Relevant

provision of the
pfrs for sme
Scope of Section 12 (Exception)

• Basic financial instruments covered by Section 11

• Investments in subsidiaries, associates and joint ventures
• Employers rights and obligations under employee benefit plans
• Rights under insurance contracts
• Financial instruments that meet the definition of an entity’s own equity
• Leases
• Contracts for contingent consideration in a businesscombination
Scope of Section 12 (Exception)
• Financial instruments, contracts and obligations under share-based payment
transactions
• Reimbursement assets (Section 21 Provisions and Contingencies)
Initial Recognition and Measurement
• An entity shall recognize a financial asset or a financial liabilityprovisions
only when the entity becomes a party to the contractual of the instrument.

• A financial asset or financial liability is initially recognized at fair value, which

is normally the transaction price.
Subsequent Measurement
• Some changes in the fair value of hedging instruments in adesignated
hedging relationship are required to be recognized in other comprehensive
income
• Equity instruments that are not publicly traded and whose fairvalue cannot
be measured reliably without undue cost and effort, and contracts linked to
such instrument, are measured at cost less impairment.
Hedge Accounting
• The entity designates and documents the hedging relationship so that the risk being
hedged, the hedged item and the hedging instrument are dearly identified and the
risk in the hedged item is the risk being hedged with the hedging instrument.
• The hedged risk is one of the risks specified under PFRS for SMEs.
• The hedging instrument is as specified under PFRS for SMES.
• The entity expects the hedging instrument to be highly effective in offsetting the
designated hedged risk. The effectiveness of a hedge is the degree to which changes
in the fair value or cash flows of the hedged item that are attributable to the hedged
risk are offset by changes in the fairvalue or cash flows of the hedging instrument.
PFRS FOR SME’s
• It is an interest rate swap, a foreign currency swap, a foreign currency
forward exchange contract or a commodity forward exchange contract that is
expected to be highly effective in offsetting a risk specified under PFRS for
SMES that is designated as the hedged risk.
• It involves a party external to the reporting entity (i., external to the group,
segment or individual entity being reported on)
• Its notional amount is equal to the designated amount of the principal or
notional amount of the hedged item.
 PFRS for SME’s
• It has a specified maturity date not later than
1. the maturity of the financial instrument being hedged
2. the expected settlement of the commodity purchase or sale commitment,
3. the occurrence of the highly probable forecast foreign currencycommodity transaction
being hedged

• It has no prepayment, early termination or extension features.

Hedge of fixed interest rate risk of a recognized
financial instrument or commodity price risk of a
commodity held
Fixed Interest Rate Risk of a debt instrument measured at amortized cost:
• Recognize the hedging instrument as an asset or liability andthe change in the
fair value of the hedging instrument in profitor loss, and
• Recognize the change in the fair value of the hedged itemrelated to the
hedged risk in profit or loss and as anadjustment to the carrying amount of
the hedged item
Hedge of variable interest rate risk of a recognized financial
instrument, foreign exchange risk or commodity price risk in a firm
commitment or highly probable forecast transaction, or net investment
in a foreign operation
1. The variable interest rate risk in a debt instrument measured at amprtized cost
2. The foreign exchange risk in a firm commitment or a highly probable forecast
transaction,
3. The commodity price risk in a firm commitment or highly probable forecast
transaction, or
4. The foreign exchange risk in a net investment in a foreign operation,
 Accounting for
Forward Contracts
Forward Contract
• Forward contract is an agreement between two parties to exchange a
specified amount of commodity, security, or foreign currency at a specified
date in the future at a pre-agreed price.
 llustration 1: Fair value hedge of a recognized
asset
• December 15, 20x1, ABC Co. sold goods to a Japanese firm for 1,000,000 yens. ABC Co.
was concerned about the fluctuation in the Japanese yen, so on this date, ABC Co. entered
into a 30-day forward contract to sell 1,000,000 yens for P470,000 to a bank at a forward
rate of P0.47.
• Relevant rates are shown below:
Dec. 15, 20x1 Dec. 31, 20x1 Jan. 15, 20x2
Spot rate P 0.48 P 0.49 P 0.46
Forward rate P 0.47 P 0.485 P 0.46
 llustration 1: Fair value hedge of a recognized
asset
Entries for Dec. 15, 20x1

Hedged Item- Accounts Receivable Hedging Instrument- Forward Contract

Accounts 480,000 No entry
Receivable
Sales 480,000
 llustration 1: Fair value hedge of a recognized
asset
Entries for Dec. 31, 20x1

