Accounting for MODULE 8

BSA 2105 -
Provisions; Revenue Group 6

Contracts; Employee
Benefits and Share- Manalo, Aron
Manalo, Irene

based Payment Manalo, Sherry Ann

Marasigan, Eunice
Marcellana, Lovely Anne
Learning Objectives

To define the provision, revenue

contracts, employee benefits and share
based payments
To understand the recognition,
measurement, presentation and
disclosure in the financial statements
To explain the application of accounting
principles for provision and revenue
contracts
To differentiate between employees
benefits and share based payments
Provision
A provision is an existing liability of uncertain timing or uncertain amount. Provisions
are actually estimated liability because it is both probable and measurable.
Recognition Present Obligation
An entity has a present obligation (legal or

of Provision constructive) as a result of past event.

Probable
It is probable that an outflow of resources
embodying economic benefits will be required to
settle obligation.

Reliable Estimate
A reliable estimate can be made of the amount of
the obligation. If these conditions are not met, no
provision shall be recognized.
Legal obligation is an obligation arising from a
contract, legislation or other operation of law.

Constructive obligation is an obligation that

derives from an entity's actions where:

The entity has indicated to other parties

(by a pattern of past practice, published
policies or a current statement) that it will
accept certain responsibilities; and
As a result, the entity has created in the
other parties a valid expectation it will
discharge those responsibilities.
Obligating Event

It gives rise to a present

obligation and an event
that creates a legal or
constructive obligation
because the entity has no
realistic alternative but to
settle the obligation
created by the event.
Pro-forma
journal entry:

To record the recognition of a provision:

Expense xx

Estimated liability xx
Contingent Liability

Possible obligation arising Present obligation that arises from a past

from past events whose event but is not recognized because
existence will be confirmed either:
only by the occurrence or
non-occurrence of some (i) it is not probable that an outflow of
uncertain future event not resources embodying economic benefits
wholly within the entity's will be required to settle the obligation, or
control.
(ii) the amount of the obligation cannot
be measured with sufficient reliability.
Relationship between provision
and contingent liability

In general sense, all provisions are contingent

because they are uncertain in timing or amount. The
term "contingent" is used for items that are not
recognized because their existence will be confirmed
by occurrence or non-occurrence of one or more
uncertain future events not within the control of the
entity.

The "contingent liability" is used for liabilities that

do not meet the recognition criteria.
Specific Applications

No provision should be made for future Provisions should be made for onerous contracts,
operating losses, including those being contracts where the unavoidable future costs
1 relating to a restructuring, as they do
2 under the contract exceed the expected future
not meet the definition of a liability at economic benefits (e.g. a leased property sub-let at
the end of the financial reporting a lower rent).
period.
A provision for restructuring costs is recognized only
A restructuring is a sale or termination when the general recognition criteria are met. More
of a line of business, closure of specifically, a constructive obligation only arises
3 business locations, changes in 4 when a detailed formal plan is in place and it has
management structure or a begun or been announced to those affected by it. A
fundamental re-organization of the board decision is not enough. Restructuring
company. No obligation arises for the provisions should include only direct expenditures
sale of an operation until there is a caused by the restructuring, not costs that
binding sale agreement. associated with the ongoing activities of the entity.
MEASUREMENT
OF PROVISIONS
The amount recognized as a
provision should be the best
estimate of the expenditure
required to settle the present
obligation at the financial
reporting date.

.
Measurement If the provision is being made for a large
population of items, such as for product
of Provisions warranties

Provision for one-off events

(restructuring, environmental clean-up,
settlement of a lawsuit)

If a single obligation is being measured

and the possible outcomes are mostly
higher (or mostly lower) then the single
most likely outcome
CONSIDERATION IN DETERMINING BEST ESTIMATE

Risk and uncertainties that surround the underlying events

Future Events
A. Forecast reasonable changes in applying
existing technology
B. Ignore possible gains on sales of assets
C. Consider changes in legislation only if virtually
certain to be enacted

Discounted present value using a pre-tax discount rate that

reflects the current market assessments of the value of
money and the risk specific to the liability.
CONSIDERATION IN DETERMINING BEST ESTIMATE

Reimbursement by another party

The amount recognized as an asset should not
exceed the amount of the provision and it should not
be treated as a reduction of the required provision.

Gains on expected disposal assets.

Presence of onerous contract

If the entity has an onerous contract, the
present obligation under the contract shall be
recognized and measured as a provision.
CONSIDERATION IN DETERMINING BEST ESTIMATE

Re-measurement of provisions
A. Review and adjust provisions at each
reporting date.
B. If an outflow no longer probable, provision is
reversed.

