Finals Cfas

CONCEPTUAL FRAMEWORK AND ACCOUNTING
STANDARDS
FINALS
CHAPTER 1 such goods and services will be paid when
THE NEED FOR FINANCIAL due. They are dependent upon the
continuation of the enterprise as a major
REPORTING customer.
● Employees - evaluate the financial status
FINANCIAL REPORTING of the enterprise to assess the latter’s
● Financial Reporting is the disclosure of ability to provide remuneration, retirement
financial results and related information to benefits, and employment opportunities.
management and external stakeholders ● Customers - have an interest in
(e.g., investors, customers, regulators) information about the continuance of an
about how a company is performing over a enterprise, especially when they have a
specific period of time. long-term involvement with, or are
dependent on, the enterprise as their
INTERNAL USERS supplier.
❖ Users of financial information who have
access to specific types of accounting A business entity is subject to government
information. regulations mainly for the interest of public
❖ Active owners of business and the investors and other parties dealing with it.
management ● Government and its agencies - rely on
➔ To evaluate the entity’s financial information to determine whether
performance, make financial and business entities comply whether business
operational plans and implement entities comply with prescribed rules and
business decisions regulations. They are dependent on the
➔ To continue or to liquidate, to financial information to collect the correct
infuse additional investments, to amount of taxes, to determine taxation
borrow from creditors and to policies and to set the basis for national
change business methods and income and similar statistics.
strategies. ● Public – is interested in finance information
● Management accounting reports usually about the trends and the range of business
provides the information needed by these entities’ economic activities, as the general
users (Board of Directors, Shareholders) direction of business growth is indicative of
the nation’s economic status.
EXTERNAL USERS
● Those who do not have ready access to DIRECT USERS
readily available information about an entity ● Users with direct interest
● Information needs (profitability, liquidity, ● EXAMPLES: owners, managers, creditors,
solvency, financial flexibility, financial suppliers, customers, employees, taxing
capacity) by these users are provided by authority
general purpose financial reports (financial
accounting). INDIRECT USERS
● Inactive owners - delegate the ● Use accounting information to provide
stewardship of the enterprise’s resources advice or to protect the interest of the direct
to the management, and they use the user.
financial statements to keep track of the ● EXAMPLES: regulatory agencies, labor
enterprise’s financial decision and financial unions, financial and legal consultants.
performance to make decisions whether
they should hold or sell their equity A reporting entity, oftentimes called an accounting
interests. entity, may be a business enterprise, a
● Present and potential creditors - through government unit, a not-for-profit organization, an
the financial information, assess the ability individual, a unit within an enterprise and any other
of the enterprise to pay its loans and the unit that is considered to have a personality
interest attaching to such loans. different from the personality of its owners,
● Suppliers of goods and services - on the members, and employees. The concept that
other hand, determine whether the cost of separates the personality of the enterprise from
that of its owners and other stakeholders is
diamla, foronda, gan 1
conventionally called the “accounting entity ❖ Creation of International Accounting
concept”. An accounting entity is capable of Standards Committee (IASC) in 1973
controlling its own economic resources and ➢ Development of a set uniform
incurring economic obligations. global accounting standards known
as International Accounting
BRANCHES OF ACCOUNTING Standards (IAS)
❖ FINANCIAL ACCOUNTING ❖ The IASC was reconstituted in 2001 as
➢ The broadest branch of accounting International Accounting Standards Board
➢ Concerned with recognition, (IASB) under the umbrella of the
measurement, and communication International Financial Reporting Standard
of economic resources and (IFRS) Foundation
economic obligations ➢ IFRS FOUNDATION: a not-for-
➢ Information is communicated profit, public interest organization
through complete set of financial established to develop a single
statements high-quality, understandable,
➢ Conform to the Generally Accepted enforceable and globally accepted
Accounting Principles (GAAP) accounting standards called the
➢ Serves the information needs of the IFRS, and to promote and facilitate
external users adoption of the standards
❖ The accounting standards that originated
❖ MANAGEMENT ACCOUNTING
from the works of the IASC, even if
improved or revised by IASB are known as
➢ Serves the information needs of the
IAS while standards that originated from
internal users, specifically the
the works of the IASB are called IFRS
active owners and managers in
❖ IFRS include the following:
making and implementing short-
term and long range plans for the ➢ Specific IFRS
enterprise ➢ Interpretations made by the
➢ Reports are not required to conform International Financial Reporting
with GAAP Interpretations Committee (IFRIC),
the body that interprets the works of
❖ COST ACCOUNTING
the IASB;
➢ Concerned with the measurement ➢ IAS; and
and recognition of cost of goods ➢ Interpretations made by the
manufactured and sold Standing Interpretations Committee
(SIC), the body that interpreted the
❖ TAX ACCOUNTING works of the IASC.
➢ Concerned with the computation of
taxes and preparation of tax returns IN SUMMARY:
submitting to taxing authority ● IASC issues IAS to be interpreted by SIC
● IASB issues IFRSs to be interpreted by
IFRIC
❖ GOVERNMENT ACCOUNTING
● Under the present time, the IASB still
➢ The process of analyzing, issues new standards and major
classifying, summarizing and amendments to the existing IFRSs
communicating all transactions ● MISSION STATEMENT OF IFRS: to
involved in receipts and disposition communicate financial information that
of government funds and property achieves Transparency – by enhancing the
and interpreting the results thereof. international comparability and quality of
financial information, Accountability –
AUDITING
reducing information gap between the
● Refers to an independent examination of
investors and the people whom they have
the financial statements conducted by a
trusted their investments, and Efficiency –
CPA for the purpose of rendering an
by helping investors identify opportunities
opinion as to the fairness of the
and risks, thus improving capital allocation.
presentation to the financial statements
● Financial Reporting practices are dynamic,
being influenced by the complicated
FINANCIAL REPORTING AND THE transactions that result innovative business
STANDARD SETTING PROCESS practices that evolve from changes in

economic, political, and even cultural the Accounting Standards Council that formalized
environment the standard setting process in the Philippines.
● In essence, the financial reporting
standards shall continually be reviewed, The ASC was formed on November 18, 1981 to
amended, and revised, when necessary, study the accounting standard-setting process in
for the purpose of faithfully communicating the Philippines. The main function of the ASC was
in the most relevant manner the results of to establish and improve generally accepted
economic transactions of reporting entities. accounting principles in the Philippines. The
accounting standards developed by the ASC were
THE STANDARD SETTING PROCESS known as the Statements of Financial Accounting
ADOPTED BY IASB Standards (SFAS). These standards were based
Under the IFRS Foundation is the IASB. IFRS on existing practices in the Philippines, research
Foundation is an independent, not-for-profit private and studies undertaken by the council, available
sector organization. The following are the principal national and international accounting literature,
objectives of IFRS Foundation: statements by then IASC and the Financial
1. to develop a single set of high quality, Accounting Standards Boards (FASB) of the
understandable, enforceable, and globally United States of America.
accepted international financial reporting
standards (through the IASB); The ASC shall be composed of fifteen (15)
2. to promote the use and rigorous application members with a Chairman, who had been a senior
of those standards; practitioner in public accountancy and fourteen
3. to take account of the financial reporting representatives from following organization:
needs of emerging economies and small 1. Board of Accountancy (1)
and medium-sized entities; and 2. Securities and Exchange Commission (1)
4. to promote and facilitate adoption of IFRSs, 3. Bangko Sentral ng Pilipinas (1)
being standards and interpretations issued 4. Commission on Audit (1)
by the IASB, through the convergence of 5. An association or organization of CPAS in
national accounting standards and IFRS. active public practice of accountancy (1)
6. Accredited National Professional
One of the primary functions of the IFRS Organization of CPAs
Foundation is to govern and oversee the activities Public Practice (6)
of its standard-setting body, which is the IASB. Its Commerce and Industry (1)
trustees safeguard the independence of the IASB Academe/Education (1)
and ensure the financing of the organization. Government (1)
The IASB is the independent standard-setting The members were selected by these
body of the IFRS Foundation. At present, the IASB organizations based on some degree of
has 15 members, all of whom work full-time for the recognition for technical expertise.
development and publication of IFRSs.
Although the IASC was created in 1973, earlier
The IASB follows a due process in the than the organization of ASC in 1981, it was only
development of financial reporting standards. The in 1997 that our ASC made a decision to move fully
due process involves interested individuals and to the International Accounting Standard (IAS),
organizations around the world and comprises the although some statements of financial accounting
following stages: standards adopted by the ASC even before 1997
1. setting the agenda had already been based on the IAS.
2. planning the project
3. developing and publishing the discussion The objectives of the ASC in harmonizing the
paper Philippine accounting standards with the
4. developing and publishing the exposure International Accounting Standards were as
draft follows:
5. developing and publishing the standard 1. To develop, in the public interest, a single
6. issuance of the standard set of high quality understandable and
enforceable accounting standards that
THE STANDARD SETTING PROCESS IN require high quality, transparent and
THE PHILIPPINES comparable information in financial
During the year of 1981, the Philippine Institute of statements and other financial reporting to
Certified Public Accountants (PICPA) organized help participants in the various capital
markets and other users of the information
to make economic decisions;
2. To promote the use and rigorous Due process for projects, normally, but not
application of those standards; and necessarily involves the following steps:
3. To work the convergence of Philippine 1. consideration of pronouncements of IASB;
accounting standards with International 2. formation of a task force, when deemed
Financial Reporting Standards (IFRS), necessary, to give advice to FRSC;
issued by the IASB and its predecessors, 3. issuing for comment an exposure draft
IASC. approved by a majority of the FRSC
members; comment period will be at least
The ASC was succeeded by the Financial 60 days, unless a shorter period (not less
Reporting Standards Council (FRSC), which was than 30 days) is considered by FRSC;
established in 2006 by the Board of Accountancy. 4. consideration of the comments received
The BoA is the body that regulates the practice of within the comment period, when
accountancy in the Philippines. The FRSC appropriate, preparing a comment letter to
continued the function of the ASC of establishing the IASB; and
GAAP in the Philippines. It carries on the decision 5. approval of a standard or an interpretation
of the ASC to converge Philippine accounting by a majority of FRSC members.
standards with the International Financial
Reporting Standards. To this date, the FRSC is continuously monitoring
the revisions of and the amendments to the IFRSs
The FRSC shall be composed of fifteen (15) to ensure that improvements in the IFRSs are
members with a Chairman, who had been a being made effective in the Philippines.
presently a senior accounting practitioner in any
scope of accounting practice and fourteen (14) Other than the FRSC, the Board of Accountancy
representatives from the following: will closely monitor the implementation of the
1. Board of Accountancy (BoA) (1) Philippine Financial Reporting Standards.
2. Securities and Exchange Commission
(SEC) (1)
3. Bangko Sentral ng Pilipinas (BSP) (1)
4. Bureau of Internal Revenue (BIR) (1)
5. A major organization composed of
preparers and users of financial statements
(1)
6. Commission on Audit (COA) (1)
7. Accredited National Organization of CPAs CHAPTER 2
Public Practice (2) THE CONCEPTUAL FRAMEWORK
Commerce and Industry (2) FOR FINANCIAL REPORTING
Academe and Education (2)
Government (2)
CONCEPTUAL FRAMEWORK
● A complete, comprehensive and single
document promulgated by the IASB.
The FRSC formed the Philippine Interpretations
● A summary of the terms and concepts that
Committee (PIC) in November 2006 to assist the
underlie the preparation and presentation
former in establishing and improving the financial
of financial statements for external users.
reporting standards in the Philippines. The PIC
● The Conceptual Framework for Financial
issues implementation guidelines on PFRS.
Reporting (Conceptual Framework)
describes the objective of, and the
Similar to IFRSs, the PFRSs consist of:
concepts for, general purpose financial
1. the specific PFRSs which are adopted from
reporting.
IFRSs;
● An attempt to provide an overall theoretical
2. the PASs which are adopted from IASs;
foundation of accounting.
3. the Philippine Interpretations, which are
● Intended to guide standard setters,
adopted from the interpretations of the
preparers and users of financial information
IFRIC and the ISC and the interpretations
in the preparation and presentation of
of PIC.
financial statements.
● The underlying theory for the development
PFRSs are developed through a due process that
of accounting standards and revision of
involves members of PICPA, financial executives,
previously issued accounting standards.
regulatory authorities, members of the academe,
and other interested individuals and organizations.

