Tackling Psa by SGV

Tackling the Issues of PFRS 9 &
10 & PAS 19
Presentation to:
Philippine Institute of Public Accountants
October 21 , 2011
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2011 SGV & Co. All rights reserved.
Agenda
PFRS 9, Financial Instruments

PFRS 10, Consolidation
Amendments to PAS 19, Employee Benefits
Slide 2
Philippine Financial Reporting Standards
PFRS 9, Financial Instruments
Slide 3
IAS 39 Replacement project timeline
Q4
2009
Q2
2010
Q4
2010
ED
IFRS
Q1
2011
Q4
2011
Supp
ED
ReED
Phase 1
Classification & m easurement
- Financial assets
IFRS
- Financial liabilities
Phase 2
Im pairm ent
Phase 3
Hedge accounting
Slide 4
ED
ED
IFRS?
Classification and measurement

Financial assets
Debt
Business m odel
test?
Derivative
No
Equity
Yes
Held-for-trading?
Yes
Characteristics
of the financial
asset test?
No
No
No
Fair value through

OCI option?
Yes
Yes
Fair Value Option

(FVO)?
Yes
No
Am ortized
cost
Slide 5
Fair value through

profit or loss
Fair value
through OCI
Business model test

The objective of the entitys business model must be to
hold instruments to collect contractual cash flows
Some sales would not contradict that objective.
However, amortised cost may not be appropriate if more
than infrequent sales.
Not an instrument-by-instrument approach
Disclosures required
On derecognition of amortised cost assets, gains or losses are to
be disclosed on the face of the income statement
Additional qualitative disclosures of the reasons for the sale
Slide 6
Characteristics of the financial asset test
Contractual terms of the financial asset give rise, on specified dates,

to cash flows that solely represent principal and interest payments
Interest is consideration for the time value of money and the credit
risk associated with the principal amount outstanding during a
particular period of time.
Examples of features/assets that will not qualify

Inverse floaters
Convertible bonds
Leverage
Slide 7
Equity investments at Fair Value through

OCI
Available for all equity investments that are not held for trading.
Free choice for each investment at initial recognition. Designation

irrevocable thereafter.
Dividends will be recognised in profit or loss, if return on investment.
No recycling of fair value changes to profit or loss on impairment,

disposal or in any other circumstances.
No impairment testing.
No exception from use of fair value for unquoted equities that cannot
be reliably measured, but guidance on when cost may be an
appropriate estimate.
Slide 8
Reclassifications
(between amortized cost and FVPL)
Reclassification will be required when an entity changes its business

model
Prohibited in all other circumstances
Any reclassification is to be accounted for prospectively from the

reclassification date
Which is the first day of the first reporting period following the change in
business model that results in an entity reclassifying financial assets
Reclassification from amortized cost to fair value measure instrument

at fair value on that date; recognize difference between carrying amount
and fair value in a separate line in P/L
Reclassification from fair value to amortized cost fair value of the

instrument on the date of reclassification becomes its new carrying
amount
Detailed disclosures will be required in interim reports and annual

financial statements
Slide 9
Embedded derivatives
Bifurcation of embedded derivatives is eliminated for host

financial assets within the scope of IAS 39
Only one classification approach Do the embedded derivatives

together with the host instrument meet the contractual cash flow
characteristics test?
Yes the hybrid contract (as a whole) qualifies for amortized cost
classification
No the hybrid contract (as a whole) is measured at fair value
Embedded derivatives with non-financial hosts existing

requirements maintained
Slide 10
Financial liabilities
Changes to the Fair Value Option
Maintain IAS 39 guidance, except when Fair Value Option is used:
Record effect of changes in own credit risk in OCI unless it creates

an accounting mismatch (without recycling to p&l)
Other fair value changes in profit or loss
Retain existing rules for bifurcation of derivatives embedded in host

financial liabilities
Slide 11
Effective date and transition

Retrospective application
Mandatory effective date is January 1, 2013*
Early adoption permitted
Retrospective application is required, by assessing the classification

of financial assets at the initial application date and applying
amortized cost or fair value measurement from the date of initial
recognition
Determination of whether an instrument is held for trading is made

