SAINT COLUMBAN COLLEGE

COLLEGE OF BUSINESS EDUCATION

REFRESHER COURSE
1st Semester 2020- 2021

THEORY OF ACCOUNTS W. P. Mondido Jr., CPA

TOA. 03 - Presentation of Financial Statements Handout 3

LECTURE NOTES: PRESENTATION OF FINANCIAL STATEMENTS (PAS A REVISED 2007 INCLUDING

AMENDMENTS)

Scope
An entity shall apply this standard in preparing and presenting general purpose financial
statements in accordance with Philippine Financial Reporting Standards (PFRSs).

Definition and Objective of Financial Statements

Financial statements are a structured representation of the financial position and financial
performance of an entity. The objective of financial statements is to provide information about the
financial position and financial performance and cash flows of an entity that is useful to a wide range of
users in making economic decisions. Financial statements also show the results of management’s
stewardship of the resources entrusted to it.

Complete Set of Financial Statements

A complete set of financial statements comprises:
1) A statement of financial position as at the end of the period; (Balance Sheet)
2) A statement of comprehensive income for the period; (Income Statement)
3) A statement of changes in equity for the period
4) A statement of cash flows for the period
5) Notes, comprising a summary of significant accounting policies and other explanatory information
and;
6) A statement of financial position as at the beginning of the earliest comparative period when an
entity applies an accounting policy retrospectively or makes a retrospective restatement of items
in its financial statements, or when it reclassifies items in the financial statements

Note: An entity may use titles for the statement other than those used in this Standard and it shall
present with equal prominence all of the financial statements in a complete set of financial
statements.

General Features (Important Considerations)

1. Fair Presentation and compliance with PFRSs

Financial statements shall present fairly the financial position, financial performance and cash flows if an
entity. Fair presentation requires the faithful representation of the effects of transactions, other events
and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income
and expenses set out in the Framework. The application of PFRSs, with additional disclosure when
necessary, is presumed to result in financial statements that achieve a fair presentation.

An entity whose financial statement complies with PFRSs shall make an explicit and unreserved
statement of such compliance in the notes. An entity shall not describe financial statements a s complying
with PFRSs unless they comply with all the requirements of PFRSs.

In virtually all circumstances, an entity achieves a fair presentation by compliance with applicable PFRS. A
fair presentation also requires an entity:
a) To select and apply accounting policies in accordance with PAS 8 Accounting Policies, Changes in
Accounting Estimates and Errors. PAS 8 sets out a hierarchy of authoritative guidance that
management considers in the absence of a PFRS that specifically applies to an item.
b) To present information, including accounting policies in a manner that provides relevant, reliable
comparable and understandable information.
c) To provide additional disclosure when compliance with the specific requirements in PFRSs is
insufficient to enable users to understand the impact of particular transactions, other events and
conditions on the entity’s financial position and financial performance.
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An entity cannot rectify inappropriate accounting policies either by disclosure of the accounting policies
used or by note or explanatory material.

In extremely rare circumstances in which management concludes that compliance with a requirement in
a PFRS would be so misleading that it would conflict with the objective of financial statements set out in
the Framework

When an entity departs from requirements of PFRS it shall disclose:

a) That management has concluded that the financial statements present fairly the entity’s financial
position, financial performance and cash flows
b) That it has complied with applicable PFRS, except that it has departed from a particular
requirement to achieve a fair presentation
c) The title of the PFRS from which the entity has departed, the nature of the departure, including
the treatment that the PFRS would require, the reason why that treatment would be so misleading
in the circumstances that it would conflict with the objective of financial statements set out in the
Framework and the treatment adopted; and
d) For each period presented, the financial effect of the departure on each item in the financial
statements that would have been reported in complying with the requirement.

2. Going Concern. An entity preparing PFRSS financial statement is presumed to be a going concern. If
management has significant concerns about the entity’s ability to continue as a going concern, the
uncertainties must be disclosed. If management concludes that the entity is not a going concern, the
financial statements should not be prepared on a going concern basis, in which case PAS 1 requires a
series of disclosures.

