CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS

Lesson 11.1 - PFRS 3: Business Combination

PFRS 3 covers the accounting treatment of goodwill acquired in a business
combination, which occurs when one company acquires another or when 2 or more
companies merge into one wherein one company gains control over the other, called
parent or acquirer. The controlled company is the subsidiary or acquire. There is
also the so-called “true mergers” or “mergers of equal”.
- Essential elements of business combination:
o Control – is when the investor has the power to direct the investee’s
relevant activities and normally presumed when the acquirer holds more
than 50% of acquiree’s voting rights. An acquirer may obtain control by:
 Transferring cash or other assets
 Incurring liabilities
 Issuing equity interests
 Providing more than one type of consideration
 Contract without transferring consideration
o Business – an integrated set of activities and assets that is capable of being
conducted and managed for the purpose of providing a return in the form
of dividends, economic benefits directly to investor. It has the following
elements:
 Input – any economic resource that results to an output when one or
processes are applied.
 Process – any system, standard, protocol, convention or rule that
when applied to input creates an output.
 Output – the result of input and output that provides investment
returns to the stakeholders of the business.
- Accounting for business combination using acquisition method which
requires:
o Identifying the acquirer
 Acquirer is the entity that obtains control
 Acquire is the business that was acquirer obtains control
o Determining the acquisition date – the date on which the acquirer
obtains control of the acquiree which is normally the closing date or
whatever is indicated in the written agreement.
o Recognizing and measuring goodwill – the acquirer computes and
recognizes either the goodwill (an asset) or gain on a bargain purchase,
also known as negative goodwill (as gain in profit or loss). To determine
such, the following are considered:
 Consideration transferred – is measured at fair value in the form
of –
 Cash
 Non-cash assets
 Equity instruments
 A business or a subsidiary of the acquirer
 Contingent consideration
 Non-controlling interest (NCI) or minority interest in the
acquiree which is measured either at fair value or the NCI’s
proportionate share of the acquirer’s identifiable net assets.
 Previously held equity interest in the acquiree – any interest held
by the acquirer before the business combination. It will affect the
computation of goodwill if business combinations is achieved in
stages.
 Identifiable assets acquired and liabilities assumed
 Recognition principle – the acquirer recognizes the
identifiable assets acquired, liabilities assumed and any NCI
in the acquiree separate from goodwill on acquisition date.
 Recognition conditions –
o Must meet the definitions of assets and liabilities under
conceptual framework at acquisition date
o It must be part of what acquirer and the acquire
exchanged in the business combination transaction
o It may result to the acquirer recognizing assets and
liabilities that the acquiree had not previously
recognized in its financial statements.
 Measurement principle – it is measured at its acquisition-
date fair values.
Lesson 11.2 - PFRS 5: Non-current Assets Held for Sale and Discontinued
Operations
PFRS 5 prescribes the accounting for assets held for sale including disposal
groups, and the presentation and disclosure of discontinued operations. It requires
assets and groups of assets that are held for sale to be presented separately in the
statement of financial position and the results of discontinued operations to be
presented separately in the statement of profit or loss and other comprehensive
income.
- Definitions of terms –
o Disposal group – a group of assets to be disposed of, by sale or
otherwise, together as a group in a single transaction, and liabilities
directly associated with those assets that will be transferred in the
transaction which could be a subsidiary, a cash generating unit or a
single operation within an entity.
o Cash-generating unit – the smallest identifiable group of assets for
which independent cash flows can be identified and measured.
o Fair value - the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants
at the measurement date.
o Cost of disposal – the incremental costs directly attributable to the
disposal of an asset or disposal group, excluding finance costs and
income tax expense.
o Recoverable amount – the higher of an asset’s fair value less costs of
disposal and its value in use
o Value in use – the present value of an estimated future cash flows
expected to arise from the continuing use of an asset and from its
disposal at the end of its useful life.
o Discontinued operation – a component of an entity that has either
been disposed of or is classified as held for sale and:
 Represents a separate major line of business or geographical
area of operations or
 Is part of a single coordinated plan to dispose of a separate
major line of business or geographical area of operations
  Is a subsidiary acquired exclusively with a view to resale.
o Component of an entity – operations and cash flows that can be
clearly distinguished operationally and for financial reporting purposes,
from the rest of the entity.
- Classification of assets held for sale – a non-current asset or disposal group
is classified as held for sale if it carrying amount will be recovered principally
through a sale transaction rather than through continuing use and should meet
the following criteria:
o The asset must be available for immediate sale in its present condition.
o The sale must be highly probable, which means –
 Management must be committed to a plan to sell the asset
 There must be an active program to locate a buyer
 The asset must be marketed for sale at a price that is reasonable
in relation to its current fair value
 The sale should be expected to take place within one year from
the date of classification. However, it can still be classified as
held for sale even if it exceeds beyond one year if –
 The delay must have been caused by events or
circumstances beyond the entity’s control
 There must be sufficient evidence that the entity is still
committed to sell the asset
 It is unlikely that significant changes to the plan will be made
or that the plan will be withdrawn.
Illustration
On December 1, 2020, a company became committed to a plan to sell a
manufacturing facility and has already found a potential buyer. The company does
not intend to discontinue the operations currently carried out in the facility. On
December 31, 2020 there is a back log of uncompleted orders so that the company
can only transfer the facility to the buyer upon completion of orders which is not
expected to occur until the third quarter of 2021. Can the manufacturing facility be
classified as held for sale at December 31, 2020?
Answer:
One of the criteria was not met: “The asset must be available for immediate sale in
its present condition”, and therefore it cannot be classified as held for sale. It must
be treated in the same way as other items in property, plant and equipment and
continue to be depreciated and should not be separately disclosed.
- Event after the reporting period – if the criteria for classification as held for
sale are met after the reporting period, it is not classified as such but the event
should be treated as a non-adjusting event after the reporting period.
- Measurement of assets held for sale:
o It should be measured at the lower or its carrying amount and fair value
less costs of disposal (net realizable value)
o It should not be depreciated even if they are still being used by the
entity.
- Changes to a plan of sale – if an asset ceases to be classified as held for sale,
it should be measured at the lower of the asset’s
o Carrying amount before its classification as held for sale, adjusted for
any depreciation, amortization or revaluation that would have been
recognized had the asset not been classified as held for sale and
o Recoverable amount at the date of subsequent decision not to sell.

