PAS 2 INVENTORIES b.

Conversion Costs
 Prescribes the accounting treatment for
inventories. Necessary in converting Raw Materials into
 Recognize primary issue in the accounting for Finished Goods
inventories is the determination of cost to be ✓ Costs of direct labor
recognized as asset and carried forward until ✓ Production Overhead
it is expense.
 Provides guidance in the determination of c. Other Costs necessary in bringing the
cost of inventories, including the use of cost inventories to their present location and condition.
formulas and their subsequent measurement
and recognition as expense. EXCLUDED FROM THESE COSTS OF
INVENTORIES:
EXCLUDED IN PAS 2: -are treated as an expense in the period it was
 Assets accounted for under other standards. incurred;
A. Financial Instruments (PAS 32 and PFRS 9)
B. Biological assets and agricultural produce at the a. abnormal amounts of wasted materials, labor or
point of harvest. other production costs
b. storage costs, unless those costs are necessary
 Assets not measured under the lower cost or in the production process before
net realizable value. a further production stage
a. Inventories of producers of agricultural, forest, c. administrative overheads that do not contribute
and mineral products measured at net to bringing the inventories to
realizable value in accordance with well- their present location and condition
established practices in those industries. d. selling costs

b. Inventories of commodity broker-traders COST FORMULA

measured at fair value less cost to sell. 1. SPECIFIC INDENTIFICATION
- Shall be used for inventories that are not
INVENTORIES ordinarily interchangeable and those segregated
Assets: for specific projects
1. Held for Sale in the ordinary course of business - Specific costs are attributed to identified items of
(FINISHED GOODS) inventory
> Ordinary Course- necessary, normal or usual - Cost of Sales- represents actual costs of the
business activities of an entity. specific items sold
- Ending Inventory- represents actual costs of the
2. In the process of production for such sale specific items on hand
(WORK IN PROCESS) - Not appropriate when inventories consist of large
number of items that are ordinarily interchangeable
3. In the form of materials or supplies to be - Simply multiply UNITS on HAND by ACTUAL
consumed in the production process or in the UNIT COST.
rendering of services (RAW MATERIALS AND
MANUFACTURING SUPPLIES) 2. FIRST-IN, FIRST-OUT (FIFO)
- Inventories purchased or produced first are sold
MEASUREMENT first, the unsold inventories at the end of
-measured at LOWER OF COST AND NET the period are those most recently purchased or
REALIZABLE VALUE COST produced
- Cost of Sales - represents actual costs from
a. Purchase Cost earlier purchases
✓ Purchase Price net of trade discounts and other - Ending Inventory- represents actual costs from
rebates the most recent purchases.
✓ Import duties
✓ Non-refundable or non-recoverable purchase 3. WEIGHTED AVERAGE
taxes - Cost of Sales and Ending Inventory are
✓ Transport determined based on the weighted average cost of
✓ Handling and other costs directly attributable to beginning inventory and all inventories purchased
the acquisition of the inventory. or produced during the period.
NET REALIZABLE VALUE (NRV)
 the entity;
- Per PAS 2.6, this is the estimated selling price in 3. Carrying amount of inventories carried at fair
the ordinary course of business less the value less costs to sell;
estimated costs of completion and the estimated 4. Amount of inventories recognized as an
costs necessary to make the sale. expense during the period;
- Refers to the net amount that an entity expects to 5. Amount of any write-down of inventories
realize from the sale of inventory in the recognized as an expense in the period;
ordinary course of business. 6. Amount of any reversal of write-down that is
- This is entity-specific value. It may not equal to recognized as a reduction in the amount of
fair value less costs to sell. inventories recognized as expense in the period;
- The use of lower of cost and NRV in measuring 7. Circumstances or events that led to the reversal
inventories is in line with the basic of a write-down of inventories; and
accounting concept that an asset shall not be 8. Carrying amount of inventories pledged as
carried at an amount that exceeds its security for liabilities.
recoverable amount.
