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PHILIPPINE INTERPRETATIONS COMMITTEE (PIC) QUESTIONS AND ANSWERS (Q&As)

Q&A No. 2016-01 Conforming Changes to PIC Q&As – Cycle 2016 Introduction This Q&A No. 2016-01 sets out the changes (i.e., amendments or withdrawal) to certain PIC Q&As. These changes are made as a consequence of the issuance of new Philippine Financial Reporting Standards (PFRS) and amendments to certain existing PFRS that are effective as of December 31, 2015. The consequential amendments are set out in the same section as the amended PIC Q&As attached to this Q&A No. 2016-01. In addition, a marked-up copy of the amended PIC Q&A showing the changes made (i.e., new text is underlined and deleted text is struck through) is attached as an appendix to the amended PIC Q&A. The effective date of the amendments is included in the Q&As affected. PIC Q&As Amended The following table summarizes the changes made to the amended PIC Q&As:

PIC Q&As Amended Amendments

PIC Q&A No. 2008-01: Rate used in discounting post-employment benefit obligations

Changed in the reference to the PFRS upon which PIC Q&A No. 2008-01 was based as a result of the issuance of the revised PAS 19, Employee Benefits.

PIC Q&A No. 2011-05: Fair Value or Revaluation as Deemed Cost

Deleted reference to PIC Q&A No. 2011-01, which was withdrawn in 2013.

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PIC Q&As Withdrawn The following table summarizes the basis and effective date of withdrawal of the Q&As withdrawn:

PIC Q&As Withdrawn Basis for Withdrawal

PIC Q&A No. 2008-02: PAS 20.43 – Accounting for Government Loans with Low Interest Rates

PIC Q&A No. 2008-02 contained the consensus on certain issue relating to paragraph 43 of Philippine Accounting Standard (PAS) 20, Accounting for Government Grants and Disclosure of Government Assistance. PAS 20 was amended so that accounting treatment of the difference is to be consistent with that of PAS 39 Financial Instruments: Recognition and Measurement. Consequently, PIC Q&A No. 2008-02 is considered withdrawn effective as of January 1, 2009, the effective date of the amendment.

Date approved by PIC: April 27, 2016

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(Original signed)

PIC Members

Wilson P. Tan, Chairman

Emmanuel Y. Artiza Sharon G. Dayoan Clark Joseph C. Babor Gina S. Detera Wilfredo A. Baltazar Ferdinand George A. Florendo Gloria T. Baysa Jose Emmanuel U. Hilado Rosario S. Bernaldo Lyn I. Javier Ma. Isabel E. Comedia Ma. Concepcion Y. Lupisan Jerome Antonio B. Constantino Normita L. Villaruz

Date approved by FRSC: October 12, 2016

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PHILIPPINE INTERPRETATIONS COMMITTEE (PIC) QUESTIONS AND ANSWERS (Q&As)

Q&A No. 2008 – 01 (Amended April 2016) (See Appendix for copy showing amendments)

Q&A No. 2008–01

PAS 19.83– Rate used in discounting post-employment benefit obligations

Issue

What rate shall be used in discounting post-employment benefit obligations?

Background

Paragraph 83 of PAS 19, Employee Benefits, provides that the rate used to discount post- employment benefit obligations shall be determined by reference to market yields at the balance sheet date on government bonds in countries where there is no deep market in high quality corporate bonds. The currency and term of the government bonds shall be consistent with the currency and estimated term of the post-employment benefit obligations. Paragraph 85 of PAS 19 also provides that the discount rate reflect the timing of benefit payments.

The more common source of discount rates by actuaries is the Philippine Dealing and Exchange Corporation (PDEX). The PDS rates published by PDEX, usually used by actuaries, are based on the yield for peso government issued coupon bearing instruments which pay out interest payments on a periodic basis over the term of the bond and the principal upon maturity.

Another source of discount rates is Bloomberg which provide rates for peso government bonds that are the effective yield for debt instruments which repays the investor one time and only upon maturity, the principal and any effective interest (zero coupon).

