Module 4 COMPONENTS OF FINANCIAL STATEMENTS PDF
Module 4 COMPONENTS OF FINANCIAL STATEMENTS PDF
Assets
An entity must normally present a classified statement of financial position, separating
current and noncurrent assets and liabilities. Only if a presentation based on liquidity provides
information that is reliable and more relevant may the current/noncurrent split be omitted. An entity
shall classify an asset as current when:
• It expects to realize the asset, or intends to sell or consume it, in its normal operating
cycle
• It holds the asset primarily for the purpose of trading
• It expects to realize the asset within twelve months after the reporting period
• The asset is cash or a cash equivalent (as defined in IAS 7) unless the asset is
restricted from being exchanged or used to settle a liability for at least twelve months
after the reporting period.
Normal Operating Cycle – The time between the acquisition of assets for processing and their
realization cash or cash equivalents. When the entity’s normal operating cycle is not clearly
identifiable, its duration is assumed to be twelve months.
The caption “noncurrent assets” is a residual definition. PAS 1 provides that an entity shall classify
all other assets as non-current.
An entity classifies its financial liabilities as current when they are due to be settled within
twelve months after the end of the reporting period, even if:
• The original term was for a period longer than twelve months; and
• The intention is supported by an agreement to refinance, or reschedule the
payments, on a long-term basis is completed after the end of the reporting period
and completed before the financial statements are authorized for issue.
If the entity has the discretion to refinance, or to roll over the obligation for at least twelve
months after the end of the reporting period under an existing loan facility, it classifies the
obligation as non-current, even if it would be due within a shorter period.
If a liability has become payable on demand because an entity has breached an
undertaking under a long-term loan agreement on or before the end of the reporting period, the
liability is current, even if the lender has agreed, after the end of the reporting period and before
the authorization of the financial statements for issue, not to demand payment as a consequence
of the breach. However, the liability is classified as non-current if the lender agreed by the end of
the reporting period to provide a period of grace ending at least 12 months after the end of the
reporting period, within which the entity can rectify the breach and during which the lender cannot
demand immediate repayment.
Equity
Equity is the residual interest in the assets of the entity after deducting all the liabilities.
Simply put, equity means net asset or total assets minus total liabilities.
The account name in reporting the equity of an entity depends on the form of the business
organization:
Sole proprietorship Owner’s equity
Partnership Partner’s equity
Corporation Stockholders’ equity or shareholders’ equity
Forms of the Statement of Financial Position
A statement of financial position may be prepared using any of the following formats:
• Account form, which looks like a T account, where assets are listed on the left side
of the statement while liabilities and equity are listed on the right side
• Report form presents the assets, liabilities, and equity in a continuous format.
Liabilities are presented after total assets and equity accounts are listed after the
liabilities section
• Financial position form emphasizes working capital of the firm. In this format, net
assets are equal to the equity.
An entity shall disclose the following items in the statement of comprehensive income as
allocations of profit or loss for the period:
• Profit or loss for the period attributable to Minority interest and Owners of the parent.
• Total comprehensive income for the period attributable to Minority interest and
Owners of the parent.
Statement of comprehensive income present income and expense for a given reporting
period. An entity shall present all items of income and expense recognized in a period:
• In a single statement of comprehensive income, or
• 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).
An entity shall present either an analysis of expenses using a classification based on either
the nature of expenses or their function within the entity, whichever provides information that is
reliable and more relevant.
Nature of expense method – Expenses are aggregated in the income statement according
to their nature and are not reallocated among various functions within the entity.
Revenue X
Other income X
Changes in inventories of finished goods and work in progress X
Raw materials and consumables used X
Employee benefit costs X
Depreciation and amortization X
Other expense X
Total expense (X)
Profit X
An entity shall present, either in the statement of changes in equity or in the notes, the
amount of dividends recognized as distributions to owners during the period, and the related
amount per share.
Classification
The statement of cash flows presents information on the inflows and outflows of cash and
cash equivalent classified into operating activities, investing activities, and financing activities.
