INTRODUCTION TO

INTERNATIONAL ACCOUTING
STANDARDS (IAS),
INTERNATIONAL FINANCIAL
REPORTING STANDARDS (IFRS),
AND
INTERNATIONAL ACCOUNTING
STANDARDS BOARD (IASB)
WRITTEN REPORT

Prepared by:
Jannel M. Paloma
Wryn Hendrix Belandrez
BSA-4
This report aims to tackle the following:
1. International Accounting Standards (IAS)
2. International Financial Reporting Standards (IFRS)
3. International Accounting Standards Board (IASB)
4. Why is there a need to update the IFRS

INTERNATIONAL ACCOUNTING STANDARDS (IAS)

International Accounting Standards (IAS) are a set of rules for financial statements that
were replaced in 2001 by International Financial Reporting Standards (IFRS) and have
subsequently been adopted by most major financial markets around the world.
International Accounting Standards (IASs) were issued by the antecedent International
Accounting Standards Council (IASC), and endorsed and amended by the International
Accounting Standards Board (IASB)
International Accounting Standards (IAS) were the first international accounting
standards that were issued by the International Accounting Standards Committee (IASC),
formed in 1973. The goal then, as it remains today, was to make it easier to compare businesses
around the world, increase transparency and trust in financial reporting, and foster global trade
and investment.
Moving Toward New Global Accounting Standards
There has been significant progress towards developing a single set of high-quality
global accounting standards since the IASC was replaced by the IASB. IFRS have been adopted
by the European Union, leaving the United States, Japan (where voluntary adoption is allowed),
and China (which says it is working towards IFRS) as the only major capital markets without
an IFRS mandate.

INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)

The IFRS standards are a set of accounting standards that serves as a basis on how a
company should report particular types of transactions and events in its financial statements.
The objective of these standards is to make the financial statements consistent, transparent and
easily comparable around the world.
The IFRS is developed and maintained by the IASB with the goal of having the
standards applied on a globally consistent basis. This allows investors and other users of
financial statements with the ability to compare the performances of publicly listed companies
which aids decision making.
In the IFRS Foundation mission statement, there are three functions stated:
  IFRS Standards bring transparency by enhancing the international
comparability and quality of financial information, enabling investors and other
market participants to make informed economic decisions.
 IFRS Standards strengthen accountability by reducing the information gap
between the providers of capital and the people to whom they have entrusted
their money. Our Standards provide information needed to hold management to
account. As a source of globally comparable information, IFRS Standards are
also of vital importance to regulators around the world.
 IFRS Standards contribute to economic efficiency by helping investors to
identify opportunities and risks across the world, thus improving capital
allocation. Use of a single, trusted accounting language lowers the cost of
capital and reduces international reporting costs for businesses.

According to the IFRS website, IFRS Accounting Standards are currently required in
more than 140 jurisdictions and permitted in many more. IFRS is not used by all countries; for
example, the United States uses Generally Accepted Accounting Principles (GAAP).

Objectives of IFRS
1. Create a Common law
One of its key objectives is to ensure that common law is introduced and adopted by as
many jurisdictions and countries as possible to bring everyone on the same page. It ensures that
everyone follows the same guidelines and adopts a universal way of reporting business
activities.
2. Aid analysis
It helps stakeholders in analyzing a company’s performance and interpreting its
financial position. For example, corporations and governments use these standards to make
credible financial statements. It aids in categorizing and reporting financial data with accuracy
and consistency. Such financial records promote better comprehension and help decision-
making.
3. Assist in preparation of reliable financial records
By following International Financial Reporting Standards, the data presented in the
books of accounts are likely to be accurate, reliable, uniform, and appropriate within the bounds
of its rules. The high quality of financial records assists investors in making informed economic
decisions.
4. Ensure comparability, transparency, and flexibility in reporting
The consistency in reporting accounting practices enables easy comparison of the
financial records of compliant companies across nations. Such comparisons allow investors to
identify risks and opportunities before investing. As a result, it promotes foreign trade and
investment. Also, it requires full disclosure of all relevant information to its stakeholders.
Standard IFRS Requirements:
 Statement of Financial Position
-shows an entity's assets, liabilities, and stockholders' equity as of the report
date.
 Statement of Comprehensive Income
-reflects net income as well as other comprehensive income, the latter being
unrealized gains and losses on assets that aren't shown on the income statement.
 Statement of Changes in Equity
-a reconciliation of the beginning and ending balances in a company’s equity
during a reporting period.
 Statement of Cash Flows
-shows changes in an entity's cash flows during the reporting period. These cash
flows are divided into cash flows from operating activities, investing activities,
and financing activities.

Major Features of IFRS

1. Principle Based Approach

The standards of IFRS are broad-based and not very elaborative, prescriptive or
inflexible in nature. Business entities are free to use their commercial judgement within the
overall framework of IFRS.

2. Fair Value Accounting

IFRS encourages fair value accounting principles, which are considered forward-
looking. Financial reporting based upon the fair-value accounting principles is most suitable
for the potential investors, who get preference over other stakeholders under the IFRS.

3. Comprehensive Income
Comprehensive Income occupies an important place in the agenda of IFRS.
Comprehensive income provides transparency in showing all revenue expenses, gains, losses,
etc.

4. Consolidation
Under the consolidation technique, which is a part of International Financial Reporting
Standards, the assets and liabilities of a company’s subsidiaries are required to be valued at
their fair value as on the date of the acquisition.

5. Transparency
Transparency in accounting, and especially in the preparation of financial statements,
comes from the underlying and strong faith in the market forces.
Users of IFRS
IFRS is required to be used by public companies based in 167 jurisdictions, including
all of the nations in the European Union as well as Canada, India, Russia, South Korea, South
Africa, and Chile. The U.S. and China each have their own systems.

IFRS vs GAAP
 IFRS is developed by IASB while GAAP were developed by the Financial Accounting
Standards Board (FASB) and the Governmental Accounting Standards Board (GASB).
 IFRS is principles-based while GAAP is rules-based.
-The difference between these two approaches is on the methodology to assess
an accounting treatment. IFRS guidelines provide much less overall detail
compared to GAAP, this makes the framework and principles of IFRS to have
more room for interpretation.
 One notable difference between GAAP and IFRS is their inventory treatment. IFRS
does not allow the use of last-in, first-out (LIFO) inventory accounting methods. GAAP
rules allow for LIFO. Both systems allow for the first-in, first-out method (FIFO) and
the weighted average-cost method. GAAP does not allow for inventory reversals, while
IFRS permits them under certain conditions.

Importance of IFRS

1. Level of Confidence
The main advantage of adopting International Financial Reporting Standards, which is
considered to be a stable, transparent, and fair accounting system across the world, would be
that the confidence level of investors domestic as well as foreign would be boosted.

2. Risk Evaluation
If the financial data and other statements are not prepared in terms of international
standards, the investors generally assign some premium. Introduction of IFRS would rule out
such hurdle to cross-border listings and as such the investors would be the gainers.

3. Merger and Takeover Activity

As the introduction of IFRS would eliminate the need to redesign the financial
statements, the way to cross-border mergers and acquisitions would be facilitated.

4. Investments
If the IFRS are introduced in a country, and various business entities become
International Financial Reporting Standards compliant, the comfort level of foreign investors
would be enhanced and they would find such destinations more lucrative. It is one of the main
importance of IFRS.
INTERNATIONAL ACCOUNTING STANDARDS BOARD (IASB)
The IASB is an independent group of experts who are equipped with recent practical
experiences in setting accounting standards, in preparing, auditing or using financial reports,
and in accounting education. These experts must also come from different regions as part of
the requirement. The IFRS Foundation Constitution outlines the full criteria for the
composition of the IASB.
The members of the IASB are responsible for developing, publishing and clarifying of
IFRS standards, including the IFRS for Small and Mid-size Enterprises (SMEs) Accounting
Standard. The standards board is also responsible for approving interpretations of IFRS
Accounting standards as developed by the IFRS Interpretations Committee. These members
are appointed by the Trustees of the IFRS Foundation.

History and Foundation of IASB

The standards board was officially born on April 1, 2001 as a replacement for the
International Accounting Standards Committee (IASC), which was originally founded in 1973.
The IFRS Foundation has overseen the IASB since its inception as part of its core mission. The
foundation also traces its roots to 1973, although it was known as the International Accounting
Standards Committee (IASC) until 2001. The IASC was replaced because it had many issues
such as not having a large support staff, and being reliant to volunteers to help them draft the
accounting standards.

IFRS Foundation
The IFRS Foundation is a not-for-profit, public interest organization established to
develop high-quality, understandable, enforceable and globally accepted accounting and
sustainability disclosure standards and to promote and facilitate adoption of the standards.
Standards are developed by our two standard-setting boards:

1. International Accounting Standards Board (IASB)

- is the one who sets IFRS.
2. International Sustainability Standards Board (ISSB)
- this standards board sets IFRS Sustainability Disclosure Standards.
- The goal of the ISSB is to deliver a comprehensive global baseline of
sustainability-related disclosure standards that provide investors and other
capital market participants with information about companies’ sustainability-
related risks and opportunities to help them make informed decisions. (ESG
matters)
The IFRS Foundation’s three-tier Structure
Created in January 2009 with the
aim of providing a formal connection
IFRS FOUNDATION between trustees and public authorities
to enhance public accountability of the
MONITORING BOARD IFRS Foundation.

IFRS
The Trustees are responsible for
Advisory IFRS FOUNDATION the governance and oversight of the IFRS
Council-
TRUSTEES Foundation, the International Accounting
Provides
Standards Board and the International
advice to Sustainability Standards Board.
Trustees,
IASB and
ISSB IASB works with an interpretative body
ISSB IASB called IFRS Interpretation Committee in
supporting the consistent application of
IFRS Accounting Standards.
The IFRS Foundation has three-tier governance structure, based on the IASB and
ISSB, governed and overseen by Trustees around the world (IFRS Foundation Trustees) who
in turn are accountable to a monitoring board of public authorities (IFRS Foundation
Monitoring Board). The standards board launched with 14 board members, although this
number has changed several times since then. Board members come from a variety of
accounting backgrounds and the selection process encourages international diversity. Trustees
of the IFRS Foundation place members on the board through an open and publicized process.

