+ SECTIONS IFRS on SME’s CERA.CRUZ.MACARAIG.RODRIGUEZ.TAN

+ Leases Section 20 Provisions and Contingencies Section 21 Liabilities and Equity Section 22

+ SECTION 20

+ Applies to all leases other than: Leases to explore for or use minerals, oil, natural gas and similar non- regenerative resources Licensing agreements for items such as motion picture films, video recordings, plays, manuscripts, patents and copyrights Measurement of property held by lessees for investment property and by lessors under operating leases Measurement of biological assets by lessees under finance leases and by lessors under operating leases Leases that could lead to a loss as a result of contractual terms unrelated to changes in the price of the leased asset, changes in foreign exchange rates, or default by one of the counterparties Onerous operating leases SCOPE

+ A. Definition: A lease is an agreement that transfers the right to use assets in return for payment Finance Lease – transfers substantially all the risks and rewards incidental to ownership. Substantially all risks and rewards are presumed transferred if: o the lease transfers ownership of the asset to the lessee by the end of the lease term o the lessee has a 'bargain purchase option' o the lease term is for the major part of the economic life of the asset even if title is not transferred at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset o the leased assets are of such a specialized nature that only the lessee can use them without major modifications o the lessee bears the lessor losses if cancelled o a secondary rental period at below market rates o the residual value risk is borne by the lessee. Operating Lease – does not transfer substantially all the risks and rewards incidental to ownership BASIC PRINCIPLES

+ B. Operating Lease Initial Measurement Lessee expenses on a straight-line basis or another basis that represents the use of the asset, unless payments to the lessor increase with expected inflation in which case the payments are expensed when payable Lessor presents assets subject to operating leases in the Statement of Financial Position according to the nature of the asset income is recognized on a straight-line basis or another basis that represents the use of the asset, unless payments received increase with expected inflation, in which case the payments are recognized as income when payable depreciation is recognized on the same basis as for similar assets Initial Direct Costs incurred in arranging leases are added to the carrying amount of the leased asset and expensed over the lease term on the same basis as the lease income BASIC PRINCIPLES

+ B. Operating Lease Sale and Leaseback Selling Price = Fair Value – profit or loss is recognized immediately Selling Price < Fair Value – profit or loss is recognized immediately, except if compensated for by future below- market price payments, which are deferred and amortized Selling Price > Fair Value > Carrying Value Deferred Outright BASIC PRINCIPLES

+ B. Operating Lease Lease bonus – amortized over lease term Initial direct costs – deferred over lease term BASIC PRINCIPLES

+ D. Finance Lease Initial measurement Lessee – measured at the lower of Fair Value of the leased property or present value of Minimum Lease Payments Lessor – presented as receivables at amounts equal to the net investment: Gross Investment discounted at the interest rate implicit in the lease BASIC PRINCIPLES

+ D. Finance Lease Subsequent measurement Lessee o Minimum Lease Payments are apportioned between finance charges and reduction of the liability using the effective interest method o Asset is depreciated over the shorter of the lease term and useful life Lessor o Finance income reflects a constant rate of return on net investment. Payments are applied against the gross investment to reduce both the principal and unearned finance income BASIC PRINCIPLES

+ D. Finance Lease Sale and Leaseback Seller/lessee defers any gain and amortizes it over the lease term BASIC PRINCIPLES

+ E. Derecognition Leases are classified at inception of the lease and this is not changed during the term unless there is an agreement between the lessee and lessor, in which case the classification is reevaluated BASIC PRINCIPLES

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+ SECTION 21

+ Applies to all provisions, contingent liabilities and contingent assets except those covered by other sections of the IFRS for SME (e.g. leases, construction contracts, employee benefits and income tax) SCOPE

+ A. Provision An entity must recognize a provision if, and only if A present obligation (legal or constructive) has arisen as a result of a past event (the obligating event), Payment is probable ('more likely than not'), and The amount can be estimated reliably BASIC PRINCIPLES

+ A. Provision Initial recognition Initially recognized at the best possible estimate at the reporting date. This value should take into any time value of money if this is considered material. When all or part of a provision may be reimbursed by a third party, the reimbursement is to be recognized separately only when it is virtually certain payment will be received. BASIC PRINCIPLES

+ A. Provision Subsequent measurement Subsequently, provisions are to be reviewed at each reporting date and adjusted to meet the best current estimate Any adjustments are recognized in profit and loss while any unwinding of discounts is to be treated as a finance cost BASIC PRINCIPLES

+ A. Provision Restructuring Must accrue provisions for: o Onerous contracts o Warranties o Restructuring if legal or constructive obligation to restructure o Sales refunds May NOT accrue provisions for: o Future operating losses, no matter how probable o Possible future restructuring (plan but not yet a legal or constructive obligation) BASIC PRINCIPLES

