Chapter 32

Non-current asset held for sale

QUESTIONS
1. Define noncurrent asset and a disposal group.
A noncurrent asset is an asset that does not meet the definition of a current asset.
The noncurrent asset may be an individual asset, like land and building, or a disposal group.

A disposal group is a group of assets to be disposed of, by sale or otherwise, together as a

group in a single transaction, and liabilities directly associated with those assets that will be
transferred in the transaction.

2. When is a noncurrent asset classified as held for sale?

PFRS 5, paragraph 6, provides that a noncurrent asset or disposal group is classified as held for
sale if the carrying amount will be recovered principally through a sale transaction rather than
through continuing use.
This simply means that the entity does not intend to use the
asset as part of the on-going business but instead intends to sell it and recover the carrying
amount principally through sale.

3. What are the conditions for classification as held for sale?

A noncurrent asset or disposal group shall be classified as held for sale if the following
conditions are present:
1. The asset or disposal group is available for immediate sale in the present condition.
In other words, the current condition of the asset should be adequate to be effectively "sold as
seen".
2. The sale must be highly probable
4. What is the meaning of "highly probable"?
For the sale to be highly probable, the following conditions must be met:
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a. Management must be committed to a plan to sell the asset or disposal group.
b. An active program to locate a buyer and complete the plan must have been initiated.
c. The sale is expected to be a "completed sale" within one year from the date of classification
as held for sale
d. The asset or disposal group must be actively marketed for sale at a sale price that is
reasonable in relation to the fair value.
e. Actions required to complete the plan indicate that it is unlikely that the plan will be
significantly changed or withdrawn.

5. Explain the measurement of noncurrent asset classified as held for sale.

PFRS 5, paragraph 15, provides that an entity shall measure a noncurrent asset or disposal
group classified as held for sale at the lower of carrying amount or fair value less cost of
disposal.

6. Explain the writedown of the noncurrent asset to fair value lesa cost of disposal.
If the fair value less cost of disposal is lower than carrying amount of the asset or disposal
group, the writedown to fair value less cost of disposal is treated as an impairment loss.
If the noncurrent asset is a disposal group, the impairment loss is apportioned across the assets
based on carrying amount.

7. Explain the treatment of a subsequent increase in fair value less cost of disposal relating to
an asset classified as held for sale.
If subsequently there is an increase in the fair value less cost of disposal, PFRS 5, paragraph 21,
provides that an entity shall recognize a gain but not in excess of any impairment loss
previously recognized.

8. What is the treatment of abandoned noncurrent asset or disposal group?

PFRS 5, paragraph 13, provides that an entity shall not classif as held for sale a noncurrent asset
or disposal group that is to be abandoned.
This is because the carrying amount will be recovered principally through continuing use or the
noncurrent asset is to be used until the end of its economic life.

9. Explain the treatment of a change in classification of a noncurrent asset classified as held for
sale:
Circumstances could arise leading to the noncurrent asset no longer being classified as held for
sale.
For example, there is a decision not to sell the noncurrent asset or the criteria for being
classified as held for sale may no longer be met.
In such a case, PFRS 5, paragraph 27, provides that the entity shall measure the noncurrent
asset that ceases to be classified as held for sale at the lower bvętween:
a. Carrying amount of the asset on the basis that the asset had not been classified as held for
sale.
b. Recoverable amount at the date of the subsequent decision not to sell.

10. Explain the presentation of noncurrent asset classified as held for sale in the statement of
financial position.
Simply stated, a noncurrent asset that is already classified as held for sale shall be presented
separately as current asset.
In other words, the assets of the disposal group shall be described as noncurrent assets
classified as held for sale presented separately as a single amount under current assets.
The liabilities of the disposal group shall be described as liabilities directly associated with
noncurrent assets classified as held for sale presented separately as a single amount under
current liabilities.

Chapter 33
Discounted Operation
QUESTIONS
1. Define a discontinued operation.
A component of an entity is classified as discontinued operation:
When the entity has actually disposed of the operation. When the operation meets the criteria
to be classified as held for sale.
PFRS 5, paragraph 12, prohibits the retroactive classification as a discontinued operation when
the discontinued criteria are met after the end of reporting period.
The discontinued operation is accounted for as a "disposal group classified as held for sale."
The component of an entity must be available for immediate sale in the present condition and
the sale must be highly probable.