In assessing whether the going concern assumption is appropriate, management takes into account all
available information about the future, which is at least, but is not limited to, twelve months from the end
of the reporting period. The degree of consideration depends on the facts in each case.

3. Accrual Basis of Accounting. PAS 1 requires that an entity prepare its financial statements except for
cash flow information, using the accrual basis of accounting. When the accrual basis of accounting is used,
an entity recognizes items as assets, liabilities, equity, income and expense (the elements of financial
statements) when they satisfy the definitions and recognition criteria for those elements in the
Framework.

4. Materiality and Aggregation. An entity shall present separately each material class of similar items.
An entity shall present separately items of a dissimilar nature of function unless they are immaterial. An
entity need not provide a specific disclosure required by PFRS if the information is not material.

Information is material if omitting, misstating or obscuring it could reasonably be expected to influence

decisions that the primary users of general purpose financial statements make on the basis of those
financial statements, which provide financial information about a specific reporting entity. [IAS 1.7]*

(* Clarified by Definition of Material (Amendments to IAS 1 and IAS 8), effective 1 January 2020.)

5. Offsetting. An entity shall not offset assets and liabilities or income and expenses, unless required or
permitted by a PFRS.

An entity reports separately both assets and liabilities, and income and expenses. Offsetting in the
statements of comprehensive income or financial position or in the separate income statement (if
presented), except when offsetting reflects the substance of the transaction or other event, detracts from
the ability of users both to understand the transactions, other events and conditions that have occurred
and to assess the entity’s future cash flows. Measuring assets net of valuation allowances –for example,
obsolescence allowances on inventories and doubtful debts allowances o receivables-is not offsetting. In
addition, an entity presents on a net basis gains and losses arising from a group of similar transactions,
for example, foreign exchange gains and losses or gains and losses arising on financial instruments held
for trading. However, an entity presents such gains and losses separately if they are material.
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6. Frequency of Reporting. An entity shall present a complete set of financial statements (including
comparative information) at least annually. When an entity changes the end of its reporting period and
presents financial statements for a period longer or shorter than one year, an entity shall disclose, in
addition to the period covered by financial statements:

a) The reason for using a longer or shorter period, and

b) The fact that amounts presented in the financial statements are not entirely comparable

7. Comparative Information. Except when PFRSs permit or require otherwise, an entity shall disclose
comparative information in respect of the previous period for all amounts reported in the current
period’s financial statements. An entity shall include comparative information for narrative and
descriptive information when it is relevant to an understanding of the current period’s financial
statements.

8. Consistency of Presentation. An entity shall retain the presentation and classification of items in the
financial statements from one period to the next unless:

a) It is apparent, following a significant change in the nature of the entity’s operations or a review of
its financial statements, that another presentation or classification would be more appropriate
having regard to the criteria for the selection and application of accounting policies in PAS 8 or
b) A PFRS requires a change in presentation

Structure and Contents of Financial Statements

The entity shall display the following information prominently and repeat it when necessary for the
information presented to be understandable
a) The name of the reporting entity or other means of identification, and any change in that
information from the end of the preceding reporting period;
b) Whether the financial statements are of an individual entity or a group of entities
c) The date of the end of the reporting period or the period covered by the set of financial statements
or notes;
d) The presentation currency, as defined in PAS 21; and
e) The level of rounding used in presenting amounts in the financial statements

STATEMENT OF FINANCIAL POSITION

Information to be presented in the statement of financial position

As a minimum, the statement of financial position shall include line items that present the following
amounts:
a) Property, plant and equipment;
b) Investment property;
c) Intangible assets;
d) Financial assets (Excluding amounts shown under (E), (H) and (I);
e) Investments accounted for using the equity method;
f) Biological assets;
g) Inventories;
h) Trade and other receivables;
i) Cash and cash equivalents;
j) The total of assets classified as held for sale and assets included in disposal groups classified as
held for sale in accordance with PFRS 5 Non-current Assets Held for Sale and Discontinued
Operations;
k) Trade and other payables;
l) Provisions;
m) Financial liabilities (excluding amount shown under ( k ), ( l );

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 n) Liabilities and assets for current tax, as defined in PAS 12 Income Taxes;
o) Deferred tax liabilities and deferred tax assets, as defined in PAS 12;
p) Liabilities included in disposal groups classified as held for sale in accordance with PFRS 5;
q) Non-controlling interests, presented within equity; and/ minority interest
r) Issued capital and reserves attributable to owners of the parent

An entity shall present additional line items, headings and subtotals in the statement of financial
position when such presentation is relevant to an understanding of the entity’s financial position.