as at the initial application date
It is possible to de-designate or re-designate financial assets at FVPL

using FVO as at the date of initial application and to apply the new
designation retrospectively
*On August 4, 2011, the IASB issued an Exposure Draft proposing to mov e the mandatory
adoption date to January 1, 2015. Comment period is until October 21, 2011.
Slide 12
Transition relief
Comparative figures are required to be restated, but with
some transition relief for early adopters:
Year of adoption
2011
2012 and onwards
Initial application date
Beginning of reporting
period
Beginning of reporting
period
Comparative figures
Are permitted, but not

required to be restated
Are required to be
restated
The Exposure Draft issued on August 4, 2011 did not revise this transition relief.
Slide 13
PFRS 10
Consolidated Financial Statements
Slide 14
Background and objectives
Background
Tension between the control model in IAS 27 and the risks and
rewards approach in SIC-12
Divergent application of IAS 27 and SIC-12 in practice

Global financial crisis put emphasis on the project
Objectives
Slide 15
Develop single control model applicable to all entities

Improve disclosures
Definition of control
PAS 27
Control is presumed to exist
when the parent owns, directly
or indirectly through
subsidiaries, more than half of
the voting power of an entity
unless, in exceptional
circumstances, it can be
clearly demonstrated that such
ownership does not constitute
control.
Slide 16
PFRS 10
An investor controls an
investee when it is exposed,
or has rights, to variable
returns from its involvement
with the investee and has the
ability to affect those returns
through its power over the
investee
PFRS 10: New definition of control

An investor controls an investee when it is exposed, or has
rights, to variable returns from its involvement with the investee
and has the ability to affect those returns through its power
over the investee
Control of an investee requires an investor to possess all

three essential elements:
Slide 17
Power over the investee;

Exposure, or rights, to variable returns from its involvement with
the investee; and
Ability to use its power over the investee to affect the amount of
the investors returns
Identify which
activities of the
investee are
considered to be
the relevant
activities, i.e.,
those that
significantly affect
the investees
returns
Power
Determine which
party, if any, has
power, that is,
having existing
rights that give it
the current ability
to direct the
relevant activities
Assessing returns
Activities
Evaluating power
Identifying activities
New definition of control

Returns
Assess whether
the investor is
exposed, or has
rights, to variable
returns from its
involvement with
the investee
Understand purpose and design
Slide 18

Identifying relevant activities
Relevant activities are those that significantly
affect the investees returns
Examples:
Establishing operating, capital and financing policies
Appointing, remunerating, and terminating employment of service

providers or key management personnel
Understand purpose and design of the investee

If two investors direct different relevant activities
Slide 19
Identify which investor can direct the activities that most

significantly affect returns

Example: Identifying relevant activities
Two investors form an investee to develop and market a

medical product
One investor is responsible for developing and obtaining

regulatory approval
Other investor is responsible for manufacturing and marketing
Determine which activity most significantly affects returns
Purpose and design of the investee

Factors that affect profit margin, revenue, etc.
Effect on returns from each decision-makers authority
Investors exposure to variability of returns
Slide 20

Evaluating power
Power is having existing rights that give an
investor the current ability to direct the relevant
activities
Main aspects of power:
Arises from rights
Need not be exercised

Does not arise from protective rights
Can exist even if others participate in directing the relevant
activities (e.g., they have significant influence)
Evidence that an investor directed activities in the past is

an indicator of power, but is not conclusive
Slide 21

Assessing returns
Returns can be only positive, only negative or
positive and negative, but must have the potential
to vary as a result of the investees performance
Examples:
Dividends, distributions of economic benefits, changes in the value

of an investment
Remuneration, fees, residual interests, tax benefits, exposure from

providing support
Synergies, cost savings, economies of scale, scarce resources,
proprietary knowledge
Slide 22

What changed or is more explicit?
Protective rights
De facto control
Potential voting rights
Delegated rights (principal-agency relationships)
Relationships with other parties (de facto agents)
Control of specified assets (silos)
Increased use of judgement
Continuous assessment
Slide 23
Power Protective rights
Protective rights do not give power

When are rights merely protective rights?
Fundamental changes in the activities of an investee
Only apply in exceptional circumstances
Examples of protective rights include the right to:
Restrict an investee from undertaking activities that could

significantly change the credit risk of the investee
Approve an investees capital expenditures (greater than the
amount spent in the ordinary business)
Protective rights do not prevent another investor from

having control
Slide 24
Power Protective rights

Example: Franchises
A franchise agreement often gives the franchisor rights,

which generally:
Are designed to protect the brand

Do not have a significant effect on franchisees returns
Assess whether rights give franchisor power:
Who benefits from activities of franchisee?