Setting of IFRS
The main objective of the IASB is to set accounting standards internationally. In
developing these standards, the IFRS Foundation has a due process outlined in their
constitution and is found in further detail, in their Due Process Handbook which sets out the
due process principles. These principles are used by the IASB and IFRS Interpretations
Committee to develop high-quality IFRS Standards.
The due process enables stakeholders all over the world to contribute and examine
carefully the standard setting, which helps ensure the best-thinking worldwide informs the
development of the requirements.
Three Underlying Principles that make the due process robust:
1. Transparency- the IASB and IFRS Interpretations Committee conduct their
activities in a transparent manner. All their activities and
due process handbook is accessible on their website.
2. Full and Fair Consultation- due process allows consideration of the
perspective of those affected by the IFRS globally.
3. Accountability- the Board analyses the potential effects of its proposals on
affected parties and explains the rationale for the
decisions it reached in developing or amending an IFRS
Standard.
WHY IS THERE A NEED TO UPDATE IFRS?
With the changes in the global financial market, the terms and substances of IFRS
standards may need to be updated to reflect new recognition, measurement, and other
requirements. In line with the objective of the IFRS which is to make the financial statements
consistent, transparent and easily comparable around the world, certain amendments are done
to improve the reporting standards and adapt to the changes.
Under the Standard-setting Program of the IASB, when the IASB decides to amend an
accounting standard or issue a new one, they review the research, including comments on the
discussion paper, and propose amendments or accounting standards to resolve issues identified
through research and consultation.
Proposals for a new Accounting Standard or an amendment to an Accounting Standard
are published in an exposure draft for public consultation. To gather additional evidence,
members of the IASB and IFRS Foundation technical staff consult with a range of stakeholders
from all over the world. The IASB analyses feedback and refines proposals before the new
Accounting Standard, or an amendment to an Accounting Standard, is issued.
Preparation of Financial
Statements
International Accounting Standard 1
 IAS are a set of rules for financial
statements that were replaced in 2001 by
International Financial Reporting
Standards (IFRS) and have subsequently
been adopted by most major financial
markets around the world.
IAS 1 Presentation of Financial Statements represents a basis
of the whole IFRS reporting, as it sets overall requirements for
the presentation of financial statements, guidelines for their
structure and minimum requirements for their content.
Terms before 2007 revision Term as amended by IAS 1 (2007

Balance sheet Statement of Financial Position

Cash flow statement Statement of cash flows

Income statement Statement of comprehensive income

Recognized in the income statement Recognized in profit or loss

Recognized (directly) (only for OCI com- recognized in other comprehensive income
ponents)
recognized [directly] in equity (for recognition recognized outside profit or loss (either in
both in OCI and equity) OCI or equity)

removed from equity and recognized in profit reclassified from equity to profit or loss as a
or loss ('recycling') reclassification adjustment
Terms before 2007 revision Term as amended by IAS 1 (2007

Standard or/and Interpretation IFRSs

on the face of in

equity holders owners (exception for 'ordinary equity

holders')

balance sheet date end of the reporting period

reporting date end of the reporting period

after the balance sheet date after the reporting period

 OBJECTIVE

This Standard prescribes the basis for presentation of

general purpose financial statements to ensure
comparability both with the entity’s financial statements of
previous periods and with the financial statements of other
entities. It sets out overall requirements for the
presentation of financial statements, guidelines for their
structure and minimum requirements for their content.
Financial Statements
To provide information about the financial
position, financial performance and cash
flows of an entity that is useful to a wide
range of users in making economic decisions.

Structure and Contents

IAS 1 requires identification of the FS and distinguishing
them from other information in the some published
document.
Components of financial statements

8 A complete set of financial statements comprises:

(a) a balance sheet;

(b) an income statement;

(c) a statement of changes in equity showing either :

(i) all changes in equity, or

(ii) changes in equity other than those arising from transactions with equity
holders acting in their capacity as equity holders;

(d) a cash flow statement; and

(e) notes, comprising a summar y of significant accounting policies and

other explanator y notes.
The follow ing terms are used in this Standard w ith the meanings specified:

Impracticable Applying a requirement is impracticable w hen the entity cannot apply it after making
every reasonable effort to do so.

Internat ional Financial Reporting Standards (IFRSs) are Standards and Interpretations adopted by the
Internat ional Accounting Standards Board (IASB) . They comprise:

(a) Internat ional Financial Reporting Standards;

(b) Internat ional Accounting Standards; and

(c) Interpretations originated by the International Financial Reporting Interpretations Committee

(IFRIC) or the former Standing Interpretations Committee (SIC).

Material 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 financial statements. Materiality
depends on the size and nature of the omission or misstatement judged in the surrounding
circumstances. The size or nature of the item, or a combinat ion of both, could be the determining
factor.
Amendments
September 06, 2007

Issuance of revised IAS 1 Presentation of Financial Statement

Main changes are to require that an entity must:

• Present all non -owner changes in equity (comprehensive income) either in one
statement of comprehensive income or in two statements (a separate income statement
and a statement of comprehensive income).

• Present a statement of financial position (balance sheet) as at the beginning of the

earliest comparative period in a complete set of financial statements when the entity
applies an accounting policy retrospectively or makes a retrospective restatement.

• Disclose income tax relating to each component of other comprehensive income.

• Disclose reclassification adjustments relating to components of other comprehensive

income.
Reasons behind those changes
Most of the respondents of the 2006 exposure draf t
preferred the two statement approach because it
distinguishes between profit or loss and total
comprehensive income. Fur thermore, they believed
that with this approach the IS remains a primar y
financial statement.

They also argued that there would be undue focus on

the bottom line of the single statement.

However, the board preferred single statement and in

line with that, it decided that an entity should have
the choice of presenting all income and expenses
recognized in a period in either one or two
statements. An entity is prohibited from presenting
components of income and expense (non -owners
changes in equity) in the statement of changes in
equity.
Impact and to whom
This resulted in an increased use of Other
Comprehensive Income. It also helps users to
assess the relevance of the individual income and
expenses that the entr y has included in Other
Comprehensive Income and it helps them to
understand how OCI items could affects profit
and loss.

The benefit also will be the consistency in

presentation in financial statements prepared in
accordance with IFRS –
Impact and to whom
OCI is being used more so a clear presentation is
more impor tant.

Presenting OCI items will never be recycled to

profit and loss separately from those that may be
recycled to PL. This make FS more
understandable, and that users will give a better
understanding of the effect that OCI items may
have on an entity’s financial per formance.

The treatment of the tax remained unchanged.

However, as a logical consequence of the
amendment, entities will be required to allocate
income tax between items that may be
reclassified (recycled) and those that are not
reclassified.
IAS 1 changes the title of financial statements as they will be
used in IFRS
 balance sheet into ‘statement of financial position’
Income statement into ‘statement of comprehensive income’
Cash flow statement into ‘statement of cash flows’
Entities are not required to use the new titles in their Financial statements. All
existing Standards and Interpretations are being amended to reflect the new
terminology. The revised IAS 1 resulted in consequential amendments to 5 IFRSs, 23
IASs, and 10 interpretations.
The revised IAS 1 was effective for annual periods
beginning on or after January 1, 2009
 Puttable Financial Instruments and Obligations Arising on Liquidation
February 14, 2008
The amendments classify the following types of financial instruments as equity,
provided they have particular features and meet specific conditions:
• Puttable financial instruments (ex. Some shares issued by co -operative
entities)
• Instruments, or components of instruments, that impose on the entity an
obligation to deliver to another par ty a pro rata share of the net assets of the
entity only on liquidation (ex. Some par tnership interests and some shares
issued by limited life entities)
Reasons behind those changes
Because of the current requirements of IAS 32, if
an issuer can be required to pay or transfer cash
or another financial asset in return for redeeming
or repurchasing a financial instrument, this is
classified as financial liability.

As a result, some financial instruments that

currently meet the definition of a financial
liability will be classified as equity because they
represent the residual interest in the net assets of
the entity.

The Board also amended IAS 1 to add new

disclosure requirements relating to puttable
instruments and obligation arising on liquidation.
The amendments were effective for annual periods
beginning on or after January 01, 2009.
 Disclosure Initiative (Amendments to IAS 1)
December 18, 2014
Materiality – the amendments clarify that;
(1) information should not be obscured by aggregating or by
providing immaterial information
(2) materiality considerations apply to the all parts of the
financial statements
(3) even when a standard requires a specific disclosure,
materiality considerations do apply.
 Statement of Financial position and statement of profit or loss and other
comprehensive income. The amendments
(1) introduce a clarification that the list of line items to be presented
in these statements can be disaggregated and aggregated as relevant and
additional guidance on subtotals on these statements
(2) clarify that an entity’s share of OCI of equity -accounted associates
and joint ventures should be presented in aggregate as single line items
based on whether or not it will subsequently be reclassified to profit or loss
Notes
– the amendments add additional examples of possible ways of
ordering the notes to clarify that understandability and comparability should
be considered when determining the order of the notes and to demonstrate
that the notes need not be presented in the order so far listed in paragraph
114 of IAS1.
Effective for annual periods beginning on or after January 1, 2016.
Reasons behind those
changes

the entity decided to rephrase

the clarification to say that ‘an
entity shall not reduce the
understandability of its financial
statements by obscuring material
information with immaterial
information
• In order to clarify that materiality applies to the whole financial statements
and that information which is not material need not be presented in the
primary financial statements or disclosed in the notes.
• Clarify that some disclosures specified in standards are simply not
important enough to justify separate disclosure for a particular entity
Definition of Material (Amendments to IAS 1 and IAS 8
The changes in Definition of Material all relate to a revised
definition of ‘material’
Three new aspects of the new definition should especially
be noted:
 Obscuring
 Could reasonably be expected to influence
 Primar y users
Old Definition (IAS 1 and IAS 8)
Omissions or misstatements of items are material if they could,
individually or collectively, influence the economic decisions that
users make on the basis of the financial statements.
New Definition (IAS 1 only)
Information is material if omitting, misstating or obscuring it could
reasonably be expected to influence the decisions that the primar y
users of general purpose financial statements make on the basis of
those financial statements, which provide financial information
about a specific reporting entity.
Reasons behind
those changes
• The existing definition only focused on
omitting or misstating information, however,
the Board concluded that obscuring
material information with information that
can be omitted can have a similar effect.
• the existing definition referred to ‘could
influence’ which the Board felt might be
understood as requiring too much
information as almost anything ‘could’
influence the decisions of some users even
if the possibility is remote.
Reasons behind those
changes

the existing definition referred

only to ‘users 'which again the
Board feared might be
understood too broadly as
requiring to consider all possible
users of financial statements
when deciding what information
to disclose
Impact and for whom
Some companies will not experience difficulties using the old definition when
judging whether information was material for inclusion in the FS. It helps the
companies to make it easier for them to make materiality judgements.
 Classification of Liabilities as Current
or Non-current
(Amendments to IAS1)
January 23, 2020

• It should be based on rights that are in existence at the end of the reporting
period and align the wording in all affected paragraphs to refer to the “rights”
to defer settlement by at least twelve months and make explicit that only rights
in place ‘at the end of the reporting period’ should affect the classification of a
liability

• Clarify that classification is unaffected by expectations about whether an

entity will exercise its right to defer settlement of a liability

• Make clear that settlement refers to the transfer to the counterparty of cash,
equity instruments, other assets or services.
Reasons behind those
changes

T h e B oard ad d re sse d th e o r ig in al re q u est of

c lar if ic atio n th at state s ‘ liab ility is c u r ren t
if an e n tity ‘d o e s n o t h ave an u n c o n d itio n al
r ig h t to d e f e r se ttle me n t of th e liab ility f o r
at le ast 1 2 mon th s. T h e b oard e x p lain ed th at
a r ig h t to d e f e r se ttle me n t is r are ly
u n c o n d itio n al, as su c h r ig h ts of te n are
c o n d itio n al o n c o mp lian c e w ith c o ve n ants.
T h e re fo re, th e y d e c id e d th at if an e n tity’s
r ig h t to d e f e r se ttle me n t of a liab ility is
su b j e ct to th e e n tity c o mp lyin g w ith
sp e c if ied c o n d itio n s, th e e n tity h as a r ig h t to
d e f e r se ttle me n t of th e liab ility at th e e n d of
th e re p o r tin g p e r io d if it c o mp lie s w ith
th ose c on d ition s at th at d ate
Impact and for
whom
The amendment changes the guidance for
the classification of liabilities as current or
non-current. It could affect the classification
of liabilities, particularly for entities that
previously considered management’s
intentions to determine classification and for
some liabilities that can be converted into
equity. All entities should reconsider their
existing classification in the light of the
amendment and determine whether any
changes are required.
The amendments were effective for annual periods
beginning on or after January 01, 2022