An entity makes the judgment about whether to present additional items separately on the basis of an
assessment of:

a) The nature and liquidity of assets;

b) The function off assets within the entity; and
c) The amounts, nature and timing of liabilities.

Current / non-current distinction

An entity shall present current and non-current assets, and current and non-current liabilities, as
separate classifications in its statement of financial position except when a presentation based on
liquidity provides information that is reliable and more relevant. When that exception applies, an entity
shall present all assets and liabilities in order of liquidity.

Current Assets

An entity shall classify an asset as current when:

a) It expects to realize the asset, or intends to sell or consume it, In its normal operating cycle;
b) It holds the asset primarily for the purpose of trading;
c) It expects to realize the asset within twelve months after the reporting period; or
d) The asset is a cash or a cash equivalent (As defined in PAS 7) unless the asset is restricted from
being exchanged or used to settle a liability for at least twelve months after the reporting period.

An entity shall classify all other assets as non-current.

Current Liabilities

An entity shall classify a liability as current when:

a) It expects to settle the liability in its normal operating cycle;

b) It holds the liability primarily for the purpose of trading;
c) The liability is due to be settled within twelve months after the reporting period or;
d) The entity does not have an unconditional right to defer settlement of the liability for at least
twelve months after the reporting period.

An entity shall classify all other liabilities as non-current.

When an entity presents current and non-current assets, and current and non-current liabilities, as
separate classifications in its statement of financial position, it shall not classify deferred tax assets
(liabilities) as current assets (liabilities).

This Standard does not prescribe the order or format in which an entity presents items.

An entity shall disclose, either in the statement of financial position or in the notes, further sub
classifications of the line items presented, classified in a manner appropriate to the entity’s operations.

The detail provided in sub classifications depends on the requirements of PFRSs and on the size,
nature and function of the amounts involved. The disclosures vary for each item, for example:

a) Items of property, plant and equipment are disaggregated into classes in accordance with PAS 16;

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 b) Receivables are disaggregated into amounts receivable from trade customers, receivables from
related parties, prepayments and other amounts;
c) Inventories are disaggregated, in accordance with PAS 2 Inventories, into classifications such as
merchandise, production supplies, materials, work in progress and finished goods;
d) Provisions are disaggregated into provisions for employee benefits and other items
e) Equity capital and reserves are disaggregated into various classes, such as paid-in capital, share
premium and reserves.

An entity shall disclose the following, either in the statement of financial position or the statement of
changes in equity, or in the notes:

a) For each class of share capital:

i. The number of shares authorized;
ii. The number of shares issued and fully paid, and issued but not fully paid;
iii. Par value per share, or that the shares have no par value
iv. A reconciliation of the number of shares outstanding at the beginning and at the end of the
period;
v. The rights, preferences and restrictions attaching to that class including restrictions on the
distribution of dividends and the repayment of capital;
vi. Shares in the entity held by the entity or by its subsidiaries or associates; and
vii. Shares reserved for issue under options and contracts for the sale of shares, including
terms and amounts; and
b) A description of the nature and purpose of each reserve within equity.

STATEMENT OF COMPREHENSIVE INCOME

An entity shall present all items of income and expense recognized in a period:

a) In a single statement of comprehensive income, or

b) In two statements: a statement displaying components of profit or loss (separate income
statement) and a second statement beginning with profit or loss and displaying components of
other comprehensive income (statement of comprehensive income).