What are the relevant activities?
How was the franchisee established and structured?
How does the franchisor support the franchisee?
What is franchisors exposure to variability of returns?
Slide 25
Power Current ability
Does the investor have the current ability to exercise

power?
Rights need to be substantive (i.e., the holder must have the

practical ability to exercise those rights)
Factors to consider whether?
Economic or other barriers exist

Multiple parties have to agree to exercise right
Holders would benefit from exercising the right
Right is currently exercisable
Slide 26
Current does not necessarily mean this instant
Power Majority of voting rights
Majority of voting rights normally gives power to direct the

relevant activities when:
Voting rights are substantive

Voting rights direct the relevant activities
Holder is not an agent of the investor
This might not be the case when:
Other legal requirements, founding documents or other contractual

arrangements restrict the ability to direct the relevant activities
Activities are subject to direction by government, court,
administrator, receiver, liquidator, or regulator
Slide 27
Power De facto control
An investor may have the power with less than half of the
voting rights
Consider facts and circumstances:
Contractual rights arising from other arrangements

Size of the investors holding of voting rights relative to the size
and dispersion of other vote holders
Potential voting rights

Additional facts & circumstances
Slide 28
Voting rights (absolute amount)

Voting rights relative to other vote holders
Number of other vote holders that would need to act together
Voting patterns at previous shareholders meetings

Illustrative Examples
In each of the succeeding examples, assume that, after
understanding the purpose and design of the investee:
Voting rights give an investor the ability to direct activities
that significantly affect the investees returns (i.e., voting
rights give power)
None of the shareholders has arrangements to consult
any of the other shareholders or make collective decisions
Decisions require the approval of a majority of votes cast
at the shareholders meeting
No other facts or circumstances are relevant
Slide 29

Question 1
Fact Pattern:
52% widely
dispersed
A holds 48%
of voting rights of B; the
remaining 52% of B is
widely held by thousands
of shareholders (none of
whom holds more than 1%
of the voting rights).
Question:
A
48%
Slide 30
Does A have
power over B?
Answer:

Answer Q1
Fact Pattern:
A holds 48%
of voting rights of B; the
remaining 52% of B is
widely held by thousands
of shareholders (none of
whom holds more than 1%
of the voting rights).
52% widely
dispersed
Question:
A
48%
Slide 31
Does A have
power over B?
Answer: A has
power

Question 2
Fact Pattern:
C holds
45% of the voting
rights of D. The other
55% of D is held by
two shareholders (each
holds 26%), with the
remaining 3% held by
three other
shareholders, each
holding 1%
Question:
Does C
have power over D?
1%
1%
1%
26%
C
45%
Answer:
Slide 32
26%

Answer Q2
Fact Pattern:
C holds
45% of the voting
rights of D. The other
55% of D is held by
two shareholders (each
holds 26%), with the
remaining 3% held by
three other
shareholders, each
holding 1%
1%
1%
Does C
have power over D?
Slide 33
26%
C
45%
Question:
Answer:
1%
26%
C does not have power.

Question 3
Fact Pattern:
E holds 40%
of the voting rights of F. E
also has a contract to
appoint management of F.
Appointing management is
the relevant activity
(significantly affects
returns).
12 investors at 5% each
Contract to
appoint mgmt
Question:
E
40%
Slide 34
Does E have
power over F?
Answer:

Answer Q3
Fact Pattern:
E holds 40%
of the voting rights of F. E
also has a contract to
appoint management of F.
Appointing management is
the relevant activity
(significantly affects
returns)
Contract to
appoint mgmt
Question:
E
40%
Slide 35
Does E have
power over F?
Answer:
E has power

