Review of   

Conceptual   
Framework and 
Accounting 
Rules  
Module 1: Valuation and Concepts 
Intended Learning Outcomes  
• ​Relate the conceptual framework to general and specific 
 accounting standards.  

• ​Discuss the status of the conceptual framework and illustrate ​how 

conflicts between the two sets of rules are settled.  

• S​ ummarize  the  different  component  rules  established  by  the 

conceptual  framework  and  explain  how  each  component 
interact with each other 
Lecture Content  
❖​Nature of Conceptual Framework 
❖​Concepts and Standards  

❖​Status of the conceptual framework 

❖​Scope or Territorial Jurisdictions 
❖​Objectives of the Framework  

❖​Purposes of the conceptual framework 

❖​Definition of financial statement elements 

Lecture Content (continued)  

❖​Objectives of financial reporting  
❖​Recognition principles  
❖​Measurement or valuation basis  
❖​Qualitative characteristics of decision-useful information 
❖​Concept of Capital and capital maintenance 
❖​Reporting entity and financial statements  
❖​Objective and Scope of financial statements 

Nature of 
Conceptual 
Framework 
Nature of Conceptual   
Framework  
A  conceptual  framework  can  be  defined  as  a system of ideas and 
objectives  that  lead  to  the  creation  of  a  consistent  set  of  rules  and 
standards.  Specifically  in  accounting,  the  rule  and  standards  set 
the  nature,  function  and  limits  of  financial  accounting  and 
financial  statements.  The  main  reasons  for  developing  an  agreed 
conceptual framework are that it provides:  

•a framework for setting accounting standards;  

•a basis for resolving accounting disputes;  
•fundamental principles which then do not have to be repeated 
in accounting standards. 

Concepts and 
Standards 
Concepts and Standards  
The  overall  purpose  of  accounting  standards  is  to  ​identify  proper 
accounting  practices  ​for  the  preparation  and  presentation  of 
financial  statements.  Accounting  standards  create  ​common 
 understanding  between  preparers  and  users  ​of  financial 
statements  particularly  on  how  items,  for  example  the  valuation  of 
assets  are  treated. Financial statements shall therefore comply with 
all applicable accounting standards. 

Status of the 
conceptual 
framework 
Status of the conceptual   
framework  
The Conceptual Framework is not a standard. If there is a conflict between a standard 
and the Conceptual Framework, the requirement of the standard will prevail.  
The authoritative status of the Conceptual Framework is depicted in the hierarchy of 
guidance shown below:  
Hierarchy of reporting standards:  
1. Philippine Financial Reporting Standards (PFRS)  
2. Judgment  
When making the judgment:  
​Management shall consider the following:  
a) Requirements in other PFRSs dealing with similar  
transactions  
b) Conceptual Framework  
​Management may consider the following:  
a) Pronouncements issued by other standard-setting bodies  
b) Other accounting literature and industry practices. 

Scope or Territorial 
Jurisdictions 
Scope or Territorial Jurisdictions  
The  Conceptual  Framework  is  concerned  with  general  purpose  financial 
reporting,  which  involves  the  preparation  of  general  purpose  financial 
statements.  The  Conceptual  Framework  provides  the  concepts  that 
underlie general purpose financial reporting with regard to the following:  
a) The objective of financial reporting  
b) Qualitative characteristics of useful financial information  
c) Financial statements and the reporting entity  
d) The elements of financial statements  
e) Recognition and derecognition  
f) Measurement  
g) Presentation and disclosure  
h) Concepts of capital and capital maintenance 

Objectives of the 
Framework 
Objectives of the Framework  
The  objective  of  general  purpose  financial  reporting  is  to  ​provide 
financial  information  ​about  the  reporting  entity  that  is  ​useful  ​to 
existing  and  potential  investors,  lenders  and  other  creditors  ​in 
making  decisions  ​about  providing  resources  to  the  entity.  This 
objective  is  the  foundation  of  the  Conceptual  Framework.  All  the 
other  aspects  of  the  Conceptual  framework  revolve  around  this 
objective. 

Purposes of the 
conceptual 
framework 
Purposes of the conceptual 
framework  
The Conceptual Framework prescribes the concepts of general 
purpose financial reporting. Its purpose is to:  
a)assist he International Accounting Standards Board (IASB) in 
developing standards that are based on consistent concepts;  
b)assist  preparers  in  developing  consistent  accounting  policies 
when  no  standard  applies  to  a  particular  transactions  or 
when a standard allows a choice of accounting policy; and  
 c)assist all parties in understanding and interpreting the 
standards. 

Purposes of the conceptual 

framework  
The Conceptual Framework provides the foundation for the 
development of Standards that:  
a) promote transparency by enhancing the international 
comparability and quality of financial information.  
b)strengthen accountability by reducing the information gap 
between providers of capital and the entity’s management.  
c)  contribute  to  economic  efficiency  by  helping  investors  identify 
opportunities  and  risks  around  the  world,  thus  improving  capital 
 allocation.  The  use  of  a single, trusted accounting language lowers 
the cost of capital and reduces international reporting costs. 

Definition of   
financial statement 
elements 
Definition of financial statement 
elements  
The elements of financial statements are:  
1. Assets  
 2. Liabilities  
3. Equity  
4. Income  
5. Expenses 
Definition of financial statement 
elements  
Asset  

An  asset  is  “a  present  economic  resource  controlled  by  the 
entity  as  a  result  of  past  events.  An  economic  resource  is  a  right 
that has the potential to produce economic benefits.  
 The definition of an asset has the following three 
aspects: ​a) Right  
b) Potential to produce economic benefits  
c) Control 

Definition of financial statement 

elements  
Right  
Asset is an economic resource and an economic resource is a right that has the 
potential to produce economic benefits. Rights have the potential to produce 
economic benefits including:  

a) Rights that correspond to an obligation of another party: 

– Right to receive cash, goods or services.  
 – Right to exchange economic resources with another party on favourable terms.  
– Right to benefit from an obligation of another party to transfer economic resource is a 
specified uncertain future event occurs  

b) Rights that do not correspond to an obligation of another party: ​– Right 

over physical objects (e.g., right to use a property or right to sell an inventory) – Right 
to use intellectual property 

Definition of financial statement 

elements  
Potential to produce economic benefits  

An economic resource can produce economic benefits for an entity in 

many ways. For example, the asset may be:  
a) Sold, leased, transferred or exchanged for other assets;  
b) Used singly or in combination with other assets to produce goods 
 or provide services;  
c) Used to enhance the value of other assets;  
d) Used to promote efficiency and cost savings; or  
e) Used to settle a liability. 

Definition of financial statement 

elements  
Control  
Control  means  the  entity  has  the  exclusive  right  over  the  benefits 
of  ​an  asset  and  the  ability  to  prevent  others  from  accessing  those 
benefits.  Accordingly,  if  one  party  controls  an  asset,  no  other party 
controls the asset.  
Control  does  not  mean  that  the  entity  can  ensure  the  resource  will 
produce  economic  benefits  in  all  circumstances.  It  only  means 
that  if the resource produces benefits, it is the entity who will obtain 
those benefits and not another party. 
Definition of financial statement 
elements  
Liability  
Liability is a “present obligation of the entity to transfer an 
economic resource as a result of past events. The definition of a 
liability has the following three aspects:  
a) Obligation  
b) Transfer of an economic resource  
c) Present obligation as a result of past events 
Definition of financial statement 
elements  
Obligation  

An obligation is a duty or responsibility that an entity has no practical ability to 

avoid. An obligation is either:  
a) Legal obligation – ​an obligation that results from a contract, legislation, or 
other operation of law; or  
b)  Constructive  obligation  –  ​an  obligation  that  results  from  an  entity’s  ​actions 
(e.g.,  past  practice  or  published  policies)  that  create a valid ​expectation 
on others that the entity will accept and discharge certain responsibilities  

An  obligation  is  always  owed  to  another  party.  However,  it  is  not  a  necessary 
that  the  identity  of  that  party  is  known,  for  example,  an  obligation  for 
environmental damages may be owned to the society at large. 
Definition of financial statement 
elements  
Transfer of an economic resource  
The  liability  is  the  obligation  that  has  the  potential  to  require  the 
transfer  of  an  economic  resource  to  another  party  and  not  the 
future  economic  benefits  that  the  obligation  may  cause  to  be 
transferred.  Thus,  the  obligation’s  potential  to  cause  a  transfer  of 
economic  benefits  need  not  be  certain,  or  even  likely,  for 
example,  the  transfer  may  be required only if a specified uncertain 
future  event  occurs.  What  is  important  is  that  the  obligation 
already  exists  and  that,  in  at  least  one  circumstance,  it  would 
require the entity to transfer an economic resource. 
Definition of financial statement 
elements  
Transfer of an economic resource (continued)  
Consequently, a liability can exist even if the probability of a transfer of 
economic resource is low, although that low probability affects decisions on 
whether the liability is to be recognized, how it is measured, what information is 
provided.  

a) An obligation to transfer an economic resource may be an obligation to: 

b) Pay cash, deliver goods, or render services;  

c) Exchange assets with another party on unfavourable terms; 

d) Transfer assets if a specified uncertain future event occurs; or  

e) Issue a financial instrument that obliges the entity to transfer an economic 

resource. 

Definition of financial statement 

elements  
Present obligation as a result of past events  
The obligation must be a present obligation that exists as a result of 
past events. A present obligation exists as a result of past events if:  
a) The entity has already obtained economic benefits or taken an 
action; and  
b) As a consequence, the entity will or may have to transfer 
economic resource that it would not otherwise have had to 
transfer. 
Definition of financial statement 
elements  
Equity  
“Equity is the residual interest in the assets of the entity after 
deducting all its liabilities. The definition of equity applies to all 
entities regardless of form (i.e., sole proprietorship, partnership, 
cooperative, corporation, non-profit entity, or government 
entity). 
Definition of financial statement 
elements  
Income  
Income is “increases in assets, or decreases in liabilities, that result 
in increase in equity, other than those relating to contributions from 
holders of equity claims”  
Expense  
Expenses are decreases in assets, or increase in liabilities, that result 
in decrease of equity, other than those relating to distributions to 
holders of equity claims” 
Definition of financial statement 
elements  
Income and Expenses (continued)  

The definitions of income and expense are 

opposites. ​Income Expenses  
I​ ncreases in assets or  ​Decreases in assets or 
decreases in liabilities   increases in liabilities  
​Results in increase in equity ​ ​Results in decrease in equity  
 ​Excludes contributions from  ​Excludes distributions to the 
the entity’s owners   entity’s owners 

Objectives of 
financial 
reporting 
Objectives of financial reporting  
The  objective  of  general  purpose  financial  reporting  is  to  provide 
financial  information  about  the  reporting  entity  that  is  useful  to  existing 
and  potential  investors,  lenders  and  other  creditors  in  making  decisions 
about providing resources to the entity.  

Primary users  
The objective of financial reporting refers to the following so called the 
primary users:  
1. Existing and potential investors; and  
2. Lenders and other creditors 

Objectives of financial reporting  

Decisions about providing resources to the entity  
The primary users’ decisions about providing resources to the entity 
involve decisions on:  
a) Buying, selling or holding investments;  
b) Providing or settling loans and other forms of credit; or  
c)  Exercising  voting  or  similar  rights  that  could  influence 
management’s  actions  relating  to  the  use  of  the  entity’s 
economic resources. 
Objectives of financial reporting  
Information on Economic resources, Claims, and Changes  

General purpose financial reports provide information on a reporting 

entity’s:  
a) Financial position – ​information on economic resources (assets) 
and claims against the reporting entity (liabilities and equity); and  
b)  Changes  in  economic  resources  and  claims  –  ​information  on 
financial  performance  (income  and  expense)  and  other 
transactions and events that lead to changes in financial position.  

Collectively, these are referred to under the Conceptual Framework as 

economic phenomena. 

Objectives of financial reporting  

Economic resources and Claims  

Information  about  the  nature  and  amounts  of  an  entity’s  economic 
resources  (assets)  and  claims  (liabilities  and  equity)  can  help  users  to 
identify  the  entity’s  financial  strengths  and  weaknesses.  That  information 
can help users in assessing the entity’s:  
a) Liquidity and solvency;  
b) Needs for additional financing and how successful it is likely to be 
in obtaining that financing; and  
c) Management’s stewardship on the use of economic resources.  

L​ iquidity refers to an entity’s ability to pay short-term obligations while 

solvency refers to an entity’s ability to meet its long-term obligations. 

Objectives of financial reporting  

Changes in economic resources and claims  
Changes in economic resources and claims result from: 
a) Financial performance (income and expense); and 
b) Other events and transactions  

Information  on  financial  performance helps users assess the entity’s 

ability  to  produce  returns  from  its  economic  resources.  Return 
provides  an  indication  on  how  well  management  has  efficiently 
and effectively used the entity’s resources. 
Objectives of financial reporting  
Information about use of the entity’s economic resources  
Information  on  how  efficiently  and  effectively  the  entity’s 
management  has  discharged  its  responsibilities  to  use  the  entity’s 
economic  resources  helps  users  assess  the  entity’s  management’s 
stewardship.  This  information  also helps in predicting how efficiently 
and  effectively  the  entity’s  resources  will  be  used  in  future  periods, 
thus  helping  in  the  assessment  of  the  entity’s  prospects  for  future 
net cash flows. 

Recognition 
principles 
Recognition principles  
The recognition 
process  

Recognition  is  the  process  of  including  in 

the  financial  position or the statements of 
financial  performance  an  item  that 
meets  the  definition  of  one  of  the 
financial  statements  elements  (i.e.,  asset, 
liability,  equity,  income  or  expense).  This 
involves  recording  the  item  in  words  and 
in  monetary  amount  and  including  that 
amount  in  the  totals  of  those  statements. 
The  amount  at  which  an  asset,  a  liability 
or  equity  is  recognized  in  the  statement 
of  financial  position  is  referred  to  as  its 
carrying  amount.  Recognition  links  the 
elements,  the  statements  of  financial 
performance as follows: 

Recognition principles  
The statements are linked because the recognition of one element (or a change in its 
carrying amount) requires the recognition or derecognition of another elements.  