Information to be presented in the statement of comprehensive income

As a minimum, the statement of comprehensive income shall include line items that present the following
amount for the period:

a) Revenue;
b) Finance costs/ interest expense;
c) Share of the profit or loss of associates and joint ventures accounted for using the equity method;
d) Tax expense;
e) A single amount comprising the total of:
i. The post-tax profit or loss of discontinued operations and
ii. The post-tax gain or loss recognized on the measurement to fair value less costs to sell or on
the disposal of the assets or disposal group(s) constituting the discontinued operation;
f) Profit or loss;
g) Each component of other comprehensive income classified by nature (Excluding amounts in ( h );
h) Share of the other comprehensive income of associates and joint ventures accounted for using the
equity method; and
i) Total comprehensive income

An entity shall disclose the following items in the statement of comprehensive income as allocations
of profit or loss for the period:

j) Profit or loss for the period attributable to:

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 i. Non-controlling interest, and
ii. Owners of the parent
k) Total comprehensive income for the period attributable to:
i. Non-controlling interests, and
ii. Owners of the parent

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

Components of the Other Comprehensive Income (OCI)

 Revaluation surplus (PAS 16 and PAS 38)

 Actuarial gains and losses on defined benefit plans recognized in accordance with of PAS 19
revised
 Gains and losses arising from translating the financial statements of a foreign operation (PAS 21)
 Gains and losses on remeasuring available-for-sale financial assets (PAS 39)
 The effective portion of gains and losses on hedging instruments in a cash flow hedge (PAS 39)
 Gains and losses on remeasuring an investment in equity instruments where the entity has
elected to present them in other comprehensive income in accordance with PFRS 9
 The effects of changes in the credit risk of a financial liability designated as at fair value through
profit and loss under PFRS 9.

Note: Amendment to PAS 1- Presentation of Items of Other Comprehensive Income (Effective on or

after July 1, 2012)

 Preserve the amendments made to PAS 1 in 2007 to require profit or loss and OCI to be presented
together, i.e. either as a single statement of comprehensive income or a separate income
statement and statement of comprehensive income
 Require entities to group items presented in OCI based on whether they are potentially
reclassifiable to profit or loss subsequently
 Require tax associated with items presented before tax to be shown separately for each of the two
groups of OCI items (without changing the option to present items of OCI either before tax or net
of tax)

An entity shall present additional line items, headings and subtotals in the statement of
comprehensive income and the separate income statement (if presented), when such presentation is
relevant to an understanding of the entity’s financial performance.

Certain items must be disclosed either on the face of the statement of comprehensive income or in the
notes, of material including:

 Write-downs of inventories to net realizable value or property, plant and equipment to

recoverable amount, as well as reversals of such write-downs
 Restructurings of the activities of an entity and reversals of any provisions for the costs of
restructuring
 Disposals of items of property, plant and equipment
 Disposals of investments
 Discontinuing operations
 Litigation settlements
 Other reversals of provisions

An entity shall present an analysis of expenses recognized in profit or loss using a

classification based on either their nature or their function within the entity, whichever provided
information that is reliable and more relevant.

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 The first form of analysis is the ‘nature of expense’ method. An entity aggregates expenses within
profit or loss according to their nature (for example, depreciation, purchases of materials, transport costs,
employee benefits and advertising costs).

The second form of analysis is ‘function of expense’ or cost of sales method and classifies expenses
according to their function as part of cost of sales or, for example, the costs of distribution or
administrative activities. At a minimum, an entity discloses its cost of sales under this method separately
from other expenses.

If the entity used the function of expense method, additional disclosure is required about the nature of
expenses, including depreciation, amortization and employee benefits expenses.

An entity shall not present any items of income or expenses as extraordinary items, in the statement
of comprehensive income, or the separate income statement (if presented), or in the notes.