Cash flows from operating activities are primarily derived from the principal
revenue‑producing activities of the entity. Examples of cash flows from operating activities are:
• cash receipts from the sale of goods and the rendering of services;
• cash receipts from royalties, fees, commissions and other revenue;
• cash payments to suppliers for goods and services;
• cash payments to and on behalf of employees;
• cash payments or refunds of income taxes unless they can be specifically identified
with financing and investing activities; and
• cash receipts and payments from contracts held for dealing or trading purposes.
An entity may hold securities and loans for dealing or trading purposes, in which case they
are similar to inventory acquired specifically for resale. Therefore, cash flows arising from the
purchase and sale of dealing or trading securities are classified as operating activities. Similarly,
cash advances and loans made by financial institutions are usually classified as operating
activities since they relate to the main revenue‑producing activity of that entity.
Investing activities are the cash flows derived from the acquisition and disposal of long-
term assets and other investment not included in cash equivalents. Only expenditures that result
in a recognized asset in the statement of financial position are eligible for classification as
investing activities. Examples of cash flows arising from investing activities are:
• cash payments to acquire property, plant and equipment, intangibles and other
long‑term assets. These payments include those relating to capitalized development
costs and self‑constructed property, plant and equipment;
• cash receipts from sales of property, plant and equipment, intangibles and other
long‑term assets;
• cash payments to acquire equity or debt instruments of other entities and interests in
joint ventures (other than payments for those instruments considered to be cash
equivalents or those held for dealing or trading purposes);
• cash receipts from sales of equity or debt instruments of other entities and interests
in joint ventures (other than receipts for those instruments considered to be cash
equivalents and those held for dealing or trading purposes);
• cash advances and loans made to other parties (other than advances and loans made
by a financial institution);
• cash receipts from the repayment of advances and loans made to other parties (other
than advances and loans of a financial institution);
• cash payments for futures contracts, forward contracts, option contracts and swap
contracts except when the contracts are held for dealing or trading purposes, or the
payments are classified as financing activities; and
• cash receipts from futures contracts, forward contracts, option contracts and swap
contracts except when the contracts are held for dealing or trading purposes, or the
receipts are classified as financing activities.
Taxes on income
Cash flows arising from taxes on income shall be separately disclosed and shall be
classified as cash flows from operating activities unless they can be specifically identified with
financing and investing activities.
Under the direct method, information about major classes of gross cash receipts and gross
cash payments may be obtained either:
• from the accounting records of the entity; or
• by adjusting sales, cost of sales (interest and similar income and interest expense and
similar charges for a financial institution) and other items in the statement of
comprehensive income for:
– changes during the period in inventories and operating receivables and
payables;
– other non‑cash items; and
– other items for which the cash effects are investing or financing cash flows.
Under the indirect method, the net cash flow from operating activities is determined by
adjusting profit or loss for the effects of:
• changes during the period in inventories and operating receivables and payables;
• non‑cash items such as depreciation, provisions, deferred taxes, unrealized foreign
currency gains and losses, and undistributed profits of associates; and
• all other items for which the cash effects are investing or financing cash flows.
Based on the foregoing, the following guidelines may be used in adjusting accrual basis
net income to the cash basis net income under the indirect method:
Net Income
+ Depreciation, amortization, and other noncash expenses
- All increases in trade noncash current assets
+ All decreases in trade noncash current assets
+ All increases in trade current liabilities
- All decreases in trade current liabilities
- Gain on disposal of property
+ Loss on disposal of property
Investing and financing activities are presented using direct method, separating major
classes of gross cash receipts and gross cash payments arising from these activities.
Notes should be cross-referenced from the face of the financial statements to the relevant
note. The notes should normally be presented in the following order:
• A statement of compliance with PFRSs
• A summary of significant accounting policies applied, including:
– The measurement basis (or bases) used in preparing the financial
statements; and
– The other accounting policies used that are relevant to an understanding of
the financial statements.