Question 4
Fact Pattern:
G holds 45%
of the voting rights of H.
The other 55% of H is
dispersed among 11
shareholders, who each
hold 5%.
Question:
Does G have
power over H?
Answer:
Slide 36
G
45%

Answer Q4
Fact Pattern:
G holds 45%
of the voting rights of H.
The other 55% of F is
dispersed among 11
shareholders, who each
hold 5%.
Question: Does G have
power over H?
Answer:
Not conclusive
in determining whether
G has power over H.
Consider other relevant
facts and circumstances.
Slide 37
G
45%

Question 5
50% widely
dispersed, half turn
up at AGM
J
35%
Fact Pattern: J holds 35% of the

voting rights of K. 3 other
shareholders each hold 5% of the
voting rights of K. The remaining
50% of the voting rights are held by
numerous other SHs, none
individually holding more than 1%
of the voting rights. 75% of the
voting rights have been
represented in recent AGM
meeting. Thus, need 37.5% to
have power.
Question: Does J have power over K?
5% 5% 5%
Answer:
Slide 38

Answer Q5
50% widely
dispersed, half turn
up at AGM
Fact Pattern: J holds 35% of the

voting rights of K. 3 other
shareholders each hold 5% of the
voting rights of K. The remaining
50% of the voting rights are held by
numerous other SHs, none
individually holding more than 1%
of the voting rights. 75% of the
voting rights have been
represented in recent AGM
meeting. Thus, need 37.5% to
have power.
Question: Does J have power over K?
5% 5% 5%
J
35%
Answer:
Slide 39
J has no power

Question 6
L holds 38% of the voting rights

of M. 3 other SHs each hold 4%
of the voting rights of M. The
remaining 50% of the voting
rights are held by numerous
other SHs, none individually
holding more than 1% of the
voting rights. 75% of the voting
rights have been represented in
recent AGM meeting. Thus,
need 37.5% to have power.
Question: Does L have power
over M?
50% widely
dispersed, half
turn up at AGM
L
38%
4%
Answer:
Slide 40
4%
4%

Answer Q6
L holds 38% of the voting rights

of M. 3 other SHs each hold 4%
of the voting rights of M. The
remaining 50% of the voting
rights are held by numerous
other SHs, none individually
holding more than 1% of the
voting rights. 75% of the voting
rights have been represented in
recent AGM meeting. Thus,
need 37.5% to have power.
Question: Does L have power
over M?
Answer:
Slide 41
50% widely
dispersed, half
turn up at AGM
L
38%
4%
4%
4%
L has power.

Practical issues
How should the exact date at which control is obtained (or lost)
be determined?
How is the exact date at which the other investors became
widely dispersed determined?
How large should an investors interest be relative to other
vote-holders, or how widely dispersed must they be for the
investor to have power?
How relevant are past voting patterns? How far should you look
back?
How will you gather all information?
Slide 42
Past voting patterns

Relationships between other shareholders
Power Potential voting rights
An investor may have the power through holding potential

voting rights
All facts and circumstances must be considered:
Substance of the rights
Slide 43
Exercisability
Barriers
Benefits
Purpose and design
Other involvement the investor has with the investee
Investors apparent expectations, motives and reasons for agreeing

the terms of the instrument

Evaluating whether potential voting rights are substantive
Evaluation
Nonsubstantive
Depends on
facts and
circumstances
Substantive
Exercise price
Deeply-out-ofthe-money
Out-of-themoney
At market (fair
value) or in-themoney
Financial ability to
exercise
Holder has no
financial ability
Holder would
have to raise
financing
Holder has cash

or financing
readily available
Exercise period
Not exercisable
Exercisable
before decisions
need to be made
Currently
exercisable
Slide 44

Example
Investees AGM is in eight months

30 days needed for shareholders to call meeting
Investor holds option to acquire the majority of shares in
the investee that is exercisable in 25 days and is deeply in
the money
Conclusion: Investor with options has power
Slide 45
Existing shareholders are unable to direct relevant activities

because a special meeting cannot be held for 30 days, when
option could have been exercised
Investor holding the option can direct relevant activities, even
before the option is exercisable

Practical issues
When is the exercise/conversion price considered a

barrier?
When are options deeply out of the money?
Could financing be obtained?

