PFRS Updates Training

The Philippine Financial

Reporting Standards
Agenda

 Amendments to PAS 1: Financial Statements Presentation

 PAS 19: (Revised) Employee Benefits
 PFRS 9: Financial Instruments
 PFRS 10: Consolidation
 PFRS 11: Joint Arrangements
 PFRS 13: Fair Value Measurement
 IASB Project Insights
 Amendments to PAS 1 on
Presentation of Items of
Other Comprehensive Income
Amendments to PAS 1
 Require the grouping of items of OCI into:
– Items that might be classified to P/L in subsequent periods;
and
– Items that will not be reclassified to P/L in subsequent
periods.
 Entity may present items of OCI either:
– Net of related tax effects; or
– Before related tax effects with one amount shown for the
aggregate amount of income tax relating to those items.
 Retain the option to present P/L and OCI in either a single
continuous statement or in two separate but consecutive
statements.
Other Comprehensive Income

1. Revaluation Surplus
2. Actuarial Gains or Losses
3. Unrealized gains or losses on securities classified as
“available for sale” or designated “FVOCI”
4. Foreign Currency Translation Adjustments
5. Unrealized gains or losses on hedging instruments
Effective Date and Transition

 Effective for annual periods beginning on or after July 1, 2012

 Full retrospective application
 Illustrative Example

2011 2010
Other Comprehensive Income:
Items that will not be reclassified to profit and loss
Actuarial gains (losses) on defined benefit plans 10,000 (20,000)
Income tax relating to items not reclassified (3,000) 6,000
Total 7,000 (14,000)

Items that may be reclassified subsequently to profit and loss

Cash flow hedges
- Gains (losses) arising during the period 12,000 (16,000)
- Reclassification adjustments for amounts recognized in P/L (2,000) 2,500
Income tax relating to items that may be reclassified (3,000) 4,050
Total 7,000 (9,450)

Other comprehensive income (loss) for the year 14,000 (23,450)

PAS 19 (Revised): Employee Benefits
PAS 19 (Revised)- Highlights

Main Changes
Actuarial gains and losses are now required to be recognised in other
comprehensive income (OCI).
Unvested past service costs can no longer be deferred and recognised
over the future vesting period.
Expected returns on plan assets will no longer be recognised in profit
or loss.

Effective Date
Effective for annual periods beginning on or after 1 January 2013.
Early application is permitted.
 Defined Benefit Plan under the Revised PAS 19

Amount to be recognized in the statement of financial position:

BEFORE AMENDMENT
PV of FV Define
define of d
d Unrecognized Unrecognized benefit
plan Past Service liabilit
benefit AG (AL)
obligat asset Cost y
ion s (asset)

AFTER AMENDMENT

PV of Defined
FV of
defined benefit
plan liability
benefit
assets (asset)
obligation
Defined Benefit Plan under the Revised PAS 19

Amount to be recognized in profit or loss:

BEFORE AMENDMENT AFTER AMENDMENT

Current service cost Current service cost

Interest cost on defined benefit

liability Net interest on the net defined
benefit liability (asset)
Expected return on plan assets

Actuarial gains and losses to the NOW RECOGNIZED IN OCI IN FULL

extent recognized (option was removed)
Past service cost in full
Amortization of past service cost
(not amortized)
Effect of any curtailments or Effect of any curtailments or
settlements settlements
Effect of asset ceiling NOW RECOGNIZED IN OCI
(unless recognized in OCI) (option was removed)
 Phase 1:
Classification and Measurement
 PFRS 9- Classification and Measurement
Classification of Financial Assets

FAIR VALUE
THROUGH P&L

FAIR VALUE
AVAILABLE
FOR SALE

HELD TO
AMORTIZED
MATURITY
COST

LOANS &
RECEIVABLES
Classification and Measurement

Is the financial asset a DEBT instrument or an EQUITY investment?

DEBT
DEBT DERIVATIVE
DERIVATIVE EQUITY
EQUITY

Meets the ‘Business model’ test? NO

YES Held for trading?