- If the cost of an inventory is written down to NRV PAS 7 STATEMENT OF CASH FLOWS
due to damage, obsolescence, declined prices or - provides the requirements in the presentation of
estimated costs to complete or sell have statement of cash flows
increases, the write down is recognized as an STATEMENT OF CASH FLOWS -provides
expense. information about the sources and utilization (i.e.,
- If the NRV subsequently increases, the previous historical changes) of cash and cash equivalents
write down is reversed, and said reversal during the period.
shall not exceed its original write down so that the
new carrying amount is lower of the cost and 1. Helps users assess the ability of the entity to
revised NRV. generate cash and cash equivalents
- Write down of inventories are usually carried out 2. Helps users assess the timing and certainty of
on an item-by-item basis. the generation of cash flows
3. Helps the users assess the need of the entity to
EXPENSE RECOGNITION OF INVENTORIES utilize those cash flows
- The carrying amount of an inventory that is sold 4. Provides information on the quality of earnings
is charged as expense in the period in of an entity
which the related revenue is recognized.
- The write-down of inventories to NRV and all DISCLOSURE:
losses of inventories are recognized as 1. Components of cash and cash equivalents and
expense in the period the write-down or loss a reconciliation of amounts in the statement of
occurs. cash flows with the equivalent items in the
- The amount of any reversal of any write-down of statement of financial position
inventories, arising from an increase in 2. Significant cash and cash equivalents held by
net realizable value shall be recognized as a the entity that are not available for use by the
reduction in the amount of inventories group, together with a management commentary.
recognized as an expense in the period in which CASH
the reversal occurs. -comprises of cash on hand and cash in bank
CASH EQUIVALENTS
CAPITALIZED AS COST OF CONSTRUCTED - PAS 7.6 these are short-term, highly liquid
ASSET investments that are readily convertible to
- Inventories that are used in the construction of known amounts of cash and which are subject to
another asset is not expensed but rather an insignificant risk of changes in value.
capitalized as cost of the constructed asset. - Debt instruments ACQUIRED WITHIN 3
Example: Inventories used in constructing a MONTHS OR LESS BEFORE THEIR MATURITY
building. The cost will form part of the building cost DATE can qualify as cash equivalents
and will be included in the EXAMPLES:
depreciation. a. 90-day money market instrument or commercial
FOR DISCLOSURES: paper
1. Accounting policies adopted in measuring b. 3-month time deposit
inventories, including the cost formula used; c. 1-year treasury bill acquired 3 months before
2. Total carrying amount of inventories and the maturity date
carrying amount in classifications appropriate to
CASH FLOWS FINANCING ACTIVITIES
Inflows- sources
Outflows- uses Affect the entity’s equity capital and borrowing
CLASSIFICATION OF CASH FLOWS structure
1. Operating Activities Examples:
2. Investing Activities 1. Cash receipts from issuing shares or other
3. Financing Activities equity instruments and cash payments to
redeem them
OPERATING ACTIVITIES 2. Cash receipts from issuing notes, loans, bonds
-PAS 7.14: derived from the principal REVENUE- and mortgage payable and other short-term or
PRODUCING Activities long-term borrowings and their repayments
- usually include cash inflows and outflows on 3. Cash payments by a lessee for the reduction of
items of INCOME AND EXPENSES or those that the outstanding liability relating to a lease
enter into the determination of profit or loss (PAS 7.17e)