July 15, 2020

Classification of Liabilities as Current or Non-
current – Deferral of Effective Date (Amendment
to IAS 1)

The changes in it defer the effective date of

Classification of Liabilities as Current or Non-
current to annual repor ting periods beginning
on or af ter Januar y 1, 2023
 Non-current Liabilities with
Covenants (Amendment to IAS 1)

 Modify the requirements introduced by classification of liabilities as

current or non-current on how the entity classifies debt and other
financial liabilities as current or non -current particular circumstances:
only covenants with which an entity is required to comply
on or before the reporting data affect the classification of a liability as
current or non-current.
 Defer the effective date of the 2020 amendments to January 1, 2024.
Reasons behind
those changes
The board decided to amend to clarify that
covenants with which the company must
comply after the reporting date do not affect
a liability’s classification at that date.
However, when non current liabilities are
subject to future covenants, companies will
now need to disclose information to help
users understand the risk that those
liabilities could become repayable within 12
months after the reporting date.
Impact and for whom

This will improve the information a

company provides about non-current
liabilities with covenants by enabling
investors to assess whether such
liabilities could become repayable within
12 months.
Disclosure of Accounting Policies which amended IAS 1 and IFRS Practice
Statement 2 Making Materiality Judgements
February 2021

• An entity is now required to disclose its material accounting policy information instead
of its significant accounting policies

• Several paragraphs are added to explain how an entity can identify material accounting
policy information and to give examples of when accounting policy information is likely
to be material

• The amendments clarify that accounting policy information is material if users of an

entity’s financial statements would need it to understand other material information in
the FS

• The amendments clarify that if an entity discloses immaterial accounting policy

information, such information shall not obscure material accounting policy information
Reasons behind
those changes
The feedback on the Board’s DP on
Principles of Disclosure suggested that
guidance is required to assist entities in
determining which accounting policies to
disclose. It was noted that the application of
materiality is key to deciding which
accounting policies to disclose, however IAS
1 does not refer to materiality but states that
“an entity shall disclose its significant
accounting policies” without the Board
providing a definition for the term ‘significant’
Impact and for whom

This will require entities to disclose their

material accounting policies rather than
their significant accounting policies. It
help companies to improve accounting
policy disclosures so that they provide
more useful information to investors and
other primar y users of the FS and also it
help companies distinguish changes in
accounting estimates from changes in
accounting policies.
 The amendments to IAS 1 and IAS 8 will be
effective for annual reporting periods beginning on
or after 1 January 2023, with early application
permitted
THANKS
 IAS 8: ACCOUNTING POLICIES,
CHANGES IN ACCOUNTING
ESTIMATES AND ERRORS
SLIDESMANIA.COM
 Presented by:
MONTECIANO, ANGELIE MAE C.
SABALO, JAQUELYN R.
SLIDESMANIA.COM
 ACCOUNTING
ESTIMATE
Adjustment of carrying amount (CA) of an Asset or Liability or amount of
periodic assumption of an Asset or Liability that results from the assessment
of the PRESENT status of an expected FUTURE benefit or obligation
associated with the asset or liability.
SLIDESMANIA.COM
 How to Account? Rationale for the Timing of Change
Accounting In

Prospective application- Estimates are Changes are expected

recognize effect of fundamentals to the and recurring
change in current and accounting process
future periods
Changes are expected
and recurring
SLIDESMANIA.COM
 Examples of FS REPORTING/ Disclosure
Change in PRESENTATION Requirement

Bad debts, Inventory A. The period of change if

Nature of change and
obsolescence, Useful life, the changes affect that
Amount of the change, unless
residual value, and expected period only or;
effect on future periods
pattern of consumption of
B. The period of change impracticable to estimate
benefit of depreciable asset,
Warranty cost, Fair value of and future periods if the
Financial Asset and Financial change affects both.
LIMITATION
Liability
SLIDESMANIA.COM
 ACCOUNTING POLICIES
These are the specific principles, basis,
conventions, rules, and practices
applied by the entity in preparing and
presenting financial statement.
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 How to Account? Rationale for the Timing of Change
Accounting In

(As if from the very Under the accounting

Required by an
beginning you are using standards, alternative
accounting standard.
the said new treatments are possible
accounting policy). so the entity shall
Adjust the opening select and apply the
balance of the Retained same accounting
Earnings. policies period I n order
to achieve
comparability of or:
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 Examples of FS REPORTING/ Disclosure
Change in PRESENTATION Requirement

Change in METHOD in inventory Is the change in policy due to the Nature of change and Details of
pricing from FIFO to weighted average initial application of an IFRS? financial effect/impact of the
method.
change in the accounting policy
Does the IFRS indicate a specific
The initial adoption of policy to carry
transitional accounting method?
assets at revalued amount to be deal
with as revaluation in accordance with
LIMITATION
PAS 16.

The change from cost model to fair Retrospective application of a

value model in measuring investment change in A/P is NOT
property and PPE
REQUIRED if it is impracticable
Change to a new policy resulting from
to determine the cumulative
the requirement of a new PFRS effect of the change therefore
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apply PROSPECTIVELY.
 ERRORS
Errors includes misapplication of accounting policies,
-

mathematical mistakes, oversight or misinterpretations

of facts, and fraud.
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 Current period Error
are errors in the current period that were discovered
either during the current period or after the current
period but before the financial statements were
authorized for issue.
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 Prior period Error
● Are errors in one or more prior periods that were
only discovered either during the current period or
after the current period but before the financial
statement were authorizes for issue.
● These corrected by retrospective restatement.
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 Retrospective Restatement
A. Restating the comparative amounts for the prior periods
presented in which the error occurred; or

B. If the error occurred before the earliest prior period

presented, restating the opening balances of assets,
liabilities and equity for the earliest prior period presented
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 Retrospective Application
Retrospective Restatement

Correcting a prior period Applying a new

error as if the error had accounting policy as if the
never occurred. policy had always been
applied
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 NEW UPDATES
OF IAS 8
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 • The definition of a change in accounting estimates is replaced with a definition of
accounting estimates. Under the new definition, accounting estimates are “monetary
amounts in financial statements that are subject to measurement uncertainty”.

• Entities develop accounting estimates if accounting policies require items in

financial statements to be measured in a way that involves measurement uncertainty.

• The Board clarifies that a change in accounting estimate that results from new
information or new developments is not the correction of an error. In addition, the
effects of a change in an input or a measurement technique used to develop an
accounting estimate are changes in accounting estimates if they do. not result from
the correction of prior period errors
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 A change in an accounting estimate may
affect only the current period’s profit or loss,
or the profit or loss of both the current
period and future periods. The effect of the
change relating to the current period is
recognized as income or expense in the
current period. The effect, if any, on future
.

periods is recognized as income or expense in

those future periods.
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 EFFECTIVE DATE AND TRANSITION

The amendments become effective for annual reporting periods beginning on or after 1
January 2023 and apply to changes in accounting policies and changes in accounting
estimates that occur on or after the start of that period. Earlier application is permitted.

The Board believes that the benefits of requiring entities to apply the amendments to prior
period changes in estimates would be minimal, and retrospective application is, therefore,
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not required.
THE END
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Thank you!
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.
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 And this is a timeline or process
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SLIDESMANIA.COM
SLIDESMANIA.COM
SLIDESMANIA.COM
SLIDESMANIA.COM
Objective of IAS 12

The objective of IAS 12 (1996) is to prescribe the accounting treatment for income taxes.

In meeting this objective, IAS 12 notes the following:

 It is inherent in the recognition of an asset or liability that that asset or liability will be recovered
or settled, and this recovery or settlement may give rise to future tax consequences which should
be recognised at the same time as the asset or liability
 An entity should account for the tax consequences of transactions and other events in the same way
it accounts for the transactions or other events themselves.

Key definitions

[IAS 12.5]

The tax base of an asset or liability is the amount attributed to that asset or liability
Tax base
for tax purposes
Temporary Differences between the carrying amount of an asset or liability in the statement of
differences financial position and its tax bases
Temporary differences that will result in taxable amounts in determining taxable
Taxable temporary
profit (tax loss) of future periods when the carrying amount of the asset or liability is
differences
recovered or settled
Deductible Temporary differences that will result in amounts that are deductible in determining
temporary taxable profit (tax loss) of future periods when the carrying amount of the asset or
differences liability is recovered or settled
Deferred tax The amounts of income taxes payable in future periods in respect of taxable
liabilities temporary differences
The amounts of income taxes recoverable in future periods in respect of:

1. deductible temporary differences

Deferred tax assets
2. the carryforward of unused tax losses, and
3. the carryforward of unused tax credits

Current tax

Current tax for the current and prior periods is recognised as a liability to the extent that it has not yet been
settled, and as an asset to the extent that the amounts already paid exceed the amount due. [IAS 12.12] The
benefit of a tax loss which can be carried back to recover current tax of a prior period is recognised as an
asset. [IAS 12.13]

Current tax assets and liabilities are measured at the amount expected to be paid to (recovered from) taxation
authorities, using the rates/laws that have been enacted or substantively enacted by the balance sheet date.
[IAS 12.46]
Tax bases

The tax base of an item is crucial in determining the amount of any temporary difference, and effectively
represents the amount at which the asset or liability would be recorded in a tax-based balance sheet. IAS
12 provides the following guidance on determining tax bases:

 Assets. The tax base of an asset is the amount that will be deductible against taxable economic
benefits from recovering the carrying amount of the asset. Where recovery of an asset will have no
tax consequences, the tax base is equal to the carrying amount. [IAS 12.7]
 Revenue received in advance. The tax base of the recognised liability is its carrying amount, less
revenue that will not be taxable in future periods [IAS 12.8]
 Other liabilities. The tax base of a liability is its carrying amount, less any amount that will be
deductible for tax purposes in respect of that liability in future periods [IAS 12.8]
 Unrecognised items. If items have a tax base but are not recognised in the statement of financial
position, the carrying amount is nil [IAS 12.9]
 Tax bases not immediately apparent. If the tax base of an item is not immediately apparent, the
tax base should effectively be determined in such as manner to ensure the future tax consequences
of recovery or settlement of the item is recognised as a deferred tax amount [IAS 12.10]
 Consolidated financial statements. In consolidated financial statements, the carrying amounts in
the consolidated financial statements are used, and the tax bases determined by reference to any
consolidated tax return (or otherwise from the tax returns of each entity in the group). [IAS 12.11]

Examples

The determination of the tax base will depend on the applicable tax laws and the entity's expectations as
to recovery and settlement of its assets and liabilities. The following are some basic examples:

