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PAS 1 Presentation of Financial

Statements

Learning Objectives

1. Enumerate and describe the general features of financial statement presentation.

2. Enumerate and describe the components of a complete set of financial statements.

3. State the acceptable methods of presenting items of income and expenses.

4. Differentiate between the statement of profit or loss and other comprehensive income and the
statement of changes in equity.

5. State the relationship of the notes with the other components of a complete set of financial
statements.

Introduction

Philippine Accounting Standard (PAS) 1 Presentation of Financial Statements prescribes the basis for the
presentation of general purpose financial statements, the guidelines for their structure, and the
minimum requirements for their content to ensure comparability.

Types of comparability

a. Intra-comparability (horizontal or inter-period) - refers to the comparability of financial statements of

the same entity but from one period to another. b. Inter-comparability (dimensional) - refers to the
comparability of financial statements between different entities. Comparability requires consistency in
the adoption and application of accounting policies and in the presentation of financial statements, e.g.,
the use of line-item descriptions and account titles either within a single entity from one period another
or across different entities PAS I applies to the proguration and presentation of gra purpose financial
statements. The recognition, measurement and disclosure requirements for specific transactions and
other events are set out other PFRSs

The terminology used in PAS is suitable for profit oriented entities. If non-profit organizations apply PAS
1, they may need to amend the line-item and financial statement descriptions

Financial Statements

Financial statements are the structured representation of im entity's financial position and results of its
operations." (PAS 19) Financial statements are the end product of the financial reporting process and
the means by which the information gathered and processed is periodically communicated to users The
financial statements of an entity pertain only to that entity and not to the industry where the entity
belongs or the economy as a whole
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General purpose financial statements ('financial statements") are "those intended to meet the needs of
users who are not in a position to require an entity to prepare reports tailored to their particular
information needs." (PAS 17)

General purpose financial statements cater to most of the common needs of a wide range of external
users. General purpose financial statements are the subject matter of the Conceptual Framework and
the PFRSS.

Purpose of financial statements

1. Primary objective: To provide information about the financial position, financial performance, and
cash flows of an entity that is useful to a wide range of users in making economic decisions

2 Secondary objective: To show the results of management's stewardship over the entity's resources.

To meet the objective, financial statements information about an entity's:

a Assets (economic resources);

b. Liabilities

c. Equity;

d. Income;

e. Expenses;

f. Contributions by, and distributions to, owners; and

g. Cash flows

This information, along with other information in the notes, helps users assess the entity's prospects for
future net ca inflows.

Complete set of financial statements

A complete set of financial statements consist of:

1. Statement of financial position;

2. Statement of profit or loss and other comprehensive income

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3. Statement of changes in equity;

4. Statement of cash flows;

5. Notes; (5a) Comparative information; and

6. Additional statement of financial position (required only when certain instances occur).

An entity may use other titles for the statements. For example, an entity may use the title "balance
sheet" in lieu d "statement of financial position" or "statement of comprehensive income" instead of
"statement of profit or loss and other comprehensive income."

However, an "income statement" is different from a "statement of profit or loss and other
comprehensive income" ora "statement of comprehensive income." We will elaborate on the later.

Reports that are presented outside of the financial views statements, such financial as reviewes by
managemen environmental reports and value added statements, are outside the scope of PERS

General Features of financial statements

1. Fair Presentation and Compliance with PFRSs Fair presentation is faithfully representing, in the
financial statements, the effects of transactions and other events in accordance with the definitions and
recognition criteria for assets, liabilities, income and expenses set out in the Conceptual Framework.

Compliance with the PFRSS is presumed to result in fairly presented financial statements.

Fair presentation also requires the proper selection and application of accounting policies, proper
presentation of information, and provision of additional disclosures whenever relevant to the
understanding of the financial statements. Inappropriate accounting policies cannot be rectified by mere
disclosure.

PAS 1 requires an entity whose financial statements comply with PFRSs to make an explicit and
unreserved statement of such compliance in the notes. However, an entity shall not make
suchstatement unless it complies with all the requirements of PFRSs,
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Illustration: Excerpt from a note to financial statement:

Statement of Compliance with Philippine Financial Reporting Standards

The financial statements of the Bank have been prepared in accordance with Philippine Financial
Reporting Standar (PFRSs). which are adopted by the Financial Reporting Standards Council (FRSC) from
the pronouncements issued by the International Accounting Standards Board (IASB).

There may be cases wherein an entity's management concludes that compliance with a PFRS
requirement is misleading.

In such cases PAS 1 permits a departure from a PFRS requiremen if the relevant regulatory framework
requires or allows suc departure

Recent regulatory framcenk refers to the accounting principles and obe financial reporting requirements
prescribed by a government rega body. For example, banks in the Philippines are regulated by the Bang
Sentral ng Pilipinas (BSP). Therefore, in addition to the PFRSs banks ma also comply with the
requirements of the BSP. Accounting princ prescribed by a regulatory body are sometimes referred to as
"Regulato Accounting Principles" (RAP). In practice, banks commonly refer to t financial reporting
required by the BSP as "FRP or Financial Reporting Package

When an entity departs from a PFRS requirement, it shal disclose the management's conclusion as to the
fair presentation of the financial statements; that all other requirements of the PERS are complied with;
the title of the PFRS from which the entity has departed; and the financial effect of the departure. Can
you identify these disclosures in the excerpt below?

Illustration: Departure from a PFRS requirement Statement of Compliance

The financial statements of the Bank have been prepared compliance with Philippine Financial Reporting
Standards (PFRS) except for the deferral of losses on sale of nonperforming assen (NPAS) to special
purpose vehicles (SPVS), non-recognition of allowance for credit losses on subordinated notes issued by
the SPV and the non-consolidation of the SPV that acquired the NPAs sold in 20x5, and 20x4, as
discussed in Note 8. PFRS 9 Financial Instruments and the Conceptual Framework requir that the losses
be charged to current operations and that the accouns of SPVS be consolidated into the Bank's
accounts. Had the losses co the sale of NPAs been charged to current operations, equity as of December
31, 20x5 and 20x4 would have decreased by 186.6 million and P87.3 million, respectively, and profits for
the years ended December 30, 20x3 and 20x4 would have decreased by 171.3 million, P72.3 million
respectively.
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In accordance with the BSP Memorandum dated February 16, 20x4. Aunting Guidelines on the Sale on
NPAs to Special Purpose Vehicles, the allowance for credit losses previously provided for the NPAs sold
to SIVs was released to cover additional allowance for credit losses required for other existing NPAs and
other risk assets of the Bank

All other requirements of the PFRSs have been complied with except those described above.
Management concludes that the financial statements present fairly the Bank's financial position,
financial performance and cash flows

2. Going Concern

Financial statements are normally prepared on a going concem basis unless the entity has an intention
to liquidate or has no other alternative but to do so.

When preparing financial statements, management shall assess the entity's ability to continue as a going
concern, taking into account all available information about the future, which is at least, but not limited
to, 12 months from the reporting date.

If the entity has a history of profitable operations and ready access to financial resources, management
may conclude that the entity is a going concern without detailed analysis,

If there are material uncertainties on the entity's ability to continue as a going concern, those
uncertainties shall be disclosed.

If the entity is not a going concern, its financial statements shall be prepared using another basis. This
fact shall be disclosed, including the basis used, and the reason why the entity is not regarded as a going
concern.

3. Accrual Basis of Accounting

All financial statements shall be prepared using the acc basis of accounting except for the statement of
cash flo which is prepared using cash basis.

4. Materiality and Aggregation

Each material class of similar items is presented separately. class of similar items is called a "line item."
Dissimilar iten presented separately unless they are immater Individually immaterial items are
aggregated with othe items.
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5. Offsetting

Assets and liabilities or income and expenses are presented separately and are not offset, unless
offsetting is required permitted by a PFRS.

Offsetting is permitted when it reflects the substaro of the transaction. Examples of offsetting: a.
Presenting gains or losses from sales of assets net of related selling expenses.

b. Presenting at net amount the unrealized gains and losses arising from trading securities and from
translation foreign currency denominated assets and liabilities, except if they are material.

c. Presenting a loss from a provision net of a reimbursemen from a third party.

Measuring assets net of valuation allowances is t offsetting. For example, deducting allowance for doubl
accounts from accounts receivables or deducting accumulated depreciation from a building account is
not offsetting.

6. Frequency of reporting

Financial statements are prepared at least annually. If entity changes its reporting period to a period
longer shorter than one year, it shall disclose the following:

a. The period covered by the financial statements:

b. The reason for using a longer or shorter period, and

c. The fact that amounts presented in the financial statements are not entirely comparable.

7. Comparative Information

PAS 1 requires an entity to present comparative information in respect of the preceding period for all
amounts reported in the current period's financial statements, unless another PFRS requires otherwise.

As a minimum, an entity presents two of each of the statements and related notes. For example, when
an entity presents its 20x2 current year financial statements, the 20x1 preceding year financial
statements shall also be presented as comparative information.

PAS 1 permits entities to provide comparative information in addition to the minimum requirement. For
example, an entity may provide a third statement of comprehensive income. In this case, however, the
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entity need not provide a third statement for the other financial statements, but must to provide the
related notes for that additional statement of comprehensive income.

Additional Statement of financial position

As mentioned earlier, a complete set of financial statements includes an additional statement of

financial position when certain instances occur. Those instances are as follows:

a. The entity applies an accounting policy retrospectively, makes a retrospective restatement of items in
its financial statements, or reclassifies items in its financial statements; and

b. The instance in (a) has a material effect on the information in the statement of financial position at
the beginning of the preceding period.

For example, if any of the instances above occur, the entity shall present three statements of financial
position as follows:

Statement of financial position Date

1. Current year. As at December 31, 20×2

2. Preceding year. As at December 31, 20×1

(comparative information).

3. Additional As at January 1, 20x1

The opening (additional) statement of financial positio dated as at the beginning of the preceding
period even if the e presents comparative information for earlier periods. The entity need not present
the related notes to the opening statement financial position.

8. Consistency of presentation The presentation and classification of items in the financ statements is
retained from one period to the next unless change in presentation:

a. is required by a PFRS; or

b. results in information that is reliable and more relevant

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A change in presentation requires the reclassification of items in the comparative information. If the
effect of a reclassification is material, the entity shall provide the "additional statement of financial
position" discussed earlier. pe of the the

Summary: General Features

1. Fair presentation & Compliance with PFRSs. 5. Offsetting

2. Going Concern. 6. Frequency of reporting period

3. Accrual Basis Materiality & aggregation. 7. Comparative information

4. Metariality & agregation 8. Consistency of presentation

Each of the financial statements shall be presented with equal prominence and shall be clearly identified
and distinguished from other information in the same published document. For example, financial
statements are usually included in an annual report, which also contains other information. The PFRSS
apply only to the financial statements and not necessarily to the other information.

The following information shall be displayed prominently and repeatedly whenever relevant to the
understanding of the information presented:

a. The name of the reporting entity

b. Whether the statements are for the individual entity or for a group of entities The date of the end of
the reporting period or the period

c. covered by the financial statements

d. The presentation currency The level of rounding used (e.g., thousands, millions, etc.)

Illustration: A heading for a financial statement is shown below.

ABC Group
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Statement of financial position

As of December 31, 20x2

(in thousands of Philippine

Pesos)

Date of the end of the reporting period

Name of the reporting

entity indicating that

the financial statement pertains to a group

Level of rounding-off and

presentation currency

The statement of financial position is dated as at the end of the reporting period while the other
financial statements are dated for the period that they cover.

PAS 1 requires particular disclosures to be presented either in the notes or on the face of the other
financial statements (e.g., footnote disclosures). Other disclosures are addressed by other PFRSs.

Management's Responsibility over Financial Statements

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The management is responsible for an entity's financial statements. The responsibility encompasses:

a. the preparation and fair presentation of financial statements in accordance with PFRSS.;

b. internal control over financial reporting;

e going concern assessment;

d oversight over the financial reporting process; and e review and approval of financial statements.

The responsibilities are expressly stated in a docume called "Statement of Management's Responsibility
for Financ Statements, which is attached to the financial statements as cover letter. This document is
signed by the entity's

a. Chairman of the Board for equivalent),

b. Chief Executive Officer (or equivalent), and

c. Chief Financial Officer (or equivalent)

Statement of Financial Position

The statement of financial position shows the entity's financial condition (i.e., status of assets, liabilities
and equity) as at a certain date. It includes line items that present the following amounts:

a. Property, plant and equipment;

b. Investment property; c. Intangible assets;

d. Financial assets (excluding (e), (h) and (i)); e. Investments accounted for using the equity method;

i. Biological assets; 8 Inventories;

h. Trade and other receivables;

i Cash and cash equivalents;

j. Assets held for sale, including disposal groups;

k Trade and other payables;

l. Provisions:

m. Financial liabilities (excluding (k) and (1));

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n. Current tax liabilities and current tax assets;

o. Deferred tax liabilities and deferred tax assets;

p. Liabilities included in disposal groups;

q. Non-controlling interests; and

r. Issued capital and reserves attributable to owners of parent

PAS 1 does not prescribe the order or format of presenting items in the statement of financial position.
The foregoing is simply a list of items that are sufficiently different in nature or function to warrant
separate presentation.

Accordingly, an entity may modify the descriptions used and the sequence of their presentation to suit
the nature of the entity and its transactions. Moreover, additional line items may be presented
whenever relevant to the understanding of the entity's financial position.

Presentation of statement of financial position A statement of financial position may be presented in a

"classified" or an "unclassified" manner.

a A classified presentation shows distinctions between current and noncurrent assets and current and
noncurrent liabilities.

b. An unclassified presentation (also called based on liquidity') shows no distinction between current
and noncurrent items.

A classified presentation shall be used except when an unclassified presentation provides information
that is reliable and more relevant. When that exception applies, assets and liabilities are presented in
order of liquidity (this is normally the case for banks and other financial institutions).

PAS 1 also permits a mixed presentation, i.e., presenting assets and liabilities using a current/non-
current some classification and others in order of liquidity. This may be appropriate when the entity has
diverse operations.

Whichever method is used, PAS 1 requires the disclosure of items that are expected to be recovered or
settled (a) within 12 months and (b) beyond 12 months, after the reporting period.

A classified presentation highlights an entity's working capital and facilitates the computation of liquidity
and solvency ratios.
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Working capital - Current Assets - Current Liabilities

Current assets and Current liabilities

Current Assets Current liabilities

-are assets that are: -are liabilities that are:

a. Expected to be realized, sold,

or consumed in the entity's

normal operating cycle;

b. Held primarily for trading;

c. Expected to be realized within 12 months after

the reporting period or

settle a liability for at least twelve: months after

the reporting period.

d. Cash or cash equivalent, unless restricted from

being exchanged or used to settle a liability for at
least twelve months after the reporting period.

All other assets and liabilities are classified as noncurrent.