Examples: 3. Cash flows on Non-Operating or Non-Trade
1. Cash receipts from the sale of goods, rendering Liabilities.
of services, or other forms of income
2. Cash payments for purchases of goods and  OPERATING ACTIVITIES Affect Profit or
services. Loss
3. Cash payments for operating expenses such as  INVESTING ACTIVITIES Affect Non-Current
employee benefits, insurance and the like Assets and Other Investments
and payments or refunds of income taxes  FINANCING ACTIVITIES Affect borrowings
4. Cash receipts and payments from contracts held and equity
for dealing or trading purposes
5. Cash flows on trade payables, accrued CASH FLOWS EXCLUDED FROM THE
expenses and other operating liabilities. ACTIVITIES SECTIONS
1. Cash flows on movements between cash and
SPECIAL ITEMS INCLUDED: cash equivalents are not presented separately
1. Cash flows from buying and selling HELD FOR because these are part of the entity’s cash
TRADING SECURITIES management rather than its operating, investing
2. Cash flows from the acquisition, rentals and and financing activities
subsequent sale of such assets
3. Loan transactions of financial institutions. 2. Bank Overdrafts

INVESTING ACTIVITIES  Cannot be Offset to Cash: presented as

Involve the acquisition and disposal of noncurrent Financing Activities
assets and other investments  Can be Offset to Cash: presented separately
Examples: in activities section
1. Cash receipts and cash payments in the
acquisition and disposal of property, plant and 3. Cash flows denominated in a foreign currency
equipment, investment property, Intangible assets are translated using the spot exchange rate at
and other noncurrent assets. the date of the cash flows.
2. Cash receipts and cash payments in the
acquisition and sale of equity or debt instruments *Exchange differences are NOT cash flows#
of other entities (other than those that are * EFFECT of Exchange Rate Changes on cash and
classified as cash equivalents or held for cash equivalents held or due in a foreign
trading) currency is reported in the statement of cash flows
3. Cash receipts and cash payments on derivative in order to RECONCILE cash and cash
assets and liabilities (other than those that equivalents at the beginning and the end of the
are held for trading or classified as financing period.
activities) *The amount of reconciliation is reported separately
4. Loans to other parties and collections thereof from the operating, investing and
(other than loans made by a financial financing activities
institution)
GENERAL CONCEPTS IN THE PREPARATION
OF STATEMENT OF CASH FLOWS - Statement of
Cash Flows is prepared using CASH BASIS
 PRESENTATION OF STATEMENT OF CASH 5. Change in the method of recognizing revenue
FLOWS from long-term construction contracts
A. Direct Method- shows each major class of gross 6. Change to a new policy resulting from the
cash receipts and gross cash payments. requirement of a new PFRS
B. Indirect Method- profit or loss is adjusted for the 7. Change in financial reporting framework such as
effects of non-cash items and changes in operating from PFRS for SMEs to full PFRSs
assets and liabilities.
PAS 8.16: NOT treated Changes in Accounting
PAS 8: ACCOUNTING POLICIES, CHANGES IN Policies
ACCOUNTING ESTIMATES AND ERRORS 1. Application of an accounting policy for
transactions, other events or conditions
-prescribes the criteria for selecting, applying and that differ in substance from those previously
changing accounting policies and occurring
accounting and disclosure of changes in 2. The application of a new accounting policy for
accounting policies, changes in accounting transactions other events or conditions that did not
estimates and correction of prior period errors. occur previously or were immaterial.
-to enhance the Relevance, Reliability and
Comparability of the entity’s financial Changes in Accounting Policies
Statements > Accounted for using the order of priority
1. Transitional provision in a PFRS, if any
ACCOUNTING POLICIES PAS 8.5 2. Prospective application, if retrospective
-are the specific principles, bases, conventions, application is impracticable.
rules and practices applied by an entity 3. Retrospective application, in the absence of a
in preparing and presenting financial statements. transitional provision.

HIERARCHY OF REPORTING STANDARDS (PAS 8.22) Retrospective Application – adjusting

1. PFRS the OPENING BALANCE of each affected
2. Judgment component of equity (e.g., retained earnings) for
the earliest prior period presented and the other
When making the judgment: Management SHALL comparative amounts disclosed for each prior
CONSIDER the following: period presented as if the new accounting policy
a. Requirements in other PFRSs dealing with had always been applied.
similar transactions
b. Conceptual Framework Impracticable – it cannot be done after making
every reasonable effort to do so.