Since employees of an entity retire at different points in time, the entity has to determine the various duration of retirement liabilities. In practice, actuaries will either (1) get the average duration of retirement liabilities and use this as the basis of the term of the peso government bond in determining the appropriate discount rate, or (2) derive the discount rate by applying a single weighted average discount rate that reflects the estimated timing and amount of benefit payments in which the benefits are to be paid.

Consensus

The rate used to discount post-employment benefit obligations shall reflect the pattern of cash flow for the payment of retirement benefits. Employees become entitled to retirement benefits at the end of their service lives. A rate that would be reflective of a one time payment upon maturity is that of a zero coupon instrument which has a single cash flow. Although payment schemes may vary (e.g., lump sum or periodic payments over the life of the retired employees), it may be assumed for actuarial purposes that payments would be made in one lump sum.

If the rate reflects the yield for peso government bonds that pay out interest payments on a periodic basis over the term of the bond and the principal upon maturity, such rate may be converted to a zero coupon rate

1 to reflect a reasonable estimate of the benefit payments.

2

Since zero coupon rates are theoretically derived, the notes to financial statements shall disclose the basis used for discounting post-employment benefit obligations.

Effective Date

The consensus in this Q&A is effective from the date of approval by the FRSC.

Date originally approved by PIC: November 26, 2008 Date amendments approved by PIC: April 27, 2016

(Original signed)

PIC Members

Wilson P. Tan, Chairman Emmanuel Y. Artiza Sharon G. Dayoan Clark Joseph C. Babor Gina S. Detera Wilfredo A. Baltazar Ferdinand George A. Florendo Gloria T. Baysa Jose Emmanuel U. Hilado Rosario S. Bernaldo Lyn I. Javier Ma. Isabel E. Comedia Ma. Concepcion Y. Lupisan Jerome Antonio B. Constantino Normita L. Villaruz Date originally approved by FRSC: January 16, 2009

Date amendments approved by FRSC: October 12, 2016

1 Reference may be made to the PDEx website or to Bloomberg website for zero coupon rates for government securities.

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Appendix (Copy showing amendments)

Q&A No. 2008–01 (Amended April 2016)

PAS 19.7883 – Rate used in discounting post-employment benefit obligations

Issue

What rate shall be used in discounting post-employment benefit obligations?

Background

Paragraph 78 83 of PAS 19, Employee Benefits, provides that the rate used to discount post- employment benefit obligations shall be determined by reference to market yields at the balance sheet date on government bonds in countries where there is no deep market in high quality corporate bonds. The currency and term of the government bonds shall be consistent with the currency and estimated term of the post-employment benefit obligations. Paragraph 80 85 of PAS 19 also provides that the discount rate reflect the timing of benefit payments.

The more common source of discount rates by actuaries is the Philippine Dealing and Exchange Corporation (PDEX). The PDS rates published by PDEX, usually used by actuaries, are based on the yield for peso government issued coupon bearing instruments which pay out interest payments on a periodic basis over the term of the bond and the principal upon maturity.

Another source of discount rates is Bloomberg which provide rates for peso government bonds that are the effective yield for debt instruments which repays the investor one time and only upon maturity, the principal and any effective interest (zero coupon).

Since employees of an entity retire at different points in time, the entity has to determine the various duration of retirement liabilities. In practice, actuaries will either (1) get the average duration of retirement liabilities and use this as the basis of the term of the peso government bond in determining the appropriate discount rate, or (2) derive the discount rate by applying a single weighted average discount rate that reflects the estimated timing and amount of benefit payments in which the benefits are to be paid.

Consensus

The rate used to discount post-employment benefit obligations shall reflect the pattern of cash flow for the payment of retirement benefits. Employees become entitled to retirement benefits at the end of their service lives. A rate that would be reflective of a one time payment upon maturity is that of a zero coupon instrument which has a single cash flow. Although payment schemes may vary (e.g., lump sum or periodic payments over the life of the retired employees), it may be assumed for actuarial purposes that payments would be made in one lump sum.

If the rate reflects the yield for peso government bonds that pay out interest payments on a periodic basis over the term of the bond and the principal upon maturity, such rate may be converted to a zero coupon rate

1 to reflect a reasonable estimate of the benefit payments.