YES NO
NO
Meets the ‘Characteristics of the Fair value through OCI option
financial asset’ test? used?
NO
YES
YES YES
Fair Value Option (FVO) used?
NO

Amortized Fair value through FAIR VALUE

cost profit or loss THROUGH OCI
 Classification Rules
Classification of Financial Assets

Measurement Category

Amortized
Fair Value
Cost
 Classification Rules
Classification of Financial Assets

Measurement Category

Amortized
Fair Value
Cost
 Business Model Test
Classification Rules

• Assess whether the asset is held within a business model

whose objective is to hold asset in order to COLLECT contractual
cash flows.

• An entity assesses whether its financial assets meet the

amortized cost requirement based on business model as
determined by the entity’s key management personnel.
 Business Model Test
Classification Rules

• Business model test IS NOT based on management intention for an

individual instrument.

• Assessment is not determined on an instrument by instrument basis but

on a higher level of aggregation.

• An entity may have more than one business model for managing its
financial instruments.
 Classification Rules
Classification of Financial Assets

Measurement Category

Amortized
Fair Value
Cost
 Contractual Cash Flow Characteristics Test
Solely Payments of Principal and Interest

• To be classified at amortized cost, the contractual terms of the financial

asset give rise on specified dates to cash flows that are SOLELY payments
of PRINCIPAL and INTEREST on the principal outstanding.

• An entity shall assess whether contractual cash flows are solely payments
of principal and interest on the principal amount outstanding for the
currency in which the financial asset is denominated.
 Contractual Cash Flow Characteristics Test
Interest Under PFRS 9

Principal

Interest

Credit Risk

Time Value
of Money
 PFRS 10:
Consolidated Financial Statements
 Interaction of IFRS 10,11,
12 & IAS 28
Control alone?

Consolidated using YES NO Joint control?

IFRS 10
YES NO
IFRS 12 Disclosures
Decide type of joint Significant
arrangement using influence?
IFRS 11
Joint Operation
Joint Venture NO
YES
Account for assets, Account for
liabilities, revenues investment using IFRS 9
and expense IAS 28
IFRS 12 Disclosures IFRS 12 Disclosures
 Consolidated financial statement
Control
Joint control
Significant
influence No control

Consolidated Equity accounting Equity

accounting Financial asset
PFRS 10: Consolidated Financial Statements

ISSUANCE: May 2011

OBJECTIVES:
 defines the principle of control and establishes control as the basis for
determining which entities are to be consolidated

 sets out how to apply the principle of control to identify whether an

investor controls an investee and therefore must consolidate the
investee

 sets out the accounting requirements for the preparation of

consolidated financial statements

EFFECTIVE DATE OF TRANSITION:

Effective for annual periods beginning on or after January 1, 2013.
Control
PAS 27 - defines control as the power to govern the financial and
operating policies of an entity

SIC 12 - interpreted the requirements of PAS 27 in the context of

special purpose entities, placed greater emphasis on risks and rewards

PFRS 10 – An investor controls an investee when the investor is

exposed to variable returns and has the ability to affect those returns
 Elements of control
 Power over the investee, which is
described as having existing rights that
give the current ability to direct the
activities of the investee that
significantly affect the investee’s
returns (such activities are referred to
as the relevant activities)
 Elements of control
 Exposure, or rights, to variable returns
from its involvement with the investee