• Supporting information for items presented on the face of the statement of financial
position, income statement, statement of changes in equity, and statement of ash
flows, in the order in which each statement and each line item is presented.
• Other disclosures, including:
– Contingent liabilities and unrecognized contractual commitments
– Non-financial disclosures, such as the entity's financial risk management
objectives and policies.
Disclosure of judgments - 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.
Going concern
An entity shall prepare financial statements on a going concern basis unless management
either intends to liquidate the entity or to cease trading or has no realistic alternative but to do so.
An entity preparing PFRS financial statements is presumed to be a going concern. Going concern
means that the accounting entity is viewed as continuing in operation indefinitely in the absence
of evidence to the contrary.
When management is aware, in making its assessment, of material uncertainties related
to events or conditions that may cast significant doubt upon the entity’s ability to continue as a
going concern, the entity shall disclose those uncertainties.
When an entity does not prepare financial statements on a going concern basis, it shall
disclose that fact, together with the basis on which it prepared the financial statements and the
reason why the entity is not regarded as a going concern.
Accrual basis
An entity shall 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 expenses (the elements of financial statements)
when they satisfy the definitions and recognition criteria for those elements in the Conceptual
Framework.
Offsetting
An entity shall not offset assets and liabilities or income and expenses, unless required or
permitted by an IFRS. An entity reports separately both assets and liabilities, and income and
expenses. Measuring assets net of valuation allowances—for example, obsolescence allowances
on inventories and doubtful debts allowances on receivables—is not offsetting.
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 the financial statements:
• the reason for using a longer or shorter period, and
• the fact that amounts presented in the financial statements are not entirely
comparable.
Normally, an entity consistently prepares financial statements for a one‑year period.
However, for practical reasons, some entities prefer to report, for example, for a 52‑week period.
This Standard does not preclude this practice.
Comparative information
Minimum Comparative Information
Except when IFRSs permit or require otherwise, an entity shall present comparative
information in respect of the preceding period for all amounts reported in the current period’s
financial statements.
An entity shall present, as a minimum, two statements of financial position, two statements
of profit or loss and other comprehensive income, two separate statements of profit or loss (if
presented), two statements of cash flows and two statements of changes in equity, and related
notes.
An entity shall include comparative information for narrative and descriptive information if
it is relevant to understanding the current period’s financial statements. In some cases, narrative
information provided in the financial statements for the preceding period(s) continues to be
relevant in the current period. For example, an entity discloses in the current period details of a
legal dispute, the outcome of which was uncertain at the end of the preceding period and is yet to
be resolved. Users may benefit from the disclosure of information that the uncertainty existed at
the end of the preceding period and from the disclosure of information about the steps that have
been taken during the period to resolve the uncertainty.
Consistency of presentation
An entity shall retain the presentation and classification of items in the financial statements
from one accounting period to the next. Change is allowed under the following circumstances:
• 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 IAS 8; or
• an IFRS requires a change in presentation.
Under Section 5.2 of the Securities Regulation Code, the Commission’s jurisdiction over
all cases enumerated under Section 5 of PD 902-A has been transferred to the Courts of general
jurisdiction or the appropriate Regional Trial Court. The Commission shall retain jurisdiction over
pending cases involving intra-corporate disputes submitted for final resolution which should be
resolved within one (1) year from the enactment of the Code. The Commission shall retain
jurisdiction over pending suspension of payments/rehabilitation cases filed as of 30 June 2000
until finally disposed.
Considering that only Sections 2, 4, and 8 of PD 902-A, as amended, have been expressly
repealed by the Securities Regulation Code, the Commission retains the powers enumerated in
Section 6 of said Decree, unless these are inconsistent with any provision of the Code.
Medium-sized entities
Medium-sized entities are those that meet all of the following criteria:
• Total assets of more than P100 million to P350 million or total liabilities of more than
P100 million to P250 million. If the entity is a parent company, the said amounts shall
be based on the consolidated figures.