Examples:  
​Recognition of income resulting in an  ​Recognition of expense resulting in a ​decrease 
increase in asset.   in assets.  
∙ ​Recording  a  sale  increases  both 
​Recognition of income resulting in a decrease ​in  cash/receivables  (asset)  and  sales 
liability.   (income)  
∙ ​Earning  an  unearned  income  decreases 
​Recognition of expense resulting in an ​increase  unearned  income  (liability)  and  increases 
on liability.  
 income.   • ​Payment for supplies expense increases ​supplies 
∙ ​Accruing  unpaid  salaries  increases  both  ​salaries  expense decreases cash. 
expense and salaries payable ​(liability).  

Sometimes  the  recognition  of  income  results  in  the  simultaneous  recognition  of  related 
expense.  This  simultaneous  recognition  of  income  and  expense  is  also  called  “matching 
of costs and income” (matching concept)  

Recognition principles  
Recognition criteria  

An item is recognized if:  

a) It meets the definition of an asset, liability, equity, income or 
expense; and  
b) Recognizing it would provide useful information, i.e., relevant and 
faithfully represented information. 

Recognition principles  
Relevance  

The recognition of an item may not provide relevant information if, for 
example:  
a) It is uncertain whether an asset or liability exists; or  
b) An asset or liability exists, but the probability of an inflow or outflow 
of economic benefits is low.  

Faithful representation  

The  recognition  of  an  item  is  appropriate  if  it  provides  both  relevant  and 
faithfully  represented  information.  The  level  of  measurement  uncertainty 
and  other  factors  (i.e.,  presentation  and  disclosure)  affect  an  item’s 
faithful representation. 

Recognition principles  
Measurement uncertainty  
An  asset  or  liability  must  be  measured  for  it  to  be  recognized.  Often, 
measurement  requires  estimation  and  thus  subject  to  measurement  uncertainty. 
The  use  of  reasonable  estimates  is  an  essential  part  of  financial  reporting  and 
does  not  necessarily  undermine  the  usefulness  of  information.  However,  an 
exceptionally  high  measurement  uncertainty  can  affect  the  faithful 
representation of an item and one or more of the following circumstances exist:  
a) There is an exceptionally wide range of possible outcomes and each 
outcome is exceptionally difficult to estimate.  
b) The measure is highly sensitive to small changes in estimates of the 
probability of different outcomes.  
c)  The  measurement  requires  exceptionally  difficult  or  exceptionally 
subjective  allocations  of  cash  flows  that  do  not  relate  solely  to  the  asset 
or liability being measured. 

Recognition principles  
Derecognition  
Derecognition  is  the  opposite  of  recognition.  It  is  the  removal  of  a 
previously  recognized  asset  or  liability  from  the  entity’s  statement  of 
financial  position.  Derecognition  occurs  when  the  item  no  longer  meet 
the  definition  of  an  asset  or  liability,  such  as  when  the  entity  loses  control 
of  all or part of the asset, or no longer has a present obligation for all part 
of the liability. On derecognition, the entity:  
a)  Derecognizes  the  assets  or  liabilities  that  have  expired  or  gave  been 
consumed,  collected,  fulfilled  or  transferred  (i.e.,  transferred  component), 
and recognizes any resulting income and expenses.  
b)  Continues  to  recognize  any  assets  or  liabilities  retained  after  derecognition 
(i.e.,  retained  component).  No  income  or  expense  is  normally  recognized  on 
the  retained  component  unless  there  is  a  change  in  its  measurement  basis. 
After  derecognition,  the  retained  component  becomes  a  unit  of  account 
separate from the transferred component. 

Measurement or 
valuation basis 
Measurement or valuation basis  
Measurement  
Recognition requires quantifying an item in monetary terms, thus 
necessitating the selection of an appropriate measurement basis.  
The  application  of  the  qualitative  characteristics,  including  the 
cost  ​constraint,  is  likely  to  result  in  the  selection  of  different 
measurement  bases  for  different  assets,  liabilities,  income  and 
expenses.  Accordingly,  the  standards  prescribe  specific 
measurement  bases  for  different  types  of  assets,  liabilities,  income 
and expenses. 
Measurement or valuation basis  
Measurement bases  
The Conceptual Framework describes the following measurement 
bases:  
1. Historical cost  
2. Current value  
a) Fair value  
b) Value in use and fulfilment value  
c) Current cost 
Measurement or valuation 
basis ​Historical cost  
The  historical  cost  of  an  asset  is  the  consideration  paid  to  acquire 
the  asset  plus  transaction  cost.  The  historical  of  liability  is  the 
consideration  received  to  incur  the  liability  minus  transaction costs. 
In  cases  where  it  is  not  possible  to  identify  the  cost,  such  as  on 
transactions  that  are  not  on  market  terms,  the  resulting  asset  or 
liability is initially recognized at current value. 
Measurement or valuation basis  
Current value  
Current  value  measures  reflect  changes  in  values  at  the 
measurement  date.  Current  value  measures  bases  include  the 
following:  
a)Fair value  
b)Value in use for assets and fulfilment value for 
liability ​c)Current cost 

Measurement or valuation basis  

Fair Value  
Fair  value  is  the  “price  that  would  be  received  to  sell  an  asset,  or 
paid  to  transfer  a  liability,  in  an  orderly  transactions  between 
market participants at the measurement date.”  
Fair value reflects the perspective of market participants. 
Accordingly, it is not an entity-specific measurement.  
Fair  value  can  be  measured  directly  by  observing  prices  in  an 
active  market  or  indirectly  using  measurement  techniques.  Fair 
value is not adjusted for transaction costs. 
Measurement or valuation basis  
Value in use and fulfilment value  
Value  in  use  is  “the  present  value  of  the  cash  flows,  or  other 
economic  benefits,  that  an entity expects to derive from the use of 
an asset and from its ultimate disposal.  
Fulfilment  value  is  “the  present  value  of  the  cash,  or  other 
economic  resources,  that  an  entity  expects  to  be  obliged  to 
transfer as it fulfils a liability. 
Measurement or valuation basis  
Current cost  
Current  cost  of  an  asset  is  “the  cost  of  an  equivalent  asset  at  the 
measurement  date,  comprising  the  consideration  that  would  be 
paid  at  the  measurement  date  plus  the  transaction  costs  that 
would be incurred at that date.  
Current  cost  of  a  liability  is  “the  consideration  that  would  be 
received  for  an  equivalent  liability  at  the measurement date minus 
the transaction costs that would be incurred at that date.” 
Measurement or valuation basis  
Consideration when a selecting a measurement basis  
When selecting a measurement basis, it is important to consider 
the following:  
a)The nature of information provided by a particular 
measurement basis; and  
b)The qualitative characteristics, the cost constrain, and 
other factors. 

Qualitative   
characteristics of 
decision-useful 
information 
Qualitative characteristics of 
decision-useful information  
The Conceptual Framework classifies the qualitative characteristics into 
the following:  
1.  Fundamental  qualitative  characteristics  ​–  these  are  the ​characteristics 
that make information useful to users. They consist of ​the following:  
a) Relevance  
b) Faithful representation  
2. Enhancing qualitative characteristics ​– these are the characteristics 
 that enhance the usefulness of information. They consist the 
following: ​a) Comparability  
b) Verifiability  
c) Timeliness  
d) Understandability 

Qualitative characteristics of 

decision-useful information  
Relevance  
Information is relevant if it can make a difference in the decisions 
of users. Relevant information has the following:  
a) Predictive value – ​the information can help the users in making 
predictions about future outcomes.  
b) Confirmatory value (feedback value) – ​the information can help 
users in confirming their previous predictions. 
Qualitative characteristics of 
decision-useful information  
Materiality  
Information  is  material  if  omitting,  misstating  or  obscuring  it  could 
reasonably  be  expected  to  influence  decisions  that  the  primary 
users  of  a  specific  reporting  entity’s  general  purpose  financial 
statements make on the basis of those financial statements.  
Materiality  is  an  entity  specific  aspect  of  relevance,  meaning 
materiality  depends  on  the  facts  and  circumstances  surrounding  a 
specific entity. Hence, materiality is a matter of judgment. 
Qualitative characteristics of 
decision-useful information  
Faithful representation  

Faithful  representation  means  the  information  provides  a  true,  correct  and  complete  depiction  of 
the  economic  phenomena  that  it  purports  to  represent.  Depicting  only  the  legal  form  would  not 
faithfully  represent  the  economic  phenomenon.  Faithfully  represented  information  has the following 
characteristics:  

1.  Completeness  ​–  all  information  (in  words  and  numbers)  necessary  for  users  to  understand  the 
phenomenon  being  depicted  is  provided.  These  include  description  of  the  nature  of  the  item, 
numerical  depiction,  description  of  the  numerical  depiction  and  explanations  of  significant 
facts surrounding the item.  

2.  Neutrality  ​–  information  is  selected  or  presented  without  bias.  Information  is  not  manipulated  to 
increase  the  probability  that  users  will  receive  it  favourably.  Neutrality  is  supported  by 
prudence,  ​which  is the use of caution when making judgments under conditions of uncertainty, 
such that ​assets or income are not overstated and liabilities or expenses are not understated.  

3.  Free  from  error  ​–  this  does  not  mean  that  the  information  is  perfectly  accurate in all aspects. ​Free 
from  error  means  there  are  no  errors  in  the  description  and  in  the  process  by  which  the 
 information  is  selected  and  applied.  If  the  information  is  an  estimate,  that  fact  should  be 
described clearly. Including an explanation of the process used in making that estimate. 

Qualitative characteristics of 

decision-useful information  
Enhancing qualitative characteristics  
Comparability  
Comparability means the ability to bring together for the purpose of noting points of 
likeness and difference. Comparable information presents similarities and 
dissimilarities. Comparability may be made within an entity or across entities. To be 
more useful, the financial information shall be compared with similar information of 
previous periods (intra-comparability), or with information produced by other entities 
(inter-comparability/dimensional comparability).  

Verifiability  
Verifiability means that different knowledgeable and independent observers could 
reach consensus, although not necessarily complete agreement, that a particular 
depiction is a faithful representation. In other words, verifiability implies consensus. 
The financial information is verifiable in the sense that it is supported by evidence so 
that an accountant that would look into the same evidence would arrive at the 
same economic decision or conclusion. 

Qualitative characteristics of 

decision-useful information  
Enhancing qualitative characteristics (continued)  
Timeliness  
Timeliness  means  having  information  available  to  decision  makers  in  time  to  influence 
their  decisions.  Timeliness  is  an  important  enhancing  qualitative  characteristics  because 
“relevant  and  faithfully  represented  financial  information  furnished  after  a  decision  is 
made is useless or of no value.”  

Understandability  
Understandability  requires  that  financial  information  must  be  comprehensible  or 
intelligible  if  it  is  to  be  useful.  Accordingly,  the  information  should  be  presented  in  a  form 
and  expressed  in  terminology  that  a  user  understands.  An  essential  quality  of  the 
information  provided  in  financial  statements  is  that  it  is  readily  understandable  by  users. 
Understandability  is  very  essential  because  a  relevant  and  faithfully  represented 
information may prove useless if it is not understood by users. 

Concept of Capital 
and capital   
maintenance 
Concept of Capital and capital 
maintenance  
The Conceptual Framework mentions two concepts of capital, namely:  
a)  Financial  concept  of  capital  ​–  capital  is  regarded  as  the  invested 
money  or  invested purchasing. Capital is synonymous with equity, net 
assets, or net worth.  
b) Physical concept of capital ​– capital is regarded as the entity’s 
productive capacity, e.g., units of output per day.  

The  choice  of  an  appropriate  concept  is  based  on  user’s  need.  Thus,  if 
users  are  primarily  concerned  with  the  maintenance  of nominal invested 
capital  or  purchasing  power  of  invested  capital,  the  financial  concept 
should  be  used; whereas, if their primary concern is the entity’s operating 
capability,  the  physical  concept  should  be  used.  Most  entities adopt the 
financial concept of capital in preparing their financial statements. 

Concept of Capital and capital 

maintenance  
The concept chosen affects the determination of profit. In this regard, the 
concepts of capital give rise to the following concepts of capital maintenance:  
a)  Financial  capital  maintenance  ​–  under  this  concept,  ​profit  is  earned  if  the ​net 
assets  at  the  end  of  the  period  exceeds  the  net  assets  at  the  beginning  ​of 
 the  period​, after excluding any distributions to, and contributions from, owner 
during  the  period.  Financial  capital  maintenance  can  be  measured ​In either 
nominal monetary unit or units of constant purchasing power.  
b)  Physical  capital  maintenance  ​–  under  this  concept,  ​profit  is  earned  only  if ​the 
entity’s  productive  capacity  at  the  end  of  the  period  exceeds  the 
productive  capacity  at  the  beginning  of  the  period​,  after  excluding  any 
distributions to, and contributions from, owners during the period.  
The  concept  of  capital  maintenance  is  essential  in  distinguishing  between  a 
return  on  capital  and  a  return  of  capital.  Only  inflows  of  assets  in  excess  of  the 
amount needed to maintain capital is regarded as return on capital or profit. 

Concept of Capital and capital 

maintenance  
Capital maintenance adjustments  
The  revaluation  or  restatements  of  assets  and  liabilities  results  in 
increases  or  decreases  in  equity.  Although  these  increases  or 
decreases  meet  the  definition  of  income  or  expenses,  they are not 
recognized  in  profit  or  loss  under  certain  concepts  of  capital 
maintenance.  Accordingly,  these  items  are  included  in  equity  as 
capital maintenance adjustments or revaluation reserves. 

Reporting entity and 

financial statements 
Reporting entity and financial 
statements  
Reporting period  
Financial  statements  are  prepared  for  a specified period of time and provide information 
on  assets,  liabilities  and  equity  that  existed  at  the  end  of  the  reporting  period,  or  during 
the reporting period, and income and expenses for the reporting period.  

​Comparative information  
–  To  help  users  of  financial  statements  in  evaluating  changes  and  trends,  financial 
statements  also  provide  comparative  information  for  at  least  one  preceding 
reporting period.  

​Forward looking presentation  

–  Financial  statements  are  designed  to  provide  information  about  past  events. 
Information  about  possible  future  transactions  and  other  events  is  included  in  the 
financial  statements  only  if  it  relates  to  the  past  information  presented  in  the 
financial statements and is deemed useful to users of financial statements.  

