Module 5 - Ufr

5.
Intended Learning Outcomes

(ILOs)
Mabuhay and welcome class to our Module 5: Amendments on financial reporting
standards Part 1.
For Module 5, we will discuss the different amendments made by IASB in the financial
reporting standards.
There are different amendments and we divide it into two modules.
The first part of the amendments is discussed in this module.
But first, we read our ILO’s.
Intended Learning Outcomes (ILOs):
At the end of the topic, the students are expected to be able to:
1. Apply amendments to PFRS 4 (Insurance Contracts) in financial reporting;

2. Apply Amendments to PAS 1 and PAS 8 (Definition of material) in financial
reporting.
5.1 Amendments to PFRS 4 -

Insurance contracts
Background
As it has become obvious that the effective date of IFRS 17 can no longer be aligned
with the effective date of IFRS 9 Financial Instruments there have been calls for the
IASB to delay the application of IFRS 9 for insurance activities and align the effective
date of IFRS 9 for those activities with the effective date of the new insurance contracts
standard.
Proponents of a deferral argued that:
1. The different effective dates would lead to accounting mismatches and volatility
in profit or loss that users of financial statements might find difficult to understand.
2. Making decisions about applying the new classification and measurement
requirements in IFRS 9 before the new insurance contracts standard is finalized
would be difficult as the decisions might differ from those companies would have
made had all details of the new standard been known.
3. Having to cope with two major accounting changes in a relatively short time
would bear the potential of significantly increased costs and efforts (for preparers
and users).
The IASB has acknowledged these concerns and is, therefore, amending IFRS 4
Insurance Contracts to address the concerns expressed about the different effective
dates of IFRS 9 and IFRS 17.
Take note:
1. IFRS 17 / PFRS 17 – Insurance contracts as discussed in Module 3 is effective

January 1, 2021. These supersede IFRS 4 / PFRS 4 – Insurance contracts.
2. IFRS 9 – Financial instruments are effective January 1, 2018, and is locally
adopted as PFRS 9.
5.1.1 Changes to PFRS 4

The amendments in Applying PFRS 9 'Financial Instruments' with IFRS 4 'Insurance
Contracts' (Amendments to PFRS 4) provide two options for entities that issue
insurance contracts within the scope of PFRS 4:
1. an option that permits entities to reclassify, from profit or loss to other

comprehensive income, some of the income or expenses arising from designated
financial assets; this is the so-called overlay approach;
2. an optional temporary exemption from applying PFRS 9 for entities whose
predominant activity is issuing contracts within the scope of PFRS 4; this is the so-
called deferral approach.
The application of both approaches is optional and an entity is permitted to stop

applying them before the new insurance contracts standard is applied.
5.1.2 Overlay approach

Overlay approach
The amendments that form the overlay approach permit an entity to exclude from profit
or loss and recognize in other comprehensive income the difference between the
amounts that would be recognized in profit or loss in accordance with PFRS 9 and the
amounts recognized in profit or loss in accordance with PAS 39 Financial Instruments:
Recognition and Measurement.
Provided that the entity issues contracts accounted for under PFRS 4, applies PFRS 9
in conjunction with PFRS 4, and classifies financial assets as fair value through profit or
loss in accordance with PFRS 9 when those assets were previously classified at
amortized cost or as available-for-sale in accordance with PAS 39.
Simply stated:
OCI = P/L in financial instruments per PFRS 9 less P/L in financial instruments per PAS
39
Take note: Effective January 1, 2018, PFRS 9 supersedes PAS 39 - Financial
instruments.

Effective date and disclosures
An entity applies the overlay approach retrospectively to qualifying financial assets
when it first applies PFRS 9.
Application of the overlay approach requires disclosure of sufficient information to
enable users of financial statements to understand how the amount reclassified in the
reporting period is calculated and the effect of that reclassification on the financial
statements.
5.1.3 Deferral approach

Deferral approach
Under the amendments that make up the deferral approach, an entity is permitted to
apply PAS 39 rather than PFRS 9 for annual reporting periods beginning before 1
January 2023 if it has not previously applied any version of PFRS 9 and if its
predominant activity is issuing contracts within the scope of PFRS 4 (Insurance
contracts).
An entity determines whether its predominant activity is issuing contracts within the
scope of PFRS 4 by comparing the carrying amount of its liabilities arising from
contracts within the scope of PFRS 4 with the total carrying amount of its liabilities.
An insurer’s activities are predominantly connected with insurance if:
1. the carrying amount of its liabilities arising from contracts within the scope of
PFRS 4 is significant compared to the total carrying amount of all its liabilities and
2. the percentage of the total carrying amount of its liabilities connected with
insurance relative to the total carrying amount of all its liabilities is either greater than
90 percent or less than or equal to 90 percent but greater than 80 percent,
3. and the insurer does not engage in a significant activity unconnected with
insurance.
In connection with the deferral approach, there is also a temporary exemption from
specific requirements in PAS 28 regarding uniform accounting policies when using the
equity method.