 Ability to use its power over the

investee to affect the amount of the
investor’s returns
 Relevant activities
Identify which activities of the investee are
considered the relevant activities, i.e., those activities
of the Investee that significantly affect the investee’s
returns.
Examples of relevant activities could include:
• Determining operation policies
• Making capital decisions
• Appointing key management personnel
• Management of underlying investments
 Power
Determine which party, if any, has power, that is, the
current ability to direct those activities. Power arises
from those rights which may include:
• Voting rights
• Potential voting rights (e.g., options or
convertible instruments)
• Decision making rights within a management
contract
• Removal or “kick-out”rights
 Returns
Assess whether the investor is exposed, or has right, to
variable returns from its involvement with the investee.
Returns can be positive, negative or both. Examples of
returns include:
• Dividends
• Remuneration
• returns that are not variable to other interest
holder (e.g., economies of scale, cost savings,
scarce products, propriety knowledge, or
synergies)
 The control model - conclusion
Assessing control of an investee:
 Consider the purpose and design
 Identify the activities of an investee that significantly
affect the returns of the investee (i.e. the relevant activities)
 Identify how decisions about relevant activities are made
 Determine whether the rights of the investor give it the
ability to direct the relevant activities
 Determine whether the investor is exposed, or has rights to
the variability associated with the returns of the investee
 Determine whether the investor has the ability to use its
power over the investee to affect its own returns
 The control model - conclusion
1. “De facto” control
 Entity can control with less than 50% of voting rights.
 factors to consider include:
- Size of the holding relative to the size and dispersion
of the other vote holders
- Potential voting rights
- Other contractual rights
 If the above not conclusive consider additional facts and
circumstances that provide evidence of power (e.g. voting
patterns at previous board meeting, etc.)
2. Structured entities
 General principles apply for assessing control for all types
of
entities
 The control model - conclusion
3. Potential Voting Rights
 Substantive potential voting rights (PVR) can give the
holder power
 Consider the terms and conditions, including:
- Whether there are any barriers that prevent the holder
from exercising
- Whether exercise of the rights would be beneficial to the holder
- Whether the rights are exercisable when decisions need to be made
4. Agency Relationships
 Consider all of the following factors:
- Scope of the decisions-making authority
- Rights held by other parties (i.e. Kick out rights)
- Remuneration of the decisions-maker
- Other interests that the decision-maker holds in the investee
Steps in determining whether control exists

1. Determine whether the investor has exposure to variable

returns
• Dividends
• Remuneration

2. Identify the investee’s relevant activities

• Activities with biggest impact on the returns

3. Determine whether the investor has the power to direct the

relevant activities
• Voting rights
• Potential voting rights that are currently exercisable
• De facto control
 PFRS 11:
Joint Arrangements
Background and objectives

Eliminate accounting policy choice to account for jointly

controlled entities using proportionate consolidation

Structure is no longer the only determinant of classification

Converge PFRS and US GAAP

Joint arrangements

A joint arrangement is an arrangement over

which two or more parties have joint control
 Accounting Treatment

Jointly controlled Jointly controlled Jointly controlled

PAS 31

Venture
operations assets entities

Joint
Recognize its assets,
Recognize its assets, Equity method or
liabilities, revenue, and
liabilities, expenses, and proportionate
expenses, and/or its
its share of income consolidation
relative shares thereof

Arrangemen
Joint operations Joint ventures
The parties with joint control have
PFRS 11

The parties with joint control have

rights to the assets and obligations
rights to the net assets of the

Joint
for the liabilities of the
arrangement.
arrangement

Recognize its assets, liabilities,

revenue, and expenses,
Equity method
and/or its relative shares
thereof
Transition
Proportionate consolidation to the equity method
Effective 1 January 2013
Recognise investment in the joint venture for earliest period
presented
Measure investment as the aggregate of the carrying amounts
of the assets and liabilities that were previously
proportionately consolidated
Including any goodwill arising from acquisition
Investment becomes ‘deemed cost’ for equity method
Test the investment for impairment
Disclose aggregated assets and liabilities
 PFRS 13:
Fair Value Measurement
PFRS 13: Fair Value Measurement

• Establishes a single source of guidance for fair value

measurements
• Defines fair value, provides guidance on its determination and
introduces consistent requirements for disclosures in fair value
measurements
SCOPE OF PFRS 13

• Applies when another PFRS requires/permits fair value

measurement

• Does not apply to:

– Share based payments
– Leases
– Net realizable value or value in use
Objectives of PFRS 13

• Define Fair Value

• Set out a framework for measuring Fair Value

• Require disclosures about FV measurement

Definition

• Old definition:
– The amount at which an asset can be exchanged or a liability settled
between knowledgeable and willing parties in an arms length
transactions

• New definition:
– The price that would be received to sell an asset or paid to settle a
liability in an orderly transactions between market participants at
measurement date.
Fair Value Hierarchy

• Level 1
– Unadjusted quoted prices in an active market for an identical asset or
liability

• Level 2
– Quoted prices in an active market for a similar asset or liability
– Quoted prices for a similar or an identical asset or liability in a market
that is not active
– Fair value derived from other observable inputs

• Level 3
– Fair value derived from unobservable inputs
Fair Value Measurement

1. Determine the asset or liability that is the subject to fair value

measurement
2. For non-financial assets, take into account the highest and best use
3. Determine the principal market and the most advantageous
market
4. Determine the appropriate valuation technique
a. Market approach
b. Cost approach
c. Income approach
Disclosure Requirements

• Valuation techniques
• Inputs used to develop the fair value
• If level 3 input is used, disclose
– The effects on P&L and OCI of the fair value measurement
Effective Date and Transition

 Effective for annual periods beginning on or after

January 1, 2013
 Early application permitted
 Prospective application required
PFRS 9: Financial Instruments
(Replacement of PAS 39)
IASB Project Insights
• Revenue Recognition
• Leases
 IASB Project Insights:
Revenue from Contracts with Customers
Project Status

 Original exposure draft issued in June 2010

 Almost 1,000 comment letters received
 Revised exposure draft issued in November 2011
 Comment period ended in March 2012
 Effective date of final standard– TBD, but no sooner
than January 1, 2015
 One year delayed effective date for private companies
 Project objective
3

Objective: To develop a single, principle-based

revenue standard for US GAAP and IFRSs
• The revenue standard aims to improve accounting
for contracts with customers by:
– Providing a more robust framework for addressing
revenue issues as they arise
– Increasing comparability across industries and capital
markets
– Requiring better disclosure

Source: International Accounting Standards Board

 Overview of Revised Proposals
3

Core principle:

Recognize revenue to depict the transfer of goods or

services to customers in an amount that reflects the
consideration to which the entity expects to be
entitled in exchange for those goods or services

Source: International Accounting Standards Board

 Overview of Revised Proposals
3

Steps to apply the core principle:

1 ●
Identify the contract with the customer

2 ●
Identify the separate performance

3 ●
Determine the transaction price

4 ●
● Allocate the transaction price to the separate performance obligations

5
Source: International Accounting Standards Board
●
● Recognize revenue when a performance obligation is satisfied
 Step 1: Identify the contract(s)
6

Objective: To identify the bundle of contractual rights and

obligations to which an entity would apply the revenue
model

• Specified criteria must be met to apply the model

to a contract
• Some contracts would be combined and accounted
for as one contract
• Contract modifications
– Some accounted for as a separate contract
– Otherwise, reevaluate remaining performance obligations

Source: International Accounting Standards Board

 Step 2: Identify the separate performance
obligation(s) 7

Objective: To identify the promised goods or services that are

distinct and, hence, that should be accounted for separately

• A good or service is distinct if either:

– The entity regularly sells the good or service separately
– The customer can benefit from the good or service on its own or
together with other readily available resources
• A good or service that is part of a bundle of goods or services is
not distinct (accounted for as single performance obligation) if
both:
– The goods or services are highly interrelated and the contract
requires the entity to provide a significant service to ‘integrate’
them into items for which the customer has contracted
– The bundle of goods or services is significantly modified or
customised to fulfil the contract
Source: International Accounting Standards Board
 Step 3: Determine transaction price
8

Objective: To determine amount of consideration that an entity

expects to be entitled in exchange for promised goods or services

• Estimate variable consideration at expected value or

most likely amount
– Use the method that is a better prediction of the amount of
consideration to which the entity will be entitled
• Adjust for time value of money only if there is a
financing component that is significant to the contract
• Customer credit risk accounted for under other
standards and presented adjacent to revenue line on
income statement
Source: International Accounting Standards Board
 Step 4: Allocate the transaction price
9

Objective: To allocate to each separate performance obligation

the amount to which the entity expects to be entitled

• Allocating on a relative standalone selling price basis

will generally meet the objective
– Estimate selling prices if they are not observable
– Residual estimation techniques may be appropriate
• Discounts and contingent amounts are allocated
entirely to one performance obligation if specified
criteria are met

