist FRSC in the developing GAAP and its review and adoption of existing International
Financial Reporting Standards (IFRS).
B.) Assist preparers of FS in applying PFRS
C.) Assist auditors in forming an opinion as to whether FS conforms to GAAP.
D.) Assist users in interpreting the FS
E.) Provide interested parties with information about PFRS formulation by FRSC
4. The scope of the Framework covers the following:
A.) C APITAL CONCEPTS: the concept of capital and capital maintenance
B.) O BJECTIVE: the objective of FS
C.) Q UALITIVE CHARACTERISTICS: the qualities or attributes that make FS useful to the users.
D.) E LEMENTS: the definition, recognition and measurement of the elements of FS.
5. The objective of FS is to provide information about the financial position, performance and
changes in financial position of an entity that is useful to a wide range of users in making
economic decisions. The FS also shows the results of the stewardship of management- - the
accountability of management for the resources entrusted to it; the management of an entity
has the primary responsibility for the preparation and presentation of FS.
6. The framework is concerned with general-purpose financial statements (including consolidated
financial statements) of all commercial, industrial and business reporting public or private
entities.
7. Special purpose financial reports (e.g., prospectuses and computations prepared for taxation
purposes) are outside the scope of this Framework.
8. Underlying assumptions on FS preparation and presentation : (1) Accrual basis (2) Going
Concern
9. The users of financial statements include (1) present and potential investors, (2) employees
and their representative groups, (3) lenders, (4) suppliers and other trade creditors , (5)
customers, (6) governments and their agencies and
(7) The public.
10.
The qualitative characteristics of FS:
PRESENTATION
C Comparability: inter-period comparability; intercompany comparability.
U- Understandability: compliance with PFRS to make information
understandable to users
CONTENT (Primary)
R- Relevance: predictive value; feedback /confirmatory value; timeliness
Ry Reliability: faithful representation; substance over form; prudence;
neutrality; completeness
11. Constraints on relevant and reliable information: (1) On timeliness: if there is undue delay in the
reporting of information, it may lose its relevance (2) On cost-benefit: the benefits derived from
information should exceed the cost of providing it (3) On qualitative characteristics: the aim is
to achieve an appropriate balance among characteristics in order to meet the objective of FS.
12. Information is material if its omission or misstatement could influence economic decisions of
users taken on the basis of the financial statements. Materiality provides a threshold or cut-of
point rather than being a primary qualitative characteristic which information must have if it is
to be useful.
13. The elements of FS:
On financial position: (1) Assets (2) Liabilities (3) Equity
On performance: (4) Income ( includes revenue and gains) (5) Expenses (include losses)
14. An item that meets the definition of an element should be recognized if:
A.) PROBABLE : it is probable that any future economic benefit associated with the item will
flow to or from the entity, AND
B.) MEASURABLE: the item has a cost or value that can be measured with reliability. Four
diferent measurement bases are used to measure the elements of FS:
Historical cost (this is considered as the most common valuation basis)
Current cost
Realizable value (or settlement value , in the case of liabilities )
Present value (this is also known as discounted value)
Philippine Financial Reporting Standards (PFRS) replaces SFAS (Statements of Financial Accounting
Standards) as the main
source of Generally Accepted Accounting Principles (GAAP) in the Philippines. Based on PAS 1, par.7,
the term PFRS shall
be composed of (a) PFRS (b) Philippine Accounting Standards (PAS), and (c) Interpretations.
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The FRSC (Financial Reporting Standards Council) replaces ASC (Accounting Standards Council). FRSC
currently issues PFRSC as
ASC, in the past, issued SFAS. Refer to page 10 of the TA Lecture Notes for further details.
The financial position of any entity is afected by the economic resources it control, its financial
structure,
its
liquidity
and
solvency, and its capacity to adapt changes in the environment in which the entity operates.
15. Two capital concepts: 1.) Financial concept (most common) and 2.) Physical concept. The
concept of capital maintenance provides the linkage between the concepts of profit since it
provides the point of reference by which profit is measured:
A.) Under the concept of financial capital maintenance, a profit is earned only if the financial
amount of ending net assets exceeds beginning net assets, excluding any contributions
from and distributions to owners during the period. This concept does not require the use of
a particular basis of measurement.
B.) Under the concept of physical capital maintenance, a profit is earned only if the physical
productive capacity (operating capability) at the end of periods exceeds the physical
productive capacity at the beginning of period, excluding any contributions from and the
distributions to owners during the period. This concept requires the adoption of the
CURRENT COST basis of measurement.
PAS 1: PRESENTATION OF FINANCIAL STATEMENTS
1. COMPONENTS OF FINANCIAL STATEMENTS (FS). A complete set of FS is composed of:
A.) Statement of financial position (balance sheet) as at the end of the period
B.) Statement of comprehensive income- for the period
C.) Statement of cash flows for the period
D.) Statement of changes in equity for the period
E.) Notes, comprising a summary of significant accounting policies & other explanatory
information.
F.) Statement of financial position as at the beginning of the earliest comparative period when
an entity applies an accounting policy retrospectively or makes a retrospective restatement
of items in its FS.
2. HEADING AND TITLES. An entity may use other titles for the statements other than those used in
PFRS and shall present with equal prominence all of the FS and distinguish them from other
information in the same published document. In addition, the following information shall be
displayed prominently:
A.) The name of reporting entity
B.) Whether the financial statements cover the individual entity or a group of entities
C.) The date at the end of reporting period or the period covered by the set of financial
statements
D.) The presentation currency (as defined under PAS 21)
E.) The level rounding (also known as truncation) used in presenting amounts in the FS
3. GENERAL FEATURES in the presentation of FS.
GOING CONCERN. An entity shall prepare FS on a going concern basis unless management
either intends to liquidate the entity or to cease trading, or has no realistic alternative but to
do so.
ACCRUAL BASIS OF ACCOUNTING. An entity shall prepare its FS, except for cash flow
information, using the accrual basis of accounting.
The term Comprehensive Income refers to all changes in equity other than changes resulting from
contributions from and distribution to owners; hence, the Statement of Comprehensive Income shall
include:
1. Components of profit or loss- these are income and expense accounts usually found in the
traditional income statement. As a
Minimum requirement, the line items to be presented are: (PAS 1, par.82)
Revenue
Finance costs
Share in the income or loss of associates and joint venture accounted for using the equity
method
Tax expense
Post-tax profit or loss on discontinued operations
Profit or loss
2. Components of other comprehensive income-these are income and expense accounts are
recognized in profit or loss and
are usually required by PFRS to be recognized directly in the equity section of the statement of
financial position (balance
sheet). Examples include: (PAS 1, par. 7)
Unrealized gain or loss on available for-sale-securities(PAS 39)
Gain or loss from translating the financial statements of a foreign operation (PAS 21)
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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.
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9. FINANCIAL LIABILITIES .An entity classifies its financial liabilities as current when they are due to be settled
within twelve
months after the balance sheet date , even if:
A.) The original term was for a period longer than twelve months; and
B.) An agreement to refinance, or to reschedule payments, on a long term basis is completed after the
reporting period
(BS date) and before the FS are authorized for issue
10. EFFECTS OF BREACHES. When an entity breaches a provision of a long-term loan agreement on or before
the end of reporting
period (BS date) with the efect that the liability becomes payable on demand, the liability is classified as
current, even if
the lender has agreed not to demand payment as a consequence of the breach.
11. STATEMENT OF CHANGES IN EQUITY (SCE). An entity shall present a statement of changes in equity
showing:
A.) Total comprehensive income for the period, showing separately the total amounts attributed to
owners of the
parent and to non-controlling (minority) interest.