What period do you consider?
When are options currently exercisable?

Would the holder benefit from the exercise?
How will you gather information?
Slide 46
Do other shareholders have potential voting rights, barriers, or

incentives that you are unaware of?
Power Delegated rights

Overview
An agent is a party engaged to act on behalf of another

party or parties (the principal(s))
A principal may delegate some or all decision-making

authority to the agent
An agent does not control an investee
All facts and circumstances must be considered
Principal?
Slide 47
Agent?

Scope of decision-making
Range of activities that are permitted by the decisionmaking agreement or by law
Discretion that the decision-maker has when making

decisions about those activities
Level of involvement that the decision-maker had in
determining the scope of its authority
Whether relevant activities have been delegated
Opportunity and incentive to gain power
Purpose and design
Risks to which the investee was designed to be exposed
Risks investee was designed to pass on to investors
Slide 48

Rights held by other parties
Number of parties holding
remov al right
Indicator that a
decision-maker is
Alw ays an agent
One party
Generally an agent
A small number of parties or an
independent board
A principal
Many people
Slide 49

Evaluating whether removal rights are substantive
Non-substantive
right
Substantive right
Exercisable only for

cause
Exercisable without
cause
Significant financial
penalty to exercise
Insignificant financial
penalty to exercise
Skills held by decisionmaker are unique
Several other parties

could fulfill role of
decision-maker
Not currently
exercisable
Currently exercisable
Principal
Agent
Decision-maker
Slide 50

Remuneration
Is the remuneration of the decision maker
commensurate with the services provided?
No
Yes
Does the remuneration include only terms,
conditions or amounts that are customarily
present in arrangements for similar services and
level of skills negotiated on an arms length
basis?
No
Decision-maker
is a principal
Yes
Does the magnitude of, and variability of the
remuneration relative to the returns expected
from the activities of the investee, together with
the other factors, indicate that the decision-maker
is an agent?
No
Yes
Decision-maker is an agent
Slide 51

Exposure to variability through other interests
Are any interests held by related

parties?
Greater the magnitude of, and
variability associated with, its
economic interests, more likely it
is a principal
Does exposure differ from other
investors?
Expected returns vs. maximum
exposure
Slide 52
Parent
Investors
Fund
manager
Delegated
80%
Delegated
80%
Direct
20%
Fund

Examples
Scope
Exam ple 1
Exam ple 2
Exam ple 3
Broad
discretion
Broad
discretion
Broad
discretion
Simple
majority, for
cause
Independent
board, for any
reason
Rights held by Simple

others
majority, for
cause
Remuneration 1% of NAV
1% of NAV
1% of NAV
20% of profits 20% of profits 20% of profits
if hurdle rate
if hurdle rate
if hurdle rate
Other
interests
2% direct
interest
20% direct
interest
20% direct
interest
Conclusion
Agent
Principal
Agent
Slide 53
Bank
Inv est
Direct
Delegated
rights
Asset
Mgr
Delegated
rights
Fund
Relationships with other parties

De facto agents
Consider whether the investor has the ability to direct other

parties (i.e., de facto agents) to act on its behalf?
Examples:
Related parties (PAS 24)

A party that cannot finance its operations without subordinated
financial support from the investor
A party with same Board or key management personnel
Rights and returns of de facto agents are considered

together with investors own, when evaluating control
Slide 54
Control of specified assets
If an investor has control of specified assets of an

investee, it treats that portion (silo) of the investee as a
separate entity if all apply
Specified assets are the only source of payment for specified

liabilities/other interests in the investee
Parties other than those with the specified liabilities do not have
rights or obligations related to the specified assets or to residual
cash flows from those assets
None of the returns from the specified assets can be used by the
remaining investee
None of the liabilities of the deemed separate entity are payable
from the assets of the remaining investee
In other words, is there a ring-fence?
Slide 55
Continuous assessment
Reassess if facts and circumstances suggest change to

one of criteria of control
Examples:
Changes to how activities are directed

Changes in exposure to variable returns
Market conditions change:
Slide 56
If affect one of control criteria re-evaluate control