 Property, plant and equipment. The tax base of property, plant and equipment that is depreciable
for tax purposes that is used in the entity's operations is the unclaimed tax depreciation permitted
as deduction in future periods
 Receivables. If receiving payment of the receivable has no tax consequences, its tax base is equal
to its carrying amount
 Goodwill. If goodwill is not recognised for tax purposes, its tax base is nil (no deductions are
available)
 Revenue in advance. If the revenue is taxed on receipt but deferred for accounting purposes, the
tax base of the liability is equal to equal to nil (as there are no future taxable amounts). Conversely,
if the revenue is recognised for tax purposes when the goods or services are received, the tax base
will be equal its carrying amount
 Loans. If there are no tax consequences from repayment of the loan, the tax base of the loan is
equal to its carrying amount. If the repayment has tax consequences (e.g. taxable amounts or
deductions on repayments of foreign currency loans recognised for tax purposes at the exchange
rate on the date the loan was drawn down), the tax consequence of repayment at carrying amount
is adjusted against the carrying amount to determine the tax base (which in the case of the
aforementioned foreign currency loan would result in the tax base of the loan being determined
by reference to the exchange rate on the draw down date).
Recognition and measurement of deferred taxes

Recognition of deferred tax liabilities

The general principle in IAS 12 is that a deferred tax liability is recognised for all taxable temporary
differences. There are three exceptions to the requirement to recognise a deferred tax liability, as follows:

 liabilities arising from initial recognition of goodwill [IAS 12.15(a)]

 liabilities arising from the initial recognition of an asset/liability other than in a business
combination which, at the time of the transaction, does not affect either the accounting or the
taxable profit and; [IAS 12.15(b)]
 at ther time of the transaction, does not give rise to equal taxable and deductible temporary
differences. [IAS 12.15(b)(iii)] *
 liabilities arising from temporary differences associated with investments in subsidiaries, branches,
and associates, and interests in joint arrangements, but only to the extent that the entity is able to
control the timing of the reversal of the differences and it is probable that the reversal will not occur
in the foreseeable future. [IAS 12.39]

*IAS 12(Amendments), Income Taxes – Recognition of Deferred Tax related to Assets and Liabilities
Arising from a Single Transaction.

Example

An entity undertaken a business combination which results in the recognition of goodwill in accordance
with IFRS 3 Business Combinations. The goodwill is not tax depreciable or otherwise recognised for tax
purposes.

As no future tax deductions are available in respect of the goodwill, the tax base is nil. Accordingly, a
taxable temporary difference arises in respect of the entire carrying amount of the goodwill. However, the
taxable temporary difference does not result in the recognition of a deferred tax liability because of the
recognition exception for deferred tax liabilities arising from goodwill.

Recognition of deferred tax assets

A deferred tax asset is recognised for deductible temporary differences, unused tax losses and unused tax
credits to the extent that it is probable that taxable profit will be available against which the deductible
temporary differences can be utilised, unless the deferred tax asset arises from: [IAS 12.24]

 the initial recognition of an asset or liability other than in a business combination which,
 at the time of the transaction, does not affect accounting profit or taxable profit and;
 does not give rise to equal taxable and deductible temporary differences. [IAS 12.24(c)] *

*IAS 12(Amendments), Income Taxes –Recognition of Deferred Tax related to Assets and Liabilities
Arising from a Single Transaction.
Deferred tax assets for deductible temporary differences arising from investments in subsidiaries, branches
and associates, and interests in joint arrangements, are only recognised to the extent that it is probable that
the temporary difference will reverse in the foreseeable future and that taxable profit will be available
against which the temporary difference will be utilised. [IAS 12.44]

The carrying amount of deferred tax assets are reviewed at the end of each reporting period and reduced to
the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of
part or all of that deferred tax asset to be utilised. Any such reduction is subsequently reversed to the extent
that it becomes probable that sufficient taxable profit will be available. [IAS 12.37]

A deferred tax asset is recognised for an unused tax loss carryforward or unused tax credit if, and only if, it
is considered probable that there will be sufficient future taxable profit against which the loss or credit
carryforward can be utilised. [IAS 12.34]

Measurement of deferred tax

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when
the asset is realised or the liability is settled, based on tax rates/laws that have been enacted or substantively
enacted by the end of the reporting period. [IAS 12.47] The measurement reflects the entity's expectations,
at the end of the reporting period, as to the manner in which the carrying amount of its assets and liabilities
will be recovered or settled. [IAS 12.51]

IAS 12 provides the following guidance on measuring deferred taxes:

 Where the tax rate or tax base is impacted by the manner in which the entity recovers its assets or
settles its liabilities (e.g. whether an asset is sold or used), the measurement of deferred taxes is
consistent with the way in which an asset is recovered or liability settled [IAS 12.51A]
 Where deferred taxes arise from revalued non-depreciable assets (e.g. revalued land), deferred taxes
reflect the tax consequences of selling the asset [IAS 12.51B]
 Deferred taxes arising from investment property measured at fair value under IAS 40 Investment
Property reflect the rebuttable presumption that the investment property will be recovered through
sale [IAS 12.51C-51D]
 If dividends are paid to shareholders, and this causes income taxes to be payable at a higher or
lower rate, or the entity pays additional taxes or receives a refund, deferred taxes are measured
using the tax rate applicable to undistributed profits [IAS 12.52A]

Deferred tax assets and liabilities cannot be discounted. [IAS 12.53]

Recognition of tax amounts for the period

Where to recognise income tax for the period

Consistent with the principles underlying IAS 12, the tax consequences of transactions and other events are
recognised in the same way as the items giving rise to those tax consequences. Accordingly, current and
deferred tax is recognised as income or expense and included in profit or loss for the period, except to the
extent that the tax arises from: [IAS 12.58]

 transactions or events that are recognised outside of profit or loss (other comprehensive income or
equity) - in which case the related tax amount is also recognised outside of profit or loss [IAS
12.61A]
  a business combination - in which case the tax amounts are recognised as identifiable assets or
liabilities at the acquisition date, and accordingly effectively taken into account in the determination
of goodwill when applying IFRS 3 Business Combinations. [IAS 12.66]

Example

An entity undertakes a capital raising and incurs incremental costs directly attributable to the equity
transaction, including regulatory fees, legal costs and stamp duties. In accordance with the requirements
of IAS 32 Financial Instruments: Presentation, the costs are accounted for as a deduction from equity.

Assume that the costs incurred are immediately deductible for tax purposes, reducing the amount of current
tax payable for the period. When the tax benefit of the deductions is recognised, the current tax amount
associated with the costs of the equity transaction is recognised directly in equity, consistent with the
treatment of the costs themselves.

IAS 12 provides the following additional guidance on the recognition of income tax for the period:

 Where it is difficult to determine the amount of current and deferred tax relating to items recognised
outside of profit or loss (e.g. where there are graduated rates or tax), the amount of income tax
recognised outside of profit or loss is determined on a reasonable pro-rata allocation, or using
another more appropriate method [IAS 12.63]
 In the circumstances where the payment of dividends impacts the tax rate or results in taxable
amounts or refunds, the income tax consequences of dividends are considered to be more directly
linked to past transactions or events and so are recognised in profit or loss unless the past
transactions or events were recognised outside of profit or loss [IAS 12.52B]
 The impact of business combinations on the recognition of pre-combination deferred tax assets are
not included in the determination of goodwill as part of the business combination, but are separately
recognised [IAS 12.68]
 The recognition of acquired deferred tax benefits subsequent to a business combination are treated
as 'measurement period' adjustments (see IFRS 3 Business Combinations) if they qualify for that
treatment, or otherwise are recognised in profit or loss [IAS 12.68]
 Tax benefits of equity settled share based payment transactions that exceed the tax effected
cumulative remuneration expense are considered to relate to an equity item and are recognised
directly in equity. [IAS 12.68C]

Presentation

Current tax assets and current tax liabilities can only be offset in the statement of financial position if the
entity has the legal right and the intention to settle on a net basis. [IAS 12.71]

Deferred tax assets and deferred tax liabilities can only be offset in the statement of financial position if the
entity has the legal right to settle current tax amounts on a net basis and the deferred tax amounts are levied
by the same taxing authority on the same entity or different entities that intend to realise the asset and settle
the liability at the same time. [IAS 12.74]

The amount of tax expense (or income) related to profit or loss is required to be presented in the statement(s)
of profit or loss and other comprehensive income. [IAS 12.77]
The tax effects of items included in other comprehensive income can either be shown net for each item, or
the items can be shown before tax effects with an aggregate amount of income tax for groups of items
(allocated between items that will and will not be reclassified to profit or loss in subsequent periods). [IAS
1.91]

Disclosure

IAS 12.80 requires the following disclosures:

 major components of tax expense (tax income) [IAS 12.79] Examples include:
o current tax expense (income)
o any adjustments of taxes of prior periods
o amount of deferred tax expense (income) relating to the origination and reversal of
temporary differences
o amount of deferred tax expense (income) relating to changes in tax rates or the imposition
of new taxes
o amount of the benefit arising from a previously unrecognised tax loss, tax credit or
temporary difference of a prior period
o write down, or reversal of a previous write down, of a deferred tax asset
o amount of tax expense (income) relating to changes in accounting policies and corrections
of errors.

IAS 12.81 requires the following disclosures:

 aggregate current and deferred tax relating to items recognised directly in equity
 tax relating to each component of other comprehensive income
 explanation of the relationship between tax expense (income) and the tax that would be expected
by applying the current tax rate to accounting profit or loss (this can be presented as a reconciliation
of amounts of tax or a reconciliation of the rate of tax)
 changes in tax rates
 amounts and other details of deductible temporary differences, unused tax losses, and unused tax
credits
 temporary differences associated with investments in subsidiaries, branches and associates, and
interests in joint arrangements
 for each type of temporary difference and unused tax loss and credit, the amount of deferred tax
assets or liabilities recognised in the statement of financial position and the amount of deferred tax
income or expense recognised in profit or loss
 tax relating to discontinued operations
 tax consequences of dividends declared after the end of the reporting period
 information about the impacts of business combinations on an acquirer's deferred tax assets
 recognition of deferred tax assets of an acquiree after the acquisition date.

Other required disclosures:

 details of deferred tax assets [IAS 12.82]

 tax consequences of future dividend payments. [IAS 12.82A]
In addition to the disclosures required by IAS 12, some disclosures relating to income taxes are required by
IAS 1 Presentation of Financial Statements, as follows:

 Disclosure on the face of the statement of financial position about current tax assets, current tax
liabilities, deferred tax assets, and deferred tax liabilities [IAS 1.54(n) and (o)]
 Disclosure of tax expense (tax income) in the profit or loss section of the statement of profit or loss
and other comprehensive income (or separate statement if presented). [IAS 1.82(d)]

AMENDMENTS
Recognition of Deferred Tax Liabilities and Deferred Tax Assets
In May 2021 the Board issued Deferred Tax related to Assets and Liabilities arising from a
Single Transaction
Why change?

The amendments were issued in response to a recommendation from the IFRS Interpretations Committee.
Research conducted by the Committee indicated that views differed on whether the recognition exemption
applied to transactions, such as leases, that lead to the recognition of an asset and liability. These differing
views resulted in entities accounting for deferred tax on such transactions in different ways, reducing
comparability between their financial statements. The Board expects that the amendments will reduce
diversity in the reporting and align the accounting for deferred tax on such transactions with the general
principle in IAS 12 of recognizing deferred tax for temporary differences. The amendments issued some
narrow scope changes to IAS 12 to specify how entities should account for deferred tax on transactions
such as leases and decommissioning obligations.