Source: International Accounting Standards Board

 Step 5: Recognise revenue
10

Objective: To recognise revenue when (or as) the entity satisfies a

performance obligation by transferring a promised good or service

Performance obligations satisfied Performance obligations satisfied

over time at a point in time
A performance obligation is satisfied All other performance obligations are
over time if: satisfied at a point in time
• the entity’s performance creates or
enhances an asset (eg WIP) that the Revenue is recognised at the point in
customer controls as the asset is time when the customer obtains control
created or enhanced; or of the promised asset. Indicators of
• the criteria in paragraph 35(b) are control include:
met (see following slides) • a present right to payment
• legal title
Revenue is recognised by measuring • physical possession
progress towards complete satisfaction • risks and rewards of ownership
of the performance obligation • customer acceptance

Source: International Accounting Standards Board

 Step 5: Recognise revenue
11

An overview of the paragraph 35(b) criteria

• A performance obligation is satisfied over time if:
– the entity’s performance does not create an asset with
alternative use to the entity; and
– at least one of the following three criteria is met:
• the customer simultaneously receives and consumes
the benefits of the entity’s performance as the entity
performs; or
• another entity would not need to re-perform work to
date if that other entity were to fulfil the remaining
obligation; or
• the entity has a right to payment for work completed
to date and it expects to fulfil the contract as promised
Source: International Accounting Standards Board
Transition and effective date
18

• Retrospective application

• Effective date no earlier than annual reporting

periods beginning on or after 1 January 2015
IASB Project Insights:
Leases
Why a Leases project?

Lessee
• Most assets and liabilities are off-balance-sheet
• Limited information about operating leases

Lessor
• Lack of transparency about residual values
• Consistency with lessee proposals and revenue
proposals
 Why a Leases project?

How the proposals address the issues

Recognition of lease
Most assets and
assets and liabilities Greater
Lessee liabilities are off-
for all leases of more transparency
balance-sheet
than 12 months about leverage,
assets used in
operations, and
Insufficient disclosure cash flows
Enhanced disclosure
Lessee about operating
requirements
leases

Separately account
Lack of transparency Greater
for residual asset
Lessor about residual values transparency
of equipment and Enhanced disclosures
about residual
vehicles about residual asset’s
exposure to risk values

Source: International Accounting Standards Board

 Proposed right-of-use model

A lease contract conveys the right to use an asset (the underlying

asset) for a period of time in exchange for consideration

Right-of-use asset

Lessor Lessee
Lease payments

Source: International Accounting Standards Board

67
 Dual approach

There is a wide spectrum of lease transactions

with different economics

Start of lease End of lease

Most
equipment/ Asset consumption
more than insignificant
vehicles

Most real Asset consumption not

estate more than insignificant

Source: International Accounting Standards Board

68
 Lease classification test

Leases for Leases for real estate

equipment/vehicles are Type B leases
are Type A leases unless
unless

●
Lease term is ●
Lease term is major
insignificant relative part of remaining
to total economic life economic life of
of asset asset
●
Present value of ●
Present value of
lease payments is lease payments is
insignificant relative substantially all of
to fair value of asset fair value of asset

Source: International Accounting Standards Board

69
 Lessee accounting model

Balance Income Cash flow

sheet statement statement
Cash paid for
Most leases of Right-of-use Amortisation Cash paid for
principal and
equipment/ asset Interest interest
Type vehicles Lease liability expense payments

Type
B Most leases of Right-of-use Single lease
expense on a
Cash paid
asset straight-line for lease
real estate Lease liability basis payments

Source: International Accounting Standards Board

70
 Lessor accounting model

Balance Income Cash flow

sheet statement
Interest income
statement
Most leases of Lease Interest income
and Cash
equipment/ receivable any profit on the received
Type vehicle Residual asset lease

Type
B Most leases of Continue to
Lease income,
Cash
typically on a
recognise
straight-line received
property underlying asset basis

Source: International Accounting Standards Board

71
 Reducing Cost and Complexity in Response to
Feedback on the 2010 ED

Short-term leases
• Option to exclude leases with a maximum term of 12
months or less

Variable lease payments

• Excluded if payments are not linked to an index or a
rate

Renewal options
• Excluded unless significant economic incentive to
exercise the option

Source: International Accounting Standards Board

72
 Comment period ends- 13 May through October 2013
September 2013
Next steps

Final standard and

Redeliberations-
effective date-
beginning Q4 2013
TBD

Source: International Accounting Standards Board

73
Thank you!