If do not affect one of control criteria no re-evaluation
Business impact
Gather information
Changes to the entities being consolidated
Additional procedures required to assess control on a
continuous basis
Compliance with bank covenants and regulatory
requirements
Structuring mergers and acquisitions/transactions and
arrangements
Slide 57
Transition
Effective for annual periods beginning on or after

January 1, 2013
Retrospective application
Slide 58
As if it was always consolidated (since the date of gaining control)

If not practicable to apply retrospectively, consolidate as of earliest
date where practicable, which may be current period
Interaction between PFRS 10, PFRS 11,

PFRS 12 and PAS 28
Does the investor
control an entity by
itself?
Yes
Does the joint venture

have joint control over
an arrangement?
Consolidation in
accordance with
IFRS 10
Disclosures in
accordance with
IFRS 12
Joint
operation
No
Yes
No
Classify j oint
arrangement in
accordance with IFRS 11
Yes
Joint
venture
No
Account for assets,

liabilities, revenue and
expenses
Account for interest

under the equity
method
Disclosures in
and other relev ant IFRS
Disclosures in
accordance with
IFRS 12
Slide 59
Does the inv estor hav e

significant influence
ov er an entity?
No
Financial
Instrument
Other
IFRS
Disclosures in
and other relev ant IFRS
Amended PAS 19,

Employee Benefits
Slide 60
What has Changed?

Highlights of Basic Differences
Pension accounting
Removal of corridor
Change in the component of net defined benefit liability or asset
Net interest on defined benefit liability (asset)
Immediate recognition of past service cost
Other recognition and measurement changes

Disclosures
Slide 61
Removal of corridor
Corridor mechanism abolished
All changes in the value of long-term employee benefit

plans will be recognized as they occur.
Those movements are recorded as follows:
Prior to am endm ent
As am ended
Service cost
Profit & Loss (P&L)
P&L
Finance cost (credit)
P&L
P&L
Remeasurements
Corridor P&L
Full P&L
Full OCI
Full OCI
Slide 62
Removal of corridor: Impact to presentation

Recognized in period
Post-employment
benefits
Service cost
Employment expense
(profit or loss)
Net interest income

(expense)
Finance cost (profit

or loss)
Remeasurement
Other comprehensive
income
Note:
IAS 19 does not specify how an entity should present service cost and net
interest on the net interest income (expense). An entity presents those
components in accordance with IAS 1.
Slide 63
Recognition of net interest

Current PAS 19
Interest cost - Interest cost is
computed by multiplying the
discount rate as determined at the
start of the period by the present
value of the defined benefit
obligation throughout that period
Expected return on plan asset expected return on plan assets is
based on market expectations, at
the beginning of the period, for
returns over the entire life of the
related obligation.
Slide 64
Amended PAS 19
Net interest the interest expense on
the net defined benefit liability or
interest income on the net defined
benefit asset
Interest rate should be the discount rate
used to measure the obligation.
(Effectively, fund asset will now
produce a credit to income b ased on
b ond yields irrespective of actual
composition of assets held.)
Component of net defined benefit liability or

asset Illustration of the new components
Net defined benefi t
l iabil ity at the s tart
of the year
Servic e cost
Net i nterest
expens e
300
40
15
Ac tual return
50
P lan assets
Interest i ncome
Remeasurem ents
Net defi ned benefit

li abili ty at the end of
the year
-35
320
Rem easurement
Plan A ssets
15
750
35
700
Pl an As sets
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Defined benefi t obl igations
(DBO)
1000
1070
Servic e cost
DB O
40
Interest expense
50
Remeasurem ents
20
DBO
* Discount rate is assumed to be 5%