Since zero coupon rates are theoretically derived, the notes to financial statements shall disclose the basis used for discounting post-employment benefit obligations.

1 Reference may be made to the PDEx website or to Bloomberg website for zero coupon rates for government securities.

2

Effective Date

The consensus in this Q&A is effective from the date of approval by the FRSC.

* * * * *

Date originally approved by PIC: November 26, 2008 Date amendments approved by PIC: April 27, 2016

(Original signed)

PIC Members

Wilson P. Tan, Chairman Emmanuel Y. Artiza Sharon G. Dayoan Clark Joseph C. Babor Gina S. Detera Wilfredo A. Baltazar Ferdinand George A. Florendo Gloria T. Baysa Jose Emmanuel U. Hilado Rosario S. Bernaldo Lyn I. Javier Ma. Isabel E. Comedia Ma. Concepcion Y. Lupisan Jerome Antonio B. Constantino Normita L. Villaruz Date originally approved by FRSC: January 16, 2009

Date amendments approved by FRSC: October 12, 2016

PHILIPPINE INTERPRETATIONS COMMITTEE (PIC) QUESTIONS AND ANSWERS (Q&As)

Q&A No. 2011 – 05 (Amended April 2016)

(See Appendix for copy showing amendments)

Q&A No. 2011 - 05

PFRS 1.D1-D8 – Fair Value or Revaluation as Deemed Cost Issue 1

What is the proper accounting treatment for the revaluation increment of property, plant and equipment when revalued amounts are accounted for as “deemed cost” at the date of transition

to PFRS (or PFRS for SMEs1)? Background

Under paragraph 7 of PFRS 1, First-time Adoption of Philippine Financial Reporting Standards, an entity shall:

prepare and present an opening PFRS statement of financial position at the date of transition to PFRSs. This is the starting point for the entity’s accounting in accordance with PFRSs.

use the same accounting policies in its opening PFRS statement of financial position and throughout all periods presented in its first PFRS financial statements. Those accounting policies shall comply with each PFRS effective at the end of the entity’s first PFRS reporting period, except as specified in paragraphs 13-19 and appendices B-E of PFRS 1.

PFRS 1 provides guidance on when a first-time adopter may adopt the “deemed cost” approach. It defines “deemed cost” as an amount used as a surrogate for cost or depreciated cost at a given date. Guidance on when a first-time adopter may adopt the “deemed cost” approach is presented in paragraphs D5-D8 of PFRS 1 as follows:

“D5 An entity may elect to measure an item of property, plant and equipment at the date of

transition to PFRS at its fair value and use that fair value as its deemed cost at that date.

D6 A first-time adopter may elect to use a previous GAAP revaluation of an item of

property, plant and equipment at, or before, the date of transition to PFRS as deemed cost at the date of the revaluation, if the revaluation was, at the date of the revaluation, broadly comparable to:

1 For relevant provisions for small and medium-sized entities, refer to PFRS for SMEs, Sections 16-18 and 35.

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(a) fair value; or

(b) cost or depreciated cost in accordance with PFRSs, adjusted to reflect, for example, changes in a general or specific price index.

D7 The elections in the preceding paragraphs are also available for:

(a) investment property, if an entity elects to use the cost model in PAS 40,

Investment Property; and

(b) intangible assets that meet:

(i) the recognition criteria in PAS 382 (including reliable measurement of original cost); and

(ii) the criteria in PAS 382 for revaluation (including the existence of an active market).

An entity shall not use these elections for other assets or for liabilities.

D8 A first-time adopter may have established a deemed cost in accordance with previous GAAP for some or all of its assets and liabilities by measuring them at their fair value at one particular date because of an event such as a privatization or initial public offering. It may use such event-driven fair value measurements as deemed cost for PFRSs at the date of that measurement.”

When the Philippines transitioned to PFRS, certain entities adjusted or classified the values of property, plant and equipment, intangible assets, and investment property under previous GAAP in their statement of financial position using the deemed cost as one of the voluntary exemptions, taking the resulting adjustment as an adjustment to retained earnings or to another category of equity, referred to herein as “Revaluation Reserve.”