Additional exclusions have been added to the IRE, detailed in paragraphs 15(b)(iii) and 24(c)

15. A deferred tax liability shall be recognised for all taxable temporary differences, except to the extent
that the deferred tax liability arises from:
(a) the initial recognition of goodwill; or
(b) the initial recognition of an asset or liability in a transaction which:
i. is not a business combination;
ii. at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss);
and
iii. at the time of the transaction, does not give rise to equal taxable and deductible temporary
differences.
24. A deferred tax asset shall be recognised for all deductible temporary differences to the extent that it is
probable that taxable profit will be available against which the deductible temporary difference can be
utilised, unless the deferred tax asset arises from the initial recognition of an asset or liability in a transaction
that:
a. is not a business combination;
b. at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss);
and
c. at the time of the transaction, does not give rise to equal taxable and deductible temporary
differences.
Impact
The amendments require an entity to recognize deferred tax on certain transactions (e.g., leases and
decommissioning liabilities) that give rise to equal amounts of taxable and deductible temporary differences
on initial recognition. The amendment reduced the diversity in recognizing deferred tax assets and liabilities
and improves comparability and transparency of the financial statements.

Effectivity

The amendments are effective for annual reporting periods beginning on or after January 1, 2023, with
early application permitted.
 IAS 12
INCOME TAXES
PRESENTED BY:
GONZALES, MA. REISA JEAN GONZALES
PACSA, JENNIFER
Objective of IAS 12

The objective of IAS 12 (1996) is to prescribe the accounting treatment for

income taxes.

In meeting this objective, IAS 12 notes the following:

• It is inherent in the recognition of an asset or liability that that asset or
liability will be recovered or settled, and this recovery or settlement may
give rise to future tax consequences which should be recognised at the
same time as the asset or liability

• An entity should account for the tax consequences of transactions and

other events in the same way it accounts for the transactions or other
events themselves.
Key definitions:
RECOGNITION

Recognition of Current Tax Liabilities and Assets

Current tax for current and prior periods shall, to the extent unpaid, be recognised
as a liability. If the amount already paid in respect of current and prior periods
exceeds the amount due for those periods, the excess shall be recognised as an
asset. Current tax liabilities (assets) for the current and prior periods shall be
measured at the amount expected to be paid to (recovered from) the taxation
authorities, using the tax rates (and tax laws) that have been enacted
orsubstantively enacted by the end of the reporting period.
Recognition of Deferred Tax Liabilities and Deferred tax assets

It is inherent in the recognition of an asset or liability that the reporting entity

expects to recover or settle the carrying amount of that asset or liability. If it is
probable that recovery or settlement of that carrying amount will make future tax
payments larger (smaller) than they would be if such recovery or settlement were
to have no tax consequences, this Standard requires an entity to recognise a
deferred tax liability (deferred tax asset), with certain limited exceptions. A
deferred tax asset shall be recognised for the carryforward of unused tax losses
and unused tax credits to the extent that it is probable that future taxable profit
will be available against which the unused tax losses and unused tax credits can be
utilised.
MEASUREMENT

Measurement of Deferred tax

Deferred tax assets and liabilities shall be measured at the tax rates that are expected
to apply to the period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that
have been enacted or substantively enacted by the end of the reporting period.

The measurement of deferred tax liabilities and deferred tax assets shall reflect the tax consequences that
would follow from the manner in which the entity expects, at the balance sheet date, to recover or settle the
carrying amount of its assets and liabilities. Deferred tax assets and liabilities shall not be discounted. The
carrying amount of a deferred tax asset shall be reviewed at each balance sheet date. An entity shall reduce the
carrying amount of a deferred tax asset to the extent that it is no longer probable that sufficient taxable profit
will be available to allow the benefit of part or all of that deferred tax asset to be utilised. Any such reduction
shall be reversed to the extent that it becomes probable that sufficient taxable profit will be
available.
PRESENTATION

Current tax assets and current tax liabilities can only be offset in the statement of financial
position if the entity has the legal right and the intention to settle on a net basis. [IAS 12.71]
Deferred tax assets and deferred tax liabilities can only be offset in the statement of financial
position if the entity has the legal right to settle current tax amounts on a net basis and the
deferred tax amounts are levied by the same taxing authority on the same entity or different
entities that intend to realise the asset and settle the liability at the same time. [IAS 12.74]
The amount of tax expense (or income) related to profit or loss is required to be presented
in the statement(s) of profit or loss and other comprehensive income. [IAS 12.77]
The tax effects of items included in other comprehensive income can either be shown net
for each item, or the items can be shown before tax effects with an aggregate amount of
income tax for groups of items (allocated between items that will and will not be reclassified
to profit or loss in subsequent periods). [IAS 1.91]
Disclosure
IAS 12.80 requires the following disclosures:
major components of tax expense (tax income) [IAS 12.79] Examples include:
current tax expense (income)
any adjustments of taxes of prior periods
amount of deferred tax expense (income) relating to the origination and reversal of temporary
differences
amount of deferred tax expense (income) relating to changes in tax rates or the imposition of new
taxes
amount of the benefit arising from a previously unrecognised tax loss, tax credit or temporary
difference of a prior period
write down, or reversal of a previous write down, of a deferred tax asset
amount of tax expense (income) relating to changes in accounting policies and corrections of
errors.
IAS 12.81 requires the following disclosures:

• aggregate current and deferred tax relating to items recognised directly in equity
• tax relating to each component of other comprehensive income
• explanation of the relationship between tax expense (income) and the tax that would be expected by
applying the current tax rate to accounting profit or loss (this can be presented as a reconciliation of
amounts of tax or a reconciliation of the rate of tax)
• changes in tax rates
• amounts and other details of deductible temporary differences, unused tax losses, and unused tax
credits
• temporary differences associated with investments in subsidiaries, branches and associates, and
interests in joint arrangements
• for each type of temporary difference and unused tax loss and credit, the amount of deferred tax
assets or liabilities recognised in the statement of financial position and the amount of deferred tax
income or expense recognised in profit or loss
• tax relating to discontinued operations
• tax consequences of dividends declared after the end of the reporting period
• information about the impacts of business combinations on an acquirer's deferred tax assets
• recognition of deferred tax assets of an acquiree after the acquisition date.
Other required disclosures:

• details of deferred tax assets [IAS 12.82]

• tax consequences of future dividend payments. [IAS 12.82A]
• In addition to the disclosures required by IAS 12, some disclosures relating to income
taxes are required by IAS 1 Presentation of Financial Statements, as follows:
• Disclosure on the face of the statement of financial position about current tax assets,
current tax liabilities, deferred tax assets, and deferred tax liabilities [IAS 1.54(n) and
(o)]
• Disclosure of tax expense (tax income) in the profit or loss section of the statement
of profit or loss and other comprehensive income (or separate statement if
presented). [IAS 1.82(d)]
A M E N D M E N T
Recognition of Deferred Tax
related to Assets and Liabilities
arising from a Single Transaction
Reason of Amendment:

The amendments were issued in response to a recommendation from the IFRS

Interpretations Committee. Research conducted by the Committee indicated
that views differed on whether the recognition exemption applied to
transactions, such as leases, that lead to the recognition of an asset and liability.
These differing views resulted in entities accounting for deferred tax on such
transactions in different ways, reducing comparability between their financial
statements. The Board expects that the amendments will reduce diversity in the
reporting and align the accounting for deferred tax on such transactions with
the general principle in IAS 12 of recognizing deferred tax for temporary
differences. The amendments issued some narrow scope changes to IAS 12 to
specify how entities should account for deferred tax on transactions such as
leases and decommissioning obligations.
15 A deferred tax liability shall be recognized for all taxable
temporary differences, except to the extent that the deferred
tax liability arises from:
(a)the initial recognition of goodwill; or
(b) the initial recognition of an asset or liability in a transaction
which:
i. is not a business combination;
ii. at the time of the transaction, affects neither accounting profit
nor taxable profit (tax loss); and
iii. at the time of the transaction, does not give rise to equal
taxable and deductible temporary differences.
24 A deferred tax asset shall be recognized for all deductible
temporary differences to the extent that it is probable that taxable
profit will be available against which the deductible temporary
difference can be utilized, unless the deferred tax asset arises from the
initial recognition of an asset or liability in a transaction that:
a. is not a business combination;
b. at the time of the transaction, affects neither accounting profit nor
taxable profit (tax loss); and
c. at the time of the transaction, does not give rise to equal taxable
and deductible temporary differences.
Impact

The amendments require an entity to recognize deferred tax

on certain transactions (e.g., leases and decommissioning
liabilities) that give rise to equal amounts of taxable and
deductible temporary differences on initial recognition. The
amendment reduced the diversity in recognizing deferred tax
assets and liabilities and improves comparability and
transparency of the financial statements.
Effective Date:

The amendments are effective for annual

reporting periods beginning on or after
January 1, 2023.
John Rhic Batistil & Justine L. Demeterio BSA 4

WRITTEN REPORT

IAS 16: Property, Plant and Equipment

The objective of this standard is to prescribe the accounting treatment for property, plant
and equipment so that users of the financial statements can discern information about an entity’s
investment in its property, plant and equipment and the changes in such investment.
Property, plant and equipment are tangible items that:
(a) are held for use in the production or supply of goods or services, for rental to others, or for
administrative purposes; and
(b) are expected to be used during more than one period.
The cost of an item of property, plant and equipment shall be recognized as an asset if, and only
if:
(a) it is probable that future economic benefits associated with the item will flow to the entity; and
(b) the cost of the item can be measured reliably.
Measurement at recognition: An item of property, plant and equipment that qualifies for
recognition as an asset shall be measured at its cost. The cost of an item of property, plant and
equipment is the cash price equivalent at the recognition date.
The cost of an item of property, plant and equipment comprises:
(a) its purchase price, including import duties and non-refundable purchase taxes, after deducting
trade discounts and rebates.
(b) any costs directly attributable to bringing the asset to the location and condition necessary for
it to be capable of operating in the manner intended by management.
(c) the initial estimate of the costs of dismantling and removing the item and restoring the site on
which it is located, the obligation for which an entity incurs either when the item is acquired or as
a consequence of having used the item during a particular period for purposes other than to produce
inventories during that period.

BACKGROUND
Before the amendments, directly attributable costs include the cost of testing whether the
asset was functioning properly, after deducting the net proceeds from selling items produced while
bringing the asset to the location.
The Board developed the proposed amendments in response to a request to the Committee asking
whether:
a) The proceed specified in paragraph 17 related only to items produced while testing; or
b) An entity was required to deduct from the cost of an item of PPE any such proceeds that
exceed the cost of testing

What caused this amendment?

• The issue mainly affects a few industries.
• Different entities had applied the requirements in IAS 16 differently.

THE AMENDMENT
The Board decided to amend IAS 16, Property, Plant and Equipment to prohibit an entity from
deducting from the cost of an item of PPE the proceeds from selling items produced before the
asset is available for use.