- Occurrence of discontinued operations:

o When a company eliminates the results of operations and cash flows of
a component of an entity from its ongoing operations, and
o There is no significant continuing involvement in that component after
its disposal.
Presentation:
- Current asset or disposal group classified as held for sale – should be
presented separately from other assets and other liabilities in the statement of
financial position.
o Assets and liabilities held for sale should not be offset.
 o The major classes of assets and liabilities held for sale should be
separately disclosed either in the face of the statement of financial
position or in the notes.
o Must be shown as a separate component of current assets/current
liabilities.
- Discontinued operations results are presented in the statement of profits
or loss and other comprehensive income as a single amount (see
disclosures below) comprising the total of the following:
o The post-tax profit or loss of discontinued operations
o Post-gain or loss recognized on the measurement to fair value less cost
to sell or on the disposal of the assets constituting the discontinued
operation.
The results of discontinued operations are presented after profit or loss from
continuing operations
Disclosures:
- In the period in which current asset or disposal group has been either
classified as held for sale or sold:
o A description of the non-current asset or disposal group
o A description of the facts and circumstances of the disposal
o Any gain or loss recognized when the item was classified as held for
sale
- Where an asset previously classified as held for sale, the entity should disclose
a description of the facts or circumstances leading to the decision and its
effect on results.
- The entity should also disclose an analysis of single amount mentioned above,
into:
o The revenue, expenses and pre-tax profit or loss of discontinued
operations
o The related income tax expense
 o The gain or loss recognized on the measurement to fair value less cost
of disposal or on the disposal of the assets of the discontinued
operations
o The related income tax expense of the above.

Lesson 11.3 - PFRS 6: Exploration and Evaluation of Mineral Resources

I. DEFINITION

EXPLORATION AND EVALUATION EXPENDITURES

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

ACCOUNTING FOR EXPLORATION AND EVALUATION

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

II. MEASUREMENT AT RECOGNITION

 If the entity opts to capitalize exploration and evaluation expenditures as

assets, it shall measure them at COST.
Elements of cost of exploration and evaluation assets
An entity shall determine an accounting policy specifying which expenditures are
recrecognized exploration and evaluation assets and apply the policy consistently. In
making this determination, an entity considers the degree to which the expenditure
can be associated with finding specific mineral resources. The following are
examples of expenditures that might be included in the initial measurement of
exploration and evaluation assets (the list is not exhaustive):
a. acquisition of rights to explore;
b. topographical, geological, geochemical, and geophysical studies;
c. exploratory drilling;
d. trenching;
e. sampling; and
f. activities in relation to evaluating the technical feasibility and commercial
viability of extracting a mineral resource.
g. the present value of any decommissioning and restoration costs for which
the entity has incurred an obligation as a consequence of having undertaken
the exploration and evaluation of activities
h. General and Admin cost DIRECTLY attributable to exploration and
evaluation activities.