PURPOSES OF CONCEPTUAL and other creditors which compose the
FRAMEWORK primary user group.
1. To assist the International Accounting ● Information that meets the needs of the
Standards Board (Board) to develop IFRS specified primary user is likely to meet the
that are based on consistent concepts; needs of other users such as employees,
2. To assist preparers of financial statements customers, government and their agencies.
to develop consistent accounting policies
when no Standard applies to a particular SPECIFIC OBJECTIVES OF FINANCIAL
transaction or other event, or when a REPORTING
Standard allows a choice of accounting ● The Conceptual Framework places more
policy; and emphasis on the importance of providing
3. To assist all parties to understand and information needed to assess the
interpret the Standards. management stewardship of the entity’s
economic resources.
STATUS OF CONCEPTUAL FRAMEWORK ● SPECIFIC OBJECTIVES:
● If there is a standard or an interpretation a. To provide information useful in
that specifically applies to a transaction, the making decisions about providing
standard or interpretation overrides the resources to the entity.
Conceptual Framework. b. To provide information useful in
● In the absence of a standard or an assessing the cash flow prospects
interpretation that specifically applies to a of the entity.
transaction, management shall consider c. To provide information about entity
the applicability of the Conceptual resources, claims and changes in
Framework in developing and applying an resources and claims.
accounting policy that results in information
that is relevant and reliable. ECONOMIC DECISIONS
● NOTE ● Existing and potential investors need
➔ Conceptual Framework is not an IFRS general purpose financial reports in order
➔ Nothing in the Conceptual Framework to enable them in making decisions
overrides any specific IFRS. whether to provide or settle loans and other
forms of credit.
➔ In case where there is a conflict, the
● Existing and potential lenders and other
requirements of the IFRS shall prevail over
creditors need general purpose financial
the Conceptual Framework
reports in order to enable them in making
decisions whether to provide loan and
OBJECTIVE OF FINANCIAL REPORTING other forms of credit.
● The objective of financial reporting forms
the foundation of the Conceptual
ASSESSING CASH FLOW PROSPECTS
Framework.
● Decisions by existing and potential
● The overall objective of financial reporting
investors about buying, selling or holding
is to provide financial information about the
equity instruments depend on the returns
reporting entity that is useful to existing and
that they expect from and investment.
potential investors, lenders and other
● Decisions by existing and potential lenders
creditors in making decisions about
and other creditors about providing or
providing resources to the entity.
settling loans and other forms of credit
● The objective of financial reporting is the
depend on the principal and interest
“why”, purpose, or goal of accounting.
payments or other returns that they expect.
● Financial reports are directed toward the
● Financial reporting should provide
common information needs of the existing
information useful in assessing the amount,
and potential investors, lenders and other
timing, and uncertainty of prospects for
creditors.
future net cash inflows to the entity.
● Users are also interested in information
about general economic conditions,
political events and climate and company
and industry outlooks. ECONOMIC RESOURCES & CLAIMS
● General purpose financial reports provide
TARGET USERS information about the financial position of a
● Financial Reporting is directed primarily to reporting entity.
the existing and potential investors, lenders

● Financial position is information about the ● Helps users to understand the return that
entity’s economic resources and the claims the entity has produced on the economic
against the reporting entity. resources.
● The economic resources are the assets ● Information about the return the entity has
and the claims are the liabilities and equity produced provides an indication of how
of the entity. well management has discharged its
● Information about financial position can responsibilities to make efficient and
help users to assess the entity’s liquidity, effective use of the entity’s economic
solvency and the need for additional resources.
financing. ● Information about past financial
1. LIQUIDITY – availability of cash in performance is usually helpful in predicting
the near future after taking into the future returns on the entity’s economic
account of financial commitments resources.
over the current period ● Information about financial performance
2. SOLVENCY – availability of cash during a period is useful in assessing the
over the longer term to meet entity’s ability to generate future cash
financial commitments as they fall inflows from operations
due.
3. PROFITABILITY – ability of the ACCRUAL ACCOUNTING
enterprise to generate cash flows in ● Accrual accounting depicts the effects of
its existing resource base. It also transactions and other events and
refers to the effectiveness with circumstances on an entity’s economic
which the entity has employed its resources and claims in the periods in
resources. which those effects occur even if the
★ Information about financial structure is resulting cash receipts and payments occur
useful in predicting future borrowing needs in a different period.
and how future profits and cash flows will ● Information about financial performance
be distributed among those with interest in measured in accordance with accrual
the enterprise. accounting provides a better basis for
assessing past and future performance
CHANGES IN ECONOMIC RESOURCES & than information solely about cash receipts
CLAIMS and payments during a period.
● Result from financial performance and from
other events or transactions, such as LIMITATIONS OF FINANCIAL REPORTING
issuing debt or equity instruments ● General purpose financial reports do not
● The financial performance of an entity and cannot provide all of the information
comprises revenue, expenses, and net that existing and potential investors,
income or loss for a period of time. lenders, and other creditors need.
● The financial performance is the level of ● General purpose financial reports are not
income earned by the entity through the designed to show the value of an entity but
efficient and effective use of its resources. the reports provide information to help the
● The financial performance of an entity is primary users estimate the value of the
also known as results of operations and is entity.
portrayed in the income statement and ● General purpose financial reports are
statement of comprehensive income. intended to provide common information to
● Information presented in the statement of users and cannot accommodate every
comprehensive income helps users assess request for information.
potential changes in the economic ● To a large extent, general purpose financial
resources that the enterprise is likely to reports are based on estimate and
control in the future. judgment rather than exact depiction.
● Changes in an entity’s economic resources
and claims not resulting from financial QUALITATIVE CHARACTERISTICS OF
performance include events such as USEFUL ACCOUNTING INFORMATION
changes in market prices or interest rates ● These are the qualities or attributes that
that affect the entity’s ability to generate net make financial information useful to users.
cash inflows. ● In deciding which information to include in
financial statements, the objective is to
USEFULNESS OF FINANCIAL ensure that the information is useful to the
PERFORMANCE users in making economic decisions.
○ Fundamental qualitative made in past years. The results of those
characteristics comparisons can help a user to correct and
○ Enhancing qualitative improve the processes that were used to
characteristics make those previous predictions.
FUNDAMENTAL QUALITATIVE ● MATERIALITY

CHARACTERISTICS a. Information is material if omitting,
● Relate to the content or substance of misstating or obscuring it could
financial information. reasonably be expected to influence
decisions that the primary users of
1. RELEVANCE - is the capability of the general purpose financial reports
financial information to make a difference in make on the basis of those reports,
the decisions made by users. Information which provide financial information
may be capable of making a difference in a about a specific reporting entity.
decision even if some users choose not to b. In other words, materiality is an entity-
take advantage of it or are already aware of specific aspect of relevance based on
it from other sources. the nature or magnitude, or both, of
■ INGREDIENTS OF A the items to which the information
RELEVANCE relates in the context of an individual
● PREDICTIVE VALUE entity’s financial report.
● CONFIRMATORY VALUE c. Consequently, the IASB cannot
specify a uniform quantitative
● PREDICTIVE VALUE: threshold for materiality or
a. Financial information has predictive predetermine what could be material
value if it can be used as an input to in a particular situation.
processes employed by users to
predict future outcomes. Financial ● “COULD REASONABLY BE EXPECTED
information need not be a prediction or TO INFLUENCE”
forecast to have predictive value. a. The “could reasonably be expected to
Financial information with predictive influence” threshold adds an element
value is employed by users in making of reasonability of financial information
their own predictions. on which economic decision is based.
b. Financial information has predictive b. By including the term “could
value when it can help users increase reasonably be expected to influence” ,
the likelihood of correctly or accurately material information shall be limited to
predicting or forecasting the outcome the economic decision of primary
of events. users rather than to all users which is
too broad in scope.
● CONFIRMATORY (FEEDBACK VALUE) c. Ensures that information capable of
a. Financial information has confirmatory influencing economic decisions of the
value if it provides feedback about primary users shall be included in the
(confirms or changes) previous financial statements.
evaluations.
b. Financial information has confirmatory ● OBSCURING INFORMATION
value when it enable users confirm or a. Information is obscure if presenting or
correct earlier expectations, thus communicating it would have a similar
allowing the users to better effect as omitting or misstating the
understand how past economic information.
activities have affected the enterprise
● PRIMARY USERS
★ The predictive value and confirmatory a. Users who are primarily affected by
value of financial information are general purpose financial statements.
interrelated. Information that has predictive b. Include the existing and potential
value often also has confirmatory value. investors, lenders and other creditors.
For example, revenue information for the c. Other users: employees, customers,
current year, which can be used as the government agencies and the public in
basis for predicting revenues in future general
years, can also be compared with revenue d. These groups are the users to whom
predictions for the current year that were general purpose financial statements
are primarily directed.
items, factors and circumstances
● FACTORS OF MATERIALITY that might affect their quality and
a. Materiality depends on the magnitude nature, and the process used to
and nature of financial information. determine the numerical depiction.
b. In the exercise of judgment in ➔ STANDARD OF ADEQUATE
determining materiality, the relative DISCLOSURE: Means that all
size and nature of an item is significant and relevant information
considered. leading to the preparation of
c. The size of the item in relation to the financial statements shall be clearly
total of the group to which the item reported.
belongs is taken into account. ➔ The accountant shall disclose a
d. The nature of the item may be material fact known to him which is
inherently material because by its very not disclosed in the financial
nature, it affects economic decision. statements but disclosure of which
is necessary in order that the
2. FAITHFUL REPRESENTATION financial statements would not be
● Financial reports represent economic misleading.
phenomena in words and numbers.
➔ The standard of adequate
● To be useful, financial information must not
disclosure is best described by
only represent relevant phenomena, but it
disclosure of any financial facts
must also faithfully represent the substance
significant enough to influence the
of the phenomena that it purports to
judgment of the informed users.
represent.
● In many circumstances, the substance of ➔ NOTES TO FINANCIAL
an economic phenomenon and its legal STATEMENTS: To be complete,
form are the same. If they are not the same, the financial statements shall be
providing information only about the legal accompanied
form would not faithfully represent the by “notes to financial statements”.
economic phenomenon. ➔ The purpose of the note is to
● To be a perfectly faithful representation, a provide the necessary disclosures
depiction would have three characteristics. required by the PFRS.
It would be: ➔ Notes to financial statements
1. COMPLETENESS provide narrative description or
➔ Completeness requires that disaggregation of the items
relevant information should be presented in the financial
presented in a way that facilitates statements and information about
understanding and avoids items that do not qualify for
erroneous implication. recognition.
➔ Completeness is the result of the
adequate disclosure standard or 2. NEUTRALITY
the principle of full disclosure. ➔ A neutral depiction is without bias in
➔ A complete depiction includes all the selection or presentation of
information necessary for a user to financial information.
understand the phenomenon being ➔ A neutral depiction is not slanted,
depicted, including all necessary weighted, emphasized, de-
descriptions and explanations. emphasized or otherwise
➔ For example, a complete depiction manipulated to increase the
of a group of assets would include, probability that financial information
at a minimum, a description of the will be received favorably or
nature of the assets in the group, a unfavorably by users.
numerical depiction of all of the ➔ The financial information should not
assets in the group, and a favor one party to the detriment of
description of what the numerical another.
depiction represents (for example, ➔ The information is directed to the
historical cost or fair value). common needs of many users and
➔ For some items, a complete not to the particular needs of
depiction may also entail specific users.
explanations of significant facts
about the quality and nature of the
➔ Neutrality is synonymous with the ➔ Can affect faithful representation if
all-encompassing principle of the level of uncertainty in providing
fairness an estimate is high.
➔ To be neutral is to be fair. ➔ The use of reasonable estimate is
an essential part of providing
● PRUDENCE financial information and does not
→ Neutrality is supported by the undermine the usefulness of the
exercise of prudence. financial information.
→ Prudence is the exercise of ➔ As long as the estimate is clearly
caution when making and accurately described and
judgments under conditions of explained, even a high level of
uncertainty. measurement uncertainty does not
→ The exercise of prudence affect the usefulness of the financial
means that assets and information.
income are not overstated
and liabilities and expenses ● SUBSTANCE OVER FORM
are not understated. Equally, ➔ If information is to represent
the exercise of prudence does faithfully, the transactions and other
not allow for the events it purports to represent, it is
understatement of assets or necessary that the transactions and
income or the overstatement events are accounted for in
of liabilities or expenses. accordance with their substance
Such misstatements can lead and reality and not merely their
to the overstatement or legal form.
understatement of income or ➔ The economic substance of
expenses in future periods. transactions and events are usually
emphasized when economic
● CONSERVATISM substance differs from legal form.
→ synonymous with prudence.
→ Means that when alternatives ENHANCING QUALITATIVE
exist, the alternative which
CHARACTERISTICS
has the least effect on equity
● Relate to the presentation or form of the
should be chosen.
financial information.
→ “in case of doubt, record any
● Intended to increase the usefulness of the
loss and do not record any
financial information that is relevant and
gain”
faithfully represented.
● These are:
3. FREE FROM ERROR
1. Comparability;
➔ Faithful representation does not 2. Verifiability;
mean accurate in all respects. 3. Timeliness; and
➔ Free from error means there are no 4. Understandability
errors or omissions in the ● The enhancing qualitative characteristics
description of the phenomenon, may also help determine which of two ways
and the process used to produce should be used to depict a phenomenon if
the reported information has been both are considered to provide equally
selected and applied with no errors relevant information and an equally faithful
in the process. representation of that phenomenon.
➔ For example, an estimate of an
unobservable price or value cannot ● COMPARABILITY
be determined to be accurate or ➔ Comparability is the qualitative
inaccurate. characteristic that enables users to
identify and understand similarities in,
MEASUREMENT and differences among, items.
● UNCERTAINTY ➔ Unlike the other qualitative
➔ Arises when monetary amounts in characteristics, comparability does not
financial reports cannot be relate to a single item. A comparison
observed directly and must instead requires at least two items.
be estimated. ➔ Comparability is not uniformity.