PRIOR TO AMENDMENT: UNDER THE AMENDMENT:

 The proceeds from selling the items  The amendment prohibits a company to
produced while bringing the asset to the deduct the proceeds from selling during
location and condition will be deducted the testing phase from the cost of an item
from cost of PPE. of PPE.

HIGHLIGHTS
1. Sales proceeds no longer deducted from the cost of a PPE before its intended use.
2. Testing the functioning of PPE means assessing its technical and physical performance.
3. Additional disclosure requirements for sales proceeds and related production cost.
4. Transition Requirements
SALES PROCEEDS UNDER PROFIT OR LOSS
Under the amendment, proceeds from selling the items before the related item of PPE is available
for its intended use should be recognized in the profit or loss, together with the cost of producing
those items. IAS 2, Inventories, should be applied in identifying and measuring those production
costs. Therefore, the following should be distinguished:
• The costs of producing and selling items before an item of PPE is available for its intended use.
• The costs of making the PPE available for its intended use.
ILLUSTRATION 1:

ABC Co. acquired factory equipment overseas on cash basis for P100,000. Additional cost
incurred include the following:

5,000- Commissions paid to brokers

25,000- Import duties

10,000- Non-refundable purchase taxes

1,000- Freight cost of transferring the equipment to ABC Co.’s premises

2,000- Cost of assembling and installing the equipment

1,500- Cost of testing the equipment

4,200- Admin. And other general costs

3,800- Advertisement costs of the new product to be produced by the equipment

The samples generated from testing the equipment were sold at P500. What is the initial
cost of the equipment?

 PRIOR TO AMENDMENT  UNDER THE AMENDMENT

Purchase Price P100,000 Purchase Price P100,000

Commissions paid to brokers 5,000 Commissions paid to brokers 5,000

Import duties 25,000 Import duties 25,000

Non-refundable purchase taxes 10,000 Non-refundable purchase taxes 10,000

Freight cost 1,000 Freight cost 1,000

Assembling and installation cost 2,000 Assembling and installation cost 2,000

Cost of testing the equipment 1,500 Cost of testing the equipment 1,500

Net proceeds from sales generated (500) Initial Cost of equipment P144,500
 Initial Cost of equipment P144,000

MEASURING THE COSTS OF ITEMS PRODUCED

Under the amendment, proceeds from selling items before the related item of PPE is
available for use should be recognized in profit or loss together with the costs associated with that
item of PPE in accordance with IFRS 15 Revenue from Contract with Customers and IAS 2
Inventories, respectively.

The Board made this decision because:

a) IAS 2 sets out a framework for measuring cost without being overly prescriptive; and
b) An entity would already be required to apply IAS 2 in measuring cost if the entity were to
determine that the sale of items produced is an output of its ordinary activities, in this case, the
items produced would meet IAS 2's definition of inventories. It would be useful to apply the same
requirements to the cost of the items produced irrespective or whether the sale of those items is an
output of an entity's ordinary activities.

ILLUSTRATION 2:

XYZ Corporation constructs equipment for its own use. The following are the costs incurred
in relation to the new equipment assembled in 2022.

Raw materials used in constructing the machinery P228,000

Labor in constructing the machinery 147,000

Cost of installation 3,600

Cost of testing the equipment 25,000

Factory Overhead- directly attributable 50,700

Sales of sample items produced during testing 10,000

 Cost of raw materials used in sample items 5,000

What is the initial cost of the equipment?

SOLUTION:

 PRIOR TO AMENDMENT  UNDER THE AMENDMENT

Raw Materials P228,000 Raw Materials P228,000

Labor 147,000 Labor 147,000

FOH 50,700 FOH 50,700

Installation 33,600 Installation 33,600

Cost of testing 25,000 Cost of testing 25,000

Net proceeds from sale 5,000 Total Cost P484,300

Total Cost P479,300

Profit or Loss

Proceeds from sales P10,000

Cost of raw materials used (5,000)

ANALYSIS:
a) The amount of cost capitalized is higher under the amendment.
b) Net proceeds from the sale of samples were not offset against the cost of testing.
c) The amount generated from the sale of samples and the related cost of raw materials used are
now recognized in Profit or Loss.

TESTING
Testing whether an item of PPE is functioning properly means assessing its technical and
physical performance rather than its financial performance. It is clarified that testing means
“assessing whether the technical and physical performance of the asset is such that it is capable of
being used in the production or supply of goods or services, for rental to others, or for
administrative purposes.

ADDITIONAL DISCLOSURE REQUIREMENTS

For sales of items that are an output of a company’s ordinary activities, the disclosure requirements
of IFRS 15 Revenue from Contracts with Customers and IAS 2 apply. For sale of items that are
not part of a company’s ordinary activities. Companies are required to disclose the following if
not presented separately in the statement of comprehensive income:
a) The amounts of proceeds and cost included in profit or loss; and
b) Which line item(s) in the statement of comprehensive income include(s) such proceeds and cost.

TRANSITIONAL REQUIREMENTS
Retrospectively, but only, to items of PPE that are brought to the location and condition
necessary for them to be capable or operating in the manner intended by the management on or
after the beginning of the earliest period presented in the financial statements in which the entity
first applies the amendments.
The entity, shall recognize the cumulative effect of initially applying the amendments as
an adjustment to the opening balance of retained earnings (or other component of equity, as
appropriate) at the beginning of that earliest period presented.

ILLUSTRATION 3:
 The entity’s annual reporting period ends on December 31. It presents only one
comparative period. As of December 31, 2020, there were items of PPE under construction
whose cost was reduced by P1,000 of proceeds obtained from selling sample products.
Additionally, during 2021 further proceeds of P500 was credited to PPE and the line item was
activated in January 2022.
Applying the amendment, the following adjustments in the financial statements for 2022
should be made:

January 1, 2021 PPE Under Construction. 1,000

Retained Earnings 1,000

December 31, 2021 PPE Under Construction. 500

Profit or Loss 500

When does the amendment come into effect?

The amendment is effective for annual periods beginning on or after January 1, 2022,
however early application is permitted.
Kimberly Rose C. Miole
Jessa B. Tagra
BSA 4

IAS 28
INVESTMENT IN ASSOCIATES
AND JOINT VENTURES [Year]
Updates in Financial Reporting Standards
TABLE OF CONTENTS

Contents
Objective ______________________________________ 0Error! Bookmark not defined.
Amendents and Causes ______________________ Error! Bookmark not defined.3
Comparison ____________________________________ Error! Bookmark not defined.
Impact ________________________________________ Error! Bookmark not defined.4
Illustrative example__________________________ Error! Bookmark not defined.4
UPDATES IN FINANCIAL REPORTING: IAS 28

Objective
IAS 28 prescribes the accounting for investments in associates and
application of the equity method when accounting investments in
associates and joint ventures.

SCOPE
IAS 28 applies to all entities that are investors with joint control of, or
significant influence over, an investee (associate or joint venture).

KEY TERMS
An associate is an entity over which an investor has significant influence.
A joint venture is a joint arrangement whereby the parties having joint
control of the arrangement have rights to the net assets of the joint
arrangement.
A significant influence as the power to participate in the financial and
operating policy decisions of the investee, but is NOT a control or joint control
of those policies.

INDICATOR
Holding (directly or indirectly) more than 20% of the voting power of the investee.

Other ways of evidencing significant influence

 Representation on the board of directors
 Participates in policy-making processes
 Material transactions
 Interchange of managerial personnel.
 Provision of essential technical information.

Page 1
UPDATES IN FINANCIAL REPORTING: IAS 28

EXEMPTIONS
 Entity is a subsidiary of another entity
 Entity's instrument not traded
 Entity is not the process of issuing publicly traded securities
 The ultimate/any intermediary parent produces consolidated FS

WHEN TO DISCONTINUE EQUITY METHOD:

An investor stops applying the equity method when its investment ceases to be an
associate or a joint venture.

Page 2
UPDATES IN FINANCIAL REPORTING: IAS 28

AMENDMENTS
IAS 28, Accounting for Investments in Associates and Joint Ventures,
provides guidance on accounting for investments in associates and joint
ventures. The standard was first issued in 1989, revised in 2003 and
2011, and most recently amended in 2017 as part of the Annual
Improvements Project.

CAUSES OF THE AMENDENTS OF IAS 28

IAS 28, like all International Accounting Standards, is reviewed regularly by
the International Accounting Standards Board (IASB) to ensure that it
remains relevant and up-to-date with the changing business environment.
Amendments to IAS 28 may be made for various reasons, including:

 Alignment with other accounting standards: The IASB may amend IAS
28 to align it with other accounting standards or to address
inconsistencies with other standards.

 Improvements in accounting practices: The IASB may amend IAS 28 to

incorporate new accounting practices or to improve existing practices.

 Changes in the business environment: The IASB may amend IAS 28 to

reflect changes in the business environment, such as changes in the
types of investments that entities are making, or changes in the
regulatory environment.

 Feedback from stakeholders: The IASB may amend IAS 28 based on

feedback from stakeholders, such as investors, regulators, and
accounting professionals.

Page 3
UPDATES IN FINANCIAL REPORTING: IAS 28

COMPARISON BETWEEN IAS 28 BETWEEN 2003 AND 2017

Measurement: One of the significant changes between the two versions is
the measurement of investments in associates. Under IAS 28 (2003), the
equity method and cost method were the two permitted methods for
accounting for investments in associates. However, under IAS 28 (2017),
entities are required to measure investments in associates at fair value
through profit or loss or by using the equity method.
Disclosure requirements: The 2017 version includes expanded disclosure
requirements, including the nature and extent of the entity's interests in
associates and joint ventures. The 2003 version of the standard did not
include such disclosure requirements.

IMPACT OF IAS 28 2017

The revised IAS 28 has significant impacts on the accounting treatment of
investments in associates and joint ventures. The requirement to measure
investment in associate at fair value through profit or loss is expected to result
in more accurate reporting of the performance of associates. Additionally, the
expanded disclosure requirements will provide stakeholders with more
comprehensive information about the nature and extent of the entity’s
interests in associates and joint ventures.

Page 4
UPDATES IN FINANCIAL REPORTING: IAS 28

ILLUSTRATIVE EXAMPLE
Assume that Entity A has an investment in Entity B, an associate. Entity A acquired
a 40% interest in Entity B on 1 January 2022 for P1,000,000. Entity B reported net
income of P200,000 for the year ended 31 December 2022.

Under IAS 28 (2003), Entity A would have accounted for its investment in Entity B
using the equity method. As such, Entity A would have recorded its share of Entity
B's net income of P80,000 (P200,000 x 40%) as an increase in the carrying amount
of its investment in Entity B.

Under IAS 28 (2017), Entity A has the option to measure its investment in Entity B
at fair value through profit or loss or using the equity method. If Entity A elects to
measure its investment in Entity B at fair value through profit or loss, it would need
to determine the fair value of the investment at each reporting date.

Suppose the fair value of Entity A's investment in Entity B at 31 December 2022 is
P1,100,000. Entity A would record a gain of P100,000 (P1,100,000 - 1,000,000) in
its statement of profit or loss for the year ended 31 December 2022.

