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Chapter 2

Financial Preparation and Analysis

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Chapter 2

Financial Preparation and Analysis

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CarolFun Andos
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ECTIVES e end of the Chapter, the student shall be able to ify the Philippine Accounting Standard * $) that sets the guidelines on the * ssentation of financial statements, scribe the scope of PAS 1. s the objective of financial statements. tify the components of the financial ents. EPT AND NATURE ppine Accounting Standard (PAS) 1, Presentation of Financial Statements, discuss the requirements of fair presentation. discuss the reportorial requirements on department from compliance with Philippine Financial Reporting Standards. describe the disclosure requirements. discuss the guidelines on change in accounting policies. describe the treatment of accounting errors. outlines the red requirements in preparing and presenting the financial staremen's Financial Reporting Sta mxtation of Financial Statements, issued dards Council (FRSC {ASC), has approved the adoption of International Financ by the International Accounting Standards Board the successor of Accounting Standard | Reporting Standards (IFRS) Se the Philippine Financial Reporting Standard (PFRS). 1 (referred to as ‘Standard’ in this Chapter is effective in the Philippines for annual beginning on or after January bers prepared and presented in ECTIVE OF PAS 1 1, 2005. Ie sl hall be applied to all general purpose financial su crdeace with Philippine Financial Reporting Standards ledjectives of Philippine Accounting Standards (PAS) 1 are: Se prescribe the basis for presentation of gene ensure comparability both with the entity Deith the financial starements of other entities; and Bic our overall requirements for the presenea nts for their content. Bo structure and minimum requiremen sal-purpose financial statements; financial statements of previous periods and tion of financial statements, guidelines for e@ FINANCIAL STATEMENTS: PREPARATION, PRESENTATION, ANALYSIS, AND INTERPRETATION PAS 1, as shown in Figure 2.1, basically requires structured financial statemesr™ ‘The proper application of the minimum requirements of PAS 1 will result to Propet presentation of financial ae enmenes and comparability of information within the entity and other entities. cuca Figure 2.1. Objectives of PAS 1 SCOPE OF PAS 1 ‘The Standard shall be applied by: L._ entities that prepare and present general purpose financial in accordance with International Financial Reporting Standards; and 2, cutitice whether or not they need to prepare consolidated financial stfements or separaié financial statements General purpose financial statements are those intended to meet the needs of users who are not in a position to demand reports tailored to meet their particular information needs. ‘The scope of PAS 1 has the following features: a. Itdoes not apply to special-purpose financial reports. by It does not apply to the structure and content of condensed interim financial statements prepared in accordance with PAS 34, Interim Financial Reporting, Pe cbres not deal with recognition, measurement and disclosure of specific transactions and thes events. Those concerns are dealt with in other Standards and Incerpretation- cane verrvainology that is suitable for proft-oriented entities, including public sect" business entities. fasiness fone entities with not for-profit activites in the private sector, public sector Of government seek to apply PAS 1, there may need to amend the desceiption® used for particular fovr gems in the financial statements for the financial statement themselves. “These requirements will help attain the objectives of proper presentation and comparability of information in the financial statements. s POSE OF FINANCIAL STATEMENTS ome PiU ue ou ncial statements are structured representation of the 4 position, financial performance and cash flows of an entity. includes the notes which contain additional information like of the item, measurement or valuation procedures and s requirements. basic objective of general purpose financial statements snication, that is, to provide information about the following: financial position financial performance cash flows management stewardship of resources information provided in the financial statements, along with other information in the notes, ‘osers in predicting the entity’s future cash flows and, in particular, their timing and certainty. process of predicting the earning potentials and financial capabilities of an entity is made eh the analysis of the different information contained on the financial statements. PONENTS OF FINANCIAL STATEMENTS ‘complete set of financial statements comprises statement of financial position; statement of comprchensive incomes statement of changes in equity: statement of cash flow; and notes, comprising a summary of significant a counting policies and other explanatory notes following reports and statements are outside the meaning of the general purpose financial ents described above and therefore outside the scope of Philippine Financial Reporting 'A financial review by management that describes and explains the main features of the ‘entity's financial performance, financial position and the principal uncertainties it facess Environmental reports and value added statements, particularly in industries in which environmental factors are significant; and Reports and statements when employees are regarded as an important user group. ing of general purpose financial statements, may include a review of ‘report, outside the mea E ‘Main factors and influences determining financial performance, including changes in the ‘environment in which the entity operates; 6 FINANCIAL STATEMENTS: PREPARATION, PRESENTATION, ANALYSIS, AND INTERPRETATION b. Entity’s policy for investment to maintain and enhance financial performance, including its dividend policy; ¢. Entity’s sources of funding and its targeted ratio of liabilities to equity; and d. Entity’s resources not recognized in the statement of financial position in accordance with Philippine Financial Reporting Standards (PFRSs).. FAIR PRESENTATION Financial statements shall present fairly the financial position, financial performance