Let us recall:
Beginning January 1, 2018, PFRS 9 supersedes PAS 39 (Financial instruments).
PFRS 4 (Insurance contracts) will be superseded by PFRS 17 (Insurance contracts)
effective January 1, 2023.
Simply stated:
On January 1, 2018, the effectivity of IFRS 9, the Deferral approach allows the entity to
use IAS 39 rather than IFRS 9 before the effectivity of IFRS 17.

Effective date and disclosures
An entity applies the deferral approach for annual periods beginning on or after 1
January 2018.
Predominance is assessed at the reporting entity level at the annual reporting date that
immediately precedes 1 April 2016. Application of the deferral approach needs to be
disclosed together with information that enables users of financial statements to
understand how the insurer qualified for the temporary exemption and to compare
insurers applying for the temporary exemption with entities applying IFRS 9. The
deferral can only be made use of for the three years following 1 January 2018.
Predominance is only reassessed if there is a change in the entity’s activities.
5.2 Amendments to PAS 1 and

PAS 8 - Definition of material
The image above depicts gold.
As a future professional and human being, will gold affect your way of thinking? Will
gold be relevant to your decision? If yes, then, gold plays a material role in your life.
On this page, we will discuss "material" in accounting parlance.

The International Accounting Standards Board (IASB) has issued 'Definition of
Material (Amendments to IAS 1 and IAS 8)' to clarify the definition of ‘material’ and
to align the definition used in the Conceptual Framework and the standards
themselves. It is locally adopted in PAS 1 and PAS 8.
Effective date
The amendments are effective for annual reporting periods beginning on or after 1
January 2020. Earlier application is permitted.
5.2.1 Changes and reasoning
behind the changes
The changes in Definition of Material (Amendments to PAS 1 and PAS 8) all relate
to a revised definition of 'material' which is quoted below from the final amendments:

Information is material if omitting, misstating, or obscuring it could reasonably be
expected to influence decisions that the primary users of general purpose
financial statements make on the basis of those financial statements, which
provide financial information about a specific reporting entity.

Three new aspects of the new definition should especially be noted:
1. Obscuring.
The existing definition only focused on omitting or misstating information, however,

the Board concluded that obscuring material information with information that
can be omitted can have a similar effect. Although the term obscuring is new in the
definition, it was already part of PAS 1 (PAS 1.30A).
2. Could reasonably be expected to influence.
The existing definition referred to 'could influence' which the Board felt might be
understood as requiring too much information as almost anything ‘could’
influence the decisions of some users even if the possibility is remote.
3. Primary users.
The existing definition referred only to 'users' which again the Board feared might be
understood too broadly as requiring to consider all possible users of financial
statements when deciding what information to disclose.
5.2.2 Obscuring
The amendments stress especially five ways material information can be obscured:
1. if the language regarding a material item, transaction or other event is vague or

unclear;
2. if information regarding a material item, transaction or other event is scattered
in different places in the financial statements;
3. if dissimilar items, transactions or other events are inappropriately
aggregated;
4. if similar items, transactions or other events are inappropriately
disaggregated;
5. and if material information is hidden by immaterial information to the extent
that it becomes unclear what information is material.
The new definition of material and the accompanying explanatory paragraphs are
contained in the PAS 1 Presentation of Financial Statements.
The definition of material in PAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors has been replaced with a reference to PAS 1.
5.3 Summary
1. The amendments in Applying IFRS 9 'Financial Instruments' with IFRS 4
'Insurance Contracts' (Amendments to IFRS 4) provide two options for entities that
issue insurance contracts within the scope of IFRS 4, namely: overlay
approach and deferral approach.
2. An entity applies the overlay approach retrospectively to qualifying financial
assets when it first applies IFRS 9.
3. An entity applies the deferral approach for annual periods beginning on or after 1
January 2018.
4. The changes in Definition of Material (Amendments to IAS 1 and IAS 8) all relate
to a revised definition of 'material' which is quoted below from the final amendments:
Information is material if omitting, misstating or obscuring it could reasonably be
expected to influence decisions that the primary users of general purpose financial
statements make on the basis of those financial statements, which provide financial
information about a specific reporting entity.

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5.

Intended Learning Outcomes

1. Apply amendments to PFRS 4 (Insurance Contracts) in financial reporting;

5.1 Amendments to PFRS 4 -

1. IFRS 17 / PFRS 17 – Insurance contracts as discussed in Module 3 is effective

5.1.1 Changes to PFRS 4

1. an option that permits entities to reclassify, from profit or loss to other

The application of both approaches is optional and an entity is permitted to stop

5.1.2 Overlay approach

5.1.3 Deferral approach

5.2 Amendments to PAS 1 and

The existing definition only focused on omitting or misstating information, however,

2. Could reasonably be expected to influence.

1. if the language regarding a material item, transaction or other event is vague or

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