JOURNAL ENTRY
The journal entry for Entity A's investment in Entity B using the equity method
under IAS 28 (2003):

Investment in Entity B (40% share) P80,000

Share of net income from Entity B P80,000

The journal entry if Entity A had elected to measure its investment in Entity B at fair
value through profit or loss under IAS 28 (2017):

Page 5
UPDATES IN FINANCIAL REPORTING: IAS 28

Investment in Entity B P1,000,000

Cash P1,000,000 (for initial acquisition)

Fair value gain on investment P100,000

Investment in Entity B P100,000

The fair value gain on the investment is recognized in Entity A's statement of profit
or loss for the year ended 31 December 2022.

Page 6
Kimberly Rose C. Miole
Jessa B. Tagra
BSA 4

IAS 28
INVESTMENT IN ASSOCIATES
AND JOINT VENTURES [Year]
Updates in Financial Reporting Standards
TABLE OF CONTENTS

Contents
Objective ______________________________________ 0Error! Bookmark not defined.
Amendents and Causes ___________________________________________________________ 3
Comparison __________________________________ 4Error! Bookmark not defined.
Impact ________________________________________ Error! Bookmark not defined.4
Illustrative example__________________________ Error! Bookmark not defined.5
Conclusion ____________________________________ Error! Bookmark not defined.5
UPDATES IN FINANCIAL REPORTING: IAS 28

Objective
IAS 28 prescribes the accounting for investments in associates and
application of the equity method when accounting investments in
associates and joint ventures.

SCOPE
IAS 28 applies to all entities that are investors with joint control of, or
significant influence over, an investee (associate or joint venture).

KEY TERMS
An associate is an entity over which an investor has significant influence.
A joint venture is a joint arrangement whereby the parties having joint
control of the arrangement have rights to the net assets of the joint
arrangement.
A significant influence as the power to participate in the financial and
operating policy decisions of the investee, but is NOT a control or joint control
of those policies.

INDICATOR
Holding (directly or indirectly) more than 20% of the voting power of the investee.

Other ways of evidencing significant influence

 Representation on the board of directors
 Participates in policy-making processes
 Material transactions
 Interchange of managerial personnel.
 Provision of essential technical information.

Page 1
UPDATES IN FINANCIAL REPORTING: IAS 28

EXEMPTIONS
 Entity is a subsidiary of another entity
 Entity's instrument not traded
 Entity is not the process of issuing publicly traded securities
 The ultimate/any intermediary parent produces consolidated FS

WHEN TO DISCONTINUE EQUITY METHOD:

An investor stops applying the equity method when its investment ceases to be an
associate or a joint venture.

Page 2
UPDATES IN FINANCIAL REPORTING: IAS 28

AMENDMENTS
IAS 28, Accounting for Investments in Associates and Joint Ventures,
provides guidance on accounting for investments in associates and joint
ventures. The standard was first issued in 1989, revised in 2003 and
2011, and most recently amended in 2017 as part of the Annual
Improvements Project
The main amendment in 2017 is the clarification of the accounting for
long-term interests in associates and joint ventures. The amendment
requires entities to apply IFRS 9 Financial Instruments to long-term
interests in associates and joint ventures, when the investor is not able
to exercise significant influence or control over the investee. This means
that investments in associates and joint ventures will now be accounted
for either at fair value through profit or loss, or at amortized cost using
the effective interest rate method, depending on the investor's business
model and the contractual terms of the investment. The amendment
also requires additional disclosures to be provided about long-term
interests in associates and joint ventures.

CAUSES OF THE AMENDENTS OF IAS 28

IAS 28, like all International Accounting Standards, is reviewed regularly by
the International Accounting Standards Board (IASB) to ensure that it
remains relevant and up-to-date with the changing business environment.
Amendments to IAS 28 may be made for various reasons, including:

 Alignment with other accounting standards: The IASB may amend IAS
28 to align it with other accounting standards or to address
inconsistencies with other standards.

Page 3
UPDATES IN FINANCIAL REPORTING: IAS 28

 Improvements in accounting practices: The IASB may amend IAS 28 to

incorporate new accounting practices or to improve existing practices.

 Changes in the business environment: The IASB may amend IAS 28 to

reflect changes in the business environment, such as changes in the
types of investments that entities are making, or changes in the
regulatory environment.

 Feedback from stakeholders: The IASB may amend IAS 28 based on

feedback from stakeholders, such as investors, regulators, and
accounting professionals.

COMPARISON BETWEEN IAS 28 BETWEEN 2003 AND 2017

Measurement: One of the significant changes between the two versions is
the measurement of investments in associates. Under IAS 28 (2003), the
equity method and cost method were the two permitted methods for
accounting for investments in associates. However, under IAS 28 (2017),
entities are required to measure investments in associates at fair value
through profit or loss or by using the equity method.
Disclosure requirements: The 2017 version includes expanded disclosure
requirements, including the nature and extent of the entity's interests in
associates and joint ventures. The 2003 version of the standard did not
include such disclosure requirements.

IMPACT OF IAS 28 2017

Page 4
UPDATES IN FINANCIAL REPORTING: IAS 28

The revised IAS 28 has significant impacts on the accounting treatment of

investments in associates and joint ventures. The requirement to measure
investment in associate at fair value through profit or loss is expected to result
in more accurate reporting of the performance of associates. Additionally, the
expanded disclosure requirements will provide stakeholders with more
comprehensive information about the nature and extent of the entity’s
interests in associates and joint ventures.

ILLUSTRATIVE EXAMPLE
Assume that Entity A has an investment in Entity B, an associate. Entity A acquired
a 40% interest in Entity B on 1 January 2022 for P1,000,000. Entity B reported net
income of P200,000 for the year ended 31 December 2022.

Under IAS 28 (2003), Entity A would have accounted for its investment in Entity B
using the equity method. As such, Entity A would have recorded its share of Entity
B's net income of P80,000 (P200,000 x 40%) as an increase in the carrying amount
of its investment in Entity B.

Under IAS 28 (2017), Entity A has the option to measure its investment in Entity B
at fair value through profit or loss or using the equity method. If Entity A elects to
measure its investment in Entity B at fair value through profit or loss, it would need
to determine the fair value of the investment at each reporting date.

Suppose the fair value of Entity A's investment in Entity B at 31 December 2022 is
P1,100,000. Entity A would record a gain of P100,000 (P1,100,000 - 1,000,000) in
its statement of profit or loss for the year ended 31 December 2022.

Page 5
UPDATES IN FINANCIAL REPORTING: IAS 28

JOURNAL ENTRY
The journal entry for Entity A's investment in Entity B using the equity method
under IAS 28 (2003):

Investment in Entity B (40% share) P80,000

Share of net income from Entity B P80,000

The journal entry if Entity A had elected to measure its investment in Entity B at fair
value through profit or loss under IAS 28 (2017):

Investment in Entity B P1,000,000

Cash P1,000,000 (for initial acquisition)

Fair value gain on investment P100,000

Investment in Entity B P100,000

The fair value gain on the investment is recognized in Entity A's statement of profit
or loss for the year ended 31 December 2022.

CONCLUSION
In conclusion, the revised IAS 28 has brought about significant changes in the
accounting treatment of investments in associates and joint ventures. The adoption

Page 6
UPDATES IN FINANCIAL REPORTING: IAS 28

of fair value measurement is expected to result in more accurate reporting of the

performance of associates. The expanded disclosure requirements will provide
stakeholders with more comprehensive information about the nature and extent of
the entity's interests in associates and joint ventures.

Page 7
IAS 37
Onerous contracts
Cost of Fulfilling a Contract - (Amendments to IAS 37)
IASB
International Accounting Standards Board

International Accounting Standards (IAS) were the first international

accounting standards that were issued by the International Accounting Standards
Committee (IASC), formed in 1973. The goal then, as it remains today, was to make
it easier to compare businesses around the world, increase transparency and trust
in financial reporting, and foster global trade and investment.

International Accounting Standards (IAS) were the first international

accounting standards that were issued by the International Accounting Standards
Committee (IASC), formed in 1973. The goal then, as it remains today, was to make
it easier to compare businesses around the world, increase transparency and trust
in financial reporting, and foster global trade and investment.
ONEROUS CONTRACT
Onerous contracts
Proposals to clarify IAS 37 Onerous contracts – Cost of
Fulfilling a Contract
The International Accounting Standards (Board) proposes to specify
in IAS 37 that, in assessing whether a contract is onerous, companies should
include all costs that relate directly to the contract, not only the incremental
costs. This clarification could particularly affect construction,
manufacturing and service companies.
Onerous contract
IAS 37 defines an onerous contract as a contract in which the
unavoidable costs of meeting the obligations under the contract
exceed the economic benefits expected to be received under it. IAS
37 also states that the unavoidable costs under a contract reflect
the least net cost of exiting from the contract, which is the lower of
the cost of fulfilling it and any compensation or penalties arising
from failure to fulfill it. However, IAS 37 does not specify which
costs to include in determining the cost of fulfilling a contract.
Unavoidable costs
The lower of the cost of fulfilling the contract and any compensation or penalties
arising from failure to fulfil it.

 The lower of the cost fulfilling the contract and any

compensation or penalties arising from failure to fulfill it.
 A contract can be onerous from its outset, or it can become
onerous when circumstances change and expected costs
increase or expected economic benefits decrease.
Rationale for Change
IAS 37 does not specify which costs to include in estimating the cost of
fulfilling a contract. People have reached different views on whether to include.
Only the incremental costs of fulfilling that contract—for example, the cost of
materials and labor required to construct a building; or all costs that relate
directly to the contract—both the incremental costs and an allocation of other
costs that relate directly to contract activities. For example, a company may
include an allocation of the depreciation charge for equipment the company uses
to construct buildings; and, the salary of a contract supervisor.
Historical background and Current status of the project
This project has been completed. The IASB issued Onerous Contracts — Cost of Fulfilling a Contra
(Amendments to IAS 37) on 14 May 2020.
PROPOSED AMENDMENTS
 IAS 37 defines an onerous contract in which the unavoidable
costs of meeting the obligations under the contract exceed the
economic benefits expected to be received under it.
 IAS also states that the unavoidable costs under a contract reflect
the least net cost of exiting from the contract, which is the lower
of the costs of fulfilling it and any compensation or penalties
arising from the failure to fulfil it. IAS 37 does not specify which
costs to include in determining the cost of fulfilling a contract.
 The board developed proposals to clarify which costs to include.
The 37 that state that the costs of fulfill the Board decided to
proceed with its proposal to clarify that:
 The cost of fulfilling a contract comprises the costs that
relate directly to the contracting a contract comprises the
costs that relate directly to the contract. Clarification of that
the costs that relate directly to the contract consist of:
a) the incremental costs of fulfilling that contract, and
b) an allocation of costs that relate directly to fulfilling that
and other Contracts:
Examples of costs that relate directly to a contract to provide goods or
services include:
 direct labour (for example, salaries and wages of employees who
manufacture and deliver the goods or provide the services directly to the
counter party);
 direct materials (for example, supplies used in fulfilling the contract);
 allocations of costs that relate directly to contract activities (for example,
costs of contract management and supervision; insurance; and
depreciation of tools, equipment and right-of-use assets used in fulfilling
the contract);
 costs explicitly chargeable to the counter party under the contract; and
 other costs incurred only because an entity entered into the contract (for
example, payments to subcontractors).
Effective date