➔ For information to be comparable, like
things must look alike and different ● VERIFIABILITY
things must look different. ➔ Verifiability helps assure users that
➔ Comparability may be made within an information faithfully represents the
entity, or between and across entities. economic phenomena it purports to
➔ Comparability with an entity represent.
(horizontal comparability or intra- ➔ Verifiability means that different
comparability) is the quality of knowledgeable and independent
information that allows comparisons observers could reach consensus,
within a single entity through time or although not necessarily complete
from one accounting period to the agreement, that a particular depiction
next. is a faithful representation.
➔ Comparability between and across
entities (inter-comparability or TYPES OF VERIFICATION
dimensional comparability) or is the ★ DIRECT VERIFICATION: verifying an
quality of information that allows amount or other representation
comparisons between two or more through direct observation, for
entities engaged in the same industry. example, by counting cash.
★ INDIRECT VERIFICATION: checking
● CONSISTENCY the inputs to a model, formula or other
➔ Implicit in the qualitative characteristic technique and recalculating the inputs
of comparability is the principle of using the same methodology.
consistency.
➔ In broad sense, consistency refers to ● TIMELINESS
the use of the same method for the ➔ Timeliness means having information
same item, either from period to period available to decision-makers in time to
within an entity or in a single period be capable of influencing their
across entities. decisions.
➔ It is the uniform application of ➔ Generally, the older the information is
accounting methods from period to the less useful it is.
period within an entity. ➔ However, some information may
continue to be timely long after the end
● UNDERSTANDABILITY of a reporting period because, for
➔ Understandability requires that example, some users may need to
financial information must be identify and assess trends.
comprehensible or intelligible if it is to
be most useful. COST CONSTRAINT ON USEFUL
➔ Classifying, characterising and INFORMATION
presenting information clearly and ● Cost is the pervasive constraint on the
concisely make it understandable. information that can be provided by
➔ Some phenomena are inherently financial reporting
complex and cannot be made easy to ● The benefit derived from the information
understand. Excluding information should exceed the cost incurred in
about those phenomena from financial obtaining the information.
reports might make the information in
those financial reports easier to CHAPTER 2 - PART 2
understand. However, those reports THE CONCEPTUAL FRAMEWORK
would be incomplete and therefore FOR FINANCIAL REPORTING -
possibly misleading. FINANCIAL STATEMENTS AND
➔ Financial reports are prepared for
users who have a reasonable
REPORTING ENTITY
knowledge of business and economic
activities and who review and analyze GENERAL OBJECTIVES OF FINANCIAL
the information diligently. At times, STATEMENTS
even well-informed and diligent users ● Financial statements are periodic reports
may need to seek the aid of an adviser generated through a series of systematic
to understand information about steps in the accounting process.
complex economic phenomena.
● Financial statements provide information disclose, and changes in
about economic resources of the reporting those methods,
entity, claims against the entity and assumptions and
changes in the economic resources and judgments.
claims.
● Financial statements provide financial TYPES OF FINANCIAL STATEMENTS
information about an entity’s assets, ● CONSOLIDATED FINANCIAL
liabilities, equity, income and expenses STATEMENTS: These are financial
useful to users of financial statements in: statements prepared when the reporting
➢ Assessing future cash flows to the entity comprises both the parent and its
reporting entity. subsidiaries
➢ Assessing management ✓ Provide information about the
stewardship of the entity’s assets, liabilities, equity, income
economic resources. and expenses of both the parent
● These financial statements include and its subsidiaries as a single
Statement of Comprehensive Income or reporting entity.
Income Statement, Statement of Financial ✓ Parent – the entity that exercises
Position or Balance Sheet, Statement of control over the subsidiaries.
Changes in Equity, Statement of Cash ✓ Consolidated information is useful
Flows and the Notes to the Financial for existing and potential investors,
Statements. lenders and other creditors of the
● The Income Statements: Provides parent in their assessment of future
information about an entity’s performance net cash inflows to the parent. This
or results of operations. The amount of is because net cash inflows to the
profit or loss generated or suffered is the parent include distributions to the
core of this financial statement. parent from its subsidiaries.
● Statement of Financial Position: Shows the ✓ Consolidated financial statements
entity’s assets, liabilities and owner’s equity are not designed to provide
which help to assess liquidity, solvency and separate information about the
financial flexibility. assets, liabilities, equity, income
● Statement of Changes in Owner’s and expenses of a particular
Equity:provides information on the factors subsidiary.
that have changed the capital of the entity.
● Information provided in the FS: ● UNCONSOLIDATED FINANCIAL
1. Entity’s financial position, with STATEMENTS: These are the financial
recognized assets, liabilities and statements prepared when the reporting
equity; entity is the parent alone
2. The entity’s financial performance ✓ Designed to provide information
with recognized income and about the parent’s assets, liabilities,
expenses; and income and expenses and not
3. Information about: about those of the subsidiaries.
a. Recognized assets,
✓ Such information can be useful to
liabilities, income and
the existing and potential investors,
expenses including nature
lenders and other creditors of the
and risks arising from those
parent because a claim against the
recognized assets and
parent typically does not give the
liabilities;
holder of that claim against
b. Assets and liabilities that
subsidiaries.
have not been recognized
(including information about ✓ Information provided in
their nature and risks arising unconsolidated financial
therefrom); statements is typically not sufficient
c. Cash flows; to meet the requirement needs of
d. Contributions from and primary users.
distributions to enterprise ✓ Accordingly, when consolidated
owners; and financial statements are required,
e. The methods, assumptions unconsolidated financial
and judgments in estimating statements cannot serve as
amounts presented or
substitute for consolidated financial ☆ The very foundation of the cost
statements. principle
☆ If there is evidence that the entity
● COMBINED FINANCIAL STATEMENTS: would experience large and
These are the financial statements when persistent losses or that the entity’s
the reporting entity comprises two or more operations are to be terminated, the
entities that are not linked by a parent and going concern assumption is
subsidiary relationship. abandoned.
➔ Provide financial information about
the assets, liabilities, equity, income ● ACCOUNTING ENTITY: The specific
and expenses of two or more business organization which may be a
entities not linked with parent and proprietorship, partnership or corporation.
subsidiary relationship. ☆ The entity is separate from the
owners, managers and employees
REPORTING ENTITY: An entity that is required or who constitute the entity
chooses to prepare financial statements. It can be ☆ Each business is an independent
a single entity or a portion of an entity, or can accounting entity.
comprise more than one entity. The following are
considered reporting entity: ● TIME PERIOD: requires that the indefinite
life of an entity is subdivided into
A. Individual corporation, partnership or
accounting periods which are usually of
proprietorship
equal length for the purpose of preparing
B. The parent alone
financial reports on financial position,
C. The parent and its subsidiaries as single
performance and cash flows.
reporting entity
D. Two or more entities without parent and ☆ By convention, the accounting
subsidiary relationship as a single reporting period or fiscal period is one year or
entity a period of twelve months.
E. A reportable business segment of an entity ☆ A calendar year is a twelve-month
period that ends on December 31.
REPORTING PERIOD: The period when financial ☆ A natural business year is a 12-
statements are prepared for general purpose month period that ends on any
financial reporting. month when the business is at the
lowest or experiencing slack
➢ Financial statements may be prepared on season.
an interim basis.
➢ Interim financial statements are not ● MONETARY UNIT – has two aspects:
required but optional ☆ Quantifiability aspect – means
that the assets, liabilities, equity,
UNDERLYING ASSUMPTIONS income and expenses should be
● Accounting assumptions are the basic stated in terms of a unit of measure
notions or fundamental premises on which which is the peso in the Philippines.
accounting is based. It is also known as ☆ Stability of the peso – means that
postulates. the purchasing power of the peso is
● Accounting assumptions serve as the stable or constant and that its
foundation or bedrock of accounting in instability is insignificant and
order to avoid misunderstanding but rather therefore may be ignored.
enhance the understanding and
usefulness of the financial statements. CHAPTER 2 - PART 3
● The Conceptual Framework for Financial THE CONCEPTUAL FRAMEWORK
Reporting mentions only one assumption: FOR FINANCIAL REPORTING -
going concern
● Implicit in accounting are the basic Elements of Financial Statements
assumptions of: (1) accounting entity, (2)
time period, and (3) monetary unit. ● Under the Conceptual Framework, the
● GOING CONCERN: This means that in the elements of financial statements are:
absence of evidence to the contrary, the ☆ assets, liabilities and equity, which
accounting entity is viewed as continuing in relate to a reporting entity’s financial
operation indefinitely. position; and

☆ income and expenses, which relate to ➔ A right can meet the definition of an
a reporting entity’s financial economic resource even if the
performance. probability that it will produce
economic benefit is low.
ASSET ➔ The economic resource is the
● An asset is a present economic resource present right that contains the
controlled by the entity as a result of past potential and not the future
events. economic benefits that the right
● An economic resource is a right that has may produce.
the potential to produce economic benefits. ➔ An economic resource could
● Note: the potential economic benefits no produce economic benefits if an
longer need to be expected to flow to the entity is entitled:
entity. a. To receive contractual cash
● ESSENTIAL CHARACTERISTICS: flows
➔ The asset is a present economic b. To exchange economic
resource. resources with another
➔ The economic resource is a right that party on favorable terms
has the potential to produce c. To produce cash inflows or
economic benefits. avoid cash outflows
➔ The economic resource is controlled d. To receive cash by selling
by the entity as a result of past the economic resource
events. e. To extinguish a liability by
transferring an economic
● FORMS OF RIGHTS resource
1. Rights that correspond to an
obligation of another entity. ● CONTROL OF AN ECONOMIC
a. Right to receive cash RESOURCE
b. Right to receive goods and ➔ An entity controls an asset if it has
services the present ability to direct the use
c. Right to exchange of the asset and obtain the
economic resources with economic benefits that flow from it.
another party on favorable ➔ Control also includes the ability to
terms prevent others from using such
d. Right to benefit from an asset and therefore preventing
obligation of another party if others from obtaining the economic
a specified uncertain future benefits from the asset.
event occurs. ➔ Control may arise if an entity
enforces legal rights.
2. Rights that do not correspond to an
obligation of another entity LIABILITY
a. Right over physical objects, ● Present obligation of an entity to transfer an
such as PPE or inventories economic resource as a result of past
b. Right to intellectual property events.
● An obligation to transfer an economic
3. Rights established by contract or resource and not the ultimate outflow of
legislation such as owning a debt economic benefits.
instrument or an equity instrument ● ESSENTIAL CHARACTERISTICS:
or owning a registered patent 1. The entity has an obligation.
2. The obligation is to transfer an
● POTENTIAL TO PRODUCE ECONOMIC economic resource.
BENEFITS 3. The obligation is a present
➔ For potential to exist, it does not obligation that exists as a result of
need to be certain or even likely that past events.
the right will produce economic ● OBLIGATION: A duty or responsibility that
benefits. It is only necessary that an entity has no practical ability to avoid.
the right already exists. ● TRANSFER OF AN ECONOMIC
➔ It is only necessary that the right RESOURCE - Obligations to transfer an
already exists. economic resource include:
a. Obligation to pay cash
b. Obligation to deliver goods or non- ➔ Derecognition of a liability occurs
cash resources when the entity no longer has a
c. Obligation to provide services at present obligation for all part of the
some future time liability.
d. Obligation to exchange economic ➔ An entity derecognizing a part of an
resources with another party on asset or liability and retained another
unfavorable terms part of it shall not recognize in profit
e. Obligation to transfer an economic or loss an income or expense
resource if specified uncertain relating to the portion retained,
future event occurs unless the portion retained is
remeasured or reclassified.
EQUITY – is the residual interest in the assets of
the entity after deducting all its liabilities. MEASUREMENT
● Measurement is defined as quantifying in
INCOME – is the increases in assets, or monetary terms the elements in the
decreases in liabilities, that result in increases in Financial Statements.
equity, other than those relating to contributions ● The measurement basis selected must be
from holders of equity claims. one that results in provision of the most
relevant and faithful representation of the
CHAPTER 2 - PART 3 information, considering the nature of the
THE CONCEPTUAL FRAMEWORK information that the measurement basis will
FOR FINANCIAL REPORTING - produce in the financial statements.
● The choice of the measurement basis is
Recognition and Measurement
determined by considering both initial
measurement (at date of creation) and
RECOGNITION subsequent measurement (date of
● The process of capturing for inclusion in the reporting).
financial statements an item that meets the ● The characteristics of the asset or the
definition of an asset, liability, equity, liability as well as how the asset or liability
income or expense. contributes to the future cash flows affect
● Involves giving a name to the financial the choice of the measurement basis.
statement element and assigning it a ● Measurement bases:
monetary amount, which is referred to as ○ Historical cost
“carrying amount”. ○ Current value
● RECOGNITION CRITERIA – An item is HISTORICAL COST: Based on a price of the

recognized in the statement of financial transaction or event that gave rise to the financial
statements if: statement element.
a. It meets the definition of an asset, a ● Does not reflect changes in values, except
liability, equity, income or changes relating to impairment of an asset
expenses; or a liability becoming onerous.
b. It provides useful information that is ● Historical cost of an asset is the value of
relevant and faithfully represented; the costs incurred in acquiring or creating
c. The benefits of the information the asset, comprising the consideration
provided to the users justify the paid to acquire or create the asset plus
costs of obtaining, providing and transaction costs
using the information; and ● Historical cost of a liability is the value of
d. It is measurable. the consideration received to incur or take
on the liability minus the transaction costs.
● DERECOGNITION: The removal of all or ● The deemed historical cost of an asset or a
part of a recognized asset or liability from liability at initial recognition is its current
the statement of financial position. value at that date which is used as a
➔ Normally occurs when an item no starting point for subsequent measurement
longer meets the definition of an at historical cost.
asset or a liability. ☆ Historical cost of an asset is updated
➔ Derecognition of an asset occurs for:
when the entity loses control of all or a. The consumption of a part or all of
part of the asset. the economic resource
(depreciation and amortization);
b. Payment received that extinguish transaction cost on the disposal of the
part or all of the asset; asset.
c. Impairment (reflecting the effect of ● An exit price or exit value.
events that cause the carrying
amount to be no longer FULFILLMENT VALUE: The present value of
recoverable); and cash that an entity expects to transfer in paying or
d. Accrual of interest to reflect any settling a liability.
financing component. ● Does not include transaction cost on
☆ Historical cost of a liability is updated incurring a liability but includes transaction
for: cost on fulfillment of a liability.
a. Fulfillment of part or all of the ● An exit price or exit value
liability;
b. The effect of events that increase CURRENT COST: The cost of an equivalent
its value, to the extent that the asset at the measurement date comprising the
liability becomes onerous (which consideration paid and transaction cost.
means that the historical cost is no ● The current cost of a liability is the
longer sufficient to depict the consideration that would be received less
obligation); any transaction cost at measurement date.
c. Accrual of interest to reflect any ● Similar to historical cost, current cost is
financing component. also based on the entry price or entry value
but reflects market conditions on
CURRENT VALUE: A measurement basis that measurement date.
uses information updated to reflect conditions at
the measurement date. USE OF CURRENT VALUE
● It is not derived even in part, from the price ● When the value of the asset is sensitive to
of the transaction or other event that gave market factors or other risks, the most
rise to the asset or liability. relevant information is provided by
● Includes: measuring the asset or liability at:
○ Fair value ➔ Fair value – if such can be directly
○ Value in use (for assets) observable; or
○ Fulfillment value (for liabilities) ➔ Value in use or current cost - if
○ Current cost the value cannot be directly
FAIR VALUE: Fair value of an asset is the price observed.
that would be received to sell an asset in an orderly ● This type of measurement basis is
transaction between market participants at applicable for assets and liabilities that
measurement date. produce cash flows directly.
● Fair value of a liability is the price that ● Thus, financial assets that are held for
would be paid to transfer a liability in an trading, financial assets that are held for
orderly transaction between market sale, and assets that are held for capital
participants at the measurement date. appreciation or for leasing out to others
● Fair value is an exit price or exit value. based on market rentals, are preferably
● Fair value can be observed directly using measured at current value.
the market price of the asset or liability in
an active market. ENTRY VALUES & EXIT VALUES
● In cases where fair value cannot be ● Entry values are measurement bases on
directly measured, an entity can use the date of acquisition, creation or
present value of cash flows. incurrence.
● Fair value is not adjusted for transaction ● Exit values are measurement bases on the
cost and does not consider the transaction date of measurement (subsequent to
costs on the disposal of an asset or acquisition or incurrence), disposal, or
settlement of liability. settlement.
● Historical cost and current cost are entry
VALUE IN USE: The present value of the cash values.
flows or other economic benefits that an entity ● Fair value, value in use and fulfillment
expects to derive from the use of an asset and from value are exit values.
the ultimate disposal.
● Does not include transaction cost on
acquiring the asset but includes