STATEMENT OF CHANGES IN EQUITY

An entity shall present a statement of changes in equity showing in the statement:

a) Total comprehensive income for the period, showing separately the total amounts attributable to
owners of the parent and to non-controlling interests;
b) For each component of equity, the effects of retrospective application or retrospective
restatement recognized in accordance with PAS 8; and
c) For each component of equity, a reconciliation between the carrying amount at the beginning and
the end of the period, separately disclosing changes resulting from:
i. Profit or loss;
ii. Each item of other comprehensive income: and
iii. Transactions with owners in their capacity as owners, showing separately contributions
by and distributions to owners and changes in ownership interests in subsidiaries that do
not result in a loss of control

The following must be disclosed either on the face of the statement of changes in equity or in the notes:

 The amount of dividends recognized as distributions to equity holders during the period, and
 The related amount per share

NOTES TO THE FINANCIAL STATEMENTS/ NOTES

The notes shall:

a) Present information about the basis of preparation of the financial statements and the specific
accounting policies used;
b) Disclose the information required by PFRSs that is not presented elsewhere in the financial
statements; and
c) Provide information that is not presented elsewhere in the financial statements, but is relevant to
an understanding of any of them.

An entity shall, as far as practicable, present notes in a systematic manner. An entity shall cross-
reference each item in the statements of financial position and of comprehensive income, in the separate
income statement (if presented), and in the statements of changes in equity and of cash flows to any
related information in the notes.

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An entity normally present notes in the following order, to assist users to understand the financial
statements and to compare them with financial statements of other entities:

a) Statement of compliance with PFRSs

b) Summary of significant accounting policies applied;
c) Supporting information for items presented in the statements of financial position and of
comprehensive income, in the separate income statement (if presented), and in the statements of
changes in equity and of cash flows, in the order in which each statement and each line item is
presented; and
d) Other disclosures, including:
i. Contingent liabilities (PAS 37) and unrecognized contractual commitments and
ii. Non-financial disclosures, e.g. the entity’s financial risk management objectives and policies
(PFRS 37)

Disclosure of accounting policies

An entity shall disclose in the summary of significant accounting policies:

a) The measurement basis or bases used in preparing the financial statements, and
b) The other accounting policies used that are relevant to an understanding of the financial
statements

Disclosure of judgements. New in the 2003 revision to PAS 1, an entity must disclose, in the summary of
significant accounting policies or other notes, the judgments, apart from those involving estimations, that
management has made in the process of applying the entity’s accounting policies that have the most
significant effect on the amounts recognized in the financial statements.

Examples include management’s judgments in determining:

 Whether financial assets are held-to-maturity investments

 when substantially all the significant risks and rewards of ownership of financial assets and lease
assets are transferred to other entities
 whether, in substance, particular sales of goods are financing agreements and therefore do not
give rise to revenue; and
 whether the substance of the relationship between the entity and a special purpose entity
indicated that the special purpose entity is controlled by the entity

Disclosure of key sources of estimation uncertainty. Also new in the 2003 revision to PAS 1, an entity
must disclose, in the notes, information about the key assumptions concerning the future and other key
sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a
material adjustment to the carrying amounts of assets and liabilities within the next financial year. These
disclosures do not involve disclosing budgets or forecasts.

The following other note disclosures are required if not disclosed elsewhere in information published
with the financial statements:

 domicile of the enterprise

 country of incorporation
 address of registered office or principal place of business
 description of enterprise’s operations and principal activities
 name of its parent and the ultimate parent if it is part of a group

Other Disclosures

Disclosures about Dividends

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The following must be disclosed either on the face of the statement of changes in equity or in the notes:

 the amounts of dividends recognized as distributions to equity holders during the period, and
 the related amount per share

The following must be disclosed in the notes:

 the amount of dividends proposed or declared before the financial statements were authorized for
issue but not recognized as a distribution to equity holders during the period, and the related
amount per share; and the amount of any cumulative preference dividends not recognized

Capital Disclosures

In August 2005, as part of its project to develop PFRS 7 Financial Instruments: Disclosures, the IASB also
amended PAS 1 to add requirements for disclosures of:

 the entity’s objectives, policies and processes for managing capital;

 quantitative date about what the entity regards as capital;
 whether the entity has complied with any capital requirement; and
 if it has not complied, the consequences of such non-compliance.

Disclosures about Puttable Shares and Obligations arising only on Liquidation

 summary quantitative data about the amount classified as equity;

 the entity’s objectives, policies and processes for managing its obligation to repurchase or redeem
the instruments;
 the expected cash outflow on redemption or repurchase of that class of financial instruments; and
 information about how the expected cash outflow on redemption or repurchase was determined.

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