B.) For each component of equity , the efects of retrospective application / restatement under PAS 8.
C.) The amount of transactions with owners in their capacity as owners , showing separately
contributions by and
distributions to owners.
D.) For each component of equity , a reconciliation of the between the carrying amount at the
beginning and the end
of the period , disclosing each change separately.
12. DIVIDENDS. An entity shall present either in the statement of changes in equity or in the notes , the
amount of dividends
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recognized as contributions to the owners and the related amount per share.
13. NOTES TO THE FS. The notes are normally presented in the following order, which assists users in
understanding the FS and
comparing them with FS of other entities:
A.) A statement of compliance with PFRS
B.) A summary of significant accounting policies applied, which shall include:
The measurement bases used in preparing FS
The other accounting policies used that are relevant to an understanding of the FS
C.) Supporting information for an items shown on the face of each FS, in the order in which each
statement and each line
item is presented.
D.)Other disclosures, including:
Contingent liabilities and unrecognized contractual commitments
Non-financial disclosures (e.g., the entitys financial risk under PFRS 7)
THE ACCOUNTING PROCESS
1. JOURNAL
a chronological records of transactions; also called as the book of original entry
General Journal- used to record (1) transactions not covered in special journals and (2)
adjusting, closing , and
revising entries.
Special Journal: CRJ cash receipts journal
SJ- sales journal
CDJ cash disbursements journal
PJ- purchase journal
2. LEDGER(general or subsidiary )
a group of accounts; also called as the book of final entry;
ACCOUNT summarizes the efect of transactions on each asset, liability , equity, income & expenses.
Nominal(temporary) accounts- subject to closing entries, mainly found in income statement
Real (permanent) accounts not subject to closing entries , mainly found in the balance sheet
Contra Accounts- an account that is deducted from another account .(e.g., sales discounts)
Adjunct accounts- an account that is added to another account .(e.g., freight-in)
3. WORKSHEET(optional)- a tool that typically contains columns for trial balance (unadjusted and adjusted),
adjustments ,
income statement and balance sheet; it is used to facilitate FS preparation.
4. ADJUSTING ENTRIES- to update amount of certain accounts
A.) Accrued revenue- revenue already earned but not yet collected
B.) Accrued expense- expense already incurred but not yet paid ACCRUA
C.) Unearned revenue revenues already collected but not yet earned
D.) Prepaid expense expense already paid but not yet incurred
DEFERRA
E.) Others(e.g., depreciation, amortization, depletion, impairment , bad debts)
5. CLOSING ENTRIES- to bring all nominal accounts to zero balance ; Income Summary account is used to
close both
income and expense accounts.
6.REVERSING ENTRIES(optional)- to simplify recording of certain recurring transactions .
The following adjusting entries may be subject to reversing entries:
A.) ACCRUALS : accrued revenue and accrued expense
B.) DEFERRALS: prepaid expense (expense method) and unearned revenue (income method)
If an entity expects, and has the discretion, to refinance or roll over an obligation for at least twelve months after the
balance sheet under an existing loan facility, it classifies the obligation as non-current , even if it would otherwise be due
within a shorter period . (PAS 1, par. 73)
The liability is classified as non-current if the lender agreed by the balance sheet date to provide a grace period ending
at least 12 months after the balance sheet date , within which the entity can rectify the breach and during which the
lender cannot demand immediate payment.(PAS 1, par 75)
An entity is required to disclose the judgments that management has made in the process of applying the entitys
accounting policies and that have the most significant efect on the amounts recognized in the FS .(PAS 1, par 122). In
addition, the notes shall contain key assumptions concerning the future and other key sources of estimation that will
pose a significant risk of causing a material adjustment to the amount of assets and liabilities within the nest period. In
such a case, the notes shall include nature, amount and other details of such assets and liabilities.(PAS 1, par 125)
OBJECTIVE . The objective of PAS 8 is to prescribe the criteria for selecting and changing
ACCOUNTING POLICIES changes in ACCOUNTING ESTIMATES and CORRECTION OF ERRORS to
enhance relevance, reliability and comparability of
FS of an entity over time as well as with FS of other entities.
SELECTION OF ACCOUNTING POLICIES. When a standard specifically applies to a transaction, the
accounting policy applied to an afected account shall be determined by applying the standard. In
the absence of a standard that applies to
a transaction, management shall use its judgement in developing and applying accounting
policy that is relevant and reliable.
CONSISTENCY OF ACCOUNTING POLICIES. Once selected, accounting policies must be applied
consistently for similar transactions, unless a standard specifically requires otherwise. An entity
shall change an accounting policy if the change (1) is required by a standard or (2) results in the
FS providing more relevant financial information.
CHANGES IN ACCOUNTIONG POLICIES. A change in accounting policy that is required by a
standard shall be applied in accordance with the transitional provisions therein. If a standard
contains no transitional provisions or if an accounting policy is changed voluntarily, the change
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shall be applied retrospectively (as if the policy had always been applied)as adjustment to the
opening balance of each afected component of equity(e.g., retained earnings) for the earliest
prior period presented.
For purposes of PAS 8, the following are NOT considered as changes in accounting policies:
1. Application of accounting policies for events that difer in substance from those previously
occurring.
2. Application of new accounting policy prospectively from the start of the earliest period
practicable.
EXCEPTION to the RULE. When it is impracticable for an entity to apply new accounting policy
retrospectively (i.e., it cannot determine the cumulative efect of applying the policy to all prior
periods), the entity applies the new policy prospectively from the start of the earliest period
practicable.
APPLICATION of NEW STANDARDS. When an entity has not applied a new standard that been
issued but not yet efective, the entity shall disclose this fact, and the reasonably estimable
information relevant for assessing the possible impact that application of the new standard will
have on the entitys FS in the period of initial application.
CHANGES in ESTIMATES. The efect of a change in an accounting estimate shall be recognized
prospectively by including it in the profit or loss during the periods( if the change afects that
period only) or the period of the change and the future periods (if the change afects both).
EXAMPLES of CHANGES in ESTIMATES. Due to uncertainties inherent in business activities, many
items in FS cannot be measured with the precision but can only be estimated. Estimation involves
judgments based on the latest available, reliable information. Common examples of accounting
estimates include:
1. Bad debts and inventory obsolescence
2. Fair value of financial assets or financial liabilities
3. Useful lives of depreciable assets; and
4. Provision for warranty obligations
A change in the measurement basis applied is a change in an accounting policy, it is not a change
in an accounting estimate. When it is difficult to distinguish a change in an accounting policy from
a change in an accounting policy from a change in an accounting estimate , the change is treated
as a change in an accounting estimate.
CORRECTION OF ERRORS.An entity shall correct material prior period errors retrospectively as
an adjustment to the opening balances of retained earnings and afected assets and liabilities. If
comparative statements are presented, the FS of prior period shall be restated to reflect the
retrospective application of the prior period errors. If the error occurred before the earliest period
presented, the opening balances of assets, liabilities and equity for the earliest period presented
shall be restated.
MATERIALITY. In applying the concept of materiality:
1. Accounting policies in the PFRSs need not to be applied when the efect of applying them is
immaterial.
2. FS do not comply with PFRSs if they contain material errors, whether due to omissions or
misstatements.
3. Material prior period errors should be corrected retrospectively in the first set of FS authorized
for issue after their discovery.
Accounting policies are the specific principles, bases, convention, rules and practice adopted by an entity in preparing
and presenting financial statements.
In making judgments, management shall refer to the following sources in descending order:
1.) The requirements and guidance in standards dealing with similar and related issues.