​Perspective adopted financial statements  

–  Information  in  financial statements is prepared from the perspective of the reporting 
entity,  not  from  the  perspective  of  any  particular  group  of  financial  ​statements 
user. 

Reporting entity and financial 

statements  
Going concern assumption  
Financial  statements  are  normally  prepared  on  the  assumption 
that  the  reporting  entity  is  a  going  concern,  meaning  the  entity 
has  ​neither  the  intention  nor  the  need  to  end  its  operations  in  the 
foreseeable  future.  If  it  is  not  the  case,  the  entity’s  financial 
statements  are  prepared  on  another  bases  (e.g.,  measurement  at 
realizable values rather than mixture of costs and values. 
Reporting entity and financial 
statements  
The reporting entity  
A  reporting  entity  is  one  that  is  required,  or  chooses,  to  prepare  financial 
statements,  and  is  not  necessarily  a  legal  entity.  It  can  be  a  single  entity 
or a group or combination of two or more entities.  

Sometimes,  an  entity  controls  another  entity.  The  controlling  entity  is 
called  a  parent,  while  the  controlled  entity  is  called  subsidiary.  If  a 
reporting  entity  comprises  both  the parent and subsidiaries, the reporting 
entity’s  financial  statements  are  referred  to  as  consolidated  financial 
statements.  If  a  reporting  entity  is  the  parent  alone,  the  reporting  entity’s 
financial  statements  are  referred  to  as  unconsolidated  financial 
statements.  If  a  reporting  entity  comprises  two  or  more  entities  that  are 
not  linked  by  a  parent-subsidiary  relationship,  the  reporting  entity’s 
financial statements are referred to as combined financial statements. 

Reporting entity and financial 

statements  
Consolidated and unconsolidated financial statements  
Consolidated  financial  statements  provide  information  on  a  parent  and 
its  subsidiaries  viewed  as  a  single  reporting  entity.  Consolidated  financial 
statements  are  not  designed  to  provide  information  on  any  particular 
subsidiary;  that  information  is  provided  on  the  subsidiary’s  own  financial 
statements.  
Consolidated  information  enables  users  to  better  assess  the  parents 
prospects  for  future  cash  flows  because  the  parent’s  cash  flows  are 
affected  by  the  cash  flows  of  its  subsidiaries.  Accordingly,  when 
consolidation  is  required,  unconsolidated  financial  statements  cannot 
be  ​used  as  substitute  for  consolidated  financial  statements.  However,  a 
parent  may  nonetheless  be  required  or  choose  to  prepare 
unconsolidated  financial  statements  in  addition  to  consolidated 
financial ​statements. 

Objective and 
Scope of financial 
statements 
Objective and Scope of   
financial statements  
The  objective  of  general  purpose  financial  statements  is  to  provide  financial 
information  about  the  reporting  entity’s  assets,  liabilities,  equity,  income  and 
expenses that is useful in assessing:  
a) The entity’s prospects for future net cash inflows; and  
b) Management’s stewardship over economic resources.  

That information is provided in the:  

a) Statement of financial position (for recognized assets, liabilities and 
equity);  
b) Statement(s) of financial performance (for income and expenses);  
c)  Other  statements  and  notes  (for  additional  information  on  recognized 
assets  and  liabilities,  information  on  unrecognized  assets  and  liabilities, 
information  on  cash  flows,  information  on  contributions  from/distributions 
to owners, and other relevant information) 
 Module 1: Review of Conceptual Framework and Accounting Rules  

Intended Learning Outcomes:  

1. Relate the conceptual framework to general and specific accounting standards.
2. Discuss the status of the conceptual framework and illustrate how conflicts between the two sets of rules are
settled.
3. Summarize the different component rules established by the conceptual framework and explain how each
component interact with each other

A. Lecture/Content  
1. Topics:
∙ ​Nature of Conceptual Framework
∙ ​Concepts and Standards
∙ ​Status of the conceptual framework
∙ ​Scope or Territorial Jurisdictions
∙ ​Objectives of the Framework
∙ ​Purposes of the conceptual framework
∙ ​Definition of financial statement elements
∙ ​Objectives of financial reporting
∙ ​Recognition principles
∙ ​Measurement or valuation basis
∙ ​Qualitative characteristics of decision-useful information
∙ ​Concept of Capital and capital maintenance
∙ ​Reporting entity and financial statements
∙ ​Objective and Scope of financial statements

2. Nature of Conceptual Framework

A conceptual framework can be defined as a system of ideas and objectives that lead to the creation of a
consistent set of rules and standards. Specifically in accounting, the rule and standards set the nature,
function and limits of financial accounting and financial statements. The main reasons for developing an
agreed conceptual framework are that it provides:
∙ ​a framework for setting accounting standards;
∙ ​a basis for resolving accounting disputes;
∙ ​fundamental principles which then do not have to be repeated in accounting standards. 3.

Concepts and Standards

The overall purpose of accounting standards is to identify proper accounting practices for the preparation
and presentation of financial statements. Accounting standards create common understanding between
preparers and users of financial statements particularly on how items, for example the valuation of
assets are treated. Financial statements shall therefore comply with all applicable accounting standards.
4. Status of the conceptual framework
The Conceptual Framework is not a standard. If there is a conflict between a standard and the
Conceptual Framework, the requirement of the standard will prevail.
The authoritative status of the Conceptual Framework is depicted in the hierarchy of guidance
shown below:

Hierarchy of reporting standards:

1. Philippine Financial Reporting Standards (PFRS)
2. Judgment
When making the judgment:
​Management shall consider the following:
a) Requirements in other PFRSs dealing with similar transactions
b) Conceptual Framework
​Management may consider the following:
a) Pronouncements issued by other standard-setting bodies
b) Other accounting literature and industry practices.

The hierarchy guidance above means that in the absence of a PFRS that specifically applies to
a transaction, management shall consider the applicability of the Conceptual Framework in developing
and applying an accounting policy that results in useful information.
To meet the objectives of general purpose financial reporting, a standard sometimes contains
requirements that depart from the Conceptual Framework. In such cases, the departure is explained in
the ‘Basis for Conclusions’ on that Standard.
The Conceptual Framework may be revised from time to time based on the IASB’s experience of
working with it. However, revisions do not automatically result to changes in the standards – not until
after IASB goes to its due process of amending a standard.

5. Scope or Territorial Jurisdictions

The Conceptual Framework is concerned with ​general purpose financial reporting. ​General purpose
financial reporting involves the preparation of ​general purpose financial statements. ​The Conceptual
Framework provides the concepts that underlie general purpose financial reporting with regard to the
following:
a) The objective of financial reporting
b) Qualitative characteristics of useful financial information
c) Financial statements and the reporting entity
d) The elements of financial statements
e) Recognition and derecognition
f) Measurement
g) Presentation and disclosure
h) Concepts of capital and capital maintenance

6. Objectives of the Framework

The objective of general purpose financial reporting is to provide financial information about the
reporting entity that is useful to existing and potential investors, lenders and other creditors in making
 decisions about providing resources to the entity. This objective is the foundation of the Conceptual
Framework. All the other aspects of the Conceptual framework revolve around this objective.
7. Purposes of the conceptual framework
The Conceptual Framework prescribes the concepts of general purpose financial reporting. Its purpose
is to:
a) assist he International Accounting Standards Board (IASB) in developing standards that are
based on consistent concepts;
b) assist preparers in developing consistent accounting policies when no standard applies to a
particular transactions or when a standard allows a choice of accounting policy; and c) assist all
parties in understanding and interpreting the standards.

The Conceptual Framework provides the foundation for the development of Standards that: a) promote
transparency by enhancing the international comparability and quality of financial information.
b) strengthen accountability by reducing the information gap between providers of capital and the
entity’s management.
c) contribute to economic efficiency by helping investors identify opportunities and risks around the
world, thus improving capital allocation. The use of a single, trusted accounting language lowers
the cost of capital and reduces international reporting costs.

8. Definition of financial statement elements

The elements of financial statements are:
1. Assets
2. Liabilities
3. Equity
4. Income
5. Expenses

Asset  
An asset is “a present economic resource controlled by the entity as a result of past events. An economic
resource is a right that has the potential to produce economic benefits.”

The definition of an asset has the following three aspects:

a) Right
b) Potential to produce economic benefits
c) Control

Right  
Asset is an economic resource and an economic resource is a right that has the potential to produce
economic benefits. Rights have the potential to produce economic benefits including: a) Rights that
correspond to an obligation of another party:
i. Right to receive cash, goods or services.
ii. Right to exchange economic resources with another party on favourable terms. iii. Right to
benefit from an obligation of another party to transfer economic resource is a specified
uncertain future event occurs
 b) Rights that do not correspond to an obligation of another party:
i. Right over physical objects (e.g., right to use a property or right to sell an inventory) ii.
Right to use intellectual property
Potential to produce economic benefits  
The asset is the present right that has the potential to produce economic benefits and not the future
economic benefits that right may produce. Thus, the right’s potential to produce economic benefits
need not be certain or even likely – what is important is that the right already exist and that, in at
least one circumstance, it would produce economic benefits for the entity.

An economic resource can produce economic benefits for an entity in many ways. For example, the
asset may be:
a) Sold, leased, transferred or exchanged for other assets;
b) Used singly or in combination with other assets to produce goods or provide services;
c) Used to enhance the value of other assets;
d) Used to promote efficiency and cost savings; or
e) Used to settle a liability.

Control  
Control means the entity has the exclusive right over the benefits of an asset and the ability to
prevent others from accessing those benefits. Accordingly, if one party controls an asset, no other
party controls the asset.

Control does not mean that the entity can ensure the resource will produce economic benefits in all
circumstances. It only means that if the resource produces benefits, it is the entity who will obtain
those benefits and not another party.

Control links an economic resource to an entity and indicates the extent to which an entity should
account for that economic resource. For example, an economic resource that an entity does not
control is not an asset of the entity. If an entity accounts only that portion of an economic resource,
the entity accounts only that portion and not and not the entire resource.

Control normally stems from legally enforceable rights. However, ownership is not always
necessary for control to exist because control can arise from other rights. Physical possession is
also not always necessary for control to exist.

Liability  
Liability is a “present obligation of the entity to transfer an economic resource as a result of past events.
The definition of a liability has the following three aspects:
a) Obligation
b) Transfer of an economic resource
c) Present obligation as a result of past events

Obligation  
An obligation is a duty or responsibility that an entity has no practical ability to avoid. An obligation
 is either:
a. Legal obligation – an obligation that results from a contract, legislation, or other operation of
law; or
b. Constructive obligation – an obligation that results from an entity’s actions (e.g., past practice
or published policies) that create a valid expectation on others that the entity will accept
and discharge certain responsibilities
An obligation is always owed to another party. However, it is not a necessary that the identity of that
party is known, for example, an obligation for environmental damages may be owned to the society
at large.

Transfer of an economic resource  

The liability is the obligation that has the potential to require the transfer of an economic resource to
another party and not the future economic benefits that the obligation may cause to be transferred.
Thus, the obligation’s potential to cause a transfer of economic benefits need not be certain, or
even likely, for example, the transfer may be required only if a specified uncertain future event
occurs. What is important is that the obligation already exists and that, in at least one
circumstance, it would require the entity to transfer an economic resource.

Consequently, a liability can exist even if the probability of a transfer of economic resource is low,
although that low probability affects decisions on whether the liability is to be recognized, how it is
measured, what information is provided.

An obligation to transfer an economic resource may be an obligation to:

a) Pay cash, deliver goods, or render services;
b) Exchange assets with another party on unfavourable terms;
c) Transfer assets if a specified uncertain future event occurs; or
d) Issue a financial instrument that obliges the entity to transfer an economic resource.

Present obligation as a result of past events  

The obligation must be a present obligation that exists as a result of past events. A present
obligation exists as a result of past events if:
a) The entity has already obtained economic benefits or taken an action; and
b) As a consequence, the entity will or may have to transfer economic resource that it would
not otherwise have had to transfer.
Equity  
“Equity is the residual interest in the assets of the entity after deducting all its liabilities. The definition of
equity applies to all entities regardless of form (i.e., sole proprietorship, partnership, cooperative,
corporation, non-profit entity, or government entity).

Although equity is defined as a residual, it may be sub-classified in the statement of financial position.
For example, the equity of a corporation may be sub-classified into share capital, retained earnings,
reserves and other components of equity. Reserves may refer to amounts set aside for the protection of
the entity’s creditors or stakeholders from losses. For some entities like cooperatives, the creation of
reserves is required by law. Transfers to such reserves are appropriations of retained earnings rather
 than expenses.

Income  
Income is “increases in assets, or decreases in liabilities, that result in increase in equity, other than
those relating to contributions from holders of equity claims”
Expense  
Expenses are decreases in assets, or increase in liabilities, that result in decrease of equity, other than
those relating to distributions to holders of equity claims”

T​he definitions of income and expense are opposites.

Income Expenses
​Increases in assets or decreases in ​Decreases in assets or increases in
liabilities liabilities
​Results in increase in equity ​ ​Results in decrease in equity
​Excludes contributions from the entity’s ​Excludes distributions to the entity’s
owners owners

Contributions from and distributions to the entity’s owners are not income and expenses, but rather
direct adjustments to equity.

Although income and expenses are defined in terms of changes in assets and liabilities, information on
income and expenses is just as important as information on assets and liabilities because financial
statement users need information on both financial position and financial performance of an entity.

9. Objectives of financial reporting

The objective of general purpose financial reporting is to provide financial information about the reporting
entity that is useful to existing and potential investors, lenders and other creditors in making decisions
about providing resources to the entity. This objective is the foundation of the Conceptual Framework. All
the other aspects of the Conceptual Framework revolve around this objective.

Primary users  
The objective of financial reporting refers to the following so called the primary
users: 1. Existing and potential investors; and
2. Lenders and other creditors

These users cannot demand information directly from reporting entities and must rely on general
purpose financial reports for much of their financial information needs. Accordingly, they are the
primary users to whom general purpose financial reports are directed to.

The information needs of individual primary users may differ and possibly conflict. Accordingly,
financial reporting aims to provide information that meets the needs of the maximum number of
primary users. Focusing on common needs, however, does not prohibit the provision of additional
information that is most useful to a particular subject of primary users.