PRESENTATION & DISCLOSURE ➔ Aggregation summarizes a large
● The presentation and disclosure can be an volume of details, hence,
effective communication tool about the information is not obscured by so
information in financial statements. many details, which, when
a. An entity reports its financial considered necessary, are
position and financial performance presented in the Notes.
and other financial information in its
financial statements. Such CONCEPTS OF CAPITAL
information must be both relevant ● FINANCIAL CONCEPT OF CAPITAL –
and faithfully represented and users of entity’s financial statements are
requires: primarily concerned with maintenance of
b. Focusing on presentation and nominal invested capital or the purchasing
disclosure, objectives and principle power of the capital.
rather than on rules; ➢ Users of an entity's financial
c. Classifying information in a manner statements are primarily concerned
that groups similar items and with maintenance of nominal
separates dissimilar items; and invested capital or the purchasing
d. Aggregating information to make it power of the capital.
not obscured either by unnecessary ➢ Capital is synonymous with the net
detail or by excessive aggregation assets or equity of the enterprise.
➢ Does not require the adoption of a
● FOCUSING ON PRESENTATION &
specific measurement basis, and
DISCLOSURE OBJECTIVES – An entity
the measurement basis used
must communicate effectively the
depends on the type of financial
information in financial statements to its
capital the entity seeks to maintain.
intended users. In so doing, balance is
needed between:
a. Giving entities flexibility to provide
● PHYSICAL CONCEPT OF CAPITAL
relevant and faithfully represented
financial statement elements, and ➢ Users of the financial statements
b. Achieving comparability within an are more concerned with the
enterprise for two different reporting operating capability of the
periods and comparability across enterprise.
enterprises for a single reporting ➢ Capital is viewed as the operating
period. capacity of the enterprise
➢ Requires the use of the current cost
● CLASSIFYING INFORMATION as measurement basis.
➔ The sorting of assets, liabilities,
equity, income and expenses on ● FINANCIAL CAPITAL MAINTENANCE
the basis of shared or similar CONCEPT
characteristics such as nature of ☆ Profit is measured as the excess of
the item, its function within the the financial (or money) amount of
business activities and how it is the net assets at the end of the
measured. period over the financial (or money)
➔ Classifying dissimilar assets, amount of the net assets at the
liabilities, equity, income and beginning of the period, after
expenses can obscure relevant excluding the effects of the
information, reduce contributions from and distributions
understandability and comparability to the owners of the enterprise
and may not provide a faithful ☆ Increases in the price of assets held
representation of financial over the period, conventionally
information referred to as holding gain, are
conceptually profits.
● AGGREGATION ☆ When the capital is defined in terms
➔ The adding together of similar of purchasing power units, only that
financial statement elements that part of the increase in the prices of
have shared characteristics and are the assets that exceeds the
included in the same classification. increase in the general price level of
prices is regarded as profit, and the
rest of the increase is treated as COMPONENTS OF FINANCIAL
capital adjustments. STATEMENTS
● Statement of financial position as the end
● PHYSICAL CAPITAL MAINTENANCE of the period
CONCEPT ● Statement of comprehensive income for
☆ Physical capital is the quantitative the period
measure of the physical productive ● Statement of changes in equity for the
capacity to produce goods and period
services. ● Statement of cash flows for the period
☆ There is profit only if the physical ● Notes, compromising a summary of
productive capacity (or operating significant accounting policies and other
capability) of the entity (or the explanatory information.
resources or funds needed to
achieve that capacity at the end of STATEMENT OF FINANCIAL POSITION
the period exceeds the physical ● Presents information on the balances of
productive capacity at the assets, liabilities, and equity as at the end
beginning of the same period, after of the reporting period.
excluding the effects of transactions ● Useful to various users of accounting
with owners. information in assessing the economic
☆ All price changes affecting assets resources that an enterprise controls, its
and liabilities are treated as capital financial structure, its liquidity and solvency
maintenance adjustments that are and its capacity to adapt to changes in the
not part of profit but are part of environment in which it operates.
equity.
STATEMENT OF COMPREHENSIVE
INCOME
CHAPTER 3 - PART 1 ● Presents the financial performance of an
BASIS FOR THE PRESENTATION entity during a reporting period.
● It is an expanded form of the income
OF THE FINANCIAL STATEMENTS statement because it encompasses both
profit and loss and other comprehensive
FINANCIAL STATEMENTS income.
● The means by which the information ● Information presented helps users to
accumulated and processed in financial assess the entity’s ability to generate cash
accounting is periodically communicated to and the potential changes in economic
the users resources that the enterprise is likely to
● The end-product or main output of the control in the future.
financial accounting process
● The structured financial representation of STATEMENTS OF CHANGES IN EQUITY
the financial position and financial ● Presents the summarized transactions
performance of an entity affecting the balance of equity accounts,
such as profit or loss, other comprehensive
income, contributions from owners and
GENERAL PURPOSE FINANCIAL distributions to owners.
STATEMENTS
● An entity shall prepare and present general STATEMENT OF CASH FLOW
purpose financial statements in ● Presents information on the inflows and
accordance with the International Financial outflows of cash and cash equivalents
Reporting Standards. during the period.
● General purpose financial statements or ● The information presented assists users in
simply financial statements are those assessing an entity’s ability to remain
intended to meet the needs of users who solvent and provide returns to investors
are not in a position to require an entity to and creditors.
prepare reports tailored to their particular
information needs. NOTES TO THE FINANCIAL STATEMENTS
● Presents relevant financial information
pertaining to the entity’s activities that
cannot be presented on the face of the
financial statements
● Include a description of the basis of the ● The requirement for a restatement of prior
presentation of financial statements and year’s financial statements and inclusion of
summary of significant accounting policies, a restated statement of financial position as
information required by the PFRS or IFRS at the beginning of the preceding period
that is not presented on the face of the presented achieves the objective of
financial statements and additional comparability.
information that will help the users better
understand the information presented in ACCOUNTING POLICIES
any of the financial statements. ● The specific principles, bases,
● It provides narrative description or conventions, rules and practices applied by
disaggregation of items presented in the an entity in preparing and presenting
financial statements and information about financial statements.
items that do not qualify for recognition. ● EXAMPLES
● Used to report information that does not fit ★ Criteria to determine which financial
into the body of the statements in order to instruments qualify as cash
enhance the understandability of the equivalents.
statements. ★ Characteristics of elements
compromising Investments Property.
OBJECTIVE OF FINANCIAL STATEMENTS ★ Characteristics of elements
● The objective of general purpose financial compromising PPE.
statements is to provide information about
★ Measurement model for a class of
the financial position, performance and
PPE.
cash flows of an enterprise that is useful to
a wide range of users in making economic ★ Use of weighted average method to
decisions. determine the cost of inventory.
● Financial statements also show the results ★ Measuring inventories at the Lower of
of the management’s stewardship of the Cost or Net Realizable Value.
resources entrusted to it. ● When an IFRS specifically applies to a
transaction, other event or condition, the
FINANCIAL STATEMENTS PROVIDE accounting policy or policies applied to that
INFORMATION ABOUT THE FOLLOWING: item shall be determined by applying the
IFRS.
★ Assets
● IFRSs set out accounting policies that the
★ Liabilities IASB has concluded result in financial
★ Equity statements containing relevant and reliable
★ Income and Expenses, including gains and information about the transactions, other
losses events and conditions to which they
★ Contributions by and distributions to apply.Those policies need not be applied
owners when the effect of applying them is
★ Cash flows immaterial.
● However, it is inappropriate to make, or
REQUIREMENTS FOR AN ADDITIONAL leave uncorrected, immaterial departures
STATEMENT OF FINANCIAL POSITION from IFRSs to achieve a particular
● Inclusion of a statement of financial presentation of an entity’s financial
position at the beginning of the preceding position, financial performance or cash
period whenever an entity restates its flows.
comparative prior period financial ● In the ABSENCE OF AN IFRS that
statements. specifically applies to a transaction, other
● Restatement of comparative prior period is event or condition, management shall use
necessary when there is any of the its judgement in developing and applying
following: an accounting policy that results in
information that is:
➔ Retrospective application of a
change in accounting policy ➔ Relevant to the economic decision-
making needs of users; and
➔ Restatement of financial
statements because of prior period ➔ Reliable, in that the financial
errors discovered. statements:
➔ Reclassification of an element in a ➔ Represents faithfully the financial
financial statement. position, financial performance and
cash flows of the entity.
➔ Reflect the economic substance of result in financial statements that achieve a
transaction, other events and fair presentation.
conditions, and not merely the legal ● An entity whose financial statements
form; comply with IFRSs shall make an
➔ Are neutral, i.e. free from bias; EXPLICIT and UNRESERVED statement
➔ Are prudent; and of such compliance in the notes.
● An entity shall not describe financial
➔ Are complete in all material
statements as complying with IFRSs
respects.
unless they comply with all the
● In making the judgment, management shall
requirements of IFRSs.
refer to, and consider the applicability of,
● In virtually all circumstances, an entity
the following sources in descending order:
achieves a fair presentation by compliance
➔ The requirement in IFRSs dealing with applicable IFRSs.
with similar and related issues; and ● A fair presentation also requires an entity:
➔ The definitions, recognition criteria ➔ to select and apply accounting
and measurement concepts for policies in accordance with IAS 8.
assets, liabilities, income and
➔ to present information, including
expense in the Conceptual
accounting policies, in a manner
Framework for Financial Reporting
that provides relevant, reliable,
(Conceptual Framework)
comparable and understandable
➔ In making the judgment, information.
management may also consider the
➔ to provide additional disclosures
most recent pronouncements of
when compliance with the specific
other standard-setting bodies that
requirements in IFRSs is
use a similar conceptual framework
insufficient to enable users to
to develop accounting standards,
understand the impact of particular
other accounting literature and
transactions, other events and
accepted industry practices.
conditions on the entity’s financial
position and financial performance.
GENERAL FEATURES ● An entity cannot rectify inappropriate
● The following are the general features for accounting principles used or by notes or
the presentation of financial statements: explanatory material.
➔ Fair presentation and compliance ● In the extremely rare circumstances in
with IFRS/PFRS which management concludes that
➔ Going Concern compliance with a requirement in an IFRS
➔ Accrual Basis of Accounting would be so misleading that it would
➔ Materiality and Aggregation conflict with the objective of financial
➔ Offsetting statements set out in the Conceptual
➔ Frequency of Reporting Framework, the entity shall depart from
➔ Comparative Information that requirement if the relevant regulatory
framework requires, or otherwise does not
➔ Consistency of Presentation prohibit, such a departure.
● When an entity departs from a requirement
FAIR PRESENTATION AND COMPLIANCE of an IFRS, it shall disclose:
WITH IFRS ➔ that management has concluded
● Financial statements shall PRESENT that the financial statements
FAIRLY position, financial performance present fairly the entity’s financial
and cash flow of an entity. position, financial performance and
● Fair presentation requires the faithful cash flows;
representation of the effects of
➔ that it has complied with the
transactions, other events and conditions in
applicable IFRSs, except that it has
accordance with the definitions and
departed from a particular
recognition criteria for assets, liabilities,
requirement to achieve a fair
income and expenses set out in the
presentation.
Conceptual Framework for Financial
Reporting (Conceptual Framework) ➔ the title of the IFRS from which the
● The application of IFRSs, with additional entity has departed, the nature of
disclosure when necessary, is presumed to the departure, including the
treatment that the iFRS would
require, the reason why that
treatment would be so misleading in consequently, it would be likely to influence
the circumstances that it would economic decisions made by users of
conflict with the objective of financial statements.
financial statements set out in the ● When assessing whether complying with a
Conceptual Framework, and the specific requirement in an IFRS would be
treatment adopted; and so misleading that it would conflict with the
➔ for each period presented, the objective of financial statements set out in
financial effect of the departure on the Conceptual Framework, management
each item in the financial considers:
statements that would have been ➔ why the objective of financial
reported in complying with the statements is not achieve in the
requirement. particular circumstances; and
● When an entity has departed from a ➔ how the entity’s circumstances
requirement of an IFRS in a prior period, differ from those of other entities
and that departure affects the amounts that comply with the requirement.
recognised in the financial statements for ● If other entities in similar circumstances
the current period, it shall make the comply with the requirement, there is a
required disclosures. rebuttable presumption that the entity’s
➔ EXAMPLE: an entity departed in a compliance with the requirement would not
prior period from a requirement in be so misleading that it would conflict with
an IFRS for the measurement of the objective of financial statements set out
assets or liabilities and that in the Conceptual Framework.
departure affects the measurement
of changes in assets and liabilities GOING CONCERN
recognised in the current period’s ● When preparing financial statements,
financial statements. management shall make an assessment of
● In the extremely rare circumstances in an entity’s ABILITY TO CONTINUE as a
which management concludes that going concern.
compliance with a requirement in an IFRS ● An entity shall prepare financial statements
would be so misleading that it would on a going concern basis unless
conflict with the objective of financial management eithers intends to liquidate
statement set out in the Conceptual the entity or to cease trading, or has no
Framework, but the relevant regulatory realistic alternative but to do so.
framework prohibits departure from the ● When management is aware, in making its
requirement, the entity shall, to the assessment, of material uncertainties
maximum extent possible, reduce the related to events or conditions that may
perceived misleading aspects of cast significant doubt upon the entity’s
compliance by disclosing: ability to continue as a going concern, the
➔ the title of the IFRS in question, the entity shall disclose those uncertainties.
nature of the requirement, and the ● When an entity does not prepare financial
reason why management has statements ion a going concern basis, it
concluded that complying with that shall:
requirement is so misleading in the ➔ disclose that fact;
circumstances that it conflicts with ➔ the basis on which it prepared the
the objective of financial statements financial statements; and
set out in the Conceptual ➔ the reason why the entity is not
Framework; and regarded as a going concern.
➔ for each period presented, the ● In assessing whether the going concern
adjustment to each item in the assumption is appropriate, management
financial statements that takes into account all available information
management has concluded would about the future, which is at least, but is not
be necessary to achieve a fair limited to, twelve months from the end of
presentation. the reporting period.
● An item of information would conflict with ● The degree of consideration depends on
the objective of financial statements when the facts in each case.
it does not represent faithfully the ● When an entity has a history of profitable
transactions, other events and conditions operations and ready access to financial
that it either purports to represent or could resources, the entity may reach a
reasonably be expected to represent and, conclusion that the going concern basis of
accounting is appropriate without detailed ● Some IFRSs specify information that is
analysis. required to be included in the financial
● In other cases, management may need to statements, which include the notes.
consider a wide range of factors relating to ● An entity need not to provide a specific
current and expected profitability, debt disclosure required by an IFRS if the
repayment schedules and potential information resulting from that disclosure is
sources of replacement fincancincing not material.
before it can satisfy that the going concern ● This is the case even if the IFRS contains
basis is appropriate. a list of specific requirements or describes
them as minimum requirements.
ACCRUAL BASIS OF ACCOUNTING ● An entity shall also consider whether to
● An entity shall prepare its financial provide additional disclosures when
statements, except for cash flow compliance with the specific requirement in
information, using the accrual basis of IFRS is insufficient to enable users of
accounting. financial statements to understand the
● When the accrual basis of accounting is impact of particular transactions, other
used, an entity recognises items as assets, events and conditions on the entity’s
liabilities, equity, income and expenses financial position and financial
(the elements of financial statements) performance.
when they satisfy the definitions and
recognition criteria from those elements in OFFSETTING
the Conceptual Framework. ● Offsetting means DEDUCTING ONE ITEM
FROM ANOTHER ITEM of different nature
MATERIALITY AND AGGREGATION and presenting only the net on the face of
● An entity shall PRESENT SEPARATELY the financial statements.
EACH MATERIAL CLASS OF SIMILAR ● An entity shall not offset assets and
ITEMS. liabilities or income and expenses, unless
● An entity shall present separately items of required or permitted by an IFRS.
a dissimilar nature or function unless they ● An entity reports separately both assets
are immaterial. and liabilities, and income and expenses.
● Financial statements result from ● Offsetting in the statements of profit or loss
processing large numbers of transactions and other comprehensive income or
or other events that are aggregated into financial position, except when offsetting
classes according to their nature or reflects the substance of the transaction or
function. other event, detracts from the ability of
● The final stage in the process of users both to understand the transactions,
aggregation and classification is the other events and conditions that have
presentation of condensed and classified occurred and to assess the entity’s future
data, which form line items in the financial cash flows.
statements. ● Measuring assets net of valuation
● If a line item is not individually material, it is allowances - for example, obsolescence
aggregated with other items either in those allowances on inventories and doubtful
statements or in the notes. debts allowances on receivables - is not
● An item that is not sufficiently material to offsetting.
warrant separate presentation in those ● Offsetting is allowed and applied when
statements may warrant separate presenting on the net basis reflects the
presentation in the notes. substance of the transaction or other event.
● When applying this and other IFRSs an
entity shall decide, taking into FREQUENCY OF REPORTING
consideration all relevant facts and ● An entity shall present a complete set of
circumstances, how it aggregates financial statements at least ANNUALLY.
information in the financial statements, ● When an entity changes the end of its
which include the notes. reporting period and presents financial
● An entity shall not reduce the statements for a period longer or shorter
understandability of its financial than one year, an entity shall disclose, in
statements by obscuring material addition to the period covered by the
information with immaterial information or financial statements:
by aggregating material items that have ➔ the reason for using a longer or
different natures or functions. shorter period, and
➔ the fact that amounts presented in ● An entity shall retain the presentation and
the financial statements are not classification of items in the financial
entirely comparable statement from one period to the next
● Normally, an entity consistently prepares unless;
financial statements for a one-year period. ➔ it is apparent, following a significant
change in the nature of the entity’s
COMPARATIVE INFORMATION operations or a review of its
● Except when IFRSs permit or require financial statements, that another
otherwise, an entity shall present presentation or classification would
comparative information in respect of the be more appropriate having regard
preceding period for all amounts reported to the criteria for the selection and
in the current period's financial statements. application of accounting policies in
● An entity shall include comparative IAS 8; or
information for narrative and descriptive ➔ an IFRS requires a change in
information if it is relevant to understanding presentation
the current period’s financial statements. ● The manner of presentation of financial
● An entity shall present, as a minimum, two statements shall be retained from period to
statements of financial position, two period, unless the changed presentation is
statements of profit and loss and other more useful to the users and enhances the
comprehensive income, two separate relevance of information.
statements of profit and loss (if presented), ● If the presentation is changed, comparative
two statements of cash flows and two financial statements for the prior period
statements of changes in equity, and shall be represented, unless impracticable
related notes. to do so.
● In some cases, narrative information ● When an entity reclassifies comparative
provided in the financial statements for the amounts, it shall disclose;
preceding period continues to be relevant ➔ the nature of reclassification;
in the current period. ➔ the amount of each item or class of
➔ EXAMPLE: an entity discloses in items that is reclassified; and
the current period details of a legal ➔ the reason for the reclassification
dispute, the outcome of which was ● When it is impracticable to reclassify
uncertain at the end of the comparative amounts, an entity shall
preceding period and is yet to be disclose the reason for not reclassifying the
resolved. Users may benefit from amount and the nature of the adjustments
the disclosure of information that that would have been made if the amount
the uncertainty existed at the end of had been reclassified.
the preceding period and from the
disclosure of information about the IDENTIFICATION OF THE FINANCIAL
steps that have been taken during
STATEMENTS
the period to resolve the
● An entity shall clearly identify the financial
uncertainty.
statements and distinguish them from other
● When an enterprise makes retrospective
information in the same published
adjustment for any one or combination of
document. IFRSs apply only to financial
the following;
statements, and not necessarily to other
➔ Change in accounting policy information presented in an annual report,
➔ Correction of prior period errors; a regulatory filing, or another document.
and Therefore, it is important that users can
➔ Reclassification or amendment of distinguish information that is prepared
items in the financial statements. using IFRSs from other information that
● Three statement of financial position shall may be useful to users but is not the subject
be presented, namely as at; of those requirements.
➔ The end of the current period ● An entity shall clearly identify each financial
➔ The end of the immediate prior statement and the notes. In addition, an
period; and entity shall display the following information
➔ The beginning of the preceding prominently, and repeat it when necessary
period. for the information presented to be
understandable:
CONSISTENCY OF PRESENTATION ➔ the name of the reporting entity or
other means of identification, and
any charge in that information from LIMITATIONS OF THE FINANCIAL
the end of the preceding reporting STATEMENTS
period; ● The real worth of the business is not
➔ whether the financial statements reflected in the financial statements
are of an individual entity ir a group because of the use of different
of entities; measurement bases.
➔ the date of the end of the reporting ● The financial statements present values
period or the period covered by the that are a mixture of different levels of
set of financial statements or notes; purchasing power.
➔ the presentation currency; and ● Due to some measurement uncertainties,
➔ the level of rounding used in some financial statement elements are not
presenting amounts in the financial recognized because only events and
statements. transactions capable of measurement and
● An entity often makes financial statements have met the recognition criteria can be
more understandable by presenting reflected.
information in thousands or millions of units ● Information such as moral efficiency of
of the presentation currency. company personnel, the strategic location
● This is acceptable as long as the entity of the company’s production facilities and
discloses the level of rounding and does markets, the enterprise’s contribution to the
not omit material information. development and deterioration of the
environment are reported nowhere in the
FUNDAMENTALLY RELATED FINANCIAL financial statements.
STATEMENTS
● The financial statements are fundamentally THE SECURITIES AND EXCHANGE
related because they relate to the effects of COMMISSION
the same sets of transactions completed by ● The national government regulatory
the enterprise during the reporting period. agency charged with supervision of the
● STATEMENT OF COMPREHENSIVE corporate sector with the original function
INCOME. The profit is the net effect of of regulating the sale and registration of
income and expenses presented in the securities.
profit section which is transferred to the ● MANDATE: Development and regulation of
appropriate equity account in the the corporate and capital market toward:
Statement of Changes in Equity. ➔ Good corporate governance;
● STATEMENT OF CHANGES IN EQUITY. ➔ Protection of investors;
Presents the changes in each major equity ➔ Widest participation of ownership;
component during the period and and
reconciles the beginning equity component ➔ Democratization of wealth
balances with the ending equity component ● Requires the submission of an annual
balances, the latter being presented as the report by companies together with financial
final figures and are brought forward as statements certified by an independent
equity account balances in the Statement CPA.
of Financial Position. ● Requires for internal record keeping and
● STATEMENT OF CASH FLOWS. internal controls to be complied with by
Presents information on cash inflows and entities.
outflows of cash and cash equivalents.
➔ OPERATING cash flow activities CLASSIFICATION OF REPORTING
involved the determination of profit. ENTITIES BASED ON THE APPLICABLE
➔ INVESTING cash flow activities PHILIPPINE FINANCIAL REPORTING
present inflows and outflows of FRAMEWORKS
cash affecting non-current assets. CLASSIFICATION OF ENTITIES (RULE 68,
➔ FINANCING cash flow activities are SRC)
those that arise from transactions ● Large and/or publicly accountable entities;
with non-trade lenders as well as ● Medium-sized entities;
owners of the equity. ● Small entities
● Micro entities