An entity that used a Revaluation Reserve account either:

(a) recycled the balance of the Revaluation Reserve to retained earnings using the same

estimated useful life and method of depreciation/amortization used for depreciating the related asset adjusted to deemed cost. The amount recycled to retained earnings effectively offsets the increase in depreciation/amortization expense charged to profit or loss; or

(b) maintained the Revaluation Reserve at its original amount and recycled such amount

one time to retained earnings when the related asset is fully depreciated or disposed of. This is usually accompanied by a note disclosure as to the portion of revaluation reserve already absorbed through depreciation.

In either approaches, the related asset is no longer subsequently revalued since its measurement basis has been treated as deemed cost.

2 PAS 32, Financial Instruments: Presentation.

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Paragraphs 16 to 17 of PFRS 1 (effective in 2005) and paragraphs D5 to D8 of Appendix D to PFRS 1 (effective on July 1, 2009) enumerate the bases of deemed cost that a first-time adopter of PFRSs may use. However, those paragraphs do not specify directly where the increase in carrying values of the assets should be adjusted – whether as an adjustment to retained earnings or to another equity category.

Further, Paragraph 11 of PFRS 1 (effective July 1, 2009) states that: “The accounting policies that an entity uses in its opening PFRS statement of financial position may differ from those that it used for the same date using its previous GAAP. The resulting adjustments arise from events and transactions before the date of transition to PFRSs. Therefore, an entity shall recognize those adjustments directly in retained earnings (or, if appropriate, another category of equity) at the date of transition to PFRSs.” This provision would normally be interpreted to mean that the effect of most adjustments to assets and liabilities in the first-time adopter’s opening PFRS balance sheet would be reflected in retained earnings.

Making the adjustment to retained earnings under PFRS 1 is also consistent with the requirement of PAS 8, Accounting Policies, Changes in Accounting Estimates and Errors. PAS 8.26 states that: “…When an entity applies a new accounting policy retrospectively, it applies the new accounting policy to comparative information for prior periods as far back as is practicable. Retrospective application to a prior period is not practicable unless it is practicable to determine the cumulative effect on the amounts in both the opening and closing statements of financial position for that period. The amount of the resulting adjustment relating to periods before those presented in the financial statements is made to the opening balance of each affected component of equity of the earliest prior period presented. Usually the adjustment is made to retained earnings…”

Consensus Based on the discussions above, the entity which, upon transition to PFRS (and even to PFRS for SMEs), opted to adopt the “deemed cost method” for its property, plant and equipment account should, in accordance with PFRS 1.11 and PAS 8.26, close out the revaluation increment account to the opening retained earnings in the financial statements at the earliest prior period presented and not to another equity category. However, the amount closed to retained earnings should not form part of retained earnings available for dividend distribution (see Issue 4). This information should be properly disclosed in the notes to financial statements (see Issue 2).

Issue 2 What are the additional disclosures required in order to comply with the relevant provisions of PAS 8 and the requirements of the Securities and Exchange Commission?

Background PAS 8.29 states that: “When a voluntary change in accounting policy has an effect on the current period or any prior period, would have an effect on that period except that it is impracticable to determine the amount of the adjustment, or might have an effect on future periods, an entity shall disclose:

(a) the nature of the change in accounting policy;

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(b) the reasons why applying the new accounting policy provides reliable and more relevant information;

(c) for the current period and each prior period presented, to the extent practicable, the

amount of adjustment:

(i) for each financial statement line item affected; and

(ii) if PAS 33applies to the entity, for basic and diluted earnings per share;

(d) the amount of the adjustment relating to periods before those presented, to the extent

practicable; and

(e) if retrospective application is impracticable for a particular prior period, or for periods before those presented, the circumstances that led to the existence of that condition and a description of how and from when the change in accounting policy has been applied.

Financial statements of subsequent periods need not repeat these disclosures.”

The following shall also be disclosed:

(a) the remaining balance of the deemed cost adjustment included in retained earnings, and

(b) the amount of the deemed cost adjustment absorbed through depreciation in profit and

loss, in case of depreciable assets, that is available for dividend declaration.

Consensus Closing out the Revaluation Reserve to retained earnings is a voluntary change in accounting policy and, as such, the required disclosures under PAS 8.29 should be complied with.

An example of a disclosure is shown below (assuming that the adjustment is made in 2011 and financial statements for 2010 and 2009 are presented as comparatives):

In accordance with the general requirement under PFRS 1, the Company closed out to the Revaluation Reserve account with a balance of Phpxxx as of January 1, 2009 to retained earnings. The Revaluation Reserve pertains to the remaining balance of the deemed cost adjustment on certain property, plant and equipment account which arose when the Company transitioned to PFRS in 2005. This adjustment to retained earnings has no effect on profit or loss and earnings per share for the years ended December 31, 2010 and 2009.

PAS 33, Earnings Per Share.

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Annually, the entity shall include the following note disclosure related to retained earnings:

As of December 31, 201X and 201X, the balance of retained earnings includes the remaining balance of the deemed cost adjustment amounting to Phpxxx and Phpxxx, respectively, related to certain property, plant and equipment which arose when the Company transitioned to PFRS in 2005. This amount has yet to be absorbed through additional depreciation in profit and loss in the case of depreciable assets [and through sale in the case of land].

Issue 3 Is a third statement of financial position required in compliance with PAS 1.10(f)?

Background Paragraph 10(f) of PAS 1 requires a statement of financial position as at the beginning of the earliest comparative period when an entity:

applies an accounting policy retrospectively,

makes a retrospective restatement of items in its financial statements, or

reclassifies items in its financial statements.”

This means that in all cases above, any material adjustments to previously reported amounts and presentation give rise to the requirement for an additional statement of financial position.

The third statement of financial position is a requirement under PFRS when retrospective changes have been performed but is not required under PFRS for SMEs.

Consensus Closing out the Revaluation Reserve to retained earnings does not affect any other item within a comparative statement of financial position and thus does not change any information previously provided to financial statement users. In such a case, the inclusion of an additional statement of financial position would not significantly influence the economic decisions of users in evaluating historical financial information and thus is not considered material to financial statements prepared in accordance with PFRS. A disclosure about the closing out of the Revaluation Reserve to the opening retained earnings account will be sufficient for this purpose.

In determining whether it is necessary to present a third statement of financial position, the entities should consider the materiality of the information that would be contained in a third statement of financial position and whether this would affect economic decisions made by a user of the financial statements. In doing so, it would be useful to take into consideration factors, such as:

the nature of the change and the alternative disclosures provided,

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whether the change in accounting policy actually affected the financial position at the beginning of the comparative period (if the accounting policy allows a prospective or limited retrospective application) , and

additionally, specific views from regulators that should be considered in this assessment.

Issue 4 How would the adjustment of the Revaluation Reserve against retained earnings affect an entity’s compliance with SEC Memorandum Circular 11 Series of 2008 (SEC MC 11-2008)?

Background SEC MC 11-2008 provides guidelines on the determination of retained earnings available for dividend declaration. It requires the submission of a reconciliation schedule for this purpose. Section 5 of SEC MC 11-2008 enumerates the unrealized items that shall be considered as not available for dividend declaration.

Consensus The deemed cost adjustment can be categorized under SEC MC 11-2008 as an unrealized item under the group “Other unrealized gains or adjustments to retained earnings brought about by certain transactions accounted for under the PFRS such as accretion income under PAS 39, Day 1 gains on initial recognition of financial instruments, reversal of revaluation increment to retained earnings, and the negative goodwill on investments in associate.” Consequently, retained earnings shall be reduced by the amount of the remaining balance of the deemed cost adjustment to arrive at retained earnings available for dividend declaration.

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Effective Date The consensus in this Q&A is effective from the date of approval by the FRSC.