General purpose financial reports do not directly show the value of a reporting entity. However, they
provide information that helps users in estimating the value of an entity. Providing useful
information requires making estimates and judgments.

Decisions about providing resources to the entity  

The primary users’ decisions about providing resources to the entity involve decisions
on: a) Buying, selling or holding investments;
b) Providing or settling loans and other forms of credit; or
c) Exercising voting or similar rights that could influence management’s actions relating to the
use of the entity’s economic resources.

Information on Economic resources, Claims, and Changes  

General purpose financial reports provide information on a reporting entity’s: a) Financial position –
information on economic resources (assets) and claims against the reporting entity (liabilities
and equity); and
b) Changes in economic resources and claims – information on financial performance (income and
expense) and other transactions and events that lead to changes in financial position. Collectively,
these are referred to under the Conceptual Framework as economic phenomena.

Economic resources and Claims  

Information about the nature and amounts of an entity’s economic resources (assets) and claims
(liabilities and equity) can help users to identify the entity’s financial strengths and weaknesses.
That information can help users in assessing the entity’s:
a) Liquidity and solvency;
b) Needs for additional financing and how successful it is likely to be in obtaining that financing;
and
c) Management’s stewardship on the use of economic resources.
​Liquidity refers to an entity’s ability to pay short-term obligations while solvency refers to an
entity’s ability to meet its long-term obligations.

Changes in economic resources and claims  

Changes in economic resources and claims result from:
a) Financial performance (income and expense); and
b) Other events and transactions

Information on financial performance helps users assess the entity’s ability to produce returns from
its economic resources. Return provides an indication on how well management has efficiently and
effectively used the entity’s resources.

Information on that variability of the return helps users in assess the uncertainty of future cash
flows. For example, significant fluctuations in reported profits may indicate financial instability and
uncertainty on the entity’s ability to generate cash flows from its operations.

Information about use of the entity’s economic resources  

Information on how efficiently and effectively the entity’s management has discharged its
responsibilities to use the entity’s economic resources helps users assess the entity’s
 management’s stewardship. This information also helps in predicting how efficiently and effectively
the entity’s resources will be used in future periods, thus helping in the assessment of the entity’s
prospects for future net cash flows.

Examples of management’s responsibilities to use the entity’s economic resources include

safeguarding those resources and ensuring the entity’s compliance with laws, regulations and
contractual provisions.
10. Recognition principles

The recognition process  

Recognition is the process of including in the financial position or the statements of financial
performance an item that meets the definition of one of the financial statements elements (i.e., asset,
liability, equity, income or expense). This involves recording the item in words and in monetary amount
and including that amount in the totals of those statements.

The amount at which an asset, a liability or equity is recognized in the statement of financial position is
referred to as its carrying amount. Recognition links the elements, the statements of financial
performance as follows:

Statement of financial position at the beginning of reporting period  

Assets minus liabilities equal equity  

Statements of financial performance  

Income minus expenses  

Contributions from holders of equity claims minus distributions to  

holders of equity claims  

Statements of financial position  

Income minus expenses  

The statements are linked because the recognition of one element (or a change in its carrying amount)
requires the recognition or derecognition of another elements.

Examples:
​Recognition of income resulting in an
increase in asset. ​Recognition of income resulting in a
 decrease in liability. income.
∙ ​Accruing unpaid salaries increases both
​Recognition of expense resulting in an salaries expense and salaries payable
increase on liability. (liability).
∙ ​Recording a sale increases both ​Recognition of expense resulting in a
cash/receivables (asset) and sales decrease in assets.
(income) ​Payment for supplies expense increases
∙ ​Earning an unearned income decreases supplies expense decreases cash.
unearned income (liability) and increases

Sometimes the recognition of income results in the simultaneous recognition of related expense. This
simultaneous recognition of income and expense is also called “matching of costs and income”
(matching concept). For example, the sale of goods results in the simultaneous recognition of sales
(income) and cost of sales (expense).

Recognition criteria  
An item is recognized if:
a) It meets the definition of an asset, liability, equity, income or expense; and
b) Recognizing it would provide useful information, i.e., relevant and faithfully represented
information.

Both criteria above must be met before an item is recognized. Accordingly, items that meet the definition
of a financial statement element but do not provide useful information are not recognized, and vice
versa.

Providing information, as well as using the information, entails costs. Thus, an entity should consider the
cost constraint (cost-benefit principle) when making recognition decisions such that the usefulness of the
information justifies its cost. It is not possible, however, to establish a uniform threshold for determining
an optimum balance between costs and benefits. This would depend on the item and the facts and
circumstances. Accordingly, judgment is required when deciding whether to recognize an item, and this
the recognition requirements in the standards may need to vary.

Even if an item that meets the definition of an asset or liability is not recognized, information about that
item may still need to be disclosed in the notes. In such cases, the item is referred to as unrecognized
asset or unrecognized liability.

Relevance  
The recognition of an item may not provide relevant information if, for example:
a) It is uncertain whether an asset or liability exists; or
b) An asset or liability exists, but the probability of an inflow or outflow of economic benefits is low.

Faithful representation  
The recognition of an item is appropriate if it provides both relevant and faithfully represented
information. The level of measurement uncertainty and other factors (i.e., presentation and disclosure)
affect an item’s faithful representation.
 Measurement uncertainty  
An asset or liability must be measured for it to be recognized. Often, measurement requires estimation
and thus subject to measurement uncertainty. The use of reasonable estimates is an essential part of
financial reporting and does not necessarily undermine the usefulness of information. Even a high level
of measurement uncertainty does not necessarily preclude an estimate from providing useful information
if the estimate is clearly and accurately described and explained.
However, an exceptionally high measurement uncertainty can affect the faithful representation of an
item, such as when the asset or liability can only be measured using cash flow based measurements
techniques and, in addition, ore or more of the following circumstances exist:
a) There is an exceptionally wide range of possible outcomes and each outcome is exceptionally
difficult to estimate.
b) The measure is highly sensitive to small changes in estimates of the probability of different
outcomes.
c) The measurement requires exceptionally difficult or exceptionally subjective allocations of cash
flows that do not relate solely to the asset or liability being measured.

Derecognition  
Derecognition is the opposite of recognition. It is the removal of a previously recognized asset or liability
from the entity’s statement of financial position.

Derecognition occurs when the item no longer meet the definition of an asset or liability, such as when
the entity loses control of all or part of the asset, or no longer has a present obligation for all part of the
liability.

On derecognition, the entity:

a) Derecogizes the assets or liabilities that have expired or gave been consumed, collected, fulfilled
or transferred (i.e., transferred component), and recognizes any resulting income and expenses. b)
Continues to recognize any assets or liabilities retained after derecognition (i.e., retained
component). No income or expense is normally recognized on the retained component unless there
is a change in its measurement basis. After derecognition, the retained component becomes a unit
of account separate from the transferred component.

11. Measurement or valuation basis

Measurement  
Recognition requires quantifying an item in monetary terms, thus necessitating the selection of an
appropriate measurement basis.

The application of the qualitative characteristics, including the cost constraint, is likely to result in the
selection of different measurement bases for different assets, liabilities, income and expenses.
Accordingly, the standards prescribe specific measurement bases for different types of assets, liabilities,
income and expenses.

Measurement bases  
The Conceptual Framework describes the following measurement bases:
1. Historical cost
2. Current value
a. Fair value
b. Value in use and fulfilment value
c. Current cost
Historical cost  
The historical cost of an asset is the consideration paid to acquire the asset plus transaction cost.
The historical of liability is the consideration received to incur the liability minus transaction costs. In
cases where it is not possible to identify the cost, such as on transactions that are not on market
terms, the resulting asset or liability is initially recognized at current value.

That value becomes the asset’s (liability’s) deemed cost for subsequent measurement at historical
cost. Unlike current value, historical cost does not reflect changes in value, but is updated overtime
t​o depict the following:
Historical cost of an asset Historical cost of an liability  
a) Impairment, depreciation or a) Increase in the obligation resulting from
amortization the liability becoming onerous
b) Collections that extinguish part or all of b) Payments or fulfilments made that
the asset extinguish part or all of the liability​ c)
c) Discount or premium amortization when Discount or premium amortization when
the asset is measured at ​amortized the liability is measured at ​amortized cost
cost

Current value  

Current value measures reflect changes in values at the measurement date. Unlike historical cost,
current value is not derived from the price of the transactions or other event that gave rise to the
asset or liability. Current value measures bases include the following:
▪ ​Fair value
▪ ​Value in use for assets and fulfilment value for liability
▪ ​Current cost

Fair value  
Fair value is the “price that would be received to sell an asset, or paid to transfer a liability, in
an orderly transactions between market participants at the measurement date.”

Fair value reflects the perspective of market participants. Accordingly, it is not an entity-specific
measurement.

Fair value can be measured directly by observing prices in an active market or indirectly using
measurement techniques. Fair value is not adjusted for transaction costs.
 Value in use and fulfilment value  
Value in use is “the present value of the cash flows, or other economic benefits, that an entity
expects to derive from the use of an asset and from its ultimate disposal.

Fulfilment value is “the present value of the cash, or other economic resources, that an entity
expects to be obliged to transfer as it fulfils a liability.
Current cost  
Current cost of an asset is “the cost of an equivalent asset at the measurement date,
comprising the consideration that would be paid at the measurement date plus the transaction
costs that would be incurred at that date.

Current cost of a liability is “the consideration that would be received for an equivalent liability
at the measurement date minus the transaction costs that would be incurred at that date.”

Consideration when a selecting a measurement basis  

When selecting a measurement basis, it is important to consider the following:
▪ ​The nature of information provided by a particular measurement basis; and
▪ ​The qualitative characteristics, the cost constrain, and other factors.

12. Qualitative characteristics of decision-useful information

The qualitative characteristics of useful financial information identify the types of information that are
likely to be most useful to the primary users on making decisions using an entity’s financial report.
Qualitative characteristics apply to information in the financial statements as well as to financial
information provided in other ways.

The Conceptual Framework classifies the qualitative characteristics into the following:

1. ​Fundamental qualitative characteristics ​– these are the characteristics that make information
useful to users. They consist of the following:
a. Relevance
b. Faithful representation
2. ​Enhancing qualitative characteristics ​– these are the characteristics that enhance the
usefulness of information. They consist the following:
a. Comparability
b. Verifiability
c. Timeliness
d. Understandability

Fundamental qualitative characteristics  

Relevance  
Information is relevant if it can make a difference in the decisions of users. Relevant information
has the following
a) Predictive value – the information can help the users in making predictions about future
 outcomes.
b) Confirmatory value (feedback value) – the information can help users in confirming their
previous predictions.
Predictive value and confirmatory value are interrelated. Information that has predictive value is
likely to have confirmatory value. For example, revenue in the current period can be used to predict
revenue in a future period and at the same time can also be used in confirming a past prediction.
Materiality  
Information is material if omitting, misstating or obscuring it could reasonably be expected to
influence decisions that the primary users of a specific reporting entity’s general purpose financial
statements make on the basis of those financial statements.

The Conceptual Framework states that materiality is an entity specific aspect of relevance, meaning
materiality depends on the facts and circumstances surrounding a specific entity. Accordingly, the
Conceptual Framework and the standards do not specify a uniform quantitative threshold for
materiality. Materiality is a matter of judgment.

IFRS Practice Statement 2 Making Materiality Judgments provides a non-mandatory guidance that
entities may follow in making materiality judgments. The guidance consists of a four-step process
called the materiality process. These steps are as follows:
1. Identify information that has the potential to be material.
2. Assess whether the information identified in Step 1 is in fact, material.
3. Organize the information within the draft financial statements in a way that communicates
the information clearly and concisely to primary users.
4. Review the draft financial statements to determine whether all material information has been
identified and materiality considered from a wide perspective and in aggregate, on the
basis of the complete set of financial statements.

Faithful representation  
Faithful representation means the information provides a true, correct and complete depiction of the
economic phenomena that it purports to represent. When an economic phenomenon’s substance
differs from its legal form, faithful representation requires the depiction of the substance (i.e.,
substance over form). Depicting only the legal form would not faithfully represent the economic
phenomenon. Faithfully represented information has the following characteristics:
a) ​Completeness ​– all information (in words and numbers) necessary for users to understand
the phenomenon being depicted is provided. These include description of the nature of the
item, numerical depiction, description of the numerical depiction and explanations of
significant facts surrounding the item.
b) ​Neutrality  ​– information is selected or presented without bias. Information is not
manipulated to increase the probability that users will receive it favourably. Neutrality is
supported by prudence, which is the use of caution when making judgments under
conditions of uncertainty, such that assets or income are not overstated and liabilities or
expenses are not understated.
c) ​Free from error ​– this does not mean that the information is perfectly accurate in all aspects.
Free from error means there are no errors in the description and in the process by which the
information is selected and applied. If the information is an estimate, that fact should be
 described clearly. Including an explanation of the process used in making that estimate.

Enhancing qualitative characteristics  

Comparability  
Comparability means the ability to bring together for the purpose of noting points of likeness and
difference. Comparable information presents similarities and dissimilarities. Comparability may be
made within an entity or across entities. To be more useful, the financial information shall be
compared with similar information of previous periods (intra-comparability), or with information
produced by other entities (inter-comparability/dimensional comparability).

Verifiability  
Verifiability means that different knowledgeable and independent observers could reach consensus,
although not necessarily complete agreement, that a particular depiction is a faithful representation.
In other words, verifiability implies consensus. The financial information is verifiable in the sense
that it is supported by evidence so that an accountant that would look into the same evidence
would arrive at the same economic decision or conclusion.

Timeliness  
Timeliness means having information available to decision makers in time to influence their
decisions. In other words, timeliness requires that financial information must be available or
communicated early enough when a decision is to be made. Timeliness is an important enhancing
qualitative characteristics because “relevant and faithfully represented financial information
furnished after a decision is made is useless or of no value.” Relevant information may lose its
relevance if there is undue delay in its reporting. Generally, the older the information, the less
useful. What happened in the past would become the basis of what would happen in the future.

Understandability  
Understandability requires that financial information must be comprehensible or intelligible if it is to
be useful. Accordingly, the information should be presented in a form and expressed in terminology
that a user understands. Classifying, characterizing and presenting information “clearly and
concisely” makes it understandable. An essential quality of the information provided in financial
statements is that it is readily understandable by users. Understandability is very essential because
a relevant and faithfully represented information may prove useless if it is not understood by users.