LARGE AND/OR PUBLICLY ACCOUNTABLE ● PFRS for Small and Medium-sized Entities
ENTITIES (PFRS/IFRS for SMEs)
Those that meet any of the following criteria: ● PFRS for Small Entities
● Total assets of more than P350M or total ● Income Tax Reporting
liabilities of more than P250M;
● Required to file financial statements under FULL PFRS/IFRS
Part II of SRC, Rule 68; ● For larger and/or publicly accountable
● In the process of filing their financial entities;
statements for the purpose of issuing any ➔ Banks, insurance companies, and
class of instruments in a public market; other entities which are holders of
● Holders of secondary licenses issued by secondary licenses issued by
regulatory agencies regulatory agencies shall also apply
the requirements of their respective
MEDIUM-SIZED ENTITIES regulatory bodies
Those that meet all of the following criteria:
● Total assets of more than P100M to P350M PFRS/IFRS FOR SMEs
or liabilities of more than P100M to P250M ● For medium-sized entities
(for a parent reporting entity, the amounts ● Medium sized entities which may choose to
are based on the consolidated figures); prepare the FS following either FULL
● Not required to file their financial PFRS/IFRS or PFRS/IFRS FOR SMEs:
statements under Part II of Rule 68; ➔ A subsidiary of parent reporting
● Not in the process of filing their financial under Full PFRS/IFRS;
statements for the purpose of issuing any ➔ A subsidiary of a foreign parent that
class of the instruments in a public market; will move towards Full PFRS/IFRS;
and
➔ A significant joint venture or
● Not holders of secondary licenses issued
associate that is part of a group that
by the regulatory agencies
is reporting under Full PFRS/IFRS;
SMALL ENTITIES ➔ A branch office or regional
Those that meet all of the following criteria: operating headquarter of a foreign
● Total liabilities of between P3M and P100M company reporting under Full
or liabilities of between P3M and P100M PFRS/IFRS;
(for a parent reporting entity, the amounts ➔ A subsidiary that is mandated to
are based on the consolidated figures); report under Full PFRS/IFRS;
● Not required to file their financial ➔ An entity that has short-term
statements under Part II of Rule 68; projection that it will breach the
● Not in the process of filing their financial quantitative threshold set in the
statements for the purpose of issuing any criteria for a medium-sized entity,
class of the instruments in a public market; provided that the event that caused
and the change in classification is
● Not holders of secondary licenses issued considered is considered
by the regulatory agencies “significant and continuing”;
➔ An entity that has been preparing
MICRO ENTITIES FS under Full PFRS/IFRS and
Those that meet all of the following criteria: decide to liquidate;
● Total assets and total liabilities of less than ➔ Other entities that the SEC may
P3M; consider as valid exceptions from
● Not required to file financial statements mandatory adoption of PFRS for
under Part II of Rule 68; SMEs.
● Not in the process of filing their financial ● A medium-sized entity, belonging to any of
statements for the purpose of issuing any the above, opting to adopt the Full
class of instruments in a public market; and PFRS/IFRS instead of the PFRS for SMEs,
● Not holders of secondary licenses issued shall include in its Notes to the Financial
by regulatory agencies Statements the facts supporting its
adoption of the Full PFRS/IFRS.
APPLICABILITY OF PHILIPPINE
FINANCIAL REPORTING FRAMEWORKS PFRS FOR SMALL ENTITIES
● Full PFRS/IFRS ● Applicable for reporting entities classified
as Small Entities;