Use of provisions
If no longer probable that an outflow of
resources will be required to settle the obligation, the
provision should be reversed.
Revenue Contracts

The Transaction Price (or contract revenue) is the consideration the contractor
expects to be entitled to in exchange for satisfying its performance obligation.

A contract with a customer may be partially within the scope of IFRS 15 and
partially within the scope of another standard. In that scenario:
If other standards specify how to separate and/or initially measure one or more
parts of contracts, then those separation and measurement requirements are
applied first.
If no other standard Provides guidance on how to separate and/or initially
measure one or more parts of contract, then IFRS 15 will be applied.
 Contracts

Revenue
An agreement between two or more
parties that creates enforceable rights
and obligations.
Contracts Customer
A party has contracted with an entity to
obtain goods or services that are an
output of the entity’s ordinary activities
in exchange for consideration.

Income
Increases in the economic benefits during
the accounting period in the form of
inflows or enhancements of assets or
decreases of liabilities that result in an
increase in equity, other than those
relating to contributions from equity
participants.
 Performance Obligation
Revenue A promise in a contract with a customer to
transfer to the customer either good

Contracts
service (or bundle of goods and services)
that is distinct; or a series of distinct goods
or services that are substantially the same
pattern of transfer to the customer.

Revenue
Income arising in the course of an entity’s
ordinary activities.

Transaction Price
The amount of consideration to which an
entity expects to be entitled in exchange for
transferring promised goods or services to
a customer, excluding amounts collected
on behalf of third parties.
 Generally, revenue is recognized when entity
has transferred promised goods or services to the
customer. IFRS 15 sets out five steps for the
recognition process:
Recognition and
Measurement of 1. Identify the contract with the customer.
Revenue
2. Identify the separate performance obligations.

3. Determine the transaction price.

4.Allocate the transaction price to the

performance obligations.

5. Recognize revenue when (or as) performance

is satisfied.
Employee Benefits
These are all forms of consideration given by an entity in exchange for services
rendered or for the termination of employment.
Classification of
Employee Benefits

Short-term employee benefits

are employee benefits (other thantermination benefits) that are expected to be settled
wholly before twelve months after the end of the annual reporting period in which the
employees render the related services.

Examples of short-term employee benefits:

A. Wages, salaries and social security contributions
B. Compensated absences (paid vacation and sick leave)
C. Profit sharing and bonuses
D. Non-monetary benefits
Classification of
Employee Benefits

Post-employment benefits
employee benefits payable after the completion of employment (excluding termination
and short term benefits), such as:

A. Retirement benefits (e.g. pensions, lump sum payments)

B. Other post-employment benefits (e.g. post-employment life insurance, medical
care).
Two types of
post-employment
benefit plans
A. Defined contribution plan
- are post-employment benefit plans under which an entity pays
fixed contributions into a separate entity (a fund) and will have no
legal or constructive obligation to pay further contributions if the
fund does not hold sufficient assets to pay all employee benefits
relating to employee service in the current and prior periods.

B. Defined benefit plan

- these are post-employment plans other than defined contribution
plans. These would include both formal plans and those informal
practices that create a constructive obligation to the entity's
employees.
Classification of
Employee Benefits

Other long-term employee benefits

include items such as the following, if not expected to be settled wholly before twelve
months after the end of the annual reporting period in which the employees render the
related service:
A. Long term paid absences such as long service or sabbatical leave
B. Jubilee or other long service benefits
C. Long term disability benefits
D. Profit sharing and bonuses
E. Deferred remuneration
Classification of
Employee Benefits

Termination benefits
an employee benefits provided in exchange for the termination of an employee's
employment, as a result of either:

A. An entity's decision to terminate an employee or group employee before the

normal retirement date; or
B. An employee's decision to accept an offer of benefits in exchange for the
termination of employment.
 Recognition and
Measurement

Short-term employee benefits

When an employee has rendered service to an entity during an accounting period, the entity
shall recognize the undiscounted amount of short term employee benefits expected to be paid
in exchange for that service:
A. As a liability (accrued expenses), after deducting any amount paid.
B. As an asset (prepaid expense) to the extent that the prepayments will lead to, for
example, a reduction in future payments or a cash refund.
C. As an expense, unless the benefit paidforms part of cost of an asset
(I.e.,PPE,inventories).