2. Give examples of discontinued operation.

a. Selling by a diversified entity of a major division that represents the entity's only activities in
the electronics industry.
b. Selling by a meat packing entity of controlling interest in a furniture entity.
All other operations of the entity are in the meat packing business.
Selling by a communications entity of all its radio stations.
The entity's remaining activities are television stations and A publishing house.
d. A conglomerate is engaged in commodity business, real estate, manufacturing and
construction business. Selling of any of the four businesses is a discontinued operation.

3. Explain the presentation of a discontinued operation in the income statement.

PFRS 5. paragraph 33, provides that an entity shall disclose a single amount comprising the
total of post-tax profit or loss of the discontinued operation and the post-tax gain or loss
recognized on the measurement to fair value less to cost of disposal or on the disposal of the
assets or disposal group constituting the discontinued operation.
Simply stated, the income or loss from discontinued operation, net of tax shall be presented as
a single amount in the income statement below the income from continuing operations.
4. Explain the presentation of a discontinued operation in the statement of financial position.
PFRS 5, paragraph 38, provides that an entity shall also present separately on the face of the
statement of financial position the following information:
1. Assets of the component held for sale separately under current assets.
Assets of the component held for sale are measured at the lower of fair value less cost of
disposal and their carrying amount.
Liabilities of the component separately under current liabilities.
d. Noncurrent assets of the component held for sale shall not be depreciated.
PFRS 5, paragraph 3, provides that the assets of the component shall be presented as a single
amount under current assets and the liabilities of the component shall be presented as a single
amount under current liabilities.

5. What are the disclosures about discontinued operation?

PFRS 5, paragraph 33, provides that the net cash flows attributable to the operating, investing
and financing activities of a discontinued operation shall be separately presented in the
statement of cash flows or disclosed in the notes.

Chapter 34
Exploration and Evaluation of mineral resources

The term exploration and evaluation of mineral resources is defined as the search for mineral
resources after the entity has obtained legal right to explore in a specific area as well as the
determination of the technical feasibility and commercial viability of extracting the mineral
resources.

Accordingly, exploration and evaluation expenditures do not include expenditures incurred:

a. Before an entity has obtained the legal right to explore a specific area.
b. After the technical feasibility and commercial viability of extracting a mineral resource are
demonstrable.
This pertains to development expenditure.
Expenditures related to development of mineral resources, for example, preparation for
commercial production, such as building roads and tunnels, cannot be recognized as
exploration and evaluation expenditures.
Exploration and evaluation expenditures
- Acquisition of rights to explore
- Topographical, geological, geochemical and geophysical studies
- Exploratory drilling
- Trenching
- Sampling
- Activities in relation to evaluating the technical feasibility and commercial viability of
extracting a mineral resource.
- General and administrative costs directly attributable to exploration and evaluation
activities.

Exploration and evaluation asset

The exploration and evaluation expenditures may qualify as exploration and evaluation
asset.
However, the standard does not provide a clearcut guidance for the recognition of
exploration and evaluation asset.
Accordingly, an entity must develop its own accounting policy for the recognition of such
asset.
As a matter of fact, IFRS 6 permits an entity to continue to apply it a previous accounting
policy provided that the resulting information is relevant and reliable.

Measurement and classification

Exploration and evaluation asset shall be measured initially at cost.
After initial recognition, an entity shall apply either the cost model or the revaluation
model.

Exploration and evaluation asset is classified either as tangible set or an intangible asset.
For example, vehicles and drilling rigs would be classified as tangible assets and drilling
rights would be classified as Intangible assets.
Two methods of accounting for exploration cost

a. Successful effort method

The exploration cost directly related to the discovery of commercially producible natural
resource is capitalized a cost of the resource property.
The exploration cost related to "dry holes" or unsuccessful discovery is expensed in the
period incurred
b. Full cost method
All exploration costs, whether successful or unsuccessful are capitalized as cost of the
successful resource discovery This is on the theory that any exploration cost is a "wild goose
chase" and therefore necessary before any commercially producible and profitable resource
can be found.
The cost of drilling dry holes is part of the cost of locating productive holes.
Both methods are used in practice.
Most large and successful oil entities follow the successful effort method.
The full cost method is popular among small oil entities.

Chapter 35
Operating Segments
Segment Reporting An entity shall disclose information to enable users of financial statements to evaluate the
nature and financial effects of the business activities in which it engages and the economic environment in
which it operates. PFRS 8 shall apply to the separate or individual financial statements of an entity and to the
consolidated financial statements of a group with a parent:
a. Whose debt or equity instruments are traded in a public market.
b. That files or is in the process of filing the consolidated financial statements with a securities commission or
other regulatory organization for the purpose of issuing any class of instruments in a public market. However,
if a financial report contains both the consolidated financial statements of a parent and the parent’s separate
financial statements, segment information is required only in the consolidated financial statements.
Operating Segment An operating segment is a component of an entity:
a. That engages in business activities from which it may earn revenue and incur expenses, including revenue
and expenses relating to transactions with other components of the same entity.
Start-up operations may be operating segments before earning revenue but corporate headquarters or some
functional departments that may earn revenue that is incidental only to the activities of the entity would not
be operating segments.
b. Whose operating results are regularly reviewed by the entity’s chief operating decision maker to make
decisions about resources to be allocated to the segment and assess its performance. The chief operating
decision maker may be the entity’s chief executive officer, chief operating officer, or a group of executive
directors depending on who within the organization is responsible for the allocation of resources and
assessing the performance of operating segments.
c. And for which discrete financial information is available.
Management Approach The management approach is used in identifying operating segments. It means that
the operating segments are identified on the basis of internal reports about components of an entity that are
regularly reviewed by the chief operating decision maker in order to allocate resources to the segment and to
assess its performance.

Reportable segments An entity shall report about an operating segment that meets any of the following
quantitative thresholds: (10% RAP)
1. REVENUE TEST The segment revenue, including both sales to customers and intersegment sales or transfers,
is 10% or more of the combined revenue, internal and external, of all operating segments
2. ASSET TEST The assets of the segment are 10% or more of the combined assets of all operating segments
3. PROFIT/LOSS TEST The absolute amount of profit or loss of the segment is 10% or more of the greater in
absolute amount of:
a. Combined profit of all operating segments that reported a profit
b. Combined loss of all operating segments that reported a loss Operating segments that do not meet any of
the quantitative thresholds may be considered reportable and separately disclosed on a voluntary basis if
management believes that information about the segment would be useful to the users of the financial
statements.
Overall size test - 75% threshold
If the total external revenue of reportable operating segments constitutes less than 75% of the
entity external revenue, additional operating segments shall be identified as reportable
segments even if they do not meet the 10% quantitative threshold until at least 75% of the
entity external revenue is included in reportable segments.
Aggregation of segments
Two or more operating segments may be aggregated into a “single operating segment” if the
segment have similar economic characteristic and the segments share a majority of the
following five aggregation criteria:
a. Nature of product or service
b. Nature of production process
c. Type or class of customers
d. Marketing method or the method used to distribute the product
e. The nature of the regulatory environment, for example, banking, insurance, or public utility

Information to be disclosed for each segment

An entity shall disclose the following for each reportable operating segment:
1. General information about the operating segment such as factors used to identify the
reportable segments and type of products and services from which each reportable segment
derives revenue
2. Information about profit or loss, including specified revenue and expenses included in the
measure of profit or loss
3. Information about segment assets and segment liabilities and the basis of measurement
4. Reconciliation of the totals of segment revenue, segment profit or loss, segment assets,
segment liabilities and other material segment items to corresponding items in the entity’s
financial statements

Entity-wide disclosures
Entity-wide disclosures are additional information that is required to be disclosed by all entities
if such information is not provided as part of the reportable segment information.
1. An entity shall disclose the revenue from external customers for each product and service
2. An entity shall disclose the following geographical information:
a. Revenue from external customers in the entity’s country of domicile, and in all foreign
operations in total
b. Separate disclosure of material revenue from external customers in an individual foreign
country
3. The entity shall disclose the fact of reliance on major customers, the total amount of
revenue from major customers and the identity of the segment or segments reporting the
revenue. The entity is not required to disclose the identity of the major customer or the
amount of revenue that each segment reports from that customer.
A major customer is a single external customer providing revenue which amounts to 10% or
more of an entity’s external revenue. In the illustrative problem #2, the major customer
provides external revenue of at least P800,000 or 10% * P8,000,000.
 Chapter 36
Financial Instruments
QUESTIONS
1. Explain the initial measurement of financial asset.
PFRS 9, paragraph 5.1.1, provides that at initial recognition, an entity shall measure a financial
asset at fair value plus, in the cuse of financial asset not at fair value through profit or loss,
transaction costs that are directly attributable to the sequisition of the financial asset.
As a rule, transaction costs that are directly attributable to the acquisition of the financial asset
shall be capitalized as cost of the financial asset.
However, if the financial asset is held for trading or if the financial asset is measured at fair
value through profit or loss, transaction costs are expensed outright.