➔ Small entities that have operations ➔ Statement of Financial Position;
or investments in another country ➔ Statement of Income; and
with different functional currency ➔ Notes to Financial Statements
shall apply instead the PFRS/IFRS ● All these components must cover a two-
for SMEs or the Full PFRS/IFRS. year comparative period.
➔ Small entities falling under any of ● The management of micro entities using a
the following, may at their option reporting framework other than PFRS for
apply the PFRS/IFRS for SMEs or Small Entities shall assess the applicability
Full PFRS/IFRS instead of PFRS of the basis of accounting considering the
for Small Entities: nature of the entity, the objective of the
➔ A subsidiary of parent reporting financial statements and the requirements
under Full PFRS/IFRS or of the law or regulators.
PFRS/IFRS for SMEs; ● The SEC requires the reporting entity to
➔ A subsidiary of a foreign parent that adopt a higher framework should the
will move towards Full PFRS/IFRS prescribed thresholds for total assets or
or PFRS/IFRS for SMEs; liabilities fall within different classification of
➔ A significant joint venture or the reporting entity.
associate that is part of a group that
is reporting under Full PFRS/IFRS
or PFRS/IFRS for SMEs; CHAPTER 4
➔ A branch office or regional PREPARING THE FINANCIAL
operating headquarter of a foreign STATEMENTS
company reporting under Full
PFRS/IFRS or PFRS/IFRS for
SMEs; COMPONENTS FINANCIAL STATEMENTS
➔ An entity that has short-term A. STATEMENT OF FINANCIAL POSITION:
projection that it will breach the the financial position of the entity as of a
quantitative threshold set in the given reporting date, comprising assets,
criteria for a small entity, provided liabilities and equity.
that the event that caused the B. STATEMENT OF COMPREHENSIVE
change in classification is INCOME: The performance of an entity for
considered is considered a given reporting period. Two components
“significant and continuing”; of comprehensive income are presented:
profit or loss and other comprehensive
➔ An entity that has a concrete plan to
income.
conduct an initial public offering
C. STATEMENT OF CASH FLOWS: The
within the next two years;
historical changes in cash and cash
➔ An entity that has been preparing equivalents during a reporting period.
FS under Full PFRS/IFRS for SMEs D. STATEMENT OF CHANGES IN EQUITY:
and decide to liquidate; and Events that cause changes in equity and
➔ Other entities that the SEC may include profit or loss, other comprehensive
consider as valid exceptions from income and transactions with owners of the
mandatory adoption of PFRS for enterprise.
Small Entities. E. NOTES TO THE FINANCIAL
● Small Entities which opted to apply the STATEMENTS: The accounting policies
PFRS for SMEs or Full PFRS under any of adopted by the management, schedules to
the foregoing grounds shall include in its support the balances presented on the face
FS the facts supporting their adoption of of the financial statements and other
the PFRS for SMEs for Full PFRS. information that may be relevant to the
users but is not appropriately presented on
INCOME TAX REPORTING the face of the financial statements.
● Micro entities have the option of adopting
either the PFRS for Small Entities or the RESPONSIBILITY FOR THE
income tax basis.
PRESENTATION OF FINANCIAL
● The following at a minimum, shall consist
the mirco entities’ FS;
STATEMENTS
● Financial statements portray the economic
➔ The Statement of Management’s activities and the result of the economic
Responsibility; activities undertaken by the enterprise
➔ Auditor’s Report; during a reporting period. Financial
statements are generated internally by an (b) It is held primarily for the purpose of
enterprise and are communicated to those being traded;
who would use them as the basis for (c) It is expected to be realized within
economic decisions. twelve months after the reporting
● Financial statements are basically the period; or
representation of the company’s (d) It is cash or cash equivalent, unless
management. its is restricted from being
● The presentation of financial statements is exchanged or used to settle a
affected to a large extent by the accounting liability for at least twelve months
policies adopted by the management. from the end of the reporting period.
Accounting policies are the specific ● All other assets that do not meet any of the
principles, bases, conventions, rules and foregoing criteria are classified as non-
practices applied by an entity in preparing current assets.
financial statements. The accounting ● The operating cycle of an entity is the time
policies adopted by the management between the acquisition of assets for
should be in compliance with the financial processing and their realization in cash or
reporting frameworks discussed in the cash equivalents, When the entity’s normal
previous chapter. Financial statements that operating cycle is not clearly identifiable, it
are in compliance with the appropriate is assumed to be twelve months
reporting framework are presumed to be (paragraph 68, IAS 1). A manufacturing
fairly presented and comparable with entity’s normal operating cycle is
financial statements of other enterprises presented overleaf.
within the same classification.
● Financial statements, except the statement
of cash flows, are prepared applying the
ASSET REASON FOR
accrual basis.
CLASSIFICATION AS
CURRENT ASSET
STATEMENT OF FINANCIAL POSITION
● The statement of financial position, which CASH Unless otherwise
is conventionally called the balance sheet, described, presumed
presents the financial position of an to be unrestricted.
enterprise as of a given date.
● It presents three elemental assets, TRADE Expected to be
liabilities and equity RECEIVABLES realized in the entity’s
● Philippine Accounting Standards (PAS 1) (Accounts and Notes normal operating
1, Presentation of Financial Statements, Receivable arising cycle.
requires the presentation of assets and from sale of goods or
liabilities following the current and non- rendering of services)
current classification, unless presentation
based on liquidity provides information that INVENTORIES Expected to be sold in
is more relevant to the users. This means the entity’s normal
that as a general rule assets are classified operating cycle.
under either assets or non-current assets.
Likewise, liabilities are classified under PREPAID EXPENSES Expected to be
either current liabilities or non-current consumed in the
liabilities. This manner of presentation aids entity’s normal
the users to evaluate more readily the operating cycle.
availability of the enterprise to meet its
current obligations. FINANCIAL ASSETS Held primarily for the
AT FAIR VALUE purpose of being
CURRENT AND NON-CURRENT ASSETS THROUGH PROFIT traded.
● An asset is classified as a current asset if it OR LOSS (For
satisfies any one of the following criteria example, investments
(paragraph 66, IAS 1 Presentation of in shares of stock or
Financial Statements): investments in debt
(a) It is expected to be realized in, or is instruments of other
intended for sale or consumption in entities that are
the entity's normal operating cycle; currently being traded
in capital markets and

The following are examples of obligations normally
are intended to be sold
classified as current liabilities:
currently)
LIABILITY REASON FOR
NON-TRADE Expected to be CLASSIFICATION AS
RECEIVABLES realized within twelve CURRENT LIABILITY
COLLECTIBLE months after the
WITHIN 12 MONTHS reporting period TRADE PAYABLES Expected to be settled
(for example: (Accounts payable and in the entity’s normal
dividends receivable, Notes Payable which operating cycle
interest receivable, arise from purchase of
and advances to goods or services in
officers due currently) the normal course of
business)
The following are examples of non-current assets: ACCRUED EXPENSE Expected to be settled
(a) Property, Plant and equipment , which in the entity’s normal
include land, building , equipment, furniture operating cycle
and fixtures, tools, if used in the normal
operations of the entity or if intended to be DIVIDENDS Expected to be settled
used in the operations of the entity in the PAYABLE 12 months after the
future. reporting period
(b) Intangible assets, such as patents,
franchise, trademarks, customer list, which UNEARNED Expected to be settled
provide economic benefit and rights to the REVENUES in the entity’s normal
entity for a period of more than twelve operating cycle
months.
(c) Investment Property, which includes land LONG-TERM NOTES The entity does not
or building that are held for appreciation in PAYABLE DUE have an unconditional
value, for rental to others for an WITHIN 12 MONTHS, right to postpone
undetermined future use. maturity date is settlement of the
(d) Financial assets that are not expected to be extended for a period obligation for at least
realized in cash in the entity;s normal of 5 years from original 12 months after the
operating cycle or within 12 months after maturity date. reporting period.
the reporting period, such as long-term Arrangement for the
advances to officers and key employees, extension of maturity
other non-trade receivab;es which are date is completed after
collectible after at least twelve months after the reporting period.
the reporting period, financial assets at fair
value through other comprehensive
● All other liabilities that do not meet any of
income, debt investments at amortized cost
the foregoing criteria are classified as non-
and investments in associates.
current liabilities. Examples of obligations
that are generally classified as non-current
CURRENT AND NON-CURRENT LIABILITIES
liabilities are as follows:
● Current liabilities include obligations which
(a) Long term notes payable that are
meet any of the following criteria
due beyond 12 months from the
(paragraph 69, IAS 1):
end of the reporting period;
(a) It is expected to be settled in the
(b) Bonds payable that are due beyond
entity’s normal operating cycle;
twelve months after the reporting
(b) It is held primarily for the purpose of
period;
being traded;
(c) Long-term notes payable that are
(c) It is due to be settled within 12
due within twelve months after the
months after the reporting period; or
reporting period, but which terms
(d) The entity does not have an
are extended on a long-term basis
unconditional right to defer
and negotiation has been
settlement of the liability for at least
completed before the end of the
12 months after the re[porting
reporting period.
period.
EQUITY
● The equity of a corporate form is presented
according to a source.
● Components of Shareholder’s Equity: ● The statement presenting the financial
- Contributed capital performance of an entity is an expanded
- Retained earnings statements in 2 sections:
- Cumulative other comprehensive ⭑ Profit or Loss section
income ⭑ Other comprehensive income
section
CONTRIBUTED CAPITAL
● Share capital FORMS OF SCI
⭑ Preference share capital ● ONE-STATEMENT FORM - includes both
⭑ Ordinary share capital the profit or loss and the other
● Share premium/additional contributed comprehensive income.
capital ● TWO-STATEMENT FORM - one
statement for the profit or loss and another
RETAINED EARNINGS statement for the comprehensive income.
● represent cumulative profits earned by the
corporation reduced by the dividend EARNINGS PER SHARE
declared. ● If an entity’s capital structure is composed
of more than one class of share capital, the
CUMULATIVE OTHER COMPREHENSIVE profit which serves as the numerator for the
INCOME computation shall be reduced by the
● presents change in equity arising from non- preference dividends as follows:
owner transactions that do not pass ⭑ If the Preference Share (PS) is
through the profit or loss but are taken to cumulative, the annual dividend
other comprehensive income of the requirement, whether declared or
corporation. not, shall be deducted from the
● Examples: profit to arrive at profit attributable
⭑ Revaluation surplus from to Ordinary Shareholders (OS).
revaluation increment based on ⭑ If the PS is non-cumulative, only the
independent appraisal of PPE and dividend on preference share that
intangible assets, has been declared during the
⭑ Unrealized gain or losses on period shall be deducted from profit
investments at FVOCI, to arrive at profit attributable to OS.
⭑ Foreign currency translation gains
and losses of assets and liabilities STATEMENT OF CASH FLOWS
of a foerign operation, ● Presents information on the inflows and
⭑ Actuarial gains and losses on outflows of cash equivalents, classified into
defined benefit employee operating activities, investing activities, and
retirement plans. financing activities.
FORMS OF THE STATEMENT OF OPERATING ACTIVITIES

FINANCIAL POSITION ● Include all transactions and other events
● ACCOUNT FORM - resembles the T- that enter into determination of income in
account profit or loss. Examples:
● REPORT FORM - a continuous format of ● Collections from customers
presenting all three elements. Liabilities are ● Payment to suppliers
presented immediately after total assets ● Payment to employees for wages and
and equity accounts are listed after salaries
liabilities. ● Payment to government for taxes
● FINANCIAL POSITION FORM - ● Payment to lenders for interest
emphasized the working capital of the firm
INVESTING ACTIVITIES
STATEMENT OF COMPREHENSIVE ● Include all cash transactions affecting
INCOME assets not normally identified with normal
● Presents the performance of the entity for operating cycle. Examples:
a given period of time: ⭑ Granting of non-trade loans and
● Two elements: collecting them
⭑ INCOME, and
⭑ EXPENSES
⭑ Acquiring and disposing
investments in non-current financial INCREASE/DECREASE IN INVENTORIES
assets, and ● Increase is deducted from profit because
⭑ Acquiring and disposing PPE and increase in inventories results from
intangible assets purchase of goods, which in effect causes
a decrease in the cash balance.
NON-CASH ACTIVITIES ● Decrease in inventories is added to profit
● Non-cash activities that significantly affect because it represents an expense in the
assets and liabilities are not presented in current year from a purchase made last
the face of the statement of cash flows but year.
may be presented in the accompanying
notes to the financial statements. INCREASE/DECREASE IN PREPAID
EXPENSES
METHODS OF PRESENTING CASH FLOWS ● Increase is deducted from profit because it
FROM OPERATING ACTIVITIES results from payment of cash this year, but
● DIRECT METHOD the expense is to be incurred in subsequent
period and is not yet deducted from current
⭑ Enumerates the major classes of
year’s income.
gross operating receipts and
● Decrease in prepaid expense is added
payments.
because it results from incurrence of
⭑ Reconstructions are made based expense this year, with payment already
on income statement accounts and made in a prior year.
changes in account balances in the
statement of financial position to INCREASE/DECREASE IN A/P
arrive at the amounts shown as ● Increase in AP and accrued expense is
receipts and payment for added to net income because it is
operations. presumed to have resulted from current
● INDIRECT METHOD year purchases or expenses that were
⭑ Present cash flows from operations deducted to arrive at profit but cash patent
by reconciling profit or loss before is to be made in a subsequent period.
income tax top operating cash ● Decrease in these accounts is deducted
flows. because the related expense had been
⭑ Adjustments are made for income reported in a prior year but it required cash
and expenses not involving cash or outflow during this year.
receipts or cash payments.
⭑ Examples: Depreciation, INDIRECT METHOD
amortization of intangible assets,
gains and losses on sale of non-
cash assets and gains and losses
on debt extinguishment.
DEPRECIATION AND AMORTIZATION