2.) The definition, recognition criteria and measurement concepts set forth in the Conceptual Framework.
In the making the judgment, management may also consider the most recent pronouncements of other standard-setting
bodies that
use similar conceptual framework to develop accounting standards, other accounting literature and accepted industry
practices, to the
extent that these do not conflict with PFRS and the Conceptual Framework.
Applying a requirement is impracticable when the entity cannot apply it after making every reasonable efort to do so.
A change in accounting estimates results from a new information or developments and, hence, are not correction of
errors.
The concept of fundamental error has been eliminated .Instead, PAS 8 uses and defines term prior period prior. Prior
period errors are omission
and misstatements in the FS for one or more periods; they are committed in prior periods but are discovered only in the
current period.
Omissions or misstatements of items are material, if they could, individually or collectively, influence the economic
decisions of users taken
on the basis of the FS. Materiality depends on the size and nature of the omission or misstatement judged in the
surrounding circumstances.
FOR
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The results of discontinued operations, net of tax, should be shown as a single amount in the income
statement
separately
from the income from continuing operations. To explain the details of this single amount, the following
should
be
disclosed
in
the notes to the FS:
1. The amount of revenue, expenses and income or loss attributable to the discontinued operation
during
the
current
period
and the related income tax.
2. Any impairment loss( as the fair value less cost to sell of the net assets of the discontinued
operations
is
lower
than
their
carrying amounts).If the carrying amount is lower , the expected gain is not recognized but only
disclosed.
3. The termination cost of employees and other costs that are directly incurred as a result of the
discontinuance.
4. Any gain or loss from the actual disposal of the assets and settlement of liabilities of a discontinued
operation.
Cost to sell is the incremental costs directly attributable to the disposal of an asset (or disposal
group
),
excluding
finance
costs and income tax expense.
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THE
EVENTS AFTER THE BALANCE SHEET DATE are favorable and unfavorable events that occur
between the balance sheet and the date when the FS are authorized for issue; FS shall be disclose
the date when the FS were authorized for issue , and who gave that authorization
ADJUSTING EVENTS after a balance date sheet (i.e., those that provide evidence of conditions that
existed at the balance sheet date) should be recognized in the FS. Examples are (among others):
a.) Resolution or settlement after BS date of a court case that confirms that the entity had a
present
obligation
at
the
BS
date.
b.) Bankruptcy of a customer that occurs after BS date, confirming that a loss existed at the BS
date on a trade receivable.
c.) Sale of inventories after the BS date that may give evidence on net realizable value (NRV) at the
BS date.
d.) Determination after the BS date of the cost of the assets purchased; or the proceeds from the
assets sold , before the
BS date.
e.) Determination after the BS date of the profit sharing or bonus payment if the enterprise had the
present
obligation
at the BS date to make such payment.
f.)The discovery of fraud or errors that show the FS are incorrect.
An entity shall adjust the amounts recognized in its FS to reflect the adjusting events after the BS
date
.
If
an
entity
receives
an
information after the BS date about conditions that existed at the BS date , it shall update disclosures
that
relate
to
those
conditions, in the light of the new information.
NON-ADJUSTING EVENTS after the balance sheet date (i.e., those that are indicative of conditions
that arose after the balance sheet date) are not recognized but are disclosed in the notes to the FS.
Examples are( among others) :
a.) Major business combination or disposing a major subsidiary after the BS date
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This is previously called as subsequent events. Subsequent events , as defined previously , are
events
that
happened
after
the
BS date until the date of FS issuance.
If the entitys owners (or other parties) have the power to amend the FS after issue, the entity shall
disclose this fact. The process
involved in authorizing the FS for issue will vary depending upon the management structure, statutory
requirements
and
procedures followed in preparing and finalizing the FS.
An entity shall disclose the following for each material category of non-adjusting event after the BS
date:
An estimate of its financial efect , or statement that such an estimate cannot be made.
A restructuring is a program, planned and controlled by management, that materially changes either
the
scope
of
a
business
undertaken by an enterprise or the manner in which that business is conducted. (PAS 37)
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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
CONTIGENT ASSET
Disclose ( in the Notes)
No requirement
No requirement
7. MEASUREMENT OF PROVISION. The amount recognized as a provision should be the BEST ESTIMATE
of
the
expenditure
required to settle the present obligation at the balance sheet date , taking into account the risks
and
uncertainties
surrounding the circumstances that relate to the provision.
Where the provision being measured involves a large population in terms, the obligation is
estimated by weighing all possible outcomes by their associated probabilities. This
statistical
method
of
estimation
is
known
as
the
EXPECTED VALUE.
Where there is a continuous range of possible outcomes, and each point in the range is a s
likely as any other, the
the MID-POINT of the range is used.
Where the efect of the time value of money is material, the amount of provision should be
the
PRESENT
VALUE
of the expenditures expected to be required to settle the obligation .
8. REIMBURSEMENT. Where some or all of the expenditures required in settling a provision is expected
to
be
reimbursed
by
another party, the reimbursement should be recognized as a separate asset when it is virtually
certain
that
reimbursement
will be received if the enterprise settles an obligation. The amount recognized for the
reimbursement
should
not
exceed
the amount of the provision. In the incomes statement, the expense relating to a provision may be
presented
net
of
the
amount recognized for a reimbursement.
9. RESTRUCTURING. A provision for restructuring costs is recognized only when the general criteria
for
a
provision
are
met
(see item no.1). A restructuring provision should not be associated with ongoing activities of the
enterprise
and
should
not
include costs such as retraining or relocating continuing staf, marketing or investment in new
system
and
distribution
networks.
An onerous contract is a contract in which the unavoidable costs of meeting the obligations under the
contract
exceed
the
economic benefits to be received under it. The term onerous is literally to mean burdensome.
The discount rate should a pre-tax that reflects the current market assessments of the time value of
money
and
the
risks
specific
to the liability. The discount rate should not reflect risks for which future cash flow estimates have been
adjusted.(PAS 37, par 47)
A restructuring is a program , planned and controlled by movement , that materially changes either the
scope
of
a
business
undertaken by an enterprise or the manner in which that business is conducted.
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OF
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)
The FRSC Chairman, who had been or presently as senior accounting practitioner in any scope of
accounting practice, shall be appointed by the PRC upon the recommendation of BoA in coordination with
PICPA as the accredited professional organizations. The Chairman and members of FRSC shall have a term
of three (3) years renewable for another term.
IFRSs are standards issued by the International Accounting Standards Board (IASB); the IASB replaced the
International Accounting Standards Committee (IASC).
Based on paragraph 7 of PAS 1, the term PFRS shall composed of (a) PFRS (b) Philippine Accounting
Standards (c) Interpretations.
PFRS sets out the recognition, measurement, presentation and disclosure requirements dealing with
transactions
and
events
that
are important in general purpose of FS. A PFRS is developed through a due process that normally
involves
the
following:
(a)Consideration of the pronouncement of IASB.
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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.
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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.
The SEC and PSE require companies covered by the reportorial requirements of Revised Securities A ct to file quarterly
interim
financial reports within 45 days after the end of each of the first three quarters. Also, the SEC requires companies
covered
by
the
Rules on Commercial Papers and Financing Act to file quarterly financial reports within 45 days after each year-end.
An interim period is a financial reporting period shorter than a full financial year . Interim financial reports may be
presented
monthly, quarterly, or semiannually.
Comprehensive income is to include all changes in equity , except contributions from and distributions to owners.