Management MAY CONSIDER the following:
a. Pronouncements issued by other standard- If retrospective treatment is impracticable if the
setting bodies prior period effects cannot be determined or
b. Other accounting literature and industry if it requires significant estimates and assumptions
practices to have been made when the prior period financial
statements were prepared and these are
1. CHANGE IN ACCOUNTING POLICIES impossible to determine in the current period.
-PAS 8 permits change in accounting policy only if
it is required by a PFRS or Results in Voluntary Change in accounting policy is
reliable and more relevant information accounted for by retrospective application.
-usually results from a change in measurement An early application of a PFRS is not a voluntary
basis change in accounting policy.
Examples:
1. Change from FIFO to the Weighted Average cost 2. PAS 8.5 CHANGES IN ACCOUNTING
formula for inventories ESTIMATES
2. Change from the Cost Model to the Fair Value - an adjustment of the carrying amount of an asset
Model of measuring investment property or a liability, or the amount of the periodic
3. Change from the Cost Model to the Revaluation consumption of an asset, that results from the
Model of measuring (PPE) property, assessment of the present status of, and
plant and equipment and intangible assets expected future benefits and obligations associated
4. Change in Business Model for classifying assets with, assets and liabilities.
- Results from new information or new ERRORS OF OMISSION – not doing something
developments and accordingly are not correction of that should have been done.
errors.
- Accounted for by PROSPECTIVE APPLICATION TYPES OF ERRORS ACCORDING TO THE
- - recognizing the effects of the change in profit or PERIOD OF OCCURRENCE
loss either in:
- the period of change OR the period of change and A. CURRENT PERIOD ERRORS -errors in the
future periods current period that were discovered
- if both are affected. The beginning balance of either during the current period or after the current
Retained Earnings and period but before the financial statements were
- the previous financial statements are NOT authorized for use. These are corrected simply by
RESTATED. correcting entries.
Estimates are essential part of financial reporting C. PRIOR PERIOD ERRORS - are errors in one or
and do not undermine the reliability of financial more periods that were only discovered either
reports. It involves judgment based on latest during the current period or after the current period
available information. but before the financial statements were authorized
Examples: for issue. These are corrected by retrospective
a. Net Realizable Value of Inventories restatement.
b. Depreciation
c. Bad Debts PAS 8.42 RETROSPECTIVE RESTATEMENT
d. Fair Value of Financial Assets or Financial - Restating the comparative amounts for the prior
Liabilities period(s) presented in which the error
e. Provisions occurred, or
- Restating the opening balances of assets,
CHANGE IN ACCOUNTING POLICY liabilities, and equity for the earliest prior period
Normally results from a CHANGE IN presented, if the error occurred before the earliest
MEASUREMENT BASIS (ex. FIFO to WEIGHTED prior period presented.
AVE., COST to FAIR VALUE etc.) - Shall be made as far as practicable
- If it is impracticable to determine the cumulative
CHANGE IN ACCOUNTING ESTIMATE effect of a prior period error at the beginning
Normally results from changes on how the of the current period, the entity is allowed to correct
expected inflows or outflows of economic the error PROSPECTIVELY from the
benefits are realized from assets or incurred on earliest date practicable.
liabilities.
RETROSPECTIVE RESTATEMENT
IN CASE OF DIFFICULTY IN DISTINGUISHING Correcting a PRIOR-PERIOD ERROR AS IF the
THE CHANGE BETWEEN THE TWO: THE error had never occurred
CHANGE IS TREATED AS CHANGE IN
ACCOUNTING ESTIMATE. RETROSPECTIVE APPLICATION
Applying as new accounting policy AS IF the policy
3. ERRORS had always been applied.
- Include misapplication of accounting policies,
mathematical mistakes, oversights
or misinterpretations of facts and fraud. PAS 10: EVENTS AFTER REPORTING PERIOD

PAS 8.41 Financial statements do not comply with - Prescribes the accounting for, and disclosures of,
PFRS if they contain either material events after the reporting period, including
errors or immaterial errors made intentionally to disclosures regarding the date when the financial
achieve a particular presentation of an entity’s statements were authorized for issue.