Date originally approved by PIC: October 20, 2011 Date amendments approved by PIC: April 27, 2016

(Original signed)

PIC Members

Wilson P. Tan, Chairman Emmanuel Y. Artiza Sharon G. Dayoan Clark Joseph C. Babor Gina S. Detera Wilfredo A. Baltazar Ferdinand George A. Florendo Gloria T. Baysa Jose Emmanuel U. Hilado Rosario S. Bernaldo Lyn I. Javier Ma. Isabel E. Comedia Ma. Concepcion Y. Lupisan Jerome Antonio B. Constantino Normita L. Villaruz Date originally approved by FRSC: January 25, 2012 Date amendments approved by FRSC: October 12, 2016

Appendix

(Copy showing amendments)

Q&A No. 2011 – 05 (Amended April 2016)

PFRS 1.D1-D8 – Fair Value or Revaluation as Deemed Cost Issue 1

What is the proper accounting treatment for the revaluation increment of property, plant and equipment when revalued amounts are accounted for as “deemed cost” at the date of transition

to PFRS (or PFRS for SMEs1)? Background

Under paragraph 7 of PFRS 1, First-time Adoption of Philippine Financial Reporting Standards, an entity shall:

prepare and present an opening PFRS statement of financial position at the date of transition to PFRSs. This is the starting point for the entity’s accounting in accordance with PFRSs.

use the same accounting policies in its opening PFRS statement of financial position and throughout all periods presented in its first PFRS financial statements. Those accounting policies shall comply with each PFRS effective at the end of the entity’s first PFRS reporting period, except as specified in paragraphs 13-19 and appendices B-E of PFRS 1.

PFRS 1 provides guidance on when a first-time adopter may adopt the “deemed cost” approach. It defines “deemed cost” as an amount used as a surrogate for cost or depreciated cost at a given date. Guidance on when a first-time adopter may adopt the “deemed cost” approach is presented in paragraphs D5-D8 of PFRS 1 as follows:

“D5 An entity may elect to measure an item of property, plant and equipment at the date of

transition to PFRS at its fair value and use that fair value as its deemed cost at that date.

D6 A first-time adopter may elect to use a previous GAAP revaluation of an item of

property, plant and equipment at, or before, the date of transition to PFRS as deemed cost at the date of the revaluation, if the revaluation was, at the date of the revaluation, broadly comparable to:

1 For relevant provisions for small and medium-sized entities, refer to PFRS for SMEs, Sections 16-18 and 35.

2

(a) fair value; or

(b) cost or depreciated cost in accordance with PFRSs, adjusted to reflect, for example, changes in a general or specific price index.

D7 The elections in the preceding paragraphs are also available for:

(a) investment property, if an entity elects to use the cost model in PAS 40,

Investment Property; and

(b) intangible assets that meet:

(i) the recognition criteria in PAS 382 (including reliable measurement of original cost); and

(ii) the criteria in PAS 382 for revaluation (including the existence of an active market).

An entity shall not use these elections for other assets or for liabilities.

D8 A first-time adopter may have established a deemed cost in accordance with previous GAAP for some or all of its assets and liabilities by measuring them at their fair value at one particular date because of an event such as a privatization or initial public offering. It may use such event-driven fair value measurements as deemed cost for PFRSs at the date of that measurement.”

When the Philippines transitioned to PFRS, certain entities adjusted or classified the values of property, plant and equipment, intangible assets, and investment property under previous GAAP in their statement of financial position using the deemed cost as one of the voluntary exemptions, taking the resulting adjustment as an adjustment to retained earnings or to another category of equity, referred to herein as “Revaluation Reserve.”

An entity that used a Revaluation Reserve account either:

(a) recycled the balance of the Revaluation Reserve to retained earnings using the same

estimated useful life and method of depreciation/amortization used for depreciating the related asset adjusted to deemed cost. The amount recycled to retained earnings effectively offsets the increase in depreciation/amortization expense charged to profit or loss; or

(b) maintained the Revaluation Reserve at its original amount and recycled such amount

one time to retained earnings when the related asset is fully depreciated or disposed of. This is usually accompanied by a note disclosure as to the portion of revaluation reserve already absorbed through depreciation.