An example of kinds of disclosures as required by PAS 34, par 17 are as follows:
(a) write-down of inventories to net realizable value and the reversal of such write-down
(b) recognition of loss from the impairment of PPE and intangibles and the reversal of such an impairment loss
(c) reversal of any provision for the costs of restructuring
(d) acquisitions and disposals of items of PPE
(e) commitments for the purchase of PPE
(f) litigations settlements
(g) corrections of fundamental errors in previously reported financial data
(h) any debt default or breach of a debt covenant that has not been corrected subsequently
(i) related party transactions.
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The chief operating decision maker identifies a function , not necessarily a manager with a specific title. That function is
to allocate resources to
and assess the performance of the operating segments of an entity. (PFRS 8, par.7)
An entity shall disclose the following general information about an operating segment: (PFRS 8,par.22)
1. Factors used to identify the reportable segments , including the basis of organization .(e.g., whether the
management
has
chosen
to
organize the entity around diferences in products and services have been aggregated.)
2.)Types of products and services from which each reportable segment drives its revenue.
An entity shall disclose the following about each reportable segment if the specified amounts are included in the
measure
of
profit
or
loss: (PFRS 8, par.23)
(a.)Revenues from external customers and transactions with other operating segments of the same entity
(b.)Interest revenue and interest expense
(c.)Depreciation and amortization
(d.)Material times of income and expenses and material noncash items other than depreciation and amortization
(e.)Interest in profit or loss of associates and joint venture accounted for by the equity method.
(f.) Income tax expense
An entity shall disclose the following about each reportable segment if the specified amounts are included in the
measure
of
segment
assets reviewed by chief operating officer: (PFRS 8, par.24)
(a.) The amount of investments in associates and joint venture accounted for the equity method, and
(b.)The amounts of additions to non-current assets other financial instruments , deferred tax assets, post
employment benefit asset
and rights arising under insurance contracts.
EXAMPLES
Products that are the result of
processing after harvest
Biological assets
Agricultural produce
Sheep
Wool
Yarn , carpet
Trees in a plantation
Logs ( Felled trees)
Lumber
forest
Cotton
Thread, clothing
Plants
Harvested cane
Sugar
Dairy cattle
Pigs
Bushes
Milk
Carcass
Leaf
Cheese
Sauges,cured hams
Tea, curred tobacco
Vines
Grapes
Wine
Fruit Trees
Picked Fruit
Processed fruit
RECOGNITION CRITERIA
An entity shall recognize a biological asset or agriculture produce when:
A.) The entity control the asset as a result of past events;
B.) It is probable that the future economic benefits associated with the asset will flow to the entity ;
and
Page 15 of 36
C.) The fair value or cost of the asset can be measured reliably
MEASUREMENT BASIS.
A BIOLOGICAL ASSET shall be measured on initial recognition and at each balance sheet date
(reporting
period
)
at
fair
value less cost to sell .
AGRICULTURAL PRODUCE harvested from an entitys biological assets shall be measured at the point of
harvest
at
its
fair
value less estimated costs to sell.
Any gain or losson the initial recognition of biological assets at fair value less costs to sell and any
changes
in
the
fair
value
less costs to sell of biological assets during the reporting period is included in profit or loss for the
period.
All
costs
related
to biological assets that are measured at fair value are recognized in profit or loss when incurred to
purchase biological assets.
Any gain on the initial recognition of agricultural produce at fair value less costs to sell will be included
in
the
profit
or
loss
for the period to which it relates.
Page 16 of 36
DEFINITION
A business combination is a transaction or other event in which an acquirer obtains control of one
or more businesses.
ACQUISITION METHOD
An entity shall account for each business combination by applying the acquisition method . Applying
the acquisition method requires.
Identifying the acquirer
Determining acquisition date
Recognizing and measuring the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in
the acquiree ; and
Recognizing and measuring goodwill or a gain from a bargain purchase.
RECOGNITION PRINCIPLE.
On the acquisition date, the acquirer shall recognize, separately from goodwill, the identifiable
assets acquired , the liabilities assumed and any non-controlling interest in the acquiree. Contrary to
PAS 37 (see related notes on page 9) , PFRS 3 requires that an acquirer shall recognize a contingent
liability assumed in a business combination if it is a present obligation that arises from the past
events (even if it is not probable that an outflow of resources embodying economic benefits will be
required to settle the obligation and its fair value can measured reliably.
MEASURMENT PRINCIPLE
Page 17 of 36
The acquirer shall measurer the identifiable assets acquired and the liabilities assumed at their
acquisition
date
FAIR
VALUES. Few exemptions are:
The acquire shall measure an acquired non-current asset or disposal group that is classified as
held for sale at the acquisition date at their fair value less costs to sell in accordance with PFRS
5 (see related notes on page 6).
The acquire shall measure the value of a reacquired right recognizes as an intangible asset on
the basis of the remaining contractual term of the related contract regardless o whether market
participants would consider potential contractual renewals in determining its fair value.
GOODWILL.
On the acquisition date, the acquirer shall recognize GOODWILLmeasured as the excess of
consideration
transferred
over
the
net of acquisition date amounts of the identifiable assets acquired and liabilities assumed.
BUSINESS COMBINATION ACHIEVED IN STAGES
An acquirer sometimes obtains control of an acquiree in which it was held an equity interest
immediately
before
the
acquisition date. PFRS refers to such a transaction as a business combination achieved in stages ,
sometimes
also
referred
to
as a STEP ACQUISITION.
In a business combination achieved in stages, the acquirer shall measure its previously held equity
interest
in
the
acquirer
at its acquisition-date fair value and recognize the resulting gain or loss, if any , in profit or loss.
BUSINESS COMBINATION ACHIEVED WITHOUT THE TRANSFER OF CONSIDERATION.
The acquisition method of accounting for a business combination applies to business combinations
where
an
acquirer
obtains
control of an acquiree without transferring consideration or where business combinations are
achieved
by
contract
alone
in
stapling arrangement.
An acquirer is the entity that obtains control of the acquiree; the acquiree is the business or
businesses
that
the
acquirer
contains control of an business combination.
Control is the power to govern the financial and operating policies of an entity or business so as to
obtain
benefits
from
its
activities. Control is presumed to exist when an entity acquires more than one-half of another
entitys voting rights.
Business is an integrated set of activities and assets that is capable of being conducted and managed
for
purpose
of
providing
return in the form of dividends , lower costs or other economic benefits directly to investors or other
owners,
members
or
participants.
Acquisition method of business combination is previously known as the purchase method.
Acquisition date is the date on which the acquirer obtains control of the acquiree.
Under paragraph 32 of PFRS 3, GOODWILL is equal to the excess of (A) over (B) below;
(A) The aggregate (total) of:
The consideration transferred, which shall be calculated as the sum of the sum of the
acquisition-date fair values of the assets transferred by the acquirer, the liabilities incurred
by
the
acquirer
to
former
owners
of
the
acquiree
and the equity interests issued by the acquirer. (Examples of potential forms of
consideration
include
cash,
other
assets, contingent consideration , ordinary or preference equity instruments)
The amount of any non-controlling interest in the acquiree
In a business combination achieved in stages, the acquisition date fair value of the
acquirers previously held equity interest in the acquiree
(B)The net of acquisition of the identifiable assets acquired and the liabilities assumed.
Occasionally, an acquirer makes a BARGAIN PURCHASE, which is a business combination in which
(B)
exceeds
(A)
above
.
In
which case, the acquirer shall recognize the resulting GAIN in profit or loss on the acquisition date,
after
making
reassessment whether it has correctly identified all of the assets acquired and liabilities assumed.
(PFRS 3,par.3)
Page 18 of 36
1.
Consolidated financial statements are the financial statements of a group presented as those of a single
economic
entity; consolidated FS shall include all subsidiaries of the parent.
2. A group is parent and all of its companies while a parent is an entity that has one or more subsidiaries.
3. A subsidiaryis an entity that is controlled by another entity (parent).
4. Control is presumed to exist even when the parent owns half or less of the voting power of an entity but has
the power:
over more than half of the voting rights by virtue of an agreement with other investors.
to govern the financial and operating policies of entity under a statute or an agreement .
to appoint or remove the majority of the members of the board of directors or equivalent
governing body.
to cast majority of votes at meetings of the board of directors or equivalent governing body.
The existence and efect of potential voting rights currently exercisable or convertible (e.g., share warrant,
share
call
options, convertible securities to ordinary shares) are considered when assessing whether an entity has the
power
to
govern the financial and operating policies of another entity.
5. Consolidated FS shall include all domestic and foreign subsidiariesof then parent , even if subsidiaries are
engaged
in business activities dissimilar from those of other entities within the group.
6. A parent need not present consolidated FS if and only if:
The parent itself is a wholly-owned subsidiary, or partially-owned subsidiary and its other owners
do not object to the parent not presenting consolidate FS.
The parents debt and equity instruments are not traded in a public market- a domestic or foreign
stock exchange or an over-the-counter market.
Then parent did not file or is not in the process of filling its FS with a securities and exchange
commission or other regulatory body for the purpose of issuing any class of instruments in a
public market.
The ultimate or any intermediate parent of the parent produces consolidated FS available for
public use that comply with PFRS.
A parent that is exempted from presenting consolidated FS may present separate FS as its only FS
7. In preparing consolidated FS, the following consolidation procedures are normally followed:
The FS of the parent and its subsidiaries are combined in on a line by line basis by adding together
like items of assets, liabilities, equity , income, and expenses.
Intergroup balances and transactions including income and expenses , are eliminated in full.
When FS used in consolidation are drawn up from diferent reporting dates, adjustments should be
made for the efects of significant transactions or other events that occur between those dates and
the date of the parents FS.In any case, the diference between reporting dates should be no more
than three months.
Consolidated FS should be prepared using uniform accounting policies for like transactions and
other events similar circumstances.
Non-controlling interest shallbe presented in the consolidated statement of financial position
within equity , separately from parent shareholders equity. Non-controlling interests in the profit
or loss of the group should also be separately presented.
Changes in a parents ownership interest in a subsidiary that do not result in a loss of controlare
accounted for a equity transactions (i.e., transactions with owners in their capacity as owners.)
8. In the parent separate FS, investments in subsidiaries (including investments in jointly controlled entities
and associates ) shall be accounted for either:
At cost, or
In accordance with PAS 39 on financial instruments
The same accounting (policy) shall be applied for each category of investment; investments in
subsidiaries , jointly
controlled entities and associates that are classified as held for sale shall be accounted for under PFRS 5.
(see
related
notes on page 6)
The definition of subsidiary under PAS 27 includes unincorporated entities like partnerships.
Under SIC Interpretations 12, special purpose entities shall be consolidated when the substance of the
relationship
between
an entity and the special purpose entities are controlled by that entity. A subsidiary are classified as held for
sale
if
control
is likely to be temporary with the view of the disposal within twelve months form acquisition and management
is
actively
seeking buyer.
Separate financial statements are these presented by parent in which the investments are accounted for on
the
basis
of
the
direct equity interest rather than on the basis of the reported and net assets of subsidiary.
Non-contorlling interest is used to be known as minority interest.
A parent can lose control of subsidiary with or without a change in absolute or relative ownership levels. This
could
occur
as result of a contractual agreement or in two or more arrangements.
PAS 27 (as amended May 2008) states that an entity shall recognize a dividend form a subsidiary , jointly
controlled
entity,
associate in profit or loss in its separate financial statements when its right to receive the dividend is
Page 19 of 36
established.
Consequently, the requirement to separate the retained earnings of an entity into pre-acquisition and postacquisition
components as a method for assessing whether a dividend is a recovery of its associated has been removed
Foreign currency monetary amounts should be reported using the CLOSING RATE
Non-monetary items carried at historical cost should be reported using the exchange rate
at the date of transaction.
Non-monetary items carried at fair value should be reported at the rate that existed when
the fair values were determined.
Recognition of Exchange Diferences
Exchange diferences arising when monetary itemsare settled or when monetary items
are translated at rates diferent from those at which they were translated when initially
recognized are reported in profit or loss in the period.
Exchange diferences arising on the monetary items that form part of the reporting
entitys net investment in a foreign operation, in a separate component of equity; upon
disposal of the net investment, they will be recognized in profit or loss.
If gain or loss on a non- monetary item is recognized directly in equity (for example, a
property revaluation under PAS 16), any foreign exchange component of that gain or loss
is also recognized directly in equity.
An exchange loss on foreign currency debt used to finance the acquisition of an asset
could no longer be added to the carrying amount of the asset even if the loss resulted
from a severe devaluation of a currency which there against which there was no practical
means of hedging.
3. FOREIGN CURRENCY FINANCIAL STATEMENTS TRANSLATION
The results and financial position of an entityare translated into a diferent presentation currency
using the following
procedures:
Assets and liabilities for each balance sheet presented are translated at the CLOSING RATE
at
the
date
of
that
balance sheet
Income and expenses for each income statement are translated at exchange rates at the
dates of the transactions
borrows or lends funds when the amounts payable or receivable are denominated in a foreign
currency
Page 20 of 36
Disclose the entitys functional currency and the method of translation used to determine the
supplementary information.
When an entity presents its financial statements in a currency in that is diferent from its
functional
currency,
it
may
describe those financial statements as complying with PFRS only if they comply with all the
requirements
of
each
applicable
Standard and Interpretation.
6. DISCLOSURE REQUIREMENTS.
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
The objective of PAS 29 is to establish specific standards for enterprises reporting in the currency
of
a
hyperflationary
economy, so that the financial information provided is meaningful.
Page 21 of 36
2.
3.
4.
5.
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 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
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.
SCOPE
All entities regardless of the nature of activities should prepare a cash flows statement and
present
it
as
an
integral
part
its financial statements.
BENEFITS
A cash flow statement, when in conjunction with rest of the financial statements, provides
additional
information
to
users of FS:
1. A better insight into the financial structure of an entity , including its liquidity and solvency ,
and its ability to afect the amounts and timing of cash flows in order to adapt to changing
circumstances and opportunities.
2. Enhanced information for purposes of evaluating changes in assets, liabilities, and equity of
an entity.
3. The statement enhances the comparability of reporting operating performance by diferent
entities because it eliminates the efects of using diferent accounting treatments for similar
transactions.
4. The statement serves as indicator of the amount, timing and reasonable certainty of future
cash flows.
PRESENTATION
The cash flow statement shall report cash flows during the period classified by operating,
investing
and
financing
activities:
1. OPERATING ACTIVITIES are the principal revenue producing activities of an entity and other
activities
that are not investing or financing activities. Cash flows from operating activitiesgenerally
Page 22 of 36
results
from
the
transactions and other events those enter into the determination of profit or loss
2. INVESTING ACTIVITES- are the acquisition and disposal of long-term assets and other
investments
not
include
in
cash
equivalents. Investing cash flows represent the extent to which expenditures have been
resources
intended
to
generate future income and cash flows.
3. FINANCING ACTIVITIES-are activities that result in changes in size and composition of
contributed equity and borrowings of the entity.