and cash flow of an entity. The Standard does not requirement true financial statements. Financial statements are fairly presented when they include all necessary information that will influence the decision of economic users. The financial position of a business entity is presented in the Statement Seatement of of Financial Position. Financial Position é presents Financial This financial statement provides information about the entity’s assets, Bogtign 3 liabilities and equity as of a given date. Thus, the information on the face of the statement of financial position is only true as of that date. The analysis on these three accounting elements will predict the probability of the entity’s liquidity, solvency and stability. The Statement of Comprehensive Income shows the financial performance or result of operation of a business entity. It provides information about the entity’s income and expenses. The financial performance of an entity refers to its ability to generate profit for a certain period, usually, one year. The elements directly related to profit are income and expenses. . Statement of Cash Flow . The Statement of Cash Flow provides information about the presents Cash Inflow and amount of cash receipts and disbursements made during the period. Cash Outilow Basic Features of Fair Presentation The following are the salient features of fair presentation i Lie requirements: Smee 1, Fair presentation requires the faithful representation of |, Gompianee to PFRSS the effects of transactions, other events and conditions in" fequrements accordance with the definition and recognition criteria for 2 Compliance to disclosure ' assets, liabilities, income and expenses. requirements 2, An application of the Philippine Financial Reporting 3. Possession of qualitative Standards, with additional disclosure when necessary, is, cae presumed to result in financial statements that achieve a 4 Other explanatory note fair presentation. An entity whose financial statements comply with PERSs shall make an explicit and unreserved statement of such compliance in the notes. Financial statements shall not be described as complying with PFRSs unless they comply with all the requirements of PERSs. dicators of Compliance with Fé Presentation The following are indicators of compliance with fair presentation requirements of financial cements: 1. An entity applies all applicable Philippine Financial Reporting Standards, 2. An entity selects and applies accounting policies in accordance with PAS No. 8, Accounting Policies, Changes in Accounting Estimates and Errors. >. An entity presents an information, including accounting polices, in a manner that provides relevant, reliable, comparable and understandable information. An entity provides additional disclosures when compliance with the specific requirements in PERSs 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, Inappropriate accounting polcies are not rectified either by disclosure of the accounting policies. used or by notes or explanatory material. EPARTURE FROM COMPLIANCE WITH PFRSs Lis the extremely rare circumstances in which management concludes that compliance with a ‘ment in PFRSs would be misleading that it would conflict with the objective of financial ements set out in the Framework, the entity shall 4 depart from that requirement if the relevant regulatory framework requires does not prohibit such departure; or > reduce the misleading aspects of compliance ifthe relevant regulatory framework prohibits departures. What indicates conflict between compliance requirements of PFRS and the objective of financial statements? An item of information would conflict with the objective of financial starements when it does not represent faithfully the transactions, other events and conditions that it either Purports to represent or could reasonably be expected to represent and, consequently, it would be likely to, influence economic decisions made by users of financial statements, ork Does Not Prohibit Departure Ben an entity departs from the requirements of the Standards because compliance with idard would be in conflict with the objective of financial statements, and the regulatory work does not prohibit departure, the entity shall disclose: 3} FINANCIAL STATEMENTS: PREPARATION, PRESENTATION, ANALYSIS, AND INTERPRETATION a. that management has concluded that the financial statements present fairly the entity’s financial position, financial performance and cash flows; b. thatit has complied with applicable Standards and Interpretations, except that ithas departed from a particular requirement to achieve a fair presentation; the title of the Standard or Interpretation from which the entity has departed, the nature of the departure, including the treatment that the Standard or Interpretation would require, the reason why that treatment would be misleading in the circumstances that it would conflict with the objective of financial statements set out in the Framework, and the treatment! adopted; and for each period presented, the financial impact of the departure on each item in the financial statements that would have been reported in complying with the requirement. Framework Prohibits Departure When an entity departs from a requirement of a Standard because compliance of the requirement would result to conflict to the objective of financial statements, and the regulatory framework e prohibits departure, the management shall reduce the perceived misleading aspects of compliance f by disclosing a. the title of the Standard in questions, the nature of the requirement, and the reason why : management has concluded that complying with the requirements is so misleading that it conflicts with the objectives of the financial statement; and .. the adjustments to each item in the financial statements that management has concluded would be necessary to achieve fair presentation. Management Consideration When assessing whether complying with a specific requirement in a Standard or an Interpretation would be so misleading that it would conflict with the objective of financial statements set out in the Framework, the management considers: a. why the objective of financial statement is not achieved in the particular circumstances; and. b. how the entity’s circumstances differ from those of other entities that comply with the requirement. If other entities in similar circumstances comply with the requirement, there isa rebuttable presumption that the entity’s compliance with the requirement would not be so misleading that it would conflict with the objective of financial statements set out in the Framework. GOING CONCERN Financial statement shall be prepared on a going concern basis unless management cither intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so. Presentation of Financial Elements The following guidelines should be observed in the preparation and presentation of financial che entity's ! statements relative to going concern assumptior as departed 1. The management shall make an assessment of an entity’s ability to continue as a going concern, 2. 