"The operating cycle of an entity is the time between the acquisition of assets for processing and their
realization in cash or cash equivalents. When the entity's normal operating cycle is not clearly
identifiable, it is assumed to be 12 months." (PA91.68)

Assets and liabilities that are realized or settled as part of the entity's normal operating cycle (e.g., trade
receivables, inventory, trade payables, and some accruals for employee and other operating costs) are
presented as current, even if they are expected to be realized or settled beyond 12 months after the
reporting period.

Assets and liabilities that do not form part of the entity's normal operating cycle (e.g., non-operating
assets and liabilities) are presented as current only when they are expected to be realized or settled
within 12 months after the reporting period.

Deferred tax assets and liabilities are always presented as noncurrent items in a classified statement of
financial position, regardless of their expected dates of reversal.
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Examples:

Current assests Current liabilities

Cash and cash equivalents Accounts payable

Accounts receivable Salaries payable

Non-trade receivable collectible within 12 months Dividends payable

Held for trading securities
Income (Current) tax payable
Inventory
Unearned revenue Portion of notes/loans/ bonds
Prepaid assets payable due within 12 months

Noncurrent assests Nonussets liabilities

Property, plant & Equipment Non-trade receivable Portion of notes/loans/ bonds payable due beyond
collectible beyond months 12 months

Investment in associate Deferred tax liability

Investment property

Intangible assets

Deferred tax asset

Refinancing agreement

A long-term obligation that is maturing within 12 months after the reporting period is classified as
current, even if a refinancing agreement to reschedule payments on a long-term basis is completed after
the reporting period and before the financial statements are authorized for issue.

However, the obligation is classified as noncurrent if the entity has the right, at the end of the reporting
period, to roll over the obligation for at least twelve months after the reporting period under an existing
loan facility. Without such right, the entity does not consider the potential to refinance the obligation
and classifies the obligation as current.

Refinancing refers to the replacement of an existing debt with new one but with different terms, e.g. an
extended maturity das or a revised payment schedule. Refinancing normally entails a for of penalty. A
refinancing where the debtor is under financia distress is called "troubled debt restructuring" * Loan
Acility refers to a credit line.
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Fact pattern

Entity A's current reporting date is December 31, 20x1. A bank loan taken 10 years ago is maturing on
October 31, 20x2.

Fact pattern

Entity A's current reporting date is December 31, 20x1. A bank loan taken 10 years ago is maturing on
October 31, 20x2.

Case 1: No right to defer settlement

On January 15, 20x2, Entity A enters into a refinancing agreement to extend the maturity date of the
loan to October 31, 20x7. Entity A's financial statements are authorized for issue on March 31. 20x2.

Analysis: Continuing with the general rule, a currently maturing obligation is classified as current even if
a refinancing agreement. on a long-term basis, is completed after the reporting period and before the
financial statements are authorized for issue Accordingly, the loan is nevertheless presented as a current
liability.

Case 2: With right to defer settlement

On January 15, 20x2, Entity A enters into a refinancing agreement with the bank to roll over the loan for
another four years. Entity A has the option to roll over the loan under the existing loan contract and, as
of December 31, 20x1, Entity A has complied with all the conditions for the rollover.

Analysis: The loan is presented as a noncurrent liability in Entity A's Dec. 31, 20x1 statement of financial
position because Entity A has the right, as of Dec. 31, 20x1, to roll over the obligation for at least twelve
months after the reporting period under the existing loan agreement.

Liabilities payable on demand

Liabilities that are payable upon the demand of the lender are classified as current.

A long-term obligation may become payable on demand as a result of a breach of a loan provision. Such
an obligation is classified as current even if the lender agreed, after the reporting period and before the
authorization of the financial statements for issue, not to demand payment. This is because the entity
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does not have an unconditional right to defer settlement of the liability for at least twelve months after
the reporting period.

However the liability is noncurrent if the lender provides the entity by the end of the reporting period
(e.g., on or before December 31) a grace period ending at least twelve months after the reporting
period, within which the entity can rectify the breach and during which the lender cannot demand
immediate repayment.

Illustration:

In 20x1, Entity A took a long-term loan from a bank. The loan agreement requires Entity A to maintain a
current ratio of 2:1. If the current ratio falls below 2:1, the loan becomes payable on demand. On
December 31, 20x1 (reporting date). Entity A's current ratio was 1.8:1, below the agreed level. Entity A's
financial statements were authorized for issue on March 31, 20x2.

Case

On January 5, 20x2, the bank gives Entity A a chance to rectify the breach of loan agreement within the
next 12 months and promises not to demand immediate repayment within this period.

Analysis: The loan is classified as current liability because the gra period is received after the reporting
date.

Case 2:

On December 31, 20x1, the bank gives Entity A a chance the breach of loan agreement within the next
12 months and promises not to demand immediate repayment within this period, rectify

Analysis: The loan is classified as noncurrent liability because the grace period is received by the
reporting date.

Illustration: Classified Statement of financial position

Entity A

Statement of financial position

As of December 31, 20x2

(amounts in Philippine Pesos)

Notes 20×2 20×1

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ASSETS

Current assets

Cash and cash equivalents P698, 020. P280, 000

Trade and other receivables. P500,00. 100,000

Inventories. P400,00. 180,000

Total current assets. 1,598,020. 560,000

Non-current assets.

Property, plant and equipment. 2,750,000. 2,800,000

Intangible assets. 600,000. 640,000

Total non-current 3,350,000. 3,440,000

Total Assets. P4,948,020. P4,000,000

LIABILITIES AND EQUITY

Current liabilities

Trade and other payables

Current tax payable

Current portion of long-term borrowings

Provisions

Total current liabilities

Non-current liabilities

Long-term borrowings

Defered tax liability

Total Liabilities

Equity

Share capital
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Retained earings

Total Equity

Total Liabilities and Equity

Statement of Profit or Loss and Other Comprehensive Income

Income and expenses for the period may be presented in either, A single statement of profit or loss and
other comprehensive

income (statement of comprehensive incomp), or Two statements (1) a statement of profit or loss
(income statement) and (2) a statement presenting comprehensive income

These presentations have the following basic formats:

PAS 1 requires an entity to present information on following:

a. Profit or loss;

b. Other comprehensive income; and

c. Comprehensive income

Presenting a separate income statement is allowed as lo as a separate statement showing

comprehensive income is ab presented (i.e., 'Two-statement presentation'). Presenting only income
statement is prohibited.
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Profit or loss

Profit or loss is income less expenses, excluding the components a other comprehensive income. The
excess of income over expenses is profit; while the deficiency is loss. This method of computing for
profit or loss is called the "transaction approach."

Income and expenses are usually recognized in profit a loss unless:

a. They are items of other comprehensive income; or

b. They are required by other PFRSs to be recognized outside dprofit or loss.

The following are not included in determining the prof or loss for the period:

Transaction Accounting

1. Correction of prior period error Direct adjustment to the beginning balance of

retained earnings. The adjustment is presented in
the statement of changes in equity.

2. Change in accounting policy Similar treatment to correction of prior period

error.

3. Other comprehensive income Changes during the period are presented in the
"other comprehensive income" section of the
statement of

comprehensive income.

Cumulative balances are presented in the equity

section of the statement of financial position.

4. Transactions with owners (e.g., issuance of Recognized directly in equity, Transactions during
share capital, declaration of dividends, and the the period are presented in the statement of
like) changes in equity

The pro or loss section shows line items that present the following amounts for the period:

a revenue, presenting separately interest revenue:

b. finance costs;

c. gains and losses arising from the derecognition of financial assets measured at amortized cost;
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d. impairment losses and impairment gains on financial assets;

e gaine and losses on reclassifications of financial assets fr amortized cost or fair value through other
comprehens income to fair value through profit or loss;

f. share in the profit or loss of associates and joint ventures,

g tax expense and;

h. result of discontinued operations.

Additional line items shall be presented whene relevant to the understanding of the entity's financia
performance. The nature and amount of material items of income or expense shall be disclosed
separately. Circumstances that would give rise to the separate disclosure of items of income and
expense include:

a write-downs of inventories to net realizable value or property, plant and equipment to recoverable
amount, as well as reversals of such write-downs;

b. restructurings of the activities of an entity and reversals of any provisions for restructuring costs;

c disposals of items of property, plant and equipment;

d. disposals of investments;

e. discontinued operations;

f. litigation settlements; and gother reversals of provisions.

f. gother reversals of provisions.

PAS 1 prohibits the presentation of extraordinary items the statement of profit or loss and other
comprehensive income in the notes.

Presentation of Expenses

Expenses may be presented using either of the following method

a. Nature of expense method - Under this method, expenses aggregated according to their nature (e.g.,
depreciation purchases of materials, transport costs, employee benefits a advertising costs) and are not
reallocated according to the functions within the entity.
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b. Function of expense method (Cost of sales method) - Under this method, an entity classifies expenses
according to their function (eg. cost of sales, distribution costs, administrative expenses, and other
functional classifications). At a minimum, cost of sales shall be presented separately from other
expenses.

The nature of expense method is simpler to apply because it eliminates considerable judgment needed
in reallocating expenses according to their function. However, an entity shall choose whichever method
it deems will provide information that is reliable and more relevant, taking into account historical and
industry factors and the entity's nature.

If the function of expense method is used, additional disclosures on the nature of expenses shall be
provided, including depreciation and amortization expense and employee benefits expense. This
information is useful in predicting future cash flows.

Other Comprehensive Income (OCI)

Other comprehensive income "comprises items of income and expense (including reclassification
adjustments) that are not recognized in profit or loss as required or permitted by other PFRSs." (PAS 17)
comprehensive income include

The components of other the following:

a. Changes in revaluation surplus;

b. Remeasurements of the net defined benefit liability (asset);

c. gains and losses on investments designated or measured a fair value through other comprehensive
income (FVOCT), d. Gains and losses arising from translating the financial statements of a foreign
operation;

e. Effective portion of gains and losses on hedging instruments in a cash flow hedge:

f. Changes in fair value of a financial liability designated at fair value through profit or loss (FVPL) that
are attributable to changes in credit risk;
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g. changes in the ime value of option when the option's intrinsic value and time value are separated and
only the changes in the intrinsic value is designated as the hedging instrument; and

h. changes in the value of the forward elements of forward contracts when separating the forward
element and spot element of a forward contract and designating as the hedging instrument only the
changes in the spot element, and changes in the value of the foreign currency basis spread of a financial
instrument when excluding it from the designation of that financial instrument as the hedging
instrument.

Amounts recognized in OCI are usually accumulated as separate components of equity. For example,
cumulative changes in revaluation surplus are accumulated in a "Revaluation surplus" account, which is
presented as a separate component of equity, cumulative gains and losses from investments in FVOCI
and from translation of foreign operation are also accumulated in separate equity accounts.

Reclassification Adjustments

Items of OCI include reclassification adjustments.

> Reclassification adjustments "are amounts reclassified to profit or loss in the current period that were
recognized in other comprehensive income in the current or previous periods." (PAS 17)

Reclassification adjustments arise, for example, on disposal of a foreign operation, derecognition of debt
instruments measured at FVOCI, or when a cash flow hedge becomes ineffective or affects profit or loss.

On derecognition (or when the cash flow hedge becomes ineffective), the cumulative gains and losses
that were accumulated in equity on these items are reclassified from OCI to profit or loss. The amount
reclassified is called the reclassification adjustment.

A reclassification adjustment for a gain is a deduction in OCI and an addition to profit or loss. This is to
avoid double inclusion in total comprehensive income.

On the other hand, a reclassification adjustment for a loss is an addition to OCI and a deduction from
profit or loss.

Reclassification adjustments do not arise on changes in revaluation surplus, derecognition of equity

instruments designated at FVOCI, and remeasurements of the net defined benefit liability (asset).

On derecognition, the cumulative gains and losses that were accumulated in equity on these items are
transferred directly to retained earnings, rather than to profit or loss as a reclassification adjustment.

Presentation of OCI
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The other comprehensive income section shall group items of OCI into the following:

a. Those for which reclassification adjustment is allowed; and b. Those for which reclassification
adjustment is not allowed,

The entity's share in the OCI of an associate or joint venture accounted for under the equity method
shall also be presented separately and also grouped according to the classifications above.

Type of Other Comprehensive Reclassification adjustment

a. Changes in revaluation surplus NO

b. Remeasurements of the net defined benefit NO

liability (asset)

c. Fair value changes in FVOCI

-equity instrument (election) NO

-debt instrument (mandatory) YES

d. Translation differences on foreign operations YES

e. Effective portion of cash flow hedges NO

Items of OCI, including reclassification adjustments, may be presented at either net of tax or gross of
tax.

Total Comprehensive Income

Total comprehensive income is "the change in equity during a period resulting from transactions and
other events, other than tho changes resulting from transactions with owners in their capacity as
owners." (PAS 1.7)

Total comprehensive income is the sum of profit or lo and other comprehensive income. It comprises
all non-com changes in equity. Presenting information on comprehensive income, and not just profit or
loss, helps users better assess the overall financial performance of the entity.
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Statement of Changes in Equity The statement of changes in equity shows the following information:

a. Effects of change in accounting policy (retrospective application) or correction of prior period error
(retrospective restatement);

b. Total comprehensive income for the period; and

c. For each component of equity, a reconciliation between the carrying amount at the beginning and the
end of the period showing separately changes resulting from:

i. profit or loss;

ii. other comprehensive income; and

iii. transactions with owners, e.g., contributions by and distributions to owners.

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Retrospective adjustments and retrospective restatements are presented in the statement of changes in
equity as adjustments to the opening balance of retained earnings rather than as changes in equity
during the period.

Components of equity include, for example, each class of contributed equity, the accumulated balance
of each class of other comprehensive income and retained earnings. (PAS 1.108)

PAS 1 allows the disclosure of dividends, and the relates amount per share, either in the statement of
changes in equity or the notes.

Note:

"Non-owner" changes in equity are presented in the statement comprehensive income while "owner"
changes (e.g., contributions and distributions to owners) are presented in the statement of chang in
equity. This is to provide better information by aggregating item with shared characteristics and
separating items with differe characteristics.

Statement of Cash Flows

PAS 1 refers the discussion and presentation of statement of flows to PAS 7 Statement of Cash Flows.

Notes

The notes provides information in addition to those presented in the other financial statements. It is an
integral part of a complete set of financial statements. All the other financial statements are intended to
be read in conjunction with the notes. Accordingly, information in the other financial statements shall be
cross referenced to the notes.
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PAS 1 requires an entity to present the notes systematic manner. Notes are normally structured as
follows:

1. General information on the reporting entity This includes the domicile and legal form of the entity, its
country of incorporation and the address of its registered office (or principal place of business, if
different from the registered office) and a description of the nature of the entity's operations and its
principal activities.

2. Statement of compliance with the PFRSs and Basis of preparation of financial statements.

3. Summary of significant accounting policies. This includes narrative descriptions of the line items the
other financial statements, their recognition criteria measurement bases, derecognition, transitional
provision and other relevant information.