● Added back to profit
● Reduces profit without any cash outflow.
GAINS
● Deducted from profit because they are
STATEMENT OF CHANGES IN EQUITY
already included in the proceeds or
● Shows the movement of each equity
payment is classified under either investing
component during a reporting period.
or financing activities
● Final figures of these equity components
are presented in the statement of financial
INCREASE/DECREASE IN A/R
position under the equity portion
● Increases in AR is deducted from profit
● The statements provide one column for
because it arises from revenue without
each equity component.
cash collections.
● Decrease in A/R is added to profit because
the revenue has been recognized in a prior NOTES TO THE FINANCIAL STATEMENTS
year but the cash collection is made only ● To achieve completeness, information that
during the year. cannot be appropriately presented in the

face of the financial statements is obligation or constructive obligation to
presented in the notes to the FS. make such payments as a result of events
● Includes: before the end of the reporting period.
A. The basis for the presentation of FS d. The discovery of fraud or errors which slow
including a summary of significant that the FS are incorrect.
accounting policies,
B. Supporting schedules for line items NON-ADJUSTING EVENTS AFTER THE
presented on the financial REPORTING PERIOD
statements, a. Relates to condition different from the
C. Other disclosures, including condition as of the reporting date.
contingent liabilities, contractual b. May be merely ignored if not considered
commitments, and events after the significant and will not affect the evaluation
reporting period which may be of the user.
relevant to the decisions to be c. Should be disclosed if material and
made eby and evaluation of the nondisclosure could influence the
users. economic decisions of users taken on the
basis of the FS.
EFFECTS OF EVENTS AFTER THE
REPORTING PERIOD
● Events after the reporting period are those EXAMPLES OF NON-ADJUSTING EVENTS
events, favorable and unfavorable that a. A major business combination or disposing
concur between the end of the reporting of a major subsidiary;
period and the date when financial b. Announcing a plan to discontinue an
statements are authorized for issue. operation, disposing of assets or settling
● The date of issuance of the FS is the date liabilities attributable to a discontinuing
when the management of the enterprise operation or entering into a binding
approves and authorizes the issue of the agreements to sell such assets or settle
FS. such liabilities;
● Two types of events that can be identified: c. Major purchases and disposals of assets,
⭑ ADJUSTING EVENTS - events that or expropriation of major assets by
provide conditions that existed at government;
the end of the reporting period. d. The destruction of a major production plant
⭑ NON-ADJUSTING EVENTS - by a fire;
events that are indicative of e. Announcing or commencing the
conditions that arose after the implementation of, a major restructuring;
reporting period. f. Major ordinary share transactions and
potential ordinary share transactions;
ADJUSTING EVENTS AFTER THE g. Abnormally large changes, after the
reporting date, in asset prices or foreign
REPORTING PERIOD
exchange rates;
● Confirms a condition that already exists at
h. Changes in tax rates or tax laws enacted or
the reporting date.
announced after the reporting period that
● The entity shall adjust the amounts
have a significant effect on current and
recognized in its FS to reflect this type of
deferred tax assets and liabilities;
subsequent events in order to reclassify an
i. Entering into a significant commitments or
information, or to recognize a financial
contingent liabilities, for example by issuing
statement element that was not previously
significant guarantees; and
recognized.
j. Commencing major litigation arising solely
out of events that occurred after the
EXAMPLES OF ADJUSTING EVENTS
reporting period.
a. The settlement after the reporting period of
a court case that confirms that the entity
had a present obligation at the reporting CHAPTER 4
date. PREPARING THE FINANCIAL
b. The receipt of information after the STATEMENTS
reporting period indicating that an asset
was impaired at the reporting date. COMPONENTS FINANCIAL STATEMENTS
c. The determination after the reporting date A. STATEMENT OF FINANCIAL POSITION:
of the amount of profit-sharing or bonus the financial position of the entity as of a
payments, if the entity had a present legal
given reporting date, comprising assets, STATEMENT OF FINANCIAL POSITION
liabilities and equity. ● The statement of financial position, which
B. STATEMENT OF COMPREHENSIVE is conventionally called the balance sheet,
INCOME: The performance of an entity for presents the financial position of an
a given reporting period. Two components enterprise as of a given date.
of comprehensive income are presented: ● It presents three elemental assets,
profit or loss and other comprehensive liabilities and equity
income. ● Philippine Accounting Standards (PAS 1)
C. STATEMENT OF CASH FLOWS: The 1, Presentation of Financial Statements,
historical changes in cash and cash requires the presentation of assets and
equivalents during a reporting period. liabilities following the current and non-
D. STATEMENT OF CHANGES IN EQUITY: current classification, unless presentation
Events that cause changes in equity and based on liquidity provides information that
include profit or loss, other comprehensive is more relevant to the users. This means
income and transactions with owners of the that as a general rule assets are classified
enterprise. under either assets or non-current assets.
E. NOTES TO THE FINANCIAL Likewise, liabilities are classified under
STATEMENTS: The accounting policies either current liabilities or non-current
adopted by the management, schedules to liabilities. This manner of presentation aids
support the balances presented on the face the users to evaluate more readily the
of the financial statements and other availability of the enterprise to meet its
information that may be relevant to the current obligations.
users but is not appropriately presented on
the face of the financial statements. CURRENT AND NON-CURRENT ASSETS
● An asset is classified as a current asset if it
RESPONSIBILITY FOR THE satisfies any one of the following criteria
PRESENTATION OF FINANCIAL (paragraph 66, IAS 1 Presentation of
STATEMENTS Financial Statements):
● Financial statements portray the economic (a) It is expected to be realized in, or is
activities and the result of the economic intended for sale or consumption in
activities undertaken by the enterprise the entity's normal operating cycle;
during a reporting period. Financial (b) It is held primarily for the purpose of
statements are generated internally by an being traded;
enterprise and are communicated to those (c) It is expected to be realized within
who would use them as the basis for twelve months after the reporting
economic decisions. period; or
● Financial statements are basically the (d) It is cash or cash equivalent, unless
representation of the company’s it is restricted from being
management. exchanged or used to settle a
● The presentation of financial statements is liability for at least twelve months
affected to a large extent by the accounting from the end of the reporting period.
policies adopted by the management. ● All other assets that do not meet any of the
Accounting policies are the specific foregoing criteria are classified as non-
principles, bases, conventions, rules and current assets.
practices applied by an entity in preparing ● The operating cycle of an entity is the time
financial statements. The accounting between the acquisition of assets for
policies adopted by the management processing and their realization in cash or
should be in compliance with the financial cash equivalents, When the entity’s normal
reporting frameworks discussed in the operating cycle is not clearly identifiable, it
previous chapter. Financial statements that is assumed to be twelve months
are in compliance with the appropriate (paragraph 68, IAS 1). A manufacturing
reporting framework are presumed to be entity’s normal operating cycle is
fairly presented and comparable with presented overleaf.
financial statements of other enterprises
within the same classification. ASSET REASON FOR
● Financial statements, except the statement CLASSIFICATION AS
of cash flows, are prepared applying the CURRENT ASSET
accrual basis.
CASH Unless otherwise
(d) Financial assets that are not expected to be
described, presumed
realized in cash in the entity;s normal
to be unrestricted.
operating cycle or within 12 months after
TRADE Expected to be the reporting period, such as long-term
RECEIVABLES realized in the entity’s advances to officers and key employees,
(Accounts and Notes normal operating other non-trade receivab;es which are
Receivable arising cycle. collectible after at least twelve months after
from sale of goods or the reporting period, financial assets at fair
rendering of services) value through other comprehensive
income, debt investments at amortized cost
INVENTORIES Expected to be sold in and investments in associates.
the entity’s normal
operating cycle. CURRENT AND NON-CURRENT LIABILITIES
● Current liabilities include obligations which
PREPAID EXPENSES Expected to be meet any of the following criteria
consumed in the (paragraph 69, IAS 1):
entity’s normal (a) It is expected to be settled in the
operating cycle. entity’s normal operating cycle;
(b) It is held primarily for the purpose of
FINANCIAL ASSETS Held primarily for the being traded;
AT FAIR VALUE purpose of being (c) It is due to be settled within 12
THROUGH PROFIT traded. months after the reporting period; or
OR LOSS (For (d) The entity does not have an
example, investments unconditional right to defer
in shares of stock or settlement of the liability for at least
investments in debt 12 months after the re[porting
instruments of other period.
entities that are The following are examples of obligations normally
currently being traded classified as current liabilities:
in capital markets and
are intended to be sold
LIABILITY REASON FOR
currently)
CLASSIFICATION AS
NON-TRADE Expected to be CURRENT LIABILITY
RECEIVABLES realized within twelve
TRADE PAYABLES Expected to be settled
COLLECTIBLE months after the
(Accounts payable and in the entity’s normal
WITHIN 12 MONTHS reporting period
Notes Payable which operating cycle
(for example:
arise from purchase of
dividends receivable,
goods or services in
interest receivable,
the normal course of
and advances to
business)
officers due currently)
ACCRUED EXPENSE Expected to be settled
The following are examples of non-current assets: in the entity’s normal
(a) Property, Plant and equipment , which operating cycle
include land, building , equipment, furniture
and fixtures, tools, if used in the normal DIVIDENDS Expected to be settled
operations of the entity or if intended to be PAYABLE 12 months after the
used in the operations of the entity in the reporting period
future.
(b) Intangible assets, such as patents, UNEARNED Expected to be settled
franchise, trademarks, customer list, which REVENUES in the entity’s normal
provide economic benefit and rights to the operating cycle
entity for a period of more than twelve
LONG-TERM NOTES The entity does not
months.
PAYABLE DUE have an unconditional
(c) Investment Property, which includes land
WITHIN 12 MONTHS, right to postpone
or building that are held for appreciation in
maturity date is settlement of the
value, for rental to others for an
extended for a period obligation for at least
undetermined future use.
CUMULATIVE OTHER COMPREHENSIVE
of 5 years from original 12 months after the
INCOME
maturity date. reporting period.
● presents change in equity arising from non-
Arrangement for the
owner transactions that do not pass
extension of maturity
through the profit or loss but are taken to
date is completed after
other comprehensive income of the
the reporting period.
corporation.
● EXAMPLES
● All other liabilities that do not meet any of ➔ Revaluation surplus from
the foregoing criteria are classified as non- revaluation increment based on
current liabilities. Examples of obligations independent appraisal of PPE and
that are generally classified as non-current intangible assets,
liabilities are as follows: ➔ Unrealized gain or losses on
(a) Long term notes payable that are investments at FVOCI,
due beyond 12 months from the ➔ Foreign currency translation gains
end of the reporting period; and losses of assets and liabilities
(b) Bonds payable that are due beyond of a foreign operation,
twelve months after the reporting
➔ Actuarial gains and losses on
period;
defined benefit employee
(c) Long-term notes payable that are
retirement plans.
due within twelve months after the
reporting period, but which terms
are extended on a long-term basis FORMS OF THE STATEMENT OF
and negotiation has been FINANCIAL POSITION
completed before the end of the ● ACCOUNT FORM - resembles the T-
reporting period. account
EQUITY
● The equity of a corporate form is presented
according to a source.
● Components of Shareholder’s Equity:
➔ Contributed capital
➔ Retained earnings
➔ Cumulative other comprehensive
income
● Line items:
➔ Share capital
➔ Subscribed share capital
● REPORT FORM - a continuous format of
➔ Ordinary share capital presenting all three elements. Liabilities are
➔ Preference share capital presented immediately after total assets
➔ Share premium and equity accounts are listed after
➔ Retained Earnings liabilities.
➔ Appropriated retained earnings
➔ Revaluation surplus
➔ Treasury shares
CONTRIBUTED CAPITAL
● Share capital
➔ Preference share capital
➔ Ordinary share capital
● Share premium/additional contributed
capital
RETAINED EARNINGS
● represent cumulative profits earned by the
corporation reduced by the dividend
declared.

● Line items:
➔ Revenue
➔ Gain or loss from derecognition of
financial assets
➔ Finance cost
➔ Share of income or loss from
associate
➔ Income Tax Expense
➔ Single amount for discontinued
operations
➔ Profit or loss for the period
➔ Total other comprehensive income
➔ Comprehensive income for the
period
PRESENTATION OF EXPENSES
● The expense in the income statement may
be presented using two methods:
➔ The nature of expense method
➔ Function of expense method
● Under the FUNCTION OF EXPENSE
METHOD, expenses are classified
according to purpose of the expense in the
● FINANCIAL POSITION FORM - operation of business. The function are as
emphasized the working capital of the firm follows:
➔ Cost of goods sold (Merchandising
STATEMENT OF COMPREHENSIVE and Manufacturing Business)
INCOME ➔ Selling expense
● Presents the performance of the entity for ➔ General and administrative
a given period of time: expense
● Two elements: ➔ Other operating expense
➔ INCOME, and ● Under the NATURE OF EXPENSE
➔ EXPENSES METHOD, there is no need to classify the
● The statement presenting the financial expenses by function. Expenses are
performance of an entity is an expanded presented based on their account names in
statements in 2 sections: the general ledger.
➔ PROFIT OR LOSS section ● The INTEREST EXPENSE or FINANCE
COST and INCOME TAX EXPENSE are
➔ OTHER COMPREHENSIVE
required to be presented as a line item in
INCOME section
the income statement.
FORMS OF SCI
● ONE-STATEMENT FORM - includes both
the profit or loss and the other
comprehensive income.
● TWO-STATEMENT FORM - one
statement for the profit or loss and another
statement for the comprehensive income.
● Based on the following illustration, Income