Slide 65
Immediate recognition of past service cost
Past service cost will be expensed when the plan amendment

occurs whether or not they are vested.
Definition of past service cost was revised to include curtailment.
Current PAS 19
Amended PAS 19
Past service cost is the change in the present

value of the defined benefit obligation for
employee service in prior periods, resulting in
the current period from the introduction of, or
changes to, post-employment benefits or
other long-term employee benefits.
Past service cost is the change in the present

value of defined benefit obligation for
employee service in prior periods, resulting
from a plan amendment (introduction or
withdrawal of, or changes to, a defined benefit
plan) or a curtailment.
Distinction between past service cost and curtailments was

necessary prior to amendment because curtailments were
recognized immediately, but unvested service cost was recognized
over the vesting period.
Slide 66
Example: Accounting for PSC under current

and amended PAS 19
Background:
Greens plan provides a pension of 2 percent of final salary for each year of
service. The benefits become vested after five years of service. On
January 1, 20X1 for which statements are being prepared, Green improved the
pension to 2.5 percent of final salary for each year of service retroactive to each
employees starting date with the company. At the date of the improvement, the
present value of the additional benefits for service up to January 1, 20X1 (the
date of the plan change) is as follows:
Employees with more than five years service
at the date of the plan change
Php500K
Employees with less than five years service at the

date of the plan change (average period until
vesting: two years)
Php400K
Slide 67

and amended PAS 19
Question:
What amount of past service cost will be recognized as part of pension
expense in 20X1?
Computation: Current PAS 19
If vested, 100% of the present value of
additional benefit
Php500
If not vested, expensed on straight-line basis

over the average vesting period (Php400 /
2years)
Past service cost recognized in 20X1
Slide 68
200
Php700

and amended PAS 19
Question:
What amount of past service cost will be recognized as part of pension
expense in 20X1?
Computation: Amended PAS 19
A past service cost of Php900,000 should be recognized and
charged in the statement of income immediately.
Slide 69
Change in the basis of distinction between

short-term and long-term
Medium- and long-term remuneration plans are recognized and

measured in the same way as pensions but all movements in
previous estimates (i.e., remeasurements) will be recorded in
profit and loss.
The distinction between long-term and short-term benefits will
be changed to be based on when an employee is expected
to receive the benefit rather than when the employee
becomes entitled to it.
Slide 70
Example: If paid holiday may be taken at any time, but is expected

to be rolled up for a number of years and taken as a sabbatical, it
would be accounted for as a long-term benefit.
Recognition of termination benefits

Current PAS 19
Amended PAS 19
An entity shall recognize termination

An entity shall recognize a liability or
benefits as a liability or expense when, expense for termination benefits at the
and only when, the entity is
earlier of the following dates:
demonstrably committed to do either
When the entity can no longer
of the following:
withdraw the offer of those benefits
Terminate the employment of an
When the entity recognizes costs
employee or group of employees
for a restructuring that is within the
before the normal retirement date
scope of PAS 37 and involves the
Provide termination benefits as a
payment of termination benefits
result of an offer made to
encourage voluntary redundancy
Slide 71
Example: Accounting for Termination

Benefits under current and amended PAS 19
Fact Pattern
Management is committed to close a factory in 10 months and, at that time,
will terminate the employment of all of the remaining employees at the factory.
Management needs the expertise of the employees at the factory to complete
existing contracts and announces the following plan. Each employee that
renders service until the closure of the factory will receive, on the termination
date, a cash payment of Php50,000. Employees leaving before closure of the
factory will receive Php20,000. There are 150 employees at the factory.
Management expects 50 employees to leave before closure. The total
expected cash outflows under the plan are Php6,000,000 [(50 employees
P20,000) + (100 employees Php50,000)].
Question
How much termination benefits liability would the company recognize? Under
current PAS 19? Under Amended PAS 19?
Slide 72
Example: Accounting for Termination

Benefits under current and amended PAS 19
Current PAS 19
Termination benefit of
Php6,000,000 when
the closure and terms
are announced
Amended PAS 19
Separate (a) Termination Benefits and (b) Benefits
provided in exchange for services
(a) Termination Benefits:

Liability of Php3,000,000 (calculated as 150
employees x Php20,000) is recognized at the
earlier of when the plan of termination is
communicated to the employees and when the
entity recognizes the restructuring costs
associated with the closure of the factory
(b) Benefits provided in exchange for services:

Php300,000 recognized in P&L for each month
during the service period of 10 months (calculated
as 100 employees x Php30,000 divided by 10
months)
Slide 73
Disclosures
Disclosures required by the amended PAS 19 will make it
easier for users to assess matters such as:
Characteristics of a companys defined benefit plans