Hedged Item- Accounts Receivable Hedging Instrument- Forward Contract

Accounts Receivable 10,000 Loss on forward contract 15,000
FOREX gain 10,000
Forward contract(liab) 15,000

• Fair Value, Dec 31 (15,000)

Less: Fair Value Dec 15 0
LOSS ON FORW. CONT. (15,000)
 llustration 1: Fair value hedge of a recognized
asset
Entries for Jan. 15, 20x2

Hedged Item- Accounts Receivable Hedging Instrument- Forward Contract

Cash-Foreign Currency 460,000 Cash-local currency 470,000
FOREX loss 30,000 Forward contract(liab) 15,000
Account Receivable 490,000
Cash-foreign currency 460,000
Fair Value, Jan 15 10,0000
Gain on forward contract 25,000
Less: Fair Value Dec 31 (15,000)
GAIN ON FORW. CONT. 25,000
Illustration 2: No hedging designation (Held for
speculation)
• ABC Co. expects the value of yens to decrease in the next 30 days.
Accordingly, on December 15, 20x1, ABC Co. enters into a 30-day forward
contract to sell 1,000,000 yens at the forward rate of P0.47.On December 31,
20x1, the forward rate was P0.485 and by January 15, 20x2, the spot rate
moved to P0.46
Illustration 2: No hedging designation (Held for
speculation)
Entries for December 15, 20x1
• Hedged Item-None • Forward Contract (Derivative)
No entry
Illustration 2: No hedging designation (Held for
speculation)
Entries for December 31, 20x1
• Hedged Item-None • Forward Contract (Derivative)
Loss on forward 15,000
contract
Forward 15,000
contarct(liab)
Illustration 2: No hedging designation (Held for
speculation)
Entries for January 15, 20x2
• Hedged Item-None • Forward Contract (Derivative)
Cash-local currency 470,000

Forward contract(liab) 15,000

Cash-foreign currency 460,000

Gain on forward contract 25,000

Illustration 3: Fair value hedge of a recognized
liability
• On December 15, 20x1, ABC Co. purchased goods from a Korean firm for
10,000 wons. ABC Co. was concerned about the fluctuation in the Korean
won, so on this date, ABC Co. entered 30-day forward contract to buy 10,000
wons for P12,400 from a bank at the forward rate of P1.24. Relevant rates
are shown below:
Dec. 15, 20x1 Dec. 31, 20x1 Jan. 15, 20x1
Spot rate 1. 20 1.26 1.30
Forward rate 1.24 1.27 1.30
 Illustration 3: Fair value hedge of a recognized
liability
Entries for Dec. 15, 20x1

Hedged Item- Accounts Payable Hedging Instrument- Forward Contract

Inventory 12,000 No entry
Accounts payable 12,000
 Illustration 3: Fair value hedge of a recognized
liability
Entries for Dec. 31, 20x1

Hedged Item- Accounts Payable Hedging Instrument- Forward Contract

FOREX loss 600 Forward Contract 300
Accounts payable 600
Gain on forward contract 300

• Fair Value, Dec 31 300

Less: Fair Value Dec 15 0
GAIN ON FORW. CONT. 300
 Illustration 3: Fair value hedge of a recognized
liability
Entries for Jan. 15, 20x2

Hedged Item- Accounts Receivable Hedging Instrument- Forward Contract

Accounts payable 12,600 Cash-foreign currency 13,000
FOREX loss 400 Forward contract(asset) 12,400
Cash-foreign currency 13,000
Cash-local currency 300
Fair Value, Jan 15 600
Gain on forward contract 300
Less: Fair Value Dec 31 300
GAIN ON FORW. CONT. 300
Illustration 4: No hedging designation (Held for
speculation)
• ABC Co. expects the value of wons to increase in the next 30 days.
Accordingly, on December 15, 20x1, ABC Co. enters into a 30-dayforward
contract to buy 10,000 wons at the forward rate of P1.24. On December 31,
20x1, the forward rate was P1.27 and by January 15, 20x2, the spot rate
moved to P1.30.
Illustration 4: No hedging designation (Held for
speculation)
Hedged Item- None Forward Contract (Derivative)
Dec. 15, 20x1
No entry
Dec. 31, 20x1 Jan. 15, 20x2
Forward Contract (Asset) 300 Cash-foreign currency 13,000
Gain on forward contract 300 Forward contract(asset) 12,400
Cash-local currency 300
Gain on forward contract 300