 Subsequent to recognition, the exploration and evaluation assets shall be

measured using the cost model or the REVALUATION model.
III.PRESENTATION

Classification of exploration and evaluation assets

 An entity shall classify exploration and evaluation assets as tangible or
intangible according to the nature of the assets acquired and apply the
classification consistently.
 Some exploration and evaluation assets are treated as intangible (e.g drilling
rights), whereas others are tangible (e.g vehicles and drilling rigs). To the
extent that a tangible asset is consumed in developing an intangible asset, the
amount reflecting that consumption is part of the cost of the intangible asset.
However, using a tangible asset to develop an intangible asset does not change
a tangible asset into an intangible asset.
Reclassification of exploration and evaluation assets
 An exploration and evaluation asset shall no longer be classified as such
when the technical feasibility and commercial viability of extracting a
mineral resource are demonstrable. Exploration and evaluation assets shall be
 assessed for impairment, and any impairment loss recognized before
reclassification.

Impairment: Recognition and measurement

 Exploration and evaluation assets shall be assessed for impairment when
facts and circumstances suggest that the carrying amount of an exploration
and evaluation asset may exceed its recoverable amount. When facts and
circumstances suggest that the carrying amount exceeds the recoverable
amount, an entity shall measure, present and disclose any resulting
impairment loss in accordance with IAS 36.
IV. DISCLOSURE

 An entity shall disclose information that identifies and explains the amounts
recognized in its financial statements arising from the exploration for and
evaluation of mineral resources.
 To comply with paragraph 23, an entity shall disclose:
(a) its accounting policies for exploration and evaluation expenditures
including the recognition of exploration and evaluation assets.
(b) the amounts of assets, liabilities, income and expense and operating and
investing cash flows arising from the exploration for and evaluation of
mineral resources.

 An entity shall treat exploration and evaluation assets as a separate class of

assets and make the disclosures required by either IAS 16 or IAS 38
consistent with how the assets are classified.
Lesson 11.4 - PFRS 8: Operating Segments
An operating segment is a component of an entity (which comprises operations and
cash flows that can be clearly distinguished, operationally and for financial reporting
purposes, from the rest of the entity) –
- That engages in business activities from which it may earn revenues and incur
expenses.
- Whose operating results are regularly reviewed by the entity’s chief operating
decision maker to make decisions about resources to be allocated to the
segment and assess its performance
- For which discrete financial information is available
An operating segment is reportable (disclosed separately) if it –
- Is used by management in internal reporting or results from aggregating two
or more segments and
- Qualifies under quantitative thresholds.
PFRS 8 requires an entity to disclose information needed in evaluating the nature
and financial effects of the business activities in which it engages and the economic
environments in which it operates. The standard applies to the separate or individual
financial statements of an entity and to the consolidated financial statements of a
group with a parent, that is publicly listed or in the process of enlisting.
- Required disclosures under PFRS 8 aim to help users of financial
statement to:
o Better understand the entity’s performance
o Better assess the entity’s prospects for future net cash flows
o Make more informed judgments about the entity as a whole.

- Adopts management approach to identify reportable segments, wherein

operating segments are identified on the basis of internal reports that are
regularly reviewed by the chief operating decision maker in order to allocate
resources to the segment and assess its performance.
- Aggregation criteria – two or more segments may be aggregated if the
segments have similar economic characteristics and similar in each of the
following respects:
 o Nature of the products and services
o Nature of production processes
o Type or class of customer for their products and services
o The methods used to distribute their products or provide their services
o Nature of the regulatory environment, if applicable e.g., banking,
insurance, etc)
- Quantitative thresholds of reportable operating segment:
o Its revenue (both external and intersegment sales) is 10% or more of the
total revenue (external and internal) of all operating segments.
o Its profit or loss is 10% or more of the greater, in absolute amount of
the –
 Total profit of all operating segments that reported a profit; and
 Total loss of all operating segments that reported a loss.
o Its assets are 10% or more of the total assets of all operating segments.,
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- The total external revenues of reportable segments should be at least 75%
of the entity’s total external revenue.
o If the 75% limit is not met, additional segments are included as
reportable segments, even if they do not meet the quantitative threshold,
until the 75% limit is met.
- Reporting of interest revenue and expense –
o Interest revenue and interest expense are reported separately for each
reportable segment.
o Exception to the above is when segment’s revenue is primarily from
interest like a financial institution, it can report the segment’s interest
revenue at its net amount.
- Information about major customers – major customer is a single external
customer who has provided 10% or more of the entity’s revenues.
Disclosures for major customers are required by the standard.