The amounts recognized in the financial statements
Risk arising from defined benefit plans, including sensitivity
analysis
Participation in multi-employer plans
Slide 74
Disclosures
Characteristics of defined benefit plans
The disclosure about the characteristics arising from defined
benefit plans are based on those in the current PAS 19 with the
following changes:
Additional information about exposure to risk
Not requiring an entity to distinguish between plan
amendments, curtailments and settlements if they occur
together
Slide 75
Disclosures
Amounts recognized in the financial statements
The disclosure about the amounts recognized in the financial
statements are based on those in the current PAS 19 with the
following changes:
Distinguishing between actuarial gains and losses arising from
demographic and financial assumptions
Stating a principle for the disaggregation of plan assets rather
than listing the categories required
Stating a principle for the disclosure of significant actuarial
assumptions rather than listing the assumptions required to be
disclosed
Slide 76
Disclosures
Risk arising from defined benefit plans
The amendments made to PAS 19 improve the required
disclosure about the amount, timing and uncertainty of future cash
flows in the following respects:
Information about asset-liability matching strategies
Sensitivity analysis How the effect of reasonably possible
changes to significant actuarial assumptions affect the defined
benefit obligation
Information about the funding and duration of the liability
Slide 77
Transition provision and effective date

An entity shall apply this Standard for annual periods
beginning on or after 1 January 2013.
Earlier application is permitted. If an entity applies this
Standard for an earlier period, it shall disclose that fact.
Slide 78
Transition provision and effective date

An entity shall apply this Standard retrospectively, except that:
An entity need not adjust the carrying amount of the assets
outside the scope of this Standard for changes in employee
benefit costs that were included in the carrying amount before
the date of initial application. The initial application is the
beginning of the earliest period presented in the first financial
statements in which the entity adopts this Standard.
In financial statements for periods beginning before
1 January 2014, an entity need not present comparative
information for the disclosures required by paragraph 145
about the sensitivity of the defined benefit obligation.
Slide 79
Business impact
The removal of corridor approach will introduce a great deal

more volatility in net assets, with potential consequences for
debt covenant ratios and other target ratios.
Companies currently recognizing actuarial variances in full
within OCI may record lower profit since expected return on
plan assets will be based on discount rate.
There is little impact on data systems, except on entities
affected by the new requirements for distinguishing short-term
and long-term benefits.
Slide 80

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Tackling the Issues of PFRS 9 &

PFRS 9, Financial Instruments

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Philippine Financial Reporting Standards

PFRS 9, Financial Instruments

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Philippine Financial Reporting Standards

IAS 39 Replacement project timeline

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Classification and measurement

Fair value through

Fair Value Option

Fair value through

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Business model test

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Philippine Financial Reporting Standards

Characteristics of the financial asset test

Contractual terms of the financial asset give rise, on specified dates,

Examples of features/assets that will not qualify

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Equity investments at Fair Value through

Free choice for each investment at initial recognition. Designation

Dividends will be recognised in profit or loss, if return on investment.

No recycling of fair value changes to profit or loss on impairment,

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Philippine Financial Reporting Standards

Reclassification will be required when an entity changes its business

Prohibited in all other circumstances

Any reclassification is to be accounted for prospectively from the

Reclassification from amortized cost to fair value measure instrument

Reclassification from fair value to amortized cost fair value of the

Detailed disclosures will be required in interim reports and annual

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Philippine Financial Reporting Standards

Bifurcation of embedded derivatives is eliminated for host

Only one classification approach Do the embedded derivatives

No the hybrid contract (as a whole) is measured at fair value

Embedded derivatives with non-financial hosts existing

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Maintain IAS 39 guidance, except when Fair Value Option is used:

Record effect of changes in own credit risk in OCI unless it creates

Other fair value changes in profit or loss

Retain existing rules for bifurcation of derivatives embedded in host

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Effective date and transition

Mandatory effective date is January 1, 2013*

Early adoption permitted

Retrospective application is required, by assessing the classification

Determination of whether an instrument is held for trading is made

It is possible to de-designate or re-designate financial assets at FVPL

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2012 and onwards

Initial application date

Are permitted, but not

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