In either approaches, the related asset is no longer subsequently revalued since its measurement basis has been treated as deemed cost.

2 PAS 32, Financial Instruments: Presentation.

3

Paragraphs 16 to 17 of PFRS 1 (effective in 2005) and paragraphs D5 to D8 of Appendix D to PFRS 1 (effective on July 1, 2009) enumerate the bases of deemed cost that a first-time adopter of PFRSs may use. However, those paragraphs do not specify directly where the increase in carrying values of the assets should be adjusted – whether as an adjustment to retained earnings or to another equity category.

Further, Paragraph 11 of PFRS 1 (effective July 1, 2009) states that: “The accounting policies that an entity uses in its opening PFRS statement of financial position may differ from those that it used for the same date using its previous GAAP. The resulting adjustments arise from events and transactions before the date of transition to PFRSs. Therefore, an entity shall recognize those adjustments directly in retained earnings (or, if appropriate, another category of equity) at the date of transition to PFRSs.” This provision would normally be interpreted to mean that the effect of most adjustments to assets and liabilities in the first-time adopter’s opening PFRS balance sheet would be reflected in retained earnings.

Making the adjustment to retained earnings under PFRS 1 is also consistent with the requirement of PAS 8, Accounting Policies, Changes in Accounting Estimates and Errors. PAS 8.26 states that: “…When an entity applies a new accounting policy retrospectively, it applies the new accounting policy to comparative information for prior periods as far back as is practicable. Retrospective application to a prior period is not practicable unless it is practicable to determine the cumulative effect on the amounts in both the opening and closing statements of financial position for that period. The amount of the resulting adjustment relating to periods before those presented in the financial statements is made to the opening balance of each affected component of equity of the earliest prior period presented. Usually the adjustment is made to retained earnings…”

Consensus Based on the discussions above, the entity which, upon transition to PFRS (and even to PFRS for SMEs), opted to adopt the “deemed cost method” for its property, plant and equipment account should, in accordance with PFRS 1.11 and PAS 8.26, close out the revaluation increment account to the opening retained earnings in the financial statements at the earliest prior period presented and not to another equity category. However, the amount closed to retained earnings should not form part of retained earnings available for dividend distribution (see Issue 4). This information should be properly disclosed in the notes to financial statements (see Issue 2).

Issue 2 What are the additional disclosures required in order to comply with the relevant provisions of PAS 8 and the requirements of the Securities and Exchange Commission?

Background PAS 8.29 states that: “When a voluntary change in accounting policy has an effect on the current period or any prior period, would have an effect on that period except that it is impracticable to determine the amount of the adjustment, or might have an effect on future periods, an entity shall disclose:

(a) the nature of the change in accounting policy;

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(b) the reasons why applying the new accounting policy provides reliable and more relevant information;

(c) for the current period and each prior period presented, to the extent practicable, the

amount of adjustment:

(i) for each financial statement line item affected; and

(ii) if PAS 33applies to the entity, for basic and diluted earnings per share;

(d) the amount of the adjustment relating to periods before those presented, to the extent

practicable; and

(e) if retrospective application is impracticable for a particular prior period, or for periods before those presented, the circumstances that led to the existence of that condition and a description of how and from when the change in accounting policy has been applied.

Financial statements of subsequent periods need not repeat these disclosures.”

The following shall also be disclosed:

(a) the remaining balance of the deemed cost adjustment included in retained earnings, and

(b) the amount of the deemed cost adjustment absorbed through depreciation in profit and

loss, in case of depreciable assets, that is available for dividend declaration.

Consensus Closing out the Revaluation Reserve to retained earnings is a voluntary change in accounting policy and, as such, the required disclosures under PAS 8.29 should be complied with.

An example of a disclosure is shown below (assuming that the adjustment is made in 2011 and financial statements for 2010 and 2009 are presented as comparatives):

In accordance with the general requirement under PFRS 1, the Company closed out to the Revaluation Reserve account with a balance of Phpxxx as of January 1, 2009 to retained earnings. The Revaluation Reserve pertains to the remaining balance of the deemed cost adjustment on certain property, plant and equipment account which arose when the Company transitioned to PFRS in 2005. This adjustment to retained earnings has no effect on profit or loss and earnings per share for the years ended December 31, 2010 and 2009.