 In October 2019, the Board decided to retain the transition requirements proposed
in the Exposure Draft, ie, an entity would apply the amendments to contracts
under which it has not yet fulfilled all its obligations at the date it first applies the
amendments. Entities would not restate comparative information.
 The Board did not propose an effective date but proposed that earlier application
be permitted.
 Paragraph 6.35 of the Due Process Handbook explains that the effective date of
any amendment is set so that (a) jurisdictions have sufficient time to incorporate
the new requirements into their legal systems; and (b) those applying IFRS
Standards have sufficient time to prepare for the new requirements.
 The Board generally allows at least 12 to 18 months between the issuance of a
new Standard or amendment and its effective date.
 If the Board agrees with our recommendations set out in this paper, we expect
the Board to issue the amendments during the second quarter of 2020.
 We think entities and jurisdictions would have sufficient time to apply and
incorporate the amendments if the Board were to set an effective date of 1
January 2022 ie approximately 18 months after the end of the second quarter of
2020. Accordingly, we recommend that the Board require entities to apply the
amendments for annual periods beginning on or after 1 January 2022.
 The Board received no feedback on its proposal to permit early application.
Accordingly, we recommend permitting such earlier application.
Changes
The changes in Onerous Contracts — Cost of Fulfilling a Contract
(Amendments to IAS 37) specify that the ‘cost of fulfilling’ a contract
comprises the ‘costs that relate directly to the contract’. Costs that relate
directly to a contract can either be incremental costs of fulfilling that
contract (examples would be direct labor, materials) or an allocation of
other costs that relate directly to fulfilling contracts (an example would be
the allocation of the depreciation charge for an item of property, plant and
equipment used in fulfilling the contract).
 PREVIOUS AMENDMENTS

 IFRS 15 does not specify how to account • The board developed proposals to clarify
for onerous contracts. Instead, IFRS 15 which costs to include. The 37 that state
directs companies to apply the general that the costs of fulfill the Board decided to
onerous contract requirements in IAS proceed with its proposal to clarify that:
37. • The cost of fulfilling a contract comprises
• The previous Standard for onerous the costs that relate directly to the
construction contracts required companies contracting a contract comprises the costs
to include both incremental costs and other that relate directly to the contract.
costs that relate directly to contract Clarification of that the costs that relate
activities in measuring contract costs. directly to the contract consist of the
Construction companies’ financial incremental costs of fulfilling that contract,
statements would become less and an allocation of costs that relate
comparable if these companies took directly to fulfilling that and other Contracts
different views on how to apply IAS 37.
 PREVIOUS AMENDMENTS

• If a construction company decided to • Examples of costs that relate directly to a

include only incremental costs in contract to provide goods or services
determining the cost of fulfilling a contract, include:
it would have changed its policy to one that (a) direct labor (for example, salaries and
is less likely to give early warning of wages of employees who
expected contract losses than its previous manufacture and deliver the goods or provide
policy applying the previous Standard the services directly to the
• Only the incremental costs of fulfilling that counter party);
contract—for example, the cost of (b) direct materials (for example, supplies used
materials and labor required to construct a in fulfilling the contract);
building; or (c) allocations of costs that relate directly to
• All costs that relate directly to the contract activities (for example,
contract—both the incremental costs and costs of contract management and
an allocation of other costs that relate supervision; insurance; and
directly to contract activities. For example, depreciation of tools, equipment and right-of-
a company may include use assets used in fulfilling
the contract);
 PREVIOUS AMENDMENTS

• For example, a company may (d) costs explicitly chargeable to the

include an allocation of: counter-party under the contract;
• the depreciation charge for and
equipment the company uses to (e) other costs incurred only
construct buildings; and because an entity entered into the
• the salary of a contract contract (for
supervisor example, payments to
subcontractors).
IMPLICATIONS
 Clarifying that IAS 37 does not require an incremental cost approach could help
avoid a significant change in accounting practice for onerous construction contracts.
However, specifying that IAS 37 does require companies to include all directly
related costs could change the way in which companies assess other types of
contracts. Companies that apply an incremental cost approach at present may record
onerous contract costs earlier than they do at present.
 Incremental cost approach is a management approach focused on examining how
costs change based on potential alternatives.
 The concept of incremental costs arises when the company’s management discusses
the possibility of changing the provision of services or production of goods and the
extra costs that this would lead. It is the additional costs incurred by a company if it
produces one extra unit of output.
SAMPLE PROBLEM 2
 SAMPLE PROBLEM 2:
Solution:

1.
Acquisition cost of patent purchased Jan. 1, 2020 P10,000,000
Less: Amortization:
2020 (10M/10 yrs) 1,000,000
2021 (10M-1M/5 yrs) 1,800,000 2,800,000
Carrying value of patent, Dec. 31, 2021 P 7,200,000
SAMPLE PROBLEM 2
Solution:

2.
Acquisition cost of franchise purchased
Feb. 1, 2021 P2,300,000
Less: Amortization (2,300,000/20yrs x 11/12) 105,417
Carrying value of franchise, Dec. 31, 2021 P2,194,583
 SAMPLE PROBLEM 2
Solution:

3.
Amortization of patent, 2021 (no.1) P1,800,000
Amortization of franchise (no.2) 105,417
Payment to franchisor (The Archer)
(6,700,000 x 5%) 335,000
Research and development cost 1,297,000
Total P3,537,417
PROBLEM 3
FROMIS 19 COMPANY’s own research department has an on-
going project to develop a new production process. At the
end of 2017, FROMIS 19 had already spent a total of P300,000
of which P270,000 was incurred before November 1, 2017. On
November 1, 2017, the company’s newly developed
production process met the criteria for recognition as an
intangible asset.

During 2018, FROMIS 19 incurred additional expenditure of

P600,000. At the end of 2018, the recoverable amount of the
intangible asset was estimated to be P570,000, including
future cash outflows to complete the process before it is
available for its intended use.
REQUIREMENTS
At December 31, Total cost of the
2017, the production production process
process should be at December 31,
recognized at a cost 2018
of?
Impairment loss
should be
recognized by
FROMIS 19 in 2018,
in connection with
the new production
process
SOLUTION PROBLEM 3
Cost of the production process at ₱30,000
Dec. 31, 2017(P300,000 – P270,000)

PAS 38 provides that the cost of an internally generated

intangible asset is the sum of expenditure incurred from the
date when the intangible asset first meets the recognition
criteria. The standard prohibits recognition as a part of the
cost of an intangible asset at a later date, the expenditure that
was initially recognized as an expense when it was incurred.
SOLUTION PROBLEM 3
Expenditure occurred
From November 1, 2015- December ₱30,000
31, 2017 (P300,000 – P270,000)

During 2018 600,000

Totals as of December 31, 2018 ₱630,000

Carrying amount as of Dec. ₱630,000

31, 2018
Recoverable Value 570,000

Impairment Loss ₱60,000

PROBLEM 4
ITZY ENTERPRISE developed a new machine that reduces the time required to mix
the chemicals used in one of its leading products. Because the process is
considered very valuable to the company, ITZY patented the machine.

ITZY incurred the following expenses in developing and patenting the machine:

Research and development laboratory expenses P750,000

Materials used in the construction of the machine 240,000
Blueprints used in the construction of the machine 96,000
Legal expenses to obtain patent 360,000
Wages paid for the employees’ work on the research,
development, and building of the machine (60% of the
time was spent in actually building the machine) 900,000
Expense of drawing required by the patent office to
be submitted with the patent application 51,000
Fees paid to Patent Office to process application 75,000
 One year later, ITZY Enterprises paid P525,000 in legal fees to
successfully defend a patent against an infringement suit by NMIXX
Company.

REQUIREMENTS

Total cost of the patent Total cost of new machine Entry to record the legal
fees paid for the
successful defense of
the patent against the
infringement suit
1. Legal expenses to obtain patent ₱360,000
Expense of drawing required by patent office
to be submitted with patent application 51,000
Fees to be paid to process patent application 75,000
Total cost of patent ₱486,000

2. Materials used in the construction of the machine ₱240,000

Blueprints used to design the machine 96,000
Wages of the employees’ work on the construction
of the machine (P900,000 x 60%) 540,000
Total cost of machine ₱876,000
3. Legal Fees Expense 525,000
Cash 525,000

The legal fees paid for the successful defense of the patent should
be expensed, not capitalized. This expenditure does not meet
the definition of and the recognition criteria for an intangible
asset.
 Acquisition and Amortization of Various
Intangible Assets
The following information pertains to BAKER COMPANY’s intangible assets:
1. On January 1, 2018, Baker signed an agreement to operate as a
franchisee of Max & Jess Food Chain, Inc. for an initial franchise fee of P
1,500,000. Of this amount, P 300,000 was paid when the agreement was
signed and the balance is payable in 4 annual payments of P300,000 each,
beginning January 1, 2019. The agreement provides that the down payment
is not refundable and no future services are required of the franchisor. The
present value at January 1, 2018, of the 4 annual payments discounted at
14% (the implicit rate for a loan of this type) is P 874,000. The agreement
also provides that 5% of the revenue from the franchise must be paid to the
franchisor annually. Baker’s revenue from the franchise for 2018 was P
19,000,000. Baker estimates the useful life of the franchise to be 10 years.
2. Baker incurred P 1,300,000 of experimental and development costs in
its laboratory to develop a patent which was granted on January 2,
2018. Legal fees and other costs associated with registration of the
patent totaled P 272,000. Baker estimates that the useful life of the
patent will be 8 years.

3. A trademark was purchased from Banawe Company for P 640,000 on

July 1, 2015. Expenditures for successful litigation in defense of the
trademark totaling P 163,200 were paid on July 1, 2017. Baker estimates
that the useful life of the trademark will be 20 years from the date of
acquisition.
QUESTIONS:
1.What is the carrying value of the franchise at December 31, 2018?
2. What is the carrying value of the patent at December 31, 2018?
3. What is the carrying value of the trademark on December 31, 2018?
4. The total expenses resulting from the transactions that would appear
on Baker’s income statement for the year ended December 31, 2018,
should be?
 SOLUTIONS:

1. Down payment ₱300,000

Present value of 4 annual payments 874,000
Total cost of franchise 1,174,000
Less: Amortization for 2018 (P1,174,000/10) 117,400
Carrying value of franchise, December 31, 2018 ₱1,056,600

2. Cost of securing patent on January 2, 2018 ₱272,000

Less: Amortization for 2018 (P272,000/8 yrs.) 34,000
Carrying value of patent, December 31, 2018 ₱238,000
SOLUTIONS
3. Cost of trademark ₱640,000
Less: Amortization, July 1, 2015 – December 31, 2018
(P 640,000/20 x 3.5 yrs.) 112,000
Carrying value of trademark, December 31, 2018 ₱528,000

4. Interest expense (P874,000 x 14%) ₱122,360

Amortization of franchise (P1,174,000/10 yrs.) 117,400
Amortization of patent (P272,000/8 yrs.) 34,000
Amortization of trademark (P640,000/20 yrs.) 32,000
Franchisee fee (P19,000,000 x 5%) 950,000
Total expenses ₱1,255,760
 END OF
REPORT <3
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