+ B. Contingencies Contingent liabilities o These are not recognized as liabilities o Unless remote, disclose an estimate of the financial effect, indications of the uncertainties relating to timing or amount, and the possibility of reimbursement Contingent assets o These are not recognized as assets. o Disclose a description of the nature and the financial effect if probable BASIC PRINCIPLES

+ Full IFRS (IAS 37) provides significantly more guidance on provisions relating to restructurings

+ SECTION 22

+ Classifies financial instruments as either liabilities or equity Applies to the accounting for equity instruments issued to owners of the entity Does not include: Interest in joint ventures, subsidiaries and associates Employers’ rights and obligations under employee benefit plan Contracts for contingent consideration in a business combination (acquirer only) Share-based payment transactions (Sec 26) SCOPE

+ A. Classification between liabilities and equity Liabilities - obligation of an entity arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits Equity - residual interest of assets in an entity after paying all obligations BASIC PRINCIPLES

+ Special Cases: A. Financial instruments that meets the definition of a liability can be classified as equity 1. Puttable Instruments Pro rata share of the entity's net assets in the event of liquidation. The instrument is the most subordinate class. o Has no priority over other claims to the assets of the entity on liquidation o Does not need to be converted into another instrument before it is in the class of instruments that is subordinate to all other classes of instruments All financial instruments in the most subordinate class have identical features. Apart from the puttable features, there must be no other contractual obligation to deliver cash or other assets associated with the instrument. The total expected cash flows attributable to the instrument over the life of the instrument are based substantially on the profit/loss or change in the net assets of the whole entity over the life of the instrument BASIC PRINCIPLES

+ Special Cases: A. Financial instruments that meets the definition of a liability can be classified as equity 2. Instruments subordinate to all other classes of instruments that impose an obligation on the entity to deliver a pro rata share of the net assets of the entity only on liquidation. 3. Members' shares in co-operative entities and similar instruments are equity if: o the entity has an unconditional right to refuse redemption of the members' shares, or o redemption is unconditionally prohibited by local law, regulation or the entity's governing charter. BASIC PRINCIPLES

+ Special Cases: B. Instruments classified as liability rather than equity 1. If the distribution of net assets on liquidation is subject to a maximum amount (a ceiling). 2. If it obliges the entity to make payments to the holder before liquidation, such as a mandatory dividend. 3. Mandatorily redeemable preference shares 4. A puttable instrument that entitles the holder to an amount measured on some other basis not under IFRS for SMEs (like local GAAP) is a financial liability. 5. A puttable instrument that is classified as equity in a subsidiary’s financial statements is classified as a liability in the consolidated group financial statements. 6. Cumulative, redeemable preference share BASIC PRINCIPLES

+ B. Original Issue of shares or other equity instruments Recognition: Recognized as equity when another party is obliged to provide cash or other resources in exchange for the instruments. Applies equally to the sale of options, rights, warrants and similar equity instruments. Instrument is issued before cash is received = receivable, offset to equity Subscribed shares = no increase in equity

+ BASIC PRINCIPLES B. Original Issue of shares or other equity instruments Measurement : At fair value, net of direct issuance costs. If payment is deferred, measure at present value. Transaction costs = deduction from equity, net of income tax benefit

+ BASIC PRINCIPLES C. Stock dividends and stock splits Stock dividends and splits do not result in changes to total equity. An entity shall reclassify amounts within equity in accordance with applicable laws.

+ BASIC PRINCIPLES D. Convertible debt or similar compound financial instruments Proceeds on the issue are allocated between the liability and equity component. Liability component is measured at fair value of a similar liability that does not have a conversion feature. Uses effective interest method for the bond discount or premium. Residual amount is allocated to the equity component. Transaction costs shall be allocated between the debt and equity component based on their relative fair values

+ BASIC PRINCIPLES E. Treasury Shares Measured at the fair value of the consideration paid Deducted from equity No gain or loss is recognized on the purchase, sale, issue or cancellation

+ BASIC PRINCIPLES F. Distributions to Owners Equity is reduced by the amount of distributions to owners, net of any income tax benefits. Liability to distribute non-cash assets to its owners is recognized at the fair value of the assets to be distributed

+ BASIC PRINCIPLES G. Non-controlling interest and transactions in shares of a consolidated subsidiary Changes in a parent’s controlling interest in a subsidiary that do not result in a loss of control are treated as equity transactions with the owners. No gain or loss is recognized. An entity shall not recognize any change in the carrying amounts of assets (including goodwill) or liabilities as a result of such transactions.

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