If the entity's expectations of the timing of settlement change temporarily, it need not
reclassify a short term employee benefit.
 Recognition and
Measurement

Post-employment benefits
A. Defined Contribution Plans
When an employee has rendered service to an entity during a period, the entity shall
recognize the contribution payable to a defined contribution plan in exchange for that service:

A. As a liability (accrued expenses), after deducting any contribution already paid. If the
contribution already paid exceeds the contribution due for service before the end of the
reporting period.
B. As an asset (prepaid expense) to the extent that prepayment will lead to, for example,
a reduction in future payments or a cash refund.
C. As an expense, unless another PFRS requires or permits the inclusion of the
contribution in the cost of an asset.
 Recognition and
Measurement

Post-employment benefits

B. Defined Benefit Plans

May be unfunded, or they may be wholly or partly funded by contributions by an entity, and
sometimes its employees, into an entity, or fund, that is legally separate from the reporting
entity and from which the employees benefits are paid. The payment of funded benefits when
they fall due depends not only on the financial position and the investment performance of the
fund but also on an entity's ability, and willingness, to make good any shortfall in the fund's
assets. Therefore, the entity is, in substance, underwriting the actuarial and investment risks
associated with the plan. Consequently, the expense recognized for a defined benefit plans not
necessarily the amount of the contribution due for the period.
 Recognition and
Measurement

Other long-term employee benefits

Accounting for long term benefits is same with accounting for post employment benefits in
that:
A. Actuarial gains and losses are recognized immediately and no 'corridor'
(as discussed for post employment benefits) is applied; and

B. All past service costs are recognized immediately.

 Recognition and
Measurement
Termination benefits
Recognize liability and expense at the earlier of:
A. The date the entity can no longer withdraw the benefit or offer
B. The date the entity recognizes restructuring costs under PAS 37.

An entity shall measure termination benefits on initial recognition, and shall measure and
recognize subsequent changes, in accordance with the nature of the employee benefit, provided
that if the termination benefits are an enhancement to post employee benefits, the entity shall
apply the requirements for post employment benefits. Otherwise:
A. If termination benefits settled wholly before12 months from reporting date, liabilities
should not be discounted.
B. If termination benefits are not settled wholly before12 months from reporting date,
they should be discounted.
Share-based Payment

A share-based payment is a transaction in which the entity receives goods or services as

consideration for equity instruments of the entity (including shares or share options), or acquires
goods or services for amounts that are based on the price of the entity's shares or other equity
instruments of the entity.
Share-based Compensation Plan

A compensation arrangement established by the entity whereby the entity’s employee shall
receive equity shares in exchange for their service or the entity incurs liabilities to the employees
in amounts based on the price of its shares.

Strategy that uses compensation to motivate the recipients.

 Equity Settled
Types of Share-
based Payments
Transactions Cash Settled

Share-based
payments with cash
alternatives
Equity
settled - The entity issues equity instruments in
consideration for services received, e.g., stock
options.

STOCK OPTIONS
- Right but not an obligation granted to
officers and key employees to enable them to
acquire shares of the entity during a specified
period upon fulfillment of certain conditions at
a specified price.
Cash - The entity incurs a liability for services
settled received and liability is based on the entity’s
equity instruments, e.g., stock appreciation
rights.

STOCK APPRECIATION
RIGHTS
- Right entitles an employee to receive cash
which is equal to the excess of the market
value of the entity’s share over a
predetermined price for a stated number of
shares on settlement or exercise date.
 *Simply stated, a
share appreciation
right creates liability

Share Option Stock appreciation

right
SHARE-BASED
PAYMENTS
WITH CASH
ALTERNATIVES a. Originally equity-settled and cash settled
was subsequently added, or

b. Granted simultaneously
Recognition

Equity-settled share based payment transaction

- Recognize a corresponding increase in equity if the goods or services were received.

Cash-settled share based payment transaction

- Recognize a liability if the goods or services were acquired.
Recognition

Cash-settled share based payment transaction

- The entity shall measure the goods or services acquired and the liability incurred at
the fair value of the liability. Until the liability is settled, the entity shall remeasure the
fair value of the liability at the end of each reporting period and at the date of
settlement, with any changes in fair value recognized in profit or loss for the period.

*Fair value of liability is equal to the excess of the market value of share over a
predetermined price for a given number of shares over a definite vesting period.
Recognition

Share-based payments with cash alternatives

1. Continue to recognized the original fair value of the instrument in the normal way.

2. Recognized the liability to settle in cash at the modification date based on the fair
value of the shares at modification date and extent to which the specified services have
been received.
Recognition

Share-based payments with cash alternatives

3. Remeasure the fair value of the liability at each reporting date and at the date of
settlement, which any changes in fair value recognized in profit or loss for the period.

4. Balance of the equity components should be the excess of the original fair value of
the equity instruments, date of grant minus fair value of cash alternative, date of
modification)x number of share options x the extent to which the specified services have
been received.
Accounting for MODULE 8
BSA 2105 -
Provisions; Revenue Group 6

Contracts; Employee
Benefits and Share- Manalo, Aron
Manalo, Irene

based Payment Manalo, Sherry Ann

Marasigan, Eunice
Marcellana, Lovely Anne