is presented first followed by expense.
● Total income minus operating expense is
called OPERATING INCOME.
● INTEREST EXPENSE is presented
separately because this is a non-operating
expense. It means this is an expense that
has nothing to do with the operation activity METHODS OF PRESENTING CASH FLOWS
of the business. FROM OPERATING ACTIVITIES
● INCOME TAX EXPENSE is also presented ● DIRECT METHOD
separately. ➔ Enumerates the major classes of
gross operating receipts and
EARNINGS PER SHARE payments.
● If an entity’s capital structure is composed ➔ Reconstructions are made based
of more than one class of share capital, the on income statement accounts and
profit which serves as the numerator for the changes in account balances in the
computation shall be reduced by the statement of financial position to
preference dividends as follows: arrive at the amounts shown as
⭑ If the Preference Share (PS) is receipts and payment for
cumulative, the annual dividend operations.
requirement, whether declared or ● INDIRECT METHOD
not, shall be deducted from the ➔ Present cash flows from operations
profit to arrive at profit attributable by reconciling profit or loss before
to Ordinary Shareholders (OS). income tax top operating cash
⭑ If the PS is non-cumulative, only the flows.
dividend on preference share that ➔ Adjustments are made for income
has been declared during the and expenses not involving cash or
period shall be deducted from profit receipts or cash payments.
to arrive at profit attributable to OS.
➔ Examples: Depreciation,
amortization of intangible assets,
STATEMENT OF CASH FLOWS gains and losses on sale of non-
● Presents information on the inflows and cash assets and gains and losses
outflows of cash equivalents, classified into on debt extinguishment.
operating activities, investing activities, and
financing activities. DEPRECIATION AND AMORTIZATION
● Added back to profit
OPERATING ACTIVITIES ● Reduces profit without any cash outflow.
● Include all transactions and other events
that enter into determination of income in GAINS
profit or loss. Examples: ● Deducted from profit because they are
● Collections from customers already included in the proceeds or
● Payment to suppliers payment is classified under either investing
● Payment to employees for wages and or financing activities
salaries
● Payment to government for taxes INCREASE/DECREASE IN A/R
● Payment to lenders for interest ● Increases in AR is deducted from profit
because it arises from revenue without
INVESTING ACTIVITIES cash collections.
● Include all cash transactions affecting ● Decrease in A/R is added to profit because
assets not normally identified with normal the revenue has been recognized in a prior
operating cycle. Examples: year but the cash collection is made only
➔ Granting of non-trade loans and during the year.
collecting them
➔ Acquiring and disposing INCREASE/DECREASE IN INVENTORIES
investments in non-current financial ● Increase is deducted from profit because
assets, and increase in inventories results from
➔ Acquiring and disposing PPE and purchase of goods, which in effect causes
intangible assets a decrease in the cash balance.
● Decrease in inventories is added to profit
NON-CASH ACTIVITIES because it represents an expense in the
● Non-cash activities that significantly affect current year from a purchase made last
assets and liabilities are not presented in year.
the face of the statement of cash flows but
may be presented in the accompanying
notes to the financial statements.

INCREASE/DECREASE IN PREPAID relevant to the decisions to be
EXPENSES made eby and evaluation of the
● Increase is deducted from profit because it users.
results from payment of cash this year, but
the expense is to be incurred in subsequent EFFECTS OF EVENTS AFTER THE
period and is not yet deducted from current REPORTING PERIOD
year’s income. ● Events after the reporting period are those
● Decrease in prepaid expense is added events, favorable and unfavorable, that
because it results from incurrence of concur between the end of the reporting
expense this year, with payment already period and the date when financial
made in a prior year. statements are authorized for issue.
● The date of issuance of the FS is the date
INCREASE/DECREASE IN A/P when the management of the enterprise
● Increase in AP and accrued expense is approves and authorizes the issue of the
added to net income because it is FS.
presumed to have resulted from current ● Two types of events that can be identified:
year purchases or expenses that were ➔ ADJUSTING EVENTS - events that
deducted to arrive at profit but cash patent provide conditions that existed at
is to be made in a subsequent period. the end of the reporting period.
● Decrease in these accounts is deducted
➔ NON-ADJUSTING EVENTS -
because the related expense had been
events that are indicative of
reported in a prior year but it required cash
conditions that arose after the
outflow during this year.
reporting period.
INDIRECT METHOD
ADJUSTING EVENTS AFTER THE
REPORTING PERIOD
● Confirms a condition that already exists at
the reporting date.
● The entity shall adjust the amounts
recognized in its FS to reflect this type of
subsequent events in order to reclassify
information, or to recognize a financial
statement element that was not previously
recognized.
STATEMENT OF CHANGES IN EQUITY
● Shows the movement of each equity EXAMPLES OF ADJUSTING EVENTS
component during a reporting period. a. The settlement after the reporting period of
● Final figures of these equity components a court case that confirms that the entity
are presented in the statement of financial had a present obligation at the reporting
position under the equity portion date.
● The statements provide one column for b. The receipt of information after the
each equity component. reporting period indicating that an asset
was impaired at the reporting date.
NOTES TO THE FINANCIAL STATEMENTS c. The determination after the reporting date
● To achieve completeness, information that of the amount of profit-sharing or bonus
cannot be appropriately presented in the payments, if the entity had a present legal
face of the financial statements is obligation or constructive obligation to
presented in the notes to the FS. make such payments as a result of events
● Includes: before the end of the reporting period.
A. The basis for the presentation of FS d. The discovery of fraud or errors which slow
including a summary of significant that the FS are incorrect.
accounting policies,
B. Supporting schedules for line items NON-ADJUSTING EVENTS AFTER THE
presented on the financial REPORTING PERIOD
statements, a. Relates to condition different from the
C. Other disclosures, including condition as of the reporting date.
contingent liabilities, contractual
commitments, and events after the
reporting period which may be
b. May be merely ignored if not considered information about the effects of
significant and will not affect the evaluation transactions, other events or
of the user. conditions on the entity’s financial
c. Should be disclosed if material and position, financial performance or
nondisclosure could influence the cash flows.
economic decisions of users taken on the
basis of the FS. VOLUNTARY AND INVOLUNTARY
CHANGE IN ACCOUNTING POLICY
● A change in accounting policy that is
EXAMPLES OF NON-ADJUSTING EVENTS required by the IFRS is referred to as
a. A major business combination or disposing INVOLUNTARY CHANGE in accounting
of a major subsidiary; policy.
b. Announcing a plan to discontinue an ● A change that is affected because the
operation, disposing of assets or settling management assesses that the financial
liabilities attributable to a discontinuing statements would be more relevant to the
operation or entering into a binding users is referred to as VOLUNTARY
agreements to sell such assets or settle CHANGE in accounting policy.
such liabilities; ● NOTE: Early application of an IFRS is not
c. Major purchases and disposals of assets, a voluntary change in accounting policy.
or expropriation of major assets by
government; NOT A CHANGE IN ACCOUNTING POLICY
d. The destruction of a major production plant ● The following are not changes in
by a fire; accounting policies as provided under
e. Announcing or commencing the paragraph 16 of IAS 8:
implementation of, a major restructuring; ➔ The application of an accounting
f. Major ordinary share transactions and policy for transactions, other
potential ordinary share transactions; events, or conditions that differ in
g. Abnormally large changes, after the substance from those previously
reporting date, in asset prices or foreign occurring; and
exchange rates;
➔ The application of new accounting
h. Changes in tax rates or tax laws enacted or
policy for transaction, other events
announced after the reporting period that
or conditions that did not occur
have a significant effect on current and
previously or were immaterial.
deferred tax assets and liabilities;
● The change in accounting for equity
i. Entering into a significant commitments or
securities from equity method to
contingent liabilities, for example by issuing
accounting for measurement at fair value
significant guarantees; and
through comprehensive income because
j. Commencing major litigation arising solely
the investee ceases to be an associate of
out of events that occurred after the
the reporting enterprise.
reporting period.
● Presenting for the first time a Non-Current
Asset held for sale and measuring it at
lower of carrying amount (depreciated) and
CHAPTER 5 fair value less cost to sell because the
CHANGES IN ACCOUNTING entity encounters such transaction for the
POLICIES, CHANGE IN first time, hence, requiring a different
ACCOUNTING ESTIMATES AND treatment.
ERRORS EXAMPLE OF VOLUNTARY CHANGE IN
ACCOUNTING POLICY
CHANGE IN ACCOUNTING POLICY ● Shifting from the weighted average method
● Accounting policies are the specific to the first in, first out method (or vice versa)
principles, bases, conventions, rules and as decided by the management to make
practices in preparing and presenting the financial statements comparable with
financial statements. other entities within the same industry.
● An entity shall change an accounting policy
if the change ACCOUNTING TREATMENT FOR CHANGES IN
➔ is required by an IFRS; or ACCOUNTING POLICIES
➔ Results in the financial statements ● An involuntary change in accounting policy
providing reliable and more relevant shall be accounted for as follows:
➔ if the new accounting standard e. When applicable, the transitional
provides a transitional provision, provisions that might have an effect
the enterprise has to follow the on future periods;
transitional provision. f. For the current period, and each
➔ if the new standard does not period presented, to the extent
provide a transitional provision, the practicable, the amount of the
change shall be treated adjustment for each financial line
retrospectively, unless it is item affected and for the basic and
impracticable to do so. diluted earnings per share;
● Retrospective application means restating g. The amount of the adjustment
the comparative figures for the prior relating to periods before those
periods presented as if the new accounting presented, to the extent practicable;
policy has always been applied. and
● The cumulative effect of such change shall h. If the retrospective application is
be considered as an adjustment to the impracticable, the circumstances
beginning balance of retained earnings or that led to the existence of that
another component of equity of the earliest condition and description of how
prior period presented. and from when the change in
● Retrospective application of change in accounting policy has been applied.
accounting policy is considered to be ● When an enterprise changes its accounting
impracticable when the enterprise cannot policy voluntarily, it shall apply the change
apply the new accounting policy retrospectively, adjusting the opening
retrospectively after making every balance of each affected component of the
reasonable effort to do so. equity for the earliest period presented and
● For a particular prior period, it is other comparative amounts disclosed for
impracticable to apply a change in an each prior period presented as if the new
accounting policy retrospectively if: accounting policy had always been applied
➔ the effects of the retrospective unless it is impracticable to do so:
application are not determinable ● In addition, the entity shall disclose (par.
29, IAS 8):
➔ the retrospective application
a. The nature of change in accounting
requires assumptions about what
policy;
management’s intent would have
b. The reasons why applying the new
been in that period; or
accounting policy provides reliable
➔ the retrospective application or and more relevant information;
retrospective restatement requires c. For the current period and each
significant estimates of amounts prior presented, to the extent
and it is impossible to distinguish practicable, the amount of the
objectively information about other adjustment for each financial
information from those estimates statement line item affected and for
that provide evidence of basic and diluted earnings per
circumstances that existed on the share;
date(s) at which those amounts are d. The amount of the adjustment
to be recognized, and would have relating to periods before those
been available for that period were presented to the extent practicable;
authorized for issue. and
● When an involuntary change in accounting e. If retrospective application is
policy is adopted in the current period, an impracticable, the circumstances
entity shall disclose the following (par. 28, that led to the existence of that
IAS 8): condition and a description of how
a. The title of the IFRS; and from when the change in
b. When applicable, that the change in accounting policy has been applied.
accounting policy is made in ● In all circumstances that require
accordance with transitional restatement of prior periods presented, an
provisions; enterprise applying full IFRS will present
c. The nature of the change in three sets of statement of financial position:
accounting policy;
➔ at the end of the current period;
d. When applicable, a description of
the transitional provisions; ➔ at the end of the precious period/s;
and
➔ at the beginning of the earliest prior policies, oversights or misinterpretations of
period presented. facts, and fraud.
● In all these circumstances, when an
additional statement of financial position is ACCOUNTING TREATMENT
required, the statement of financial position ● An entity shall correct material prior period
at the beginning of the earliest prior period errors retrospectively in the first set of
presented shall have been adjusted to give financial statements authorized for issue
effect to the retrospective effect to the after their discovery by:
retrospective application of accounting ➔ restating the comparative amounts
policy, reclassification of financial for the prior period(s) presented in
statement element or any other which the error occurred; or
retrospective restatement. ➔ if the error occurred before the
earliest prior period presented,
CHANGES IN ACCOUNTING ESTIMATES restating the opening balances of
● IAS 8 defines a change in accounting assets, liabilities and equity for the
estimate as an adjustment of the carrying earliest prior period presented.
amount of an asset or a liability, or the ● Potential current period errors discovered
amount of the periodic consumption of an before the issuance of the financial
asset, that results from the assessment of statements are immediately corrected.
the present status of, and expected future ● Other than restating the prior period
benefits and obligations associated with, financial statements, an entity shall
assets and liabilities. disclose the following:
● Change in accounting estimates result from a. the nature of prior period error;
new information or new developments and, b. for each prior period presented, to
accordingly, are NOT CORRECTION OF the extent practicable, the amount
ERRORS. of the correction:
● The effect of a change in accounting 1. for each financial statement
estimate shall be recognized prospectively line item affected; and
by including it in profit or loss in: 2. (if the company is required
➔ the period of change, if the change to present earnings per
affects that period only; or share information) for basic
➔ the period of the change and future and diluted earnings per
periods, if the change affects both. share.
● An entity shall disclose the nature and c. The amount of the correction at the
amount of a change in an accounting beginning of the earliest prior period
estimate that has an effect in the current presented; and
periods, except for the disclosure of the d. If retrospective restatement is
effect on future periods when it is impracticable for a particular prior
impracticable to estimate the effect. period, the circumstances that led
● If the amount of the effect in the future to the existence of that condition
period is not disclosed because estimation and a description of how and from
is impracticable, an entity shall disclose when the error has been corrected.
that fact.
ERRORS
● Prior period errors are omissions from, and
misstatements in, the entity’s financial
statements for one or more prior periods
arising from a failure to use, or misuse of,
reliable information that was available
when financial statements for those periods
were authorised for issue and could
reasonably be expected to have been
obtained and taken into account in the
preparation and presentation of those
financial statements.
● EXAMPLES: effects of mathematical
mistakes, mistakes in applying accounting

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CONCEPTUAL FRAMEWORK AND ACCOUNTING

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FUNDAMENTAL QUALITATIVE ● MATERIALITY

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● RECOGNITION CRITERIA – An item is HISTORICAL COST: Based on a price of the

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FORMS OF THE STATEMENT OF OPERATING ACTIVITIES

DEPRECIATION AND AMORTIZATION

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● Based on the following illustration, Income

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