• Not required to file financial statements under Part II of SRC Rule 68
• Not in the process of filing their financial statements for the purpose of issuing any
class of instrument in a public market
• Not holders of secondary licenses issues by regulatory agencies
Medium-sized entities shall use as their financial reporting framework the PFRS for SMEs
as adopted by the SEC. However, the following medium-sized entities shall be exempt from the
mandatory adoption of the PFRS for SME’s and may instead apply, at their option, the full PFRS:
• An SME which is a subsidiary of a foreign parent company reporting under the full
PFRS
• An SME which is a subsidiary of a foreign parent company which will be moving
towards International Financial Reporting Standards pursuant to the foreign country’s
published convergence plan
• An SME either as a significant joint venture or associate, which is part of a group that
is reporting under the full PFRS
• An SME which is a branch office or regional operating headquarter of a foreign
company reporting under the full PFRS
• An SME which has a subsidiary that is mandated to report under the full PFRS
• An SME which has a short-term projection that shows that it will breach the
quantitative thresholds set in the criteria for an SME. The breach is expected to be
significant and continuing due to its long-term effect on the company’s asset or liability
size
• An SME which has c concrete plan to conduct an initial public offering within the next
two years
• An SME which has been preparing financial statements using full PFRS and has
decided to liquidate
• Such other cases that the Commission may consider as valid exceptions from the
mandatory adoption of PFRS for SMEs
Small entities
Small entities are those that meet all of the following criteria:
• Total assets of between P3 million to P100 million or total liabilities between P3 million
to P100 million. If the entity is a parent company, the said amounts shall be based on
the consolidated figures.
• Are not required to file financial statements under Part II of SRC Rule 68
• Are not in the process of filing their financial statements for the purpose of issuing any
class of instruments in a public market
• Are not holders of secondary licenses issues by regulatory agencies
Small entities shall use their financial reporting framework the PFRS for SEs as
adopted by the Commission. However, entities who have operations or investments that
are based or conducted in a different country with different functional currency shall not
apply this framework and should instead apply the full PFRS or PFRS for SMEs.
The following small entities shall also be exempt from the mandatory adoption of
the PFRS for SEs and may instead apply, as appropriate, the full PFRS or PFRS for
SMEs:
• A small entity which is a subsidiary of a foreign parent company reporting under
the full PFRS or PFRS for SMEs
• A small entity which is a subsidiary of a foreign parent company which will be
moving towards International Financial Reporting Standards or IFRS for SMEs
pursuant to the foreign country’s published convergence plan
• A small entity either as a significant joint venture or associate, which is part of a
group that is reporting under the full PFRS or PFRS for SMEs
• A small entity which is a branch office or regional operating headquarter of a
foreign company reporting under the full PFRS or PFRS for SMEs
• A small entity which has a subsidiary that is mandated to report under the full
PFRS or PFRS for SMEs
• A small entity which has a short-term projection that shows that it will breach the
quantitative thresholds set in the criteria for a small entity. The breach is
expected to be significant and continuing due to its long-term effect on the
company’s asset size
• A small entity which has been preparing financial statements using full PFRS or
PFRS for SMEs and has decided to liquidate
• Such other cases that the Commission may consider as valid exceptions from
the mandatory adoption of PFRS for SMs
Micro entities
Micro entities are those that meet all of the following criteria:
• Total assets and liabilities are below P3 million
• Are not required to file financial statements under Part II of SRC Rule 68
• Are not in the process of filing their financial statements for the purpose of
issuing any class of instruments in a public market
• Are not holders of secondary licenses issues by regulatory agencies
Micro entities have the option to use as their financial reporting framework either
the income tax basis or PFRS for SEs, provided however, that the financial statements
shall at least consist of the Statement of Management’s Responsibility (SMR), Auditor’s
Report, Statement of Financial Position, Statement of Income and Notes to Financial
Statements, all of which cover the 2-year comparative periods, if applicable.
In the event where an entity breaches the prescribed threshold in terms of total assets or total
liabilities and thus it falls within a different classification, the Audited Financial Statements of said
entity shall be prepared in accordance with the higher framework