An entity shall disclose the components of cash and cash equivalents and shall present a
reconciliation of the amounts
in its cash flows statement with the equivalent items reported on the balance sheet.
DIRECT vs. INDIRECT METHOD
An entity shall report cash flows from operating activities using either direct or indirect method:
1. DIRECT METHOD- major classes of gross cash receipts and gross cash payments are disclosed.
2. INDIRET METHOD- profit or loss is adjusted for the efects of the transactions of a non-cash
nature ,any deferrals
and accruals of past or future operating cash receipts or payments, and items of income and
expense associated with investing or financing cash flows.
INTERESTS and DIVIDENDS.
Cash flows from interest s and dividends received and paid shall each be disclosed separately
each shall be classified in a consistent manner from period to period using the following
guidelines:
1. INTEREST PAID. Interest paid is usually classified as operating cash flows because it enters
into the determination of profit or loss .Alternatively it may be classified as financing cash
flows because it is a cost of obtaining financial resources.
2. INTEREST and DIVIDENDS RECEIVED. Interest and dividends received are usually classified as
operating cash flows because they enter into the determination of profit or loss. Alternatively,
both may be classified as investing cash flows because they are both represent returns on
investments.
3. DIVIDENDS PAID. Dividends are paid usually classified as financing cash flows because they
represent costs of obtaining financial resources. Alternatively, dividends paid may be
classified a s a component of cash flows from operating activities in order to assist users to
determine the ability of man entity to pay dividends out of operating cash flows.
NON-CASH TRANSACTIONS
Investing and financing transactions that do not require the use of cash or cash equivalents shall
be excluded from a cash flow statement. Such transactions shall be disclosed elsewhere in the
financial statements (e.g., notes to the financial statements) in a way that provides all the
relevant information about these investing and financing activities. Examples are:
1. The acquisition of assets either by assuming directly related liabilities or by means of a
finance lease.
2. The acquisition of an entity by means of an equity issue , and
3. The conversion of debt to equity
Cash flows are inflows and outflows of cash and cash equivalents .Cash comprises of cash on hand and demand
deposits.
Cash equivalents are short-term l, highly liquid investment that are readily convertible to known amounts of cash
and
which
are subject to a significant risk of change in value.
An entity may hold securities and loans for trading purposes, in which case they are similar to inventory acquired
specially for
resale. Therefore, cash flows arising from the purchase and sale of trading securities are classified as operating
activities.
Similarly
cash
and loans made by financial institutions are usually classified as operating activities since they relate to the main
revenue-producing
activity of that entity.
Some transactions, such as the sale of an item of plant give rise to gain or loss that is included in the
determination
of
profit
or
loss
However, the flows relating to such transactions are cash flows from investing activities. Cash flows arising from
taxes
on
income
shall be classified as cash flows from operating activities unless they can be specifically identified with financing
and investing activities.
Alternatively, the net cash flow from operating activities may be presented under the indirect method by showing
the
revenue
expenses disclosed in the income statement and the changes during the period in inventories and operating
receivables and payables.
PER
SHARE (EPS)
OBJECTIVE.
Page 23 of 36
The objective of PAS 33 is to prescribe principles for the determination and presentation of EPS, so
as to improve comparisons of performance among diferent entities in the same reporting period
and among diferent reporting periods for the same entity.
SCOPE.
The EPS standards shall be applied by:
1. Entities whose ordinary sharesor potential ordinary sharesare publicly traded.
2. Entities that are in the process of issuing ordinary shares or potential ordinary shares in public
markets.
3. Entities that voluntarily elect to disclose on EPS in financial statements.
PRESENTATION.
An entity should present on the face of the income statement both basis and diluted EPS. Basic
and diluted EPS must be presented with equal prominence for all periods presented, even if the
amounts are negative (i.e., loss per share).
BASIC EARNINGS PER SHARE.
Basic EPS is calculated by dividing profit or loss attributable to ordinary equity holders (the
numerator) by the weighted average number of ordinary shares outstanding (the
denominator)during the period.
1. EARNINGS.
For the purpose of calculating basic EPS, the amounts attributable to ordinary equity holders
shall
be
adjusted
for
the
tax amount of preference dividendsand other similar efects of preference shares classified as
equity.
2. SHARES.
For the purpose of calculating basic EPS, the number of ordinary shall be the weighted average
number
of
ordinary
shares outstanding for the period. The weighted average number of ordinary shares
outstanding
during
the
period
is
the number of ordinary outstanding at the beginning of the period, adjusted by the number of
ordinary
shares
issued and bought back during the period multiplied by a time-weighting factor
In this case of ordinary shares issued or reduce without a corresponding changes in resources
,
the
number
of
ordinary shares is adjusted for the proportionate change in the number or ordinary shares
outstanding
if
the
event
had
occurred at the beginning of the earliest period presented (i.e., the calculation of the basic and
diluted
EPS
for
all
periods presented shall be adjusted retrospectively).
DILUTED EARNINGS PER SHARE.
1. EARNINGS.
For the purpose of calculating diluted EPS, the earnings used in computing basic EPS shall be
adjusted by the after tax-efect of:
a.) any dividends related to diltutivepotentila ordinary shares deducted from the earnings
b.) any interest recognized in the period related to dilutive potential ordinary shares
c.) any change in earnings that would result from the conversion of dilutive potential ordinary
shares
2. SHARES
In computing diluted EPS, the ordinary shares shall be the weighted average number of
ordinary shares outstanding for the plus the weighted average number of ordinary shares that
would have been issued on the conversion of all the dilutive sharesinto ordinary shares.
An ordinary shares are an equity instrument that is a subordinate to all other classes of equity
instruments.
It
is
usually
known
as common stock under the Philippine Corporation Code.
A potential ordinary share is a financial instrument or other contract that may entitle its holder to
ordinary
shares.
Examples
include convertible bonds, convertible preferences shares, options and warrants. Options and
warrants
are
financial
instruments that give the holder the right to purchase ordinary shares.
Earnings are calculated after all expenses including taxes and if, any minority interest.
The after-tax amount of preference dividends that is deducted from the earnings are:
a.) the preference dividends on non-cumulative preference shares declared for the period and
b.) the preference dividends on cumulative preference shares for the period whether or not
dividends have been declared.
Contingently issuable shares treated as outstanding and are included in the calculation of the basic
EPS
only
from
the
date
necessary conditions are satisfied .Contingently issuable ordinary shares are ordinary shares
issuable
for
free
or
little
consideration upon the satisfaction of specified conditions in a contingent share agreement. A
contingent
share
agreement
is
an agreement to issue shares that is dependent on the satisfaction of specified conditions.
Time-weighted factor is the number of days of shares are outstanding as a proportion of total
number
of
days
for
the
period.
Page 24 of 36
Ordinary shares may be issued, or the number of ordinary shares outstanding may be reduced ,
without corresponding change in resources .Examples include: (a) capitalization or bonus issue (i.e.,
stock dividend) and (b) a share split or reverse split share (consolidation of shares).
In addition, basic and diluted EPS of all periods presented shall be adjusted for the efects of errors
and
adjustments
resulting from changes in accounting policies accounted for prospectively.
Dilution is a reduction of EPS or an increase in loss per share resulting from the assumption that
convertible
instruments
are converted, options and warrants are exercised, or ordinary shares are issued upon fulfillment of
certain conditions
Contract that require the entity to repurchase own shares , such written put option, which give the
holder
the
contractual
right to sell ordinary shares at a specified price, are reflected in the calculation of diluted EPS if the
efect is dilutive.