13. Concept of Capital and capital maintenance

The Conceptual Framework mentions two concepts of capital, namely:

a) ​Financial concept of capital ​– capital is regarded as the invested money or invested purchasing.
Capital is synonymous with equity, net assets, or net worth.
b) ​Physical concept of capital ​– capital is regarded as the entity’s productive capacity, e.g., units
of output per day.

The choice of an appropriate concept is based on user’s need. Thus, if users are primarily concerned
with the maintenance of nominal invested capital or purchasing power of invested capital, the financial
concept should be used; whereas, if their primary concern is the entity’s operating capability, the
physical concept should be used. Most entities adopt the financial concept of capital in preparing their
financial statements.

The concept chosen affects the determination of profit. In this regard, the concepts of capital give rise to
the following concepts of capital maintenance:
a) ​Financial capital maintenance ​– under this concept, profit is earned if the net assets at the end
of the period exceeds the net assets at the beginning of the period, after excluding any
distributions to, and contributions from, owner during the period. Financial capital maintenance
can be measured In either nominal monetary unit or units of constant purchasing power.
b) ​Physical capital maintenance ​– under this concept, profit is earned only if the entity’s productive
capacity at the end of the period exceeds the productive capacity at the beginning of the period,
after excluding any distributions to, and contributions from, owners during the period.

The concept of capital maintenance is essential in distinguishing between a return on capital and a
return of capital. Only inflows of assets in excess of the amount needed to maintain capital is regarded
as return on capital or profit.

The physical capital maintenance concept requires the use of current cost. On the contrary, the financial
capital maintenance concept does not require any particular measurement basis. This would depend on
the type of financial capital that the entity seeks to maintain.

The main difference between the two concepts of capital maintenance is the treatment of the effects of
changes in the prices of assets and liabilities. This is summarized below:
Financial Capital Physical Capital ​
Nominal Cost Constant purchasing power
Profit represents the increase in is treated as capital maintenance
nominal money capital over the adjustment (i.e., part of equity)
period. Capital maintenance adjustments   
Profit represents the increase in
Increases in the prices of assets invested purchasing power over
held over the period, also called the period. All price changes are treated as
holding gains, are conceptually, capital maintenance adjustments
profits but are recognized as such Only the portion of the increase in that re part of equity and not as
only when the assets are disposed prices in excess of the increase in profit.
of. the general level of prices is
regarded as profit. The remainder

The revaluation or restatements of assets and liabilities results in increases or decreases in equity.
Although these increases or decreases meet the definition of income or expenses, they are not
 recognized in profit or loss under certain concepts of capital maintenance. Accordingly, these items are
included in equity as capital maintenance adjustments or revaluation reserves.

14. Reporting entity and financial statements

Reporting period  
Financial statements are prepared for a specified period of time and provide information on assets,
liabilities and equity that existed at the end of the reporting period, or during the reporting period, and
income and expenses for the reporting period.

Comparative information  
To help users of financial statements in evaluating changes and trends, financial statements also
provide comparative information for at least one preceding reporting period.

Forward looking presentation 

Financial statements are designed to provide information about past events. Information about
possible future transactions and other events is included in the financial statements only if it relates
to the past information presented in the financial statements and is deemed useful to users of
financial statements.

Perspective adopted financial statements  

Information in financial statements is prepared from the perspective of the reporting entity, not from
the perspective of any particular group of financial statements user.

Going concern assumption  

Financial statements are normally prepared on the assumption that the reporting entity is a going
concern, meaning the entity has neither the intention nor the need to end its operations in the
foreseeable future. If it is not the case, the entity’s financial statements are prepared on another bases
(e.g., measurement at realizable values rather than mixture of costs and values.

The reporting entity  

A reporting entity is one that is required, or chooses, to prepare financial statements, and is not
necessarily a legal entity. It can be a single entity or a group or combination of two or more entities.

Sometimes, an entity controls another entity. The controlling entity is called a parent, while the controlled
entity is called subsidiary. If a reporting entity comprises both the parent and subsidiaries, the reporting
entity’s financial statements are referred to as consolidated financial statements. If a reporting entity is
the parent alone, the reporting entity’s financial statements are referred to as unconsolidated financial
statements. If a reporting entity comprises two or more entities that are not linked by a parent-subsidiary
relationship, the reporting entity’s financial statements are referred to as combined financial statements.

Consolidated and unconsolidated financial statements  

Consolidated financial statements provide information on a parent and its subsidiaries viewed as a
single reporting entity. Consolidated financial statements are not designed to provide information on
any particular subsidiary; that information is provided on the subsidiary’s own financial statements.
 Consolidated information enables users to better assess the parents prospects for future cash flows
because the parent’s cash flows are affected by the cash flows of its subsidiaries. Accordingly,
when consolidation is required, unconsolidated financial statements cannot be used as substitute
for consolidated financial statements. However, a parent may nonetheless be required or choose
to prepare unconsolidated financial statements in addition to consolidated financial statements.

15. Objective and Scope of financial statements

The objective of general purpose financial statements is to provide financial information about the
reporting entity’s assets, liabilities, equity, income and expenses that is useful in assessing: a) The
entity’s prospects for future net cash inflows; and
b) Management’s stewardship over economic resources.

That information is provided in the:

a) Statement of financial position (for recognized assets, liabilities and equity);
b) Statement(s) of financial performance (for income and expenses);
c) Other statements and notes (for additional information on recognized assets and liabilities,
information on unrecognized assets and liabilities, information on cash flows, information on
contributions from/distributions to owners, and other relevant information)
 General vs. Specific 
Accounting 
Standards 
MODULE 2: VALUATION CONCEPTS
Intended Learning Outcomes 
At the end of this module, students should learn how to: ​▪
Distinguish between general and specific accounting standards
▪ ​Illustrate the sequence of selection and application of accounting
policies between general and specific standards
 ▪ ​Understand the differences among initial and subsequent
measurement or valuation basis prescribed under the framework

Presentation of Financial 
Statements 
Presentation of Financial Statements 
Introduction
Philippine Accounting Standards (PAS) 1 Presentation of Financial Statements
prescribes the bases for the presentation of general purpose financial statements, the
guidelines for their structure, and the minimum requirements for their content to
ensure comparability.
Types if comparability
▪ ​Intra-comparability (horizontal or inter-period) – r​ efers to the comparability of
 financial statements of the same entity but from one period to another.
▪ ​Inter-comparability (dimensional) – r​ efers to the comparability of financial
statements between different entities.
Comparability requires consistency in the adoption and application of accounting
policies and in the presentation of financial statements such as the use of line item
descriptions and account titles, either within a single entity from one period to
another or across different entities.
Presentation of Financial Statements 
Financial Statements
Financial statements are the structured representation of an entity’s
financial position and results of its operations.
Financial statements are the end product of the financial reporting
process and the means by which the information gathered and
processed is periodically communicated to users. The financial
statements of an entity pertain only to that entity and not to the
industry where the entity belongs or the economy as a whole.
General purpose financial statements are “those intended to meet the
needs of users who are not in a position to require an entity to prepare
reports tailored to their particular information needs”
Presentation of Financial Statements 
Purpose of Financial Statements
1. ​Primary objective: ​To provide information about the financial position, financial
performance, and cash flows of an entity that is useful to a wide range of users I
making economic decisions.
2. ​Secondary objective: T
​ o show the results of management’s stewardship over the entity’s
resources.

To meet the objective, financial statements provide information about the

entity’s: a​ ) ​Assets (economic resources);
b) L
​ iabilities (economic obligations);
 c) E
​ quity;
d) I​ ncome;
e) E
​ xpenses;
f) C
​ ontributions by, and distributions to, owners; and
g) C
​ ash flows
Presentation of Financial Statements 
Complete set of financial statements
A complete set of financial statements consists of:
1. S
​ tatement of financial position;
2. ​Statement of profit or loss and other comprehensive income;
3. ​Statement of changes in equity;
4. ​Statement of cash flows;
5. ​Notes to the financial statements
 a) C
​ omparative information; and
6. ​Additional statement of financial position (required only when certain
instances occur)
Presentation of Financial Statements 
General features of financial statements
1. Fair presentation and Compliance with PFRSs
Fair presentation is faithfully representing, in the financial statements, the
effects of transactions and other events in accordance with the definitions
and recognition criteria for assets, liabilities, income and expenses set out in
the Conceptual Framework.
Compliance with the PFRSs is presumed to result in fairly presented
financial statements.
Fair presentation also requires the proper selection of accounting policies,
proper presentation of information and provision of additional disclosures
whenever relevant to the understanding of the financial statements.
Presentation of Financial Statements 
2. Going Concern
Financial statements are normally prepared on a going concern basis unless the
entity has an intention to liquidate or has no other alternative but to do so.
When preparing financial statements, management shall assess the entity’s ability to
continue as a going concern, taking into account all available information about the
future, which is at least, but not limited to, 12 months from the reporting date.
If the entity has a history of profitable operations and ready to access financial
resources, management may conclude that the entity is a going concern without
detailed analysis.
If there are material uncertainties on the entity’s ability to continue as a going
concern, those uncertainties shall be disclosed.
If the entity is not a going concern, its financial statements shall be prepared using
another basis. This fact shall be disclosed, including the basis used and the reason
why the entity is not regarded as a going concern.
Presentation of Financial Statements 
3. Accrual Basis of Accounting
All financial statements shall be prepared using the accrual basis of
accounting except for the statement of cash flows, which is prepared
using cash basis.

4. Materiality and Aggregation

Each material class of similar items is presented separately. A class of
similar items is called a “line item”. Dissimilar items are presented
separately unless they are immaterial. Individually immaterial items
are aggregated with other items.
Presentation of Financial Statements 
5. Offsetting
Assets and liabilities or income and expenses are presented separately and are not
offset, unless offsetting is required or permitted by a PFRS.
Offsetting is permitted when it reflects the substance of the transactions. Examples of
offsetting:
a) ​Presenting gains and losses from sales of assets net of related selling expenses.
b) ​Presenting at net amount the unrealized gains and losses arising from trading
securities and from translation of foreign currency denominated assets and
liabilities, except if they are material.
c) ​Presenting a loss from a provision net of a reimbursement from a third party
Measuring assets net of valuation allowances is not offsetting. For example,
deducting allowance for doubtful accounts from accounts receivable or deducting
accumulated depreciation from a building account is not offsetting
Presentation of Financial Statements 
6. Frequency of reporting

Financial statements are prepared at least annually. If an entity changes its reporting period
longer or shorter than one year, it shall disclosed the following:
a) T
​ he period covered by the financial statements;
b) T
​ he reason for using a longer or shorter period; and
​ he fact that amounts presented in the financial statements are not entirely c​ omparable.
c) T

7. Comparative Information

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

As a minimum, an entity presents two of each of the statements and related notes. For
example, when an entity presents its 20x2 current year financial statements, the 20x1
preceding year financial statements shall also be presented as a comparative information.
Presentation of Financial Statements 
7. Comparative Information (continued)

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

Additional Statement of Financial Position

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

of financial position when certain instances occur. Those instances are as follows:
a) ​The entity applies an accounting policy retrospectively, makes a retrospective
restatement of items in its financial statements, or reclassifies items in the financial
statements; and
b) T
​ he instance in (a) has a material effect on the information in the statement of financial
position at the beginning of the preceding period.
Presentation of Financial Statements 
8. Consistency of Presentation
The presentation and classification of items in the financial statements is
retained from one period to the next unless a change in presentation:
a) I​ s required by a PFRS; or
b) R ​ esults in information that is reliable and more relevant.
A change in presentation requires the reclassification of items in the
comparative information. If the effect of a reclassification is material, the
entity shall provide the “additional statement of financial position”.
Presentation of Financial Statements 
Structure and Content of Financial Statements

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

The following information shall be displayed prominently and repeatedly whenever relevant
to the understanding of the information presented:
a) T
​ he name of the reporting entity
b) W
​ hether the statements are for the individual entity or for a group of entities
c) T
​ he date of the end of the reporting period or the period covered by the financial
statements
d) T
​ he presentation currency
e) T
​ he level of rounding used (e.g., thousands, millions, etc.)
Presentation of Financial Statements 
The statement of financial position is dated at the end of the reporting period while the
other financial statements are dated for the period that they cover. PAS 1 requires
particular disclosures to be presented either in the notes or on the face of the other
financial statements (e.g., footnote disclosures). Other disclosures are addressed by
other PFRSs.
Presentation of Financial Statements 
Management’s Responsibility over Financial Statements
The management is responsible for an entity’s financial statements. The responsibility
encompasses:
a) T
​ he preparation and fair presentation of financial statements in accordance with PFRSs;
b) I​ nternal control over financial reporting;
c) G
​ oing concern assessment;
d) O
​ versight over the financial reporting process; and
e) R
​ eview and approval of financial statements

The responsibilities are expressly stated in a document called “Statement of Management’s

Responsibility for Financial Statements”, which is attached to the financial statements as a cover
letter. This document is signed by the entity’s
a) C
​ hairman of the Board
b) C
​ hief Executive Officer
c) C
​ hief Financial Officer

Presentation of Financial 
Statements S​ tatement of Financial Position
The statement of financial position shows the entity’s financial condition (i.e., status of
assets, liabilities and equity) as at a certain date. It includes line items that present the
following amounts:
h) ​Trade and other n) ​Current tax liabilities and
a) P ​ roperty, plant and
receivables; current tax assets;
equipment;
i) ​Cash and cash o) D
​ eferred tax liabilities
b) I​ nvestment property;
equivalents; and deferred tax
c) I​ ntangible assets; assets;
j) A
​ ssets held for sale,
d) F ​ inancial assets including disposal p) L​ iabilities included in
(excluding e, h, and i); groups; disposal groups;
e) I​ nvestments accounted k) T
​ rade and other q) N
​ on-controlling
for using equity payables; interests; and
method;
l) ​Provisions; r) I​ ssued capital and
f) B
​ iological assets; reserves attributable to
m) ​Financial liabilities
owners of the parent
g) I​ nventories; (excluding k ad l);
Presentation of Financial Statements  
Presentation of statement of financial position
A statement of financial position may be presented in a “classified” or an
“unclassified” manner.
a) ​A ​classified presentation s​ hows distinction between current and non-current
assets and current and non-current liabilities.
b) ​An ​unclassified presentation (​ also called ‘based on liquidity’) shows no
distinction between current and non-current items.
A classified presentation shall be used except when an unclassified presentation
provides information that is reliable and more relevant. When that exception applies,
assets and liabilities are presented in order of liquidity (this is normally the case for
banks and other financial institutions).
A classified presentation highlights an entity’s working capital and facilitates the
computation of liquidity and solvency ratios.