financial position, financial performance or cash
flows. PAS 10.3 EVENTS AFTER THE REPORTING
MATERIAL ERRORS – cause the financial PERIOD
statements to be misstated - Events, favorable and unfavorable, that occur
INTENTIONAL ERRORS – are fraud; fraudulent between the end of the reporting period and the
financial reporting does not comply with PFRS date when the financial statements are authorized
ERRORS OF COMMISSION – doing something for issue.
wrong
DATE OF AUTHORIZATION OF THE FINANCIAL reporting period.
STATEMENTS 6. Major business combination after the reporting
-date when management authorizes the financial period.
statements for issue regardless of whether such 7. Announcing or commencing the
authorization is final or subject to further approval. implementation of a major restructuring after
the reporting period.
TYPES OF EVENTS AFTER 8. Announcing a plan to discontinue an operation
REPORTING PERIOD after the reporting period.
9. Change in tax rate enacted after the reporting
1. ADJUSTING EVENTS AFTER THE period.
REPORTING PERIOD 10. Declaration of dividends after the reporting
-provide evidence of conditions that existed at the period.
end of the reporting period.
2. NON-ADJUSTING EVENTS AFTER THE • Dividends declared after the reporting period are
REPORTING PERIOD NOT Recognized as liability at the end of
- Events that are indicative of conditions that arose reporting period because no present obligation
after the reporting period. exists at the end of reporting period.
• PAS 10 prohibits the preparation of financial
PAS 10.9 ADJUSTING EVENTS AFTER THE statements on a going concern basis if
REPORTING PERIOD management determines after the reporting period
Examples: either that it intends to liquidate the entity or to
1. The settlement after the reporting period of a cease trading, or that it has no realistic alternative
court case that confirms that the entity has a but to do so.
present obligation at the end of reporting
period. PAS 12: INCOME TAXES
2. The receipt of information after the reporting
period indicating that an asset was impaired at -prescribes the accounting for income taxes
the end of the reporting period. Example -addresses the accounting, presentation and
bankruptcy of a customer and sale of reconciliation of these differences
inventories. -for purposes of PAS 12, income taxes that are
3. The determination after the reporting period based on taxable profits.
of the cost of asset purchased, or the proceeds
from asset sold, before the end of reporting Income taxes reported in the Statement of
period. Comprehensive Income may be different from the
4. The determination after the reporting period amount of income tax required to be paid to BIR.
of the amount of profit-sharing or bonus 1. Income Tax Expense in the Statement of
payments, if the entity had a present legal or Comprehensive Income is computed using PFRSs.
constructive obligation at the end of reporting 2. Current Tax Expense in ITR is computed using
period to make such payments. Philippine Tax Laws.
5. The discovery of fraud or errors that indicate
that the financial statements are incorrect. ISSUE: Some items are appropriately recognized
as INCOME and EXPENSE.
PAS 10.22 NON-ADJUSTING EVENTS AFTER under Financial Reporting but are either NON-
THE REPORTING PERIOD TAXABLE and NON-DEDUCTIBLE or TAXABLE
-do not require adjustments of amounts in the fs and DEDUCTIBLE only at some other periods
-disclose if material under Philippine Tax Laws.
Examples: = Differences result to PERMANENT Or
1. Changes in fair values, foreign exchange rates, TEMPORARY Differences
interest rates or market prices after the
reporting period. ACCOUNTING FOR PROFIT OR LOSS
2. Casualty Losses -profit or loss for a period before deducting tax
3. Litigation arising solely from events occurring Expense.
after the reporting period. -computed using PFRSs
4. Significant commitments or contingent -Total Income Less Total Expenses, excluding tax
liabilities entered after the reporting period. Expense
5. Major ordinary share transactions and Other terms: pretax income, financial income and
potential ordinary share transactions after the accounting income
 EITHER:
TAXABLE PROFIT (TAX LOSS) A. TAXABLE TEMPORARY DIFFERENCES
-profit or loss for a period determined in B. DEDUCTIBLE TEMPORARY DIFFERENCES
accordance with the rules established by the -have future tax consequences hence give rise to
taxation authorities, upon which income taxes are either deferred tax assets or deferred tax liabilities
payable (recoverable).