4. Disaggregation (breakdowns) of the line items in the oth financial statements and other supporting
information.

5. Other disclosures required by PFRSs, such as (the list is not exhaustive):

a. Contingent liabilities and unrecognized contractue commitments.

b. Non-financial disclosures, e.g., the entity's financial mak management objectives and policies. Events
after the reporting date, if material.

d. Changes in accounting policies and accounting estimates and corrections of prior period errors.

e. Related party disclosure. f. Judgments and estimations.

g. Capital management.

h. Dividends declared after the reporting period but before the financial statements were authorized for
issue, and the related amount per share.

i. The amount of any cumulative preference dividends not recognized.

6. Other disclosures not required by PFRSs but the management deems relevant to the understanding of
the financial statements.

Notes are prepared in a necessarily detailed manner. More often than not, they are voluminous and
occupy a bulk portion of the financial statements. For that reason (and to save trees Ⓒ), only excerpts
of notes to the financial statements are provided below, sufficient to give you an idea on how the
concepts discussed above are presented in the notes.
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Illustration 1: General information, Basis of preparation and Statement of compliance

2.2-Statement of compliance

The financial statements of the Company have been prepared in accordance with Philippine Financial
Reporting Standards (PFRS PFRSs are adopted by the Financial Reporting Standards Coninc (FRSC) from
the pronouncements issued by the Internation Accounting Standards Board

Illustration 2: Summary of significant accounting policies

2.3 Summary of significant accounting policies

(f) Inventories

Inventories are stated at the lower of cost and net realizable value Cost comprises direct materials,
direct labor costs and facto overheads that have been incurred in bringing the inventories to the present
location and condition. Cost is calculated using the weighte average method. Net realizable value
represents the estimated selli price less all estimated costs to complete and costs to sell.

Illustration 3: Significant judgments, estimates and assumptions

3. Significant accounting judgments, estimates and assumptions The key assumptions concerning the
future and other key sources d estimation uncertainty at the reporting date, that have a signific risk of
causing a material adjustment to the carrying amounts assets and liabilities within the next financial
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year are discut below.

Revaluation of property, plant and equipment The Company measures land and buildings at revalued an
with changes in fair value being recognized in other comprehen income. The Company engaged
independent valuation speciali determine fair value as at December 31, 20x1.

Illustration 4: Supporting information for a statement of financial position

Summary:
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PAS 7

Learning Objectives

1. Describe the statement of cash flows. 2. Differentiate between the following: (1) Operating activities

(2) Investing activities, and (3) Financing activities.

3. State the classifications of the following in a statement of cash flows: (a) dividends received, (b)
dividends paid, (c) interest paid and (d) interest received.

Introduction

PAS 7 prescribes the requirements in the presentation of statement of cash flows.

The statement of cash flows provides information about the sources and utilization (i.e., historical
changes) of cash and cash equivalents during the period.
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Definition of terms

Cash comprises cash on hand and cash in bank.

Cash equivalents are "short-term, highly liquid investments that are readily convertible to known
amounts of cash and which are subject to an insignificant risk of changes in value." (PAS 7.6)

Only debt instruments acquired within 3 months or less before their maturity date can qualify as cash
equivalents Examples of cash equivalents:

a. 1-year treasury bill acquired 3 months before maturity date

b. 90-day money market instrument or commercial paper

c. 3-month time deposit

Cash flows include inflows (sources) and outflows (uses) of cash and cash equivalents.

When used in conjunction with the rest of the financial statements, the statement of cash flows helps
users assess:

a. the ability of the entity to generate cash and cash equivalents,

b. the timing and certainty of the generation of cash flows, and

c. the needs of the entity to utilize those cash flows.

The statement of cash flows may also provide information

on the quality of earnings of an entity. An entity may report profit under the accrual basis but suffers
negative cash flows from its operating activities. This may provide indicators of, among other things,
difficulty in collecting accounts receivable.

As the statement of cash flows can only be prepared on a cash basis, it enhances inter-comparability
among different entities because it eliminates the effects of using different accounting treatments for
the same transactions and events.
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Classification of cash flows

The statement of cash flows presents cash flows according to the following classifications:

1. Operating activities

2. Investing activities

3. Financing activities

Operating activities

"Cash flows from operating activities are primarily derived from the principal revenue-producing
activities of the entity." (PAS714)

Operating activities usually include cash inflows and nutflows on items of income and expenses, or
those that enter into the determination of profit or loss (i.e., included in the income statement).

Examples of cash flows from operating activities:

a. cash receipts from the sale of goods, rendering of services, or other forms of income

b. cash payments for purchases of goods and services

c. cash payments for operating expenses, such as benefits, insurance, and the like, and payments or
refunds of income taxes employes

d. cash receipts and payments from contracts held for dealing trading purposes

Special items included in operating activities

> Cash flows from buying and selling held for trading securities (whether financial assets or financial
liabilities) are classified as operating activities. Held for trading securities are similar to inventories in the
sense that they are acquired specifically for resale.