Working Capital = Current Assets – Current Liabilities

Presentation of Financial Statements  
Current Assets and Current Liabilities
Current Assets Current Liabilities
- are assets that are: - are liabilities that are:

a) expected
​ to be realized, sold, or consumed

a) ​
in the entity's normal operating cycle;​ expected to be settled in the entity’s normal

operating cycle;

b) held primarily for trading; b) held primarily for trading; c)

​ expected
​ to be

realized within 12 months

after the reporting period; orc) ​due to be settled within 12 months after the reporting period; or
cash or cash equivalent, unless restricted reporting period.
from being exchanged or used to settle a d) the entity does not have an unconditional
right to defer settlement of the liability for
at least twelve months after the reporting
d) period.
liability for at least twelve months after the
All other assets and liabilities are classified as non-current.
Presentation of Financial Statements 
The operating cycle of an entity is the time between the acquisition of
assets for processing their realization in cash or cash equivalents.
When the entity’s normal operating cycle is not clearly identifiable, it
is assumed to be 12 months.
Assets and liabilities that are realized or settled as part of the entity’s
normal operating cycle are presented as current, even if they are
expected to be realized or settled beyond 12 months after the reporting
period.
Assets that do not form part of the entity’s normal operating cycle are
presented as current only when they are expected to be realized or
settled within 12 months after the reporting period.
Presentation of Financial Statements  
Examples:
Current Assets Current Liabilities​ ​∙ ​Cash and cash
equivalents ​∙ ​Accounts payable​ ​∙ ​Accounts receivable ​∙
Salaries payable
∙ ​Non-trade receivable months
collectible within 12 ∙ ​Dividends payable

∙ ​Held for trading securities ​∙ ​Income (current) tax payable​ ​∙

Inventory ​∙ ​Unearned revenue​ ​∙ ​Prepaid assets ​∙ ​Portion of
notes/loans/bonds ​payable due within 12
months
Presentation of Financial 
Statements​Non-current Assets Non-current
Liabilities
∙ ​Property, plant and ∙ ​Portion of notes/loans/bonds
equipment payable due beyond 12
∙ ​Non-trade receivable months c​ ollectible
beyond 12 months

∙ ​Investment in associate
∙ ​Investment property ∙​ ​Deferred tax liabilities ​∙ ​Intangible
assets
∙ ​Deferred tax assets
Presentation of Financial Statements 
Statement of Profit or Loss and Other Comprehensive Income
Income and expenses for the period may be presented in either:
a) ​A ​single statement o
​ f profit or loss and other comprehensive income (statement of
comprehensive income); or

b) ​Two statements – ​(1) statement of profit or loss (income statement) and (2) a statement
presenting comprehensive income.

PAS 1 requires an entity to present information on the following:

a) P
​ rofit or loss;
b) O
​ ther comprehensive income; and
c) C
​ omprehensive income

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

comprehensive income is also presented. Presenting only an income statement is
prohibited.
Presentation of Financial 
Statements ​The presentations have the following basic
format:

Single Statement Presentation

1
Statement of Profit and Loss and Other
Statement of Profit and Loss / Income Statement
Comprehensive Income
Revenues 100​ L
​ ess: Expenses 80​ ​Profit or Loss 20
Revenues 100 Less: Expenses 80 Profit or loss 20
2
Add: Other comprehensive income 10 Statement of Other Comprehensive Income
Profit or Loss 20​ A
​ dd: Other comprehensive
Comprehensive income 30
income 10​ C
​ omprehensive income 30

Two-Statement Presentation

Presentation of Financial Statements 

Profit or loss
Profit or loss is income less expenses, excluding the components of
other comprehensive income. The excess of income over expenses is
profit; while the deficiency is loss. This method of computing for profit
or loss is called the “transaction approach”.
Income and expenses are usually recognized in profit or loss
unless: a
​ )T
​ hey are items of other comprehensive income; or
b) ​They are required by other PFRSs to be recognized outside of profit
or loss
Presentation of Financial Statements  
The following are not included in determining the profit or loss for the period:
Transaction Accounting
 1. Correction of prior period error Direct adjustment to the beginning balance o
​ f retained
earnings. The adjustment is
presented in the statement of changes in
equity.

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

3. Other comprehensive income Changes during the period are presented in t​ he “other
comprehensive income” section
of the statement of comprehensive income.
Cumulative balances are presented in the
equity section of the statement of financial
position.
Recognized directly in equity. Transactions
4. Transactions with owners during the period are presented in the
(e.g., issuance of share capital, declaration statement of changes in equity.
of dividends, etc.)

Presentation of Financial Statements 

The profit or loss section shows line items that present the following amounts for the
period:
1. ​Revenue, presenting separately interest revenue;
2. ​Finance costs;
 3. ​Gains and losses arising from the derecognition of financial asset measured ​at
amortized cost.
4. ​Impairment losses and impairment gains on financial assets;
5. ​Gains and losses on reclassifications of financial assets from amortized cost ​or
fair value through other comprehensive income to fair value through ​profit
or loss;
6. ​Share in the profit or loss associates and joint ventures;
7. ​Tax expense; and
8. ​Result of discontinued operations.
Presentation of Financial Statements 
Presentation of Expenses
Expenses may be presented using either the following methods:
a) ​Nature of expense method – ​Under this method, expenses are ​aggregated
according to their nature (e.g., depreciation, purchases of ​materials,
 transport costs, employee benefits and advertising costs) and ​are not
reallocated according to their functions within the entity.

b) ​Function of expense method (cost of sales method) – ​Under this ​method,

an entity classifies expenses according to their function (e.g., cost ​of sales,
distribution costs, administrative expenses, and other functional
classifications). At a minimum, cost of sales shall be presented separately
from other expenses.
Presentation of Financial Statements  
The nature of expense method is simpler to apply because it eliminates considerable judgment
needed in reallocating expenses according to their function. However, an entity shall choose
whichever method it deems will provide information that is reliable and more relevant, taking
into account historical and industry factors and the entity’s nature.
Nature of Expense Method
Revenue xx​ ​Other income xx
Changes in inventories of finished goods and work in progress xx
Raw materials and consumables used xx​ ​Employee benefits expense xx
 Depreciation and amrotization expense xx
Other expenses xx​ ​Total expenses (xx)​ ​Profit before tax xx​ ​Income tax expense (xx)​ ​Profit after tax xx

Presentation of Financial Statements  

If the function of expense method is used, additional disclosures on the nature of expenses
shall be provided, including depreciation and amortization expense and employee benefits
expense. This information is useful in predicting future cash flows.
Function of Expense Method
Revenue xx ​Cost of sales (xx) ​Gross profit xx ​Other income xx ​Distribution
costs (xx) ​Administrative expense (xx) ​Finance cost (xx) ​Other expense
(xx)​ P
​ rofit before tax xx​ ​Income tax expense (xx)​ P
​ rofit after tax xx
Presentation of Financial Statements 
Other Comprehensive Income
Other comprehensive income “comprises item and expense (including
reclassification adjustments) that are not recognized in profit or loss as required or
permitted by other PFRSs”
The components of other comprehensive income include the following:
a) C
​ hanges in revaluation surplus;
b) R
​ emeasurements of net defined benefit liability (asset);
c) G
​ ains and losses on investments designated or measured at fair value through
other comprehensive income (FVOCI)
d) G
​ ains and losses arising from translating the financial statements of a foreign
operation;
Presentation of Financial Statements 
e) E
​ ffective portion of gains and losses on hedging instruments in a cash flow
hedge;
f) C
​ hanges in fair value of a financial liability designated at fair value through
profit or loss (FVPL) attributable to changes in credit risk;
g) C
​ hanges in the time value of option when the option’s intrinsic value and time
value is designated as the hedging instrument; and
h) ​Changes in the value of the forward elements of forward contracts when
 separating the forward element and spot element of a forward contract and
designating as the hedging instrument only the changes in the spot element,
and changes in the value of the foreign currency basis spread of a financial
instrument when excluding it from the designation of that financial
instrument as the hedging instrument.
Presentation of Financial Statements 
Presentation of OCI
The other comprehensive income section shall group items of OCI into
the following:
a) T
​ hose for which reclassification adjustment is allowed; and
b) ​Those for which reclassification adjustments is not allowed
The entity’s share in the OCI of an associate or joint venture accounted
for under the equity method shall also be presented separately and
also grouped according to the classifications above.
Presentation of Financial Statements 
Total Comprehensive Income
Total comprehensive income is “the change in equity during a period
resulting from transactions and other events, other than those changes
resulting from transactions with owners in their capacity as owners”.
Total comprehensive income is the sum of profit or loss and other
comprehensive income. It comprises all ‘non-owner’ changes in equity.
Presenting information on comprehensive income, and not just profit
or loss, helps users better assess the overall financial performance of
the entity.
Presentation of Financial Statements 
Statement of Changes in Equity
The statement of changes in equity shows the following information:
a) E
​ ffects of change in accounting policy (retrospective application) or
correction of prior period error (retrospective restatement);
b) ​Total comprehensive income for the period; and
c) F
​ or each component equity, a reconciliation between the carrying amount
at the beginning and the end of the period, showing separately changes
resulting from:
i. ​Profit or loss;
ii. ​Other comprehensive income; and
iii. ​Transactions with owners, e.g., contributions by and distribution to owners
Presentation of Financial Statements 
Retrospective adjustments and retrospective restatements are
presented in the statement of changes in equity as adjustments to the
opening balance of retained earnings rather than as change in equity
during the period.
Components of equity include, for example, each class of contributed
equity, the accumulated balance of each class of other comprehensive
income and retained earnings.
PAS 1 allows the disclosure of dividends, and the related amount per
share, either in the statement of changes in equity or in the notes
Presentation of Financial Statements 
Statement of Cash Flows
PAS 1 refers the discussion and presentation of statement of cash
flows ​to PAS 7 Statement of Cash Flows.
Notes
The notes provides information in addition to those presented in the
other financial statements. It is an integral part of a complete set of
financial statements. All other financial statements are intended to be
read in conjunction with the notes. Accordingly, information in the
other financial statements shall be cross-referenced to the notes.
Presentation of Financial Statements 
PAS 1 requires an entity to present the notes in a systematic manner. Notes are
normally structured as follows:
1. ​General information the reporting entity. – This includes the domicile and legal
form of the entity and its country of incorporation and the address of its
registered office (or principal place of business, if different from the registered
office) and a description of the nature of the entity’s operations and its principal
activities.
2. ​Statement of compliance with the PFRSs and basis of preparation of financial
statements.
3. ​Summary of significant accounting policies – This includes narrative ​descriptions
of the line items in the other financial statements, their recognition c​ riteria,
measurement bases, derecognition, transitional provisions, and other relevant
information.
Disaggregation (breakdowns) of the line items in the other financial statements and
other supporting information.
Presentation of Financial Statements 
Notes (continued)

5. ​Other disclosures required by PFRSs, such as:

a) ​Contingent liabilities and unrecognized contractual commitments.
b) ​Non-financial disclosures, e.g., the entity’s financial risk management objectives and policies.
c) ​Events after the reporting period, if material.
d) ​Changes in accounting policies and accounting estimates and corrections of prior period errors. ​e)
Related party disclosure.
f) ​Judgments and estimations.
g) ​Capital management.
h) ​Dividends declared after the reporting period but before the financial statements were authorized for issue, and
 the related amount per share.
i) ​The amount of any cumulative preference dividends not recognized.

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

Notes are prepared in a necessarily detailed manner. More often than not, they are voluminous and occupy
a ​bulk portion of the financial statements.

Hierarchy of Selection and 

Application of Accounting 
Standards or Policies 
Hierarchy of Selection and Application of 
Accounting Standards or Policies 
When an IFRS Standard specifically applies to a transaction, other
 event or condition, an entity determines the accounting policy policies
for that item by applying the Standard.
In the absence of an IFFRS Standard that specifically applies to a
transaction, other event of condition, preparers of an entity’s financial
statements use judgment in developing and applying an accounting
policy that results in information that is (a) reliable and (b) relevant to
the economic decision-making needs of users of financial statements.
How preparers develop and apply such an accounting policy depends
on whether IFRS Standards deal with similar and related issues.
Hierarchy of Selection and Application of 
Accounting Standards or Policies 
The following diagram depicts the steps for selecting and applying accounting policies for a
transaction, other event or condition:
Hierarchy of Selection and Application of 
Accounting Standards or Policies 
Step 1—Consider whether an IFRS Standard specifically applies to the transaction,
other event or condition
If an IFRS Standard specifically applies to a transaction, other event or condition, an
entity applies the requirements of that Standard. The entity does so even if those
requirements do not align with concepts in the Conceptual Framework for Financial
Reporting (Conceptual Framework)
Step 2—Consider whether IFRS Standards deal with similar and related issues
IAS 8 specifies that, in the absence of an IFRS Standard that specifically applies to a
transaction, other event or condition, preparers use judgement in developing and
applying an accounting policy that results in relevant and reliable information. IAS 8 ​goes
on to specify that in making that judgement, preparers refer to and consider the
applicability of, in descending order:
a) t​ he requirements in IFRS Standards dealing with similar and related issues; and ​b)
the definitions, recognition criteria and measurement concepts for assets, l​ iabilities,
income and expenses in the Conceptual Framework.
Hierarchy of Selection and Application of 
Accounting Standards or Policies 
Step 2—Consider whether IFRS Standards deal with similar and related issues (continued)

The phrase ‘in descending order’ creates a hierarchy. At the top of the hierarchy are the requirements in
IFRS Standards dealing with similar and related issues. The hierarchy means that, to the extent that there
are applicable requirements in one or more IFRS Standards dealing with similar and related issues,
preparers of financial statements develop an accounting policy by referring to those requirements, rather
than to the definitions, recognition criteria and measurement concepts in the Conceptual Framework.
Preparers may need to apply judgement in deciding whether there are IFRS Standards that deal with
issues similar and related to those arising for the transaction under consideration.

In developing an accounting policy with reference to the requirements in IFRS Standards dealing with
similar and related issues, preparers need to use their judgement in applying all aspects of the Standard
that are applicable to an issue. Such aspects could include disclosure requirements. In other words:

a) ​it might be inappropriate to apply only some requirements in an IFRS Standard dealing with similar
and related issues if other requirements in that Standard also relate to the transaction for which a
policy is being developed; but

b) ​it might not be necessary to apply all the requirements of the Standard.

Hierarchy of Selection and Application of 

Accounting Standards or Policies 
Step 3—Refer to and consider the applicability of the Conceptual
Framework
Preparers of financial statements refer to the definitions, recognition criteria
or measurement concepts in the Conceptual Framework if both:
a) n
​ o IFRS Standard specifically applies to a transaction, other event or
condition; and
b) ​no IFRS Standards deal with similar and related issues.
For some transactions, other events or conditions, there could be several
issues to consider in developing an accounting policy. For some of those
issues, IFRS Standards may deal with similar and related issues; but for
other issues, there may be no such Standard. In such situations, preparers of
financial statements might refer to the requirements in an IFRS Standard for
some issues and to concepts in the Conceptual Framework for other issues
Hierarchy of Selection and Application of 
Accounting Standards or Policies 
Other sources of reference
IAS 8 states that in the absence of an IFRS Standard that specifically applies to a
transaction, other event or condition, management may also consider the most recent
pronouncements of other standard-setting bodies that use a similar conceptual
framework to develop accounting standards, other accounting literature and
accepted industry practices. Management may consider these other sources to the
extent they do not conflict with the Conceptual Framework or with the requirements
in IFRS Standards dealing with similar and related issues.

General disclosure requirements

IFRS Standards include disclosure requirements. If no IFRS Standard specifically
applies to a transaction, no disclosure requirements may specifically apply to that
transaction. However, disclosure of information about the transaction may be
necessary to satisfy the general presentation and disclosure requirements in IAS 1.
Hierarchy of Selection and Application of 
Accounting Standards or Policies 
Presentation and disclosure requirements in IAS 1 include requirements to:

a) ​present—in the statement of financial position and statement of profit or loss and other
comprehensive income—line items additional to those specifically listed in IAS 1.
Presenting additional items is required when such presentation is relevant to an
understanding of the entity’s financial position or performance; and

b) ​disclose:
i. t​ he nature and amount of material items of income or expense;
ii. i​ nformation relevant to an understanding of any of the financial statements; (iii)
significant accounting policies; and
iii. i​ nformation about assumptions made about the future, and other major sources of
estimation uncertainty.

In addition, if preparers of financial statements are developing an accounting policy by

reference to the requirements in IFRS Standards dealing with similar and related issues, they
consider all the requirements dealing with those issues, including disclosure requirements

Initial vs. Subsequent Recognition 

Principle and Measurement or 
Valuation Basis 
Initial vs. Subsequent Recognition Principle 
and Measurement or Valuation Basis 
The recognition process
Recognition is the process of including in the financial position or the
statements of financial performance an item that meets the definition of one
of the financial statements elements (i.e., asset, liability, equity, income or
expense). This involves recording the item in words and in monetary
amount ​and including that amount in the totals of those statements. The
amount at ​which an asset, a liability or equity is recognized in the statement
of financial position is referred to as its carrying amount.
Recognition criteria
a) A
​ n item is recognized if:
b) I​ t meets the definition of an asset, liability, equity, income or expense; and
Recognizing it would provide useful information, i.e., relevant and faithfully
represented information.
Initial vs. Subsequent Recognition Principle 
and Measurement or Valuation Basis 
Measurement
Recognition requires quantifying an item in monetary terms, thus
necessitating the selection of an appropriate measurement basis.
The application of the qualitative characteristics, including the cost
constraint, is likely to result in the selection of different measurement
bases for different assets, liabilities, income and expenses.
Accordingly, the standards prescribe specific measurement bases for
different types ​of assets, liabilities, income and expenses.
Initial vs. Subsequent Recognition Principle 
and Measurement or Valuation Basis 
Measurement bases
The Conceptual Framework describes the following measurement
bases:
1. ​Historical cost
2. ​Current value
a) F
​ air value
b) V
​ alue in use and fulfilment value
c) C
​ urrent cost
Initial vs. Subsequent Recognition Principle 
and Measurement or Valuation Basis 
Consideration when a selecting a measurement basis
When selecting a measurement basis, it is important to consider the
following:
▪ ​The nature of information provided by a particular
measurement basis; and
▪ ​The qualitative characteristics, the cost constrain, and other
factors.
Initial vs. Subsequent Recognition Principle 
and Measurement or Valuation Basis  
Examples of Initial and Subsequent Measurements:
 Item Initial Measurement Subsequent Measurement Applicable Standard ​Inventory C
​ ost

Lower of Cost and Net

Realizable Value IAS

​ 2
Asset ​Cost value/Value in use (if
Property, Plant and Revaluation Model)

Equipment Cost
​ ​Intangible Carrying Value (if Cost IAS 16 I​ AS 38
Model), Fair value/Value in
use (if Revaluation Model)

Carrying Value (if Cost

Model), Higher of Fair

​ ost Cost
Investment Property C ​ (if Cost Model), Fair ​value (if Fair Value Model) ​IAS

40

End of Discussion 
 Module 2: General vs. Specific Accounting Standards  

Intended Learning Outcomes:  

1. Distinguish between general and specific accounting standards
2. Illustrate the sequence of selection and application of accounting policies between general and specific
standards
3. Understand the differences among initial and subsequent measurement or valuation basis prescribed under
the framework

A. Lecture/Content  
1. Topics:
∙ ​Presentation of financial statements
∙ ​Hierarchy of selection and application of accounting standards or policies
∙ ​Initial vs. subsequent recognition principle and measurement or valuation basis

2. Presentation of financial statements

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

Types if comparability  
a) ​Intra-comparability (horizontal or inter-period) – ​refers to the comparability of financial
statements of the same entity but from one period to another.
b) ​Inter-comparability (dimensional) – ​refers to the comparability of financial statements
between different entities.

Comparability requires consistency in the adoption and application of accounting policies and in
the presentation of financial statements such as the use of line item descriptions and account
titles, either within a single entity from one period to another or across different entities.

Financial Statements  
Financial statements are the structured representation of an entity’s financial position and results of
its operations.

Financial statements are the end product of the financial reporting process and the means by which
the information gathered and processed is periodically communicated to users. The financial
statements of an entity pertain only to that entity and not to the industry where the entity belongs or
the economy as a whole.

General purpose financial statements are “those intended to meet the needs of users who are not
in a position to require an entity to prepare reports tailored to their particular information needs”
Purpose of Financial Statements  
 1. ​Primary  objective:  ​To provide information about the financial position, financial
performance, and cash flows of an entity that is useful to a wide range of users I making
economic decisions.
2. ​Secondary objective: ​To show the results of management’s stewardship over the entity’s
resources.

To meet the objective, financial statements provide information about the

entity’s: a) Assets (economic resources);
b) Liabilities (economic obligations);
c) Equity;
d) Income;
e) Expenses;
f) Contributions by, and distributions to, owners; and
g) Cash flows

Complete set of financial statements  

A complete set of financial statements consists of:
1. Statement of financial position;
2. Statement of profit or loss and other comprehensive income;
3. Statement of changes in equity;
4. Statement of cash flows;
5. Notes to the financial statements
a. Comparative information; and
6. Additional statement of financial position (required only when certain instances occur)

General features of financial statements  

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

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

Fair presentation also requires the proper selection of accounting policies, proper
presentation of information and provision of additional disclosures whenever relevant to the
understanding of the financial statements.

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

When preparing financial statements, management shall assess the entity’s ability to
continue as a going concern, taking into account all available information about the future,
which is at least, but not limited to, 12 months from the reporting date.
 If the entity has a history of profitable operations and ready to access financial resources,
management may conclude that the entity is a going concern without detailed analysis.

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

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

3. Accrual Basis of Accounting  

All financial statements shall be prepared using the accrual basis of accounting except for the
statement of cash flows, which is prepared using cash basis.

4. Materiality and Aggregation  

Each material class of similar items is presented separately. A class of similar items is called
a “line item”. Dissimilar items are presented separately unless they are immaterial.
Individually immaterial items are aggregated with other items.

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

Offsetting is permitted when it reflects the substance of the transactions. Examples of

offsetting:
a) Presenting gains and losses from sales of assets net of related selling expenses. b)
Presenting at net amount the unrealized gains and losses arising from trading securities
and from translation of foreign currency denominated assets and liabilities, except if they
are material.
c) Presenting a loss from a provision net of a reimbursement from a third party

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

6. Frequency of reporting  
Financial statements are prepared at least annually. If an entity changes its reporting period
longer or shorter than one year, it shall disclosed the following:
a) The period covered by the financial statements;
b) The reason for using a longer or shorter period; and
c) The fact that amounts presented in the financial statements are not entirely
comparable.

7. Comparative Information  
PAS 1 requires an entity to present comparative information in respect of the preceding
 period for all amounts reported in the current period’s financial statements, unless other
PFRS requires otherwise.
As a minimum, an entity presents two of each of the statements and related notes. For
example, when an entity presents its 20x2 current year financial statements, the 20x1
preceding year financial statements shall also be presented as a comparative information.

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

Additional Statement of Financial Position  

As mentioned earlier, a complete set of financial statements includes an additional statement
of financial position when certain instances occur. Those instances are as follows: a) The
entity applies an accounting policy retrospectively, makes a retrospective restatement of
items in its financial statements, or reclassifies items in the financial statements; and
b) The instance in (a) has a material effect on the information in the statement of
financial position at the beginning of the preceding period.

8. Consistency of Presentation  
The presentation and classification of items in the financial statements is retained from one
period to the next unless a change in presentation:
a) Is required by a PFRS; or
b) Results in information that is reliable and more relevant.

A change in presentation requires the reclassification of items in the comparative

information. If the effect of a reclassification is material, the entity shall provide the
“additional statement of financial position”.

Structure and Content of Financial Statements  

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

The following information shall be displayed prominently and repeatedly whenever relevant to the
understanding of the information presented:
a) The name of the reporting entity
b) Whether the statements are for the individual entity or for a group of entities c) The date of
the end of the reporting period or the period covered by the financial statements d) The
presentation currency
e) The level of rounding used (e.g., thousands, millions, etc.)
Illustration: A heading for a financial 
statement   ABC Group  
 Statement of financial position   entity indicating that
As of December 31, 20x2   the financial
(in thousands of Philippine Pesos) statement pertains to
a group.

Level of rounding-off   
Dates at the end of the reporting and presentation   
period. currency. 

Name of the reporting

The statement of financial position is dated at the end of the reporting period while the other financial
statements are dated for the period that they cover. PAS 1 requires particular disclosures to be
presented either in the notes or on the face of the other financial statements (e.g., footnote
disclosures). Other disclosures are addressed by other PFRSs.

Management’s Responsibility over Financial Statements  

The management is responsible for an entity’s financial statements. The responsibility encompasses:
a) The preparation and fair presentation of financial statements in accordance with PFRSs; b)
Internal control over financial reporting;
c) Going concern assessment;
d) Oversight over the financial reporting process; and
e) Review and approval of financial statements

The responsibilities are expressly stated in a document called “Statement of Management’s

Responsibility for Financial Statements”, which is attached to the financial statements as a cover
letter. This document is signed by the entity’s
a) Chairman of the Board
b) Chief Executive Officer
c) Chief Financial Officer

Statement of Financial Position  

The statement of financial position shows the entity’s financial condition (i.e., status of assets,
liabilities and equity) as at a certain date. It includes line items that present the following amounts: a)
Property, plant and equipment;
b) Investment property;
c) Intangible assets;
d) Financial assets (excluding e, h, and i);
e) Investments accounted for using equity method;
f) Biological assets;
g) Inventories;
h) Trade and other receivables;
i) Cash and cash equivalents;
 j) Assets held for sale, including disposal groups;
k) Trade and other payables;
l) Provisions;
m) Financial liabilities (excluding k ad l);
n) Current tax liabilities and current tax assets;
o) Deferred tax liabilities and deferred tax assets;
p) Liabilities included in disposal groups;
q) Non-controlling interests; and
r) Issued capital and reserves attributable to owners of the parent

Presentation of statement of financial position  

A statement of financial position may be presented in a “classified” or an “unclassified” manner. a) A
classified presentation ​shows distinction between current and non-current assets and current
and non-current liabilities.
b) An ​unclassified presentation ​(also called ‘based on liquidity’) shows no distinction between
current and non-current items.

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

A classified presentation highlights an entity’s working capital and facilitates the computation of
liquidity and solvency ratios.
Working Capital = Current Assets – Current Liabilities

Curren​t Assets and Current Liabilities  

Current Assets Current Liabilities  
- are assets that are: - are liabilities that are:
expected to be realized, sold, or a) normal operating cycle;
consumed in the entity's normal
operating cycle;

a) expected
​ to be settled in the entity’s

b) held primarily for trading; b) held primarily for trading; ​c) expected
​ to be
realized within 12

months after the reporting period; or c) due ​ to be settled within 12 months after the
reporting period; or
cash or cash equivalent, unless
restricted from being exchanged or d)
used to settle a liability for at least d)
twelve months after the reporting
period.
 of the liability for at least twelve
the entity does not have an
months after the reporting period.
unconditional right to defer settlement

All other assets and liabilities are classified as non-current.

The operating cycle of an entity is the time between the acquisition of assets for processing their
realization in cash or cash equivalents. When the entity’s normal operating cycle is not clearly
identifiable, it is assumed to be 12 months.
Assets and liabilities that are realized or settled as part of the entity’s normal operating cycle are
presented as current, even if they are expected to be realized or settled beyond 12 months after the
reporting period.

Assets that do not form part of the entity’s normal operating cycle are presented as current only when
they are expected to be realized or settled within 12 months after the reporting period.