PAS 33, Earnings Per Share.

5

Annually, the entity shall include the following note disclosure related to retained earnings:

As of December 31, 201X and 201X, the balance of retained earnings includes the remaining balance of the deemed cost adjustment amounting to Phpxxx and Phpxxx, respectively, related to certain property, plant and equipment which arose when the Company transitioned to PFRS in 2005. This amount has yet to be absorbed through additional depreciation in profit and loss in the case of depreciable assets [and through sale in the case of land].

Issue 3 Is a third statement of financial position required in compliance with PAS 1.10(f)?

Background Paragraph 10(f) of PAS 1 requires a statement of financial position as at the beginning of the earliest comparative period when an entity:

applies an accounting policy retrospectively,

makes a retrospective restatement of items in its financial statements, or

reclassifies items in its financial statements.”

This means that in all cases above, any material adjustments to previously reported amounts and presentation give rise to the requirement for an additional statement of financial position.

The third statement of financial position is a requirement under PFRS when retrospective changes have been performed but is not required under PFRS for SMEs.

Consensus Closing out the Revaluation Reserve to retained earnings does not affect any other item within a comparative statement of financial position and thus does not change any information previously provided to financial statement users. In such a case, the inclusion of an additional statement of financial position would not significantly influence the economic decisions of users in evaluating historical financial information and thus is not considered material to financial statements prepared in accordance with PFRS. A disclosure about the closing out of the Revaluation Reserve to the opening retained earnings account will be sufficient for this purpose.

In determining whether it is necessary to present a third statement of financial position, the entities should consider the materiality of the information that would be contained in a third statement of financial position and whether this would affect economic decisions made by a user of the financial statements. In doing so, it would be useful to take into consideration factors, such as:

(a) the nature of the change and the alternative disclosures provided,

6

(b) whether the change in accounting policy actually affected the financial position at the beginning of the comparative period (if the accounting policy allows a prospective or limited retrospective application) , and

(c) additionally, specific views from regulators that should be considered in this assessment.

(For additional guidance, refer to Q&A No. 2011-01- PAS 1.10(f) – Requirements for a Third Statement of Financial Position issued by the Philippine Interpretations Committee.)

Issue 4 How would the adjustment of the Revaluation Reserve against retained earnings affect an entity’s compliance with SEC Memorandum Circular 11 Series of 2008 (SEC MC 11-2008)?

Background SEC MC 11-2008 provides guidelines on the determination of retained earnings available for dividend declaration. It requires the submission of a reconciliation schedule for this purpose. Section 5 of SEC MC 11-2008 enumerates the unrealized items that shall be considered as not available for dividend declaration.

Consensus The deemed cost adjustment can be categorized under SEC MC 11-2008 as an unrealized item under the group “Other unrealized gains or adjustments to retained earnings brought about by certain transactions accounted for under the PFRS such as accretion income under PAS 39, Day 1 gains on initial recognition of financial instruments, reversal of revaluation increment to retained earnings, and the negative goodwill on investments in associate.” Consequently, retained earnings shall be reduced by the amount of the remaining balance of the deemed cost adjustment to arrive at retained earnings available for dividend declaration.

7

Effective Date The consensus in this Q&A is effective from the date of approval by the FRSC.

Date originally approved by PIC: October 20, 2011 Date amendments approved by PIC: April 27, 2016

(Original signed)

PIC Members

Wilson P. Tan, Chairman Emmanuel Y. Artiza Sharon G. Dayoan Clark Joseph C. Babor Gina S. Detera Wilfredo A. Baltazar Ferdinand George A. Florendo Gloria T. Baysa Jose Emmanuel U. Hilado Rosario S. Bernaldo Lyn I. Javier Ma. Isabel E. Comedia Ma. Concepcion Y. Lupisan Jerome Antonio B. Constantino Normita L. Villaruz Date originally approved by FRSC: January 25, 2012 Date amendments approved by FRSC: October 12, 2016