Costs
Costs incurred for the construction of public works might include:
(A) Materials used in the construction of the project, depreciation of fixed assets used in the work
(B) Labor cist related directly to the specific contract, i.e. costs of labor on the construction site,
including supervision
(C) Indirect costs such as insurance, technical assistance, and indirect construction expenses
(D) General or overhead costs such as administrative expenses or financial costs.
Accounting for income earned form a concession
The operating revenues earned under BOT contract should be recognized when it is possible to
generate income through
the provision of services, usually to third parties, and when the related costs and expenses have
been
incurred
or
can
be
estimated. Otherwise, payments received from the governments and others should be deferred
liabilities
(deferred
or
unearned income) and revenues should not be accrued into the profit and loss accounts for the
accounting period.
When the grantee has the right to receive income from the operation of public work after it
construction,
the
construction costs incurred should be charged to fixed assets accounts (e.g., road construction
where
the
income
is
generated form the right to collect tolls. In one of the largest BOT transactions in history, the
grantees
responsible
for
the
construction of the tunnel which links the United Kingdom and France have until the year 2041 to
recover their investment
through the operations before they to turn the operations back to the grantors of the operating
rights.
Income for the construction of public should be recognized using the percentage of completion
method of accounting for
Page 25 of 36
construction projects if the amounts earned can be reasonably accurately estimated during the
period
of
construction.
As
alternative, if the amounts earned can reasonably accurately, the grantee may use the complete
method
of
accounting,
which would mean that construction earrings would be recognized upon the conclusion of the
construction
phase
of
the
contract when the work has been completed to satisfaction for the government. These two
methods
of
accounting
are
accrual methods, which mean that recording of income, would be made when the earned
according
to
the
principles
described in this paragraph regardless of when accounts become billable to the government for
cash flow purposes either
on an interim basis or on completion of the project.
To achieve proper matching of costs incurred and revenues earned, all preconstruction and
construction
costs
should
be capitalized when incurred (meaning paid or an obligation incurred to make payments at a later
date) into asset accounts
in the records of the grantee. Such amount would then be transferred to accounting period profit or
loss
accounts
when
the
related income is earned on the accrual basis. If this method of accounting is followed, the profit
and
loss
in
the
years
of
concession operations might show only the expenses incurred, and thus losses; and the year in
which revenues are received
in cash would show the earnings, which might not have been earned exclusively in that year. Of
course,
if
all
of
the
construction is completed and the revenues are earned in the same accounting period, there
would
be
no
violation
of
the
generally accepted concept of the matching principle of accounting.
In applying the percentage of completion method of construction accounting, there are two
ways which may used
to estimate the revenues earned during accounting periods:
(a) Cost incurred during the year as a percentage of the total estimated costs of the project;
and.
(b) Revenue recognized on the basis of a technical report on the extent of the project
completion.
The percentage of the proportion of completion in method (b) should be applied to the amount of total
revenue set forth in the concession agreement. Also, related pre-construction and construction period
cost s should be charged to the same accounting period s profit or loss accounts, whether or not such
costs
have
been
actually
paid
in
cash.
However,
for
large
and
complex public works, particularly those with sub-projects of variable durations, it may be difficult to
use one single percentage of completion with respect to the entire project. In this situation the ratio of
costs incurred over year total costs of the works is the best method to applied to the total agreed
revenues
for
the
construction
phase.
The
use
of
either
these
two
method permits the income to be distributed among the periods in which the work is performed, or the
costs are incurred, and
results in a more accurate economic measurement overtime of net income.
Page 26 of 36
their net realizable value, if any at the conclusion of the contract .Generally, the net book value upon
disposal will be equal to the amount of the repayment since the rate of depreciation must take into
account the residual value of the concession assets. Any diference from what was the recorded would
be recognized as a gain
or loss from the revision of an estimate in the accounting period when determinable. If the contract
state that the asset should be transferred at fair value any diference between that amount and the
net book value is recorded in the profit and loss account.
Disclosures
In addition to the appropriate disclosures referred to in previous paragraphs, the notes to financial
statements of concessions
for the construction of public works should include the total value of the assets, the stage of
completion at the balance sheet date, and the method adopted recognize revenues.
Page 27 of 36
are not relevant to small and medium entities (SMEs) have been omitted , and the required disclosure
have been significantly reduced.
In the Philippines, FRSC (Financial Reporting Standards Council) and SEC (Securities and Exchange
Commission) set the rules
and regulations pertinent o financial reporting SMEs:
13 October 2009 FRSC adopts PFRS for SMEs form IFRS for SMEs issued in July 2009 by
IASB.
3 December 2009 Philippine SEC adopts PFRS for SMEs as a part of its rules and regulation.
1 January 2010 Efective date of application of PFRS for SMEs in the Philippines.
WHAT ARE SMALL & MEDUIM ENTITIES?
This common question of someone studying PFRS for SMEs for the first time. SMEs are known by
variety of terms, including small & medium-sized entities (SMEs), private entities, and non-publicly
accountable entities (NPAEs). Consider the following definition provided by Section 1 of the PFRS for
SMEs:
SMALL & MEDUIM ENTITIES ARE ENTITIES THAT:
(a) Do not have public accountability
(b) Publish general purpose financial statement for external users
An entity has public accountability if:
(a) Its debts or equity instruments are traded in a public market or it is in the process of issuing such
instruments for trading in a public market ( a domestic or foreign stock exchange or an over-thecounter market , including local and regional markets ),or
(b) It holds the assets in a fiduciary capacity for a broad group of outsiders as one of its primary
businesses. This is typically the case for banks, credit unions, insurance companies, securities
brokers/dealers mutual funds and investment banks.
The Securities and Exchange Commission, in its En Banc Resolution dated August 13, 2009, adopted a
definition of small & medium entities that includes a size criterion:
An entity is an SME if:
(a) The entity has total assets of between P 3 million and 350 million or total liabilities of between P
3million and 250 million.
(b) It is not required to file financial statements under SRC Rule 68.1;
(c) It is not the process of filling its financial statements for the purpose of issuing any class of
instruments in a public market;
(d) It is not a holder of secondary license issued by a regulatory agency , such as bank (all types of
bank), an investment house ; a finance company, an insurance company , a securities broker/
dealer, a mutual fund and a pre-need company ; and
(e) It is not a public utility
PRFS for SMEs vs. FULL PRFS
With the adoption of PFRS for SMEs, the term PFRS shall now be composed of two groups of
financial reporting standards:
PRFS
FULL
PFRS
PRFS for
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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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.
SMEs are used as a financial reporting standards council is entities that are not publicly
accountable, and publish general purpose financial statements for external users.
Listed companies may not used PFRS for SMEs no matter what how small they are.
If publicly accountable entity uses PFRS for SMEs, its financial statements shall not be described as
conforming to the PFRS for SMEs even if law or regulation in its jurisdiction permits or requires
PFRS for SMEs to be used publicly accountable entities.
A subsidiary whose parent uses full PFRS is not prohibited from using this PFRS for SMEs in its own
FS if that subsidiary by itself does not have public accountability.
If a subsidiarys FS are described as conforming to the PFRS for SMEs, it must comply with all the
provisions of this PFRS.
SECTION 2: Concepts and Pervasive Principles
The objective of FS is to provide information about the financial position , performance and cash
flows of an entity
Financial statements also show the results of stewardship of management- the accountability of
management resources entrusted to it.
Qualitative characteristics of FS: under stability, relevance, materiality, reliability substance over
form, prudence, completeness, comparability, timeliness, and balance between benefit and cost.
use
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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.
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.
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)
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.