▸ Some entities, in the ordinary course of their activities routinely manufacture or acquire items of
property, plant and equipment to be held for rental to others and subsequently transfer these assets to
inventories when they cease to be rented and become held for sale. For these entities, cash flows from
the acquisition, rentals and subsequent sale of such assets are considered operating activities. The
proceeds from the sale of such assets are recognized as revenue.
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Loan transactions of financial institutions (e.g., banks) are operating activities because they relate to the
main revenue producing activity of a financial institution.

Investing activities

Investing activities involve the acquisition and disposal of oncurrent assets and other investments.
Examples include:

a. cash receipts and cash payments in the acquisition and disposal of property, plant and equipment,
investment property, intangible assets and other noncurrent assets

b. cash receipts and cash payments in the acquisition and sale of equity or debt instruments of other
entities (other than thos that are classified as cash equivalents or held for trading)

c. cash receipts and cash payments 'on derivative assets and liabilities (other than those that are held for
trading of classified as financing activities)

d. loans to other parties and collections thereof other than lea made by a financial

Cash flows on trade payables, accrued expenses and other operating liabilities are classified as operating
activities and not financing activities. Only cash flows on non-operating or non-trade liabilities are
included as financing activities.

Remember the following:

1 Operating activities. ➤affect profit or loss

2. Investing activities. ➤ affect non-current assets and other investments

3. Financing activities affect profit or loss ➤ affect borrowings and equity

Cash flows excluded from the activities sections

Cash flows on movements between "cash" and "eash equivalents" are not presented separately because
these are part of the entity's cash management rather than its operating investing and financing
activities.
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Bank overdrafts that cannot be offset to cash are presented as financing activities. Those that can be
offset to cash (or are part of the entity's cash management) forms part of the balance of cash and cash
equivalents and therefore not presented separately in the activities sections.

➤ Cash flows denominated in a foreign currency are using the spot exchange rate at the date of the cash
flow Exchange differences are not cash flows. "However, the effect of exchange rate changes on cash
and cash equivalents held or due in a foreign currency is reported in the statement of cash flows in
order to reconcile cash and cash equivalents at the beginning and the end of the period." (PAS 728) The
amount of reconciliation is reported separately from the operating investing and financing activities.

General concept in the preparation of statement of cash flows The statement of cash flows is prepared
using cash basis. Under the cash basis of accounting, income is recognized only when collected and
expenses are recognized only when paid, rather than when these items are earned or incurred.

Accordingly, only transactions that affected cash and cash equivalents are reported in the statement of
cash flows. Non cash transactions are excluded and disclosed only.

When preparing statement of cash flows:

➤ Include only transactions that have affected cash and cash equivalents (e.g., purchase of assets by
paying cash).

➤ Exclude transactions that have not affected cash and cash equivalents (e.g., purchase of assets by
issuing note payable or shares of stocks and conversion of debt to equity).

Interests and Dividends

Entities (except financial institutions) may classify cash flows on interests and dividends as follows:

Cash flows Option 1 Option 2

1. Interest income received Operating activity Investing activity

2. Interest expense paid Operating activity Financing activity

3. Dividend income received Operating activity Investing activity

4 Dividend paid to owners Financing activity Operating activity

Option 1 Option 2
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➤ Interest income, interest expense and dividend ➤ Interest income dividend income are classified
income are classified as operating activities as investing activities because they result from
because they enter into the determination of investments.
profit or loss (ie., income expenses).
➤ Interest expense is classified as financing
▸ Dividend paid is classified as financing activity activity because it results from borrowing.
because it is a transaction with the owners and
➤ Dividend paid is classified as operating activity
alters the equity structure.
in order to assist users in assessing the entity's
ability to pay dividends out of operating cash
flows.

Only interests and dividends received or paid in cash are included in the statement of cash flows. For
example, dividends declared in Year 1 but paid in Year 2 are excluded from the statement of cash flows
in Year 1 and reported only in Year 2. ¹

Only option 1 is available to financial institutions.

When answering CPA board questions wherein the problem is silent, it is presumed that the entity uses
option 1.

Presentation

Cash flows from operating activities may be presented using either:

a. Direct method - shows each major class of gross cash receipts payments; or

b. Indirect method - profit or loss is adjusted for the effects of non-cash items and changes in operating
assets and liabilities.
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PAS 7 does not require any particular method; both methods are acceptable. However, PAS 7
encourages the direct method because it provides information that may be useful in estimating future
cash flows which is not available under the indirect method. In practice, however, the indirect method is
more commonly used because it is easier to apply.

Moreover, the choice between direct and indirect method of presentation is applicable only for
operating activities. For investing and financing activities, gross cash receipts and gross cash payments
for the related transactions are presented separately, unless they qualify for net presentation.
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Changes in ownership interests in subsidiaries

Cash flows arising from acquisitions and disposals of subsidiaries or other business units resulting to loss
or obtaining of control are classified as investing activities. Those that do not result to loss or obtaining
of control are classified as financing activities.

Disclosure

PAS 7 requires the following disclosures:

a. Components of cash and cash equivalents and a reconciliation of amounts in the statement of cash
flows with the equivalent items in the statement of financial position. b. Significant cash and cash
equivalents held by the entity that are not available for use by the group, together with a management
commentary.
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