-computed using tax laws > include TIMING DIFFERENCES
-Taxable Income Less Tax-Deductible Expenses - Timing Differences arise when income and
-Other terms: taxable income expenses are recognized for financial reporting
purposes in one period but are recognized for
PAS 12.6 taxation purposes in another (vice versa). They are
called timing differences because only the timing or
INCOME TAX EXPENSE (TAX INCOME) period of their recognition differs between financial
reporting and taxation. Their effect reverses in one
1. CURRENT TAX EXPENSE (CURRENT TAX or more subsequent periods.
INCOME) - PAS 12.5 The amount of income taxes
payable (recoverable) in respect of the taxable TAXABLE TEMPORARY DIFFERENCES
profit (tax loss) for a period. -give rise to DEFERRED TAX LIABILITIES
DTL are the amounts of income taxes payable
2. DEFERRED TAX EXPENSE (DEFERRED TAX in future periods in respect of taxable
INCOME) -The sum of the net changes in deferred temporary differences. PAS 12.5
tax assets and deferred tax liabilities during the
period. DTL = TAXABLE TEMP. DIFF. X TAX %
• Deferred Tax Liability > Deferred Tax Asset =
Deferred Tax Expense EXAMPLES
• Deferred Tax Liability < Deferred Tax Asset = 1. Revenue is recognized in full under
Deferred Tax Income or Benefit financial reporting but is taxable only
when collected.
PERMANENT DIFFERENCES 2. A prepayment is capitalized and
amortized to expense under financial
-income and expenses either accounting profit OR reporting but is tax deductible in full
taxable profit, but NOT BOTH upon payment.
-arise from NON TAXABLE and NONDEDUCTIBLE 3. An asset is revalued upward and no
Expenses equivalent adjustment is made for tax
-arise from those that have already been subjected purposes.
to Final Taxes 4. Depreciation recognized under
-these items are EXCLUDED from ITR financial reporting is lower than the
-do not have future tax consequences depreciation recognized for taxation
-do not give rise to deferred tax assets and purposes.
liabilities
EXAMPLES: DEDUCTIBLE TEMPORARY DIFFERENCES
1.Interest income on gov’t. bonds and treasury bills -give rise to DEFERRED TAX ASSETS
2. Interest income on bank deposits DTA are the amounts of income taxes recoverable
3. Dividend Income in future periods in respect of
4. Fines, surcharges, and penalties arising from
violation of law a.) deductible temporary differences
5. Life insurance premium on employees where the b.) carryforward of unused tax losses
entity is c.) carryforward of unused tax credits
the irrevocable beneficiary. DTA = DEDUCTIBLE TEMP. DIFF. X TAX RATE

TEMPORARY DIFFERENCES EXAMPLES:

1. Rent received in advance is treated as
-PAS 12.5 unearned income (liability) under financial
-differences between CARRYING AMOUNT of an reporting but is taxable in full upon receipt
asset or liability in the Statement of Financial of cash.
Position and its TAX BASE 2. Bad debts expense is recognized for
financial reporting when the collectability of
AR becomes doubtful while it is tax
deductible only when the AR is deemed
worthless.
3. Warranty obligation is recognized as
expense when a product is sold under
financial reporting but is tax deductible only
when actually paid.
4. Depreciation recognized under financial
reporting is higher than the depreciation
recognized for taxation purposes.
5. Losses and tax credits that can be carried
forward and deducted from future taxable
profits.