2. Explain the subsequent measurement of financial asset.

PFRS 9, paragraph 5.2.1, provides that after initial recognition, an entity shall measure a
financial asset at:
a. Fair value through profit or loss (FVPL)
b. Fair value through other comprehensive income (FVOCI)
c. Amortized cost
The measurement depends on the business model of managing financial asset which may be to
realize fair value changes and to collect contractual cash flows.

3. What are the financial assets measured at fair value through profit or loss?
The following financial assets shall be measured at fair value through profit or loss:
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1. Financial assets held for trading or popularly known as "trading securities"
2 All other investments in quoted equity instruments Debt investments that are irrevocably
designated on initial recognition as at fair value through profit or loss
4. All debt investments that do not satisfy the requirements for measurement at amortized cost
and at fair value through other comprehensive income
4 Explain financial asset held for trading.
Trading securities are debt and equity securities that are purchased with the intent of selling
them in the "near term" or very soon.
Trading securities are normally classified as current assets.

5 Explain measurement of equity investment at fair value through other comprehensive

income.
At initial recognition, PFRS 9, paragraph 5.7.5, provides that an entity may make an irrevocable
election to present in other comprehensive income or OCI subsequent changes in fair value of
an investment in equity instrument that is not held for trading.
This irrevocable approach is designed to impose discipline in accounting for nontrading equity
investment.
The amount recognized in other comprehensive income is not reclassified to profit or loss
under any circumstances.
However, on derecognition, the amount may be transferred to retained earnings.
If the investment in equity instrument is held for trading, the election to present gain and loss
in other comprehensive income is not allowed.
If the investment in equity instrument is held for trading, subsequent changes in fair value are
always included in profit or loss or reported in the income statement.

6 Explain measurement of debt investment at amortized cost.

be measured at amortized cost if both of the following conditions are met:

a. The business model is to hold the financial asset in order to collect contractual cash flows on
specified date.
b. The contractual cash flows are solely payments of principal and interest on the principal
amount outstanding.
In other words, the business model is to collect contractual cash flows if the contractual cash
flows are solely payments of principal and interest.
In such a case, the financial asset shall be measured at amortized cost.
7. Explain measurement of debt investment at fair value through other comprehensive income.
PFRS 9, paragraph 4.1.2A, provides that a financial asset shall be measured at fair value through
other comprehensive income if both of the following conditions are met:
a. The business model is achieved both by collecting contractual cash flows and by selling the
financial asset.
b. The contractual cash flows are solely payments of principal and interest on the principal
outstanding.
Note that the business model includes selling the financial asset in addition to collecting
contractual cash flows.
In this case, interest income is recognized using the effective interest method as in amortized
cost measurement.
On derecognition, the cumulative gain and loss recognized in other comprehensive income shall
be reclassified to profit or loss.
The measurement of debt investment at amortized cost or at fair value through other
comprehensive income is discussed extensively in an intermediate accounting course.

Measurement of equity investments

1. Held for trading - at fair value through profit or loss
2. Not held for trading - as a rule, at fair value through profit or loss
3. Not held for trading at fair value through other comprehensive income by irrevocable
election
4. All other investments in quoted equity instruments - at fair value through profit or loss
5. Investments in unquoted equity instruments at cost
6. Investments of 20% to 50% equity method of accounting
7. Investments of more than 50% consolidation method to be taken up in an advanced
accounting course.
Measurement of debt investments
Type here to search
1. Held for trading at fair value through profit or loss
2. Held for collection of contractual cash flows- at amortized cost
3. Held for collection of contractual cash flows at fair value through profit or loss by
irrevocable designation or fair value option
4. Held for collection of contractual cash flows and for sale of the financial asset at fair value
through other comprehensive income
5. Held for collection of contractual cash flows and for sale of the financial asset at fair value
through profit or loss by irrevocable designation or fair value option.