Examples:
Current Assets Current Liabilities  
∙ ​Cash and cash equivalents ​∙ ​Accounts payable
∙ ​Accounts receivable ​∙ ​Salaries payable
∙ ​Non-trade receivable collectible ∙ ​Dividends payable
within 12 ​months

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

Non-current Assets Non-current Liabilities  

∙ ​Property, plant and equipment ​∙ ​Portion of notes/loans/bonds payable ​∙ ​Non-trade receivable
collectible beyond due beyond 12 months ​12 months
∙ ​Investment in associate
∙ ​Investment property ​∙ ​Deferred tax liabilities ​∙ ​Intangible assets
∙ ​Deferred tax assets

Statement of Profit or Loss and Other Comprehensive Income  

Income and expenses for the period may be presented in either:
a) A ​single statement ​of profit or loss and other comprehensive income (statement of
comprehensive income); or
b) ​Two statements – ​(1) statement of profit or loss (income statement) and (2) a statement
presenting comprehensive income.

The​ presentations have the following basic format:

Single Statement Presentation  

Statement of Profit and Loss and Other Comprehensive Income  

 Revenues 100
Less: Expenses 80
Profit or loss 20
Add: Other comprehensive income 10
Comprehensive income 30
Two-Statement Presentation  
1
Statement of Profit and Loss / Income Statement
Revenues 100
Less: Expenses 80
Profit or Loss 20

2
Statement of Other Comprehensive Income
Profit or Loss 20
Add: Other comprehensive income 10
Comprehensive income 30

PAS 1 requires an entity to present information on the following:

a) Profit or loss;
b) Other comprehensive income; and
c) Comprehensive income

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

comprehensive income is also presented. Presenting only an income statement is prohibited.

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

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

a) They are items of other comprehensive income; or
b) They are required by other PFRSs to be recognized outside of profit or loss

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

Transaction Accounting  
1. Correction of prior period error Direct adjustment to the beginning balance of retained
earnings. The
adjustment is presented in the statement
of changes in equity.
 2. Change in accounting policy Similar treatment to correction of prior ​period error.
3. Other comprehensive income Changes during the period are presented in the “other
comprehensive
income” section of the statement of
comprehensive income. Cumulative
section of the statement of financial
position.
Recognized directly in equity.
4. Transactions with owners Transactions during the period are
(e.g., issuance of share capital, presented in the statement of changes
declaration of dividends, etc.) in ​equity.
balances are presented in the equity
The profit or loss section shows line items that present the following amounts for the
period: 1. Revenue, presenting separately interest revenue;
2. Finance costs;
3. Gains and losses arising from the derecognition of financial asset measured at amortized
cost.
4. Impairment losses and impairment gains on financial assets;
5. Gains and losses on reclassifications of financial assets from amortized cost or fair value
through other comprehensive income to fair value through profit or loss;
6. Share in the profit or loss associates and joint ventures;
7. Tax expense; and
8. Result of discontinued operations.

Presentation of Expenses  
Expenses may be presented using either the following methods:
a) ​Nature of expense method – ​Under this method, expenses are aggregated according to
their nature (e.g., depreciation, purchases of materials, transport costs, employee benefits
and advertising costs) and are not reallocated according to their functions within the entity.

b) ​Function of expense method (cost of sales method) – ​Under this method, an entity

classifies expenses according to their function (e.g., cost of sales, distribution costs,
administrative expenses, and other functional classifications). At a minimum, cost of sales
shall be presented separately from other expenses.

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

If the function of expense method is used, additional disclosures on the nature of expenses shall be
provided, including depreciation and amortization expense and employee benefits expense. This
information is useful in predicting future cash flows.
Nature of Expense Method  
Revenue xx Other income xx Changes in inventories of finished goods and
 work in

progress​xx
Raw materials and consumables used xx
Employee benefits expense xx
Depreciation and amortization expense xx
Other expenses xx
Total expenses ​(xx) Profit before tax xx Income tax expense ​(xx) Profit after
tax ​xx

Function of Expense Method  

Revenue xx Cost of sales (xx) Gross profit xx Other income xx Distribution costs
(xx) Administrative expense (xx) Finance cost (xx) Other expense ​(xx) Profit
before tax xx Income tax expense ​(xx)​ Profit after tax xx

Other Comprehensive Income  

Other comprehensive income “comprises item and expense (including reclassification adjustments)
that are not recognized in profit or loss as required or permitted by other PFRSs”

The components of other comprehensive income include the following:

a) Changes in revaluation surplus;
b) Remeasurements of net defined benefit liability (asset);
c) Gains and losses on investments designated or measured at fair value through other
comprehensive income (FVOCI)
d) Gains and losses arising from translating the financial statements of a foreign operation; e)
Effective portion of gains and losses on hedging instruments in a cash flow hedge; f) Changes in
fair value of a financial liability designated at fair value through profit or loss (FVPL) attributable
to changes in credit risk;
g) Changes in the time value of option when the option’s intrinsic value and time value is
designated as the hedging instrument; and
h) Changes in the value of the forward elements of forward contracts when separating the
forward element and spot element of a forward contract and designating as the hedging
instrument only the changes in the spot element, and changes in the value of the foreign
currency basis spread of a financial instrument when excluding it from the designation of that
financial instrument as the hedging instrument.

Presentation of OCI  
The other comprehensive income section shall group items of OCI into the
following: a) Those for which reclassification adjustment is allowed; and
b) Those for which reclassification adjustments is not allowed

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

Total Comprehensive Income  

Total comprehensive income is “the change in equity during a period resulting from transactions
and other events, other than those changes resulting from transactions with owners in their
capacity as owners”.

Total comprehensive income is the sum of profit or loss and other comprehensive income. It
comprises all ‘non-owner’ changes in equity. Presenting information on comprehensive income, and
not just profit or loss, helps users better assess the overall financial performance of the entity.

Statement of Changes in Equity  

The statement of changes in equity shows the following information:
a) Effects of change in accounting policy (retrospective application) or correction of prior period
error (retrospective restatement);
b) Total comprehensive income for the period; and
c) For each component equity, a reconciliation between the carrying amount at the beginning
and the end of the period, showing separately changes resulting from:
i. Profit or loss;
ii. Other comprehensive income; and
iii. Transactions with owners, e.g., contributions by and distribution to owners

Retrospective adjustments and retrospective restatements are presented in the statement of

changes in equity as adjustments to the opening balance of retained earnings rather than as
change in equity during the period.

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

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

Statement of Cash Flows  

PAS 1 refers the discussion and presentation of statement of cash flows to PAS 7 Statement of
Cash Flows.
Notes  
The notes provides information in addition to those presented in the other financial statements. It is
an integral part of a complete set of financial statements. All other financial statements are intended
to be read in conjunction with the notes. Accordingly, information in the other financial statements
shall be cross-referenced to the notes.

PAS 1 requires an entity to present the notes in a systematic manner. Notes are normally
structured as follows:
1.General information the reporting entity.
This includes the domicile and legal form of the entity and its country of
 incorporation and the address of its registered office (or principal place of business, if
different from the registered office) and a description of the nature of the entity’s
operations and its principal activities.

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

3.Summary of significant accounting policies

This includes narrative descriptions of the line items in the other financial
statements, their recognition criteria, measurement bases, derecognition, transitional
provisions, and other relevant information.

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

5.Other disclosures required by PFRSs, such as:

a) Contingent liabilities and unrecognized contractual commitments.
b) Non-financial disclosures, e.g., the entity’s financial risk management objectives
and policies.
c) Events after the reporting period, if material.
d) Changes in accounting policies and accounting estimates and corrections of prior
period errors.
e) Related party disclosure.
f) Judgments and estimations.
g) Capital management.
h) Dividends declared after the reporting period but before the financial statements
were authorized for issue, and the related amount per share.
i) The amount of any cumulative preference dividends not recognized.

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

Notes are prepared in a necessarily detailed manner. More often than not, they are
voluminous and occupy a bulk portion of the financial statements.
3. Hierarchy of selection and application of accounting standards or policies
When an IFRS Standard specifically applies to a transaction, other event or condition, an entity
determines the accounting policy policies for that item by applying the Standard.

In the absence of an IFFRS Standard that specifically applies to a transaction, other event of
condition, preparers of an entity’s financial statements use judgment in developing and applying an
accounting policy that results in information that is (a) reliable and (b) relevant to the economic
decision-making needs of users of financial statements. How preparers develop and apply such an
accounting policy depends on whether IFRS Standards deal with similar and related issues.

The following diagram depicts the steps for selecting and applying accounting policies for a
transaction, other event or condition:
Step 1—Consider whether an IFRS Standard specifically applies to the transaction, other 
event or condition  

If an IFRS Standard specifically applies to a transaction, other event or condition, an entity applies
the requirements of that Standard. The entity does so even if those requirements do not align with
concepts in the Conceptual Framework for Financial Reporting (Conceptual Framework)
Step 2—Consider whether IFRS Standards deal with similar and related issues  

IAS 8 specifies that, in the absence of an IFRS Standard that specifically applies to a transaction,
other event or condition, preparers use judgement in developing and applying an accounting policy
that results in relevant and reliable information. IAS 8 goes on to specify that in making that
judgement, preparers refer to and consider the applicability of, in descending order:

a) the requirements in IFRS Standards dealing with similar and related issues; and b) the
definitions, recognition criteria and measurement concepts for assets, liabilities, income and
expenses in the Conceptual Framework.
The phrase ‘in descending order’ creates a hierarchy. At the top of the hierarchy are the requirements
in IFRS Standards dealing with similar and related issues. The hierarchy means that, to the extent
that there are applicable requirements in one or more IFRS Standards dealing with similar and
related issues, preparers of financial statements develop an accounting policy by referring to those
requirements, rather than to the definitions, recognition criteria and measurement concepts in the
Conceptual Framework. Preparers may need to apply judgement in deciding whether there are IFRS
Standards that deal with issues similar and related to those arising for the transaction under
consideration.

In developing an accounting policy with reference to the requirements in IFRS Standards dealing with
similar and related issues, preparers need to use their judgement in applying all aspects of the
Standard that are applicable to an issue. Such aspects could include disclosure requirements. In
other words:

a) it might be inappropriate to apply only some requirements in an IFRS Standard dealing with
similar and related issues if other requirements in that Standard also relate to the transaction
for which a policy is being developed; but
b) it might not be necessary to apply all the requirements of the Standard.

Step 3—Refer to and consider the applicability of the Conceptual Framework  

Preparers of financial statements refer to the definitions, recognition criteria or measurement

concepts in the Conceptual Framework if both:

a) no IFRS Standard specifically applies to a transaction, other event or condition; and

b) no IFRS Standards deal with similar and related issues.

For some transactions, other events or conditions, there could be several issues to consider in
developing an accounting policy. For some of those issues, IFRS Standards may deal with similar
and related issues; but for other issues, there may be no such Standard. In such situations, preparers
of financial statements might refer to the requirements in an IFRS Standard for some issues and to
concepts in the Conceptual Framework for other issues

Other sources of reference  

IAS 8 states that in the absence of an IFRS Standard that specifically applies to a transaction, other
event or condition, management may also consider the most recent pronouncements of other
standard-setting bodies that use a similar conceptual framework to develop accounting standards,
other accounting literature and accepted industry practices. Management may consider these other
sources to the extent they do not conflict with the Conceptual Framework or with the requirements in
 IFRS Standards dealing with similar and related issues.

General disclosure requirements  

IFRS Standards include disclosure requirements. If no IFRS Standard specifically applies to a

transaction, no disclosure requirements may specifically apply to that transaction. However,
disclosure of information about the transaction may be necessary to satisfy the general presentation
and disclosure requirements in IAS 1.

Presentation and disclosure requirements in IAS 1 include requirements to:

a) present—in the statement of financial position and statement of profit or loss and other
comprehensive income—line items additional to those specifically listed in IAS 1. Presenting
additional items is required when such presentation is relevant to an understanding of the
entity’s financial position or performance; and
b) disclose:
i. the nature and amount of material items of income or expense;
ii. information relevant to an understanding of any of the financial statements; (iii)
significant accounting policies; and
iii. information about assumptions made about the future, and other major sources of
estimation uncertainty.

In addition, if preparers of financial statements are developing an accounting policy by reference to

the requirements in IFRS Standards dealing with similar and related issues, they consider all the
requirements dealing with those issues, including disclosure requirements

4. Initial vs. subsequent recognition principle and measurement or valuation basis

The recognition process  

Recognition is the process of including in the financial position or the statements of financial
performance an item that meets the definition of one of the financial statements elements (i.e., asset,
liability, equity, income or expense). This involves recording the item in words and in monetary
amount and including that amount in the totals of those statements. ​The amount at which an asset, a
liability or equity is recognized in the statement of financial position is referred to as its carrying amount.
Recognition criteria  
An item is recognized if:
a) It meets the definition of an asset, liability, equity, income or expense; and b) Recognizing it
would provide useful information, i.e., relevant and faithfully represented information.

Measurement  
Recognition requires quantifying an item in monetary terms, thus necessitating the selection of an
appropriate measurement basis.

The application of the qualitative characteristics, including the cost constraint, is likely to result in the
selection of different measurement bases for different assets, liabilities, income and expenses.
Accordingly, the standards prescribe specific measurement bases for different types of assets,
liabilities, income and expenses.

Measurement bases  
The Conceptual Framework describes the following measurement bases:
1. Historical cost
2. Current value
a. Fair value
b. Value in use and fulfilment value
c. Current cost

Consideration when a selecting a measurement basis  

When selecting a measurement basis, it is important to consider the following: ​▪
The nature of information provided by a particular measurement basis; and ​▪
The qualitative characteristics, the cost constrain, and other factors.

Exa​mples of Initial and Subsequent Measurements:

Item Initial Measurement Subsequent Measurement Applicable

​ Standard  

Inventory Cost Lower

​ of Cost and Net

Realizable Value IAS

​ 2
Carrying Value (if Cost
Property, Plant and Asset Cost Higher of Fair value/Value in
use (if Revaluation Model)
Equipment Cost
​ Intangible
Model), Fair v IAS 16 IAS 38
alue/Value in use (if
Revaluation Model)​ Carrying
Value (if Cost Model),

Investment Property Cost Cost

​ (if Cost Model), Fair ​value (if Fair Value Model) IAS
​ 40