If an entitys normal operating cycle is not clearly determinable its duration is assumed to be 12
months
PFRS for SMEs does not prescribe sequence or format in which items are to be presented; it simply
provides a list of minimum items that are sufficiently diferent in nature or function to warrant
separate presentation in the statement of financial position.
SECTION 5: Statement of Comprehensive Income and Income Statements
Single statement approach : Statement of Comprehensive Income shall include all items of
income and expenses recognized for the period
Two statement approach: The Income Statement shall display items considered in determining
profit or loss and the Statement of Comprehensive Income shall begin with profit or loss as its first
line and shall displays items of OCI (See SECTION 4) with the total comprehensive income as its
bottom line.
A change from the single statement approach to the tow-statement approach , or vice-versa, is a
change in accounting policy to which Section 10 applied.
SECTION 6: Statement of Changes in Equity and Statement Income and Retained Earnings
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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)
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 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.
An entity shall prepare consolidated FS that include the entity and any Special Purpose
Entities* that are controlled by that entity.
*SPECIAL PURPOSE ENTITIES (SPEs) are created to accomplish a narrow objective (e.g.,to efect
a lease , indertake research and development activities or securitize financial assets); SPEs
may take the form of a corporation, trust, partnership or unincorporated entity. SMEs are
created with the legal arrangements that impose strict requirements over the operations of the
SPE.
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)
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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.
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).
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.
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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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.
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
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.
All business combinations shall be accounted for by applying the purchase method.
The acquirer shall measure the cost of a business combination as the aggregate of:
(a) The fair values of assets given, liabilities incurred and equity instruments issued by the
acquirer,
in
exchange
for
control of the acquiree, plus
(b) Any costs directly attributable to the business combination.
Any diference between the cost of the business combination and the acquirers interest in the net
fair value of the identifiable assets, liabilities and provisions for contingent liabilities recognized
shall be accounted for as goodwill or negative goodwill.
After initial recognition, the acquirer shall measure goodwill acquired in a business combination at
cost less accumulated amortization and accumulated impairment losses .
If an entity is unable to make a reliable estimate of the useful life of goodwill, the life shall be
presumed to be ten years.
If the acquirers interest in the net fair value of the identifiable assets, liabilities and provisions for
contingent liabilities recognized exceeds the cost of the business combinations (sometimes referred
to as negative goodwill) the acquirer shall:
(a)reassess the identification and measurement of the cost of combination, and
(b) recognize immediately in profit or loss any excess remaining after that reassessment.
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Equity is the residual interest in the assets of an entity after deducting all its liabilities
A liability is a present obligation of the resources embodying economic benefits.
An entity shall recognize the issue of shares or equity instruments as equity when it issues those
instruments and another party is obliged to provide cash or other resources to the entity in
exchange for the instruments.
An entity shall account fir the transaction costs of an equity transaction as a deduction for equity,
net of any related income tax benefit.
A capitalization or bonus issue (sometimes referred to as a stock dividend) is the issue of new
shares to shareholders in proportion to their existing holding. For example , an entity may give its
shareholders one dividend or bonus share for every five shares held.
A share split (sometimes referred to as stock split) is the dividing of an entitys existing shares
into multiple shares. For example, in a share split, each shareholder may receive one additional
share for each share held. In some cases, the previously outstanding shares are cancelled and
replaced by new shares.
Capitalization and bonus and issues and share splits do not change total equity.
Treasury shares are the equity instruments of an entity that have been issued and subsequently
reacquired by the entity. An entity shall deduct from equity the fair value of the consideration
given for the treasury shares. The entity shall not recognize a gain or loss in profit or loss on the
purchase, sale, issue or cancellation of treasury shares.
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 all borrowing costs as an expense in profit or loss in the period in
which they are incurred.
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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.
A entity shall recognize the cost of all employee benefits to which its employees have become
entitled as a result of service rendered to the entity during the reporting period:
(a)
As a liability, after deducting amounts that have been paid either directly to the
employees
or
as
a
contribution
to
an
employee benefit fund.
b)
As an expense, unless another section of PFRS for SMEs requires the cost to be
recognized
as
part
of
the
cost
of
an
asset.
Under defined benefit plans, an entity shall recognize all actuarial gains and losses in the period
in which they occur, as part of either (1) profit or loss or (2) other comprehensive income. As a
consequence, the corridor approach under PAS 19 is not allowed.
SECTION 29: Income Tax
An entity shall recognize a current tax liability for tax payable on taxable profit for the current and
past periods. If the amount paid for the current and past periods exceeds the amount payable for
those periods, the entity shall recognize the excess as a current tax asset.
An entity shall recognize a deferred tax asset or liability for tax recoverable or payable in future
periods as a result of past transaction or events. Such tax arises from the diference between the
amounts recognized for the entitys assets and liabilities and the recognition of those assets and
liabilities by the tax authorities.
Discounting and ofsetting of current tax assets and liabilities are not allowed.
An entity shall record a foreign currency transaction by applying to the foreign currency amount
the spot exchange rate between the functional currency and the foreign currency at the date of
the transaction.
An entity shall translate its results and financial position into a diferent presentation currency
using the following procedures:
Assets and liabilities shall be translated at the closing rate.
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Income and expenses shall be translated at the exchange rates at the dates of the
transaction.
( The use of average rate is allowed if this approximates the exchange rates at the
transaction dates)
All resulting exchange diferences shall be recognized in other comprehensive income.
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
Most provisions of this Section are similar to PAS 24. See pages 7 and 8 of the TA Lecture
Notes.
In considering each possible related party relationship, an entity shall assess the substance
of the relationship and not merely the legal form.
SECTION 34: Specialized Activities
This section provides guidance on financial reporting by SMEs involved in three types of
specialized activities: (1) agriculture (2) extractive activities (3) service concessions
An entity engaged in agricultural activity shall determine its accounting policy for each class of
its biological assets as follows:
(a) The entity shall use the FAIR VALUE model for those biological assets for which fair value is
readily
determinable
without undue cost or efort.
(b) The entity shall use the COST model for all other biological assets.
Agricultural produce harvested from an entitys biological assets shall be measured at its fair
value
less
costs
to
sell
at
the
point of harvest.
An entity engaged in the exploration for, evaluation or extraction of mineral resources (extractive
activities) shall account for expenditure on the acquisition or development of tangible or
intangible assets for use in extractive activities by applying Section 17 Property , Plant and
Equipment and Section 18 Intangible Assets other than Goodwill, respectively
Under a service concession arrangement, the private operator shall recognize a financial asset to
extent that it has unconditional contractual right to receive cash or another financial asset from or
at the direction of the grantor for the construction services:
The private operator shall measure the financial asset at fair value. Thereafter, it shall follow
Section 11 Basic Financial Instruments and Section 12 Other Financial Instrument Issues in
accounting for the financial asset.
The private operator shall recognize an intangible asset to the extent that it receives a right (a
license to change users of the public service. The operator shall initially measure the
intangible asset at fair value. Thereafter, it shall follow Section 18 in accounting for the
intangible asset.
SECTION 35: Transition to the PFRS for SMEs
A first-time adopter of PFRS for SMEs shall apply this section in its FS that conform to PFRS for
SMEs.
Section 35 requires an entity to prepare comparative FS Covering the current year and at least one
prior year using PFRS for SMEs.
An entitys date of transition to PFRS for SMEs is the beginning of the earliest period for which the
entity present full comparative information in accordance with PFRS for SMEs in its first FS that
conform to PFRS for SMEs
Section 35 cites many exemptions for restating specific items in its first PFRS-for-SME-based FS.
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