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, those uncertainties shall be disclosed. 3. When financial statements are not prepared on a going concern basis, that fact shall be disclosed, together with the basis on which the financial statements are prepared and the reason why the entity is not regarded as a going concern. 4. The management shall take into account all available information about the future in assessing whether the going concern assumption is appropriate. 5. When an entity has a history of profitable operation and ready access to financial resources in times of need, a conclusion that the going concern basis of accounting is appropriate without detailed analysis. 6. The management before it can satisfy itself that the going concern is appropriate, in other cases, should consider the following wide range of factors relating to a. current and expected profitability; b. debt repayment schedules; and ¢. potential sources of replacement financing. ye nature of require, the uld conflict e treatment he financial requirement framework ‘compliance reason why ading that it 15 concluded CCRUAL BASIS An entity shall prepare its financial statements, except for cash flow information, using the ‘accrual basis of accounting. Under this basis, the effects of transactions and other events are recognized when they occur not as cash is received or paid and they are recorded in the accounting records and reported in financial statements of the periods to which they relate. nterpretation nts set out in Financial statements prepared on the accrual basis inform users not only of past transactions ving the payment and receipt of cash but also of obligations to pay cash in the future and of ces that represent cash to be received in the future. astances; and ply with the gement, there would not be Financial statements prepared on the accrual basis provide the type of information about past set out in the sactions and other events that is most useful to users making economic decisions. INSISTENCY OF PRESENTATION The presentation and classification of items in the financial statements shall be retained from either intends period to the next, An entity, however, is not precluded from changing the presentation and classification of mation on the face of the financial statements. e@ FINANCIAL STATEMENTS: PREPARATION, PRESENTATION, ANALYSIS, AND INTERPRETATION Instances to Change Statement Presentation e The principle of consistency is abandoned when it is apparent, following a significant change in the nature of the entity’s operations of @ 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 Standard ot an Interpretation requires a change in presentation. Conditions for Change in Presentation ‘An entity changes the presentation of its financial statements only if a. the changed presentation provides information thar is reliable and is more relevant to users of the financial statements; and, b. the revised structure is likely to continue, so that comparability is not impaired. = When making such changes in presentation, an entity reclassifies its comparative information. € For example, an entity that changes in financial statements presentation for the period ending 2015 must reclassify its 2014 financial statements in order to attain consistency of presentation. MATERIALITY AND AGGREGATION ‘Materiality is a constraint in presenting information on the financial statements. PAS 1, Presentation of Financial Statements, has underlined the following guidelines on materiality and aggregation: 1. Omission or misstatement of items are material if they could, individually or collectively, influence the economic decision of users taken on the basis of the financial statements. 2. Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstances. The size or nature of the item, or a combination of both, could be the determining factor. 3. Each material class of similar items shalll be presented separately in the financial statements. Items of a dissimilar nature of function shall be presented separately unless they are immaterial. 4. Ifa line item is not individually material, itis aggregated with other items either on the face of the financial statements or in the notes. An item that is not sufficiently material to warrant separate presentation on the face of the financial statements may nevertheless be sufficiently material for it to be presented separately in the note. i 6, The specific disclose requirement in a Standard need not be satisfied if the information is not material. more anting. nes on ctively, ts. Lin the . could ements. ney are he face e of the parately ation is Prosontation of Financial Elements ETTING is important that assets and liabilities, and income and expenses, are reported separately. sets and liabilities, and income and expenses, shall not be offset unless required or permitted ‘Standard. example, overpayment of a debtor should not be offset with receivable, ting in the income statement and in the balance sheet, except when offsetting reflects the of the transaction or other event, detracts from the ability of users both to understand asactions, other events and condition that have occurred and to assess the entity’s future cash concept of offsetting does not refer to measuring assets net of valuation allowances, as in ocess of deducting obsolescence allowance on inventories or doubtful account on receivables. PARATIVE INFORMATION information provided on the face of the financial statements will provide greater value to if it possesses the element of comparability. basic objective of comparability is to assist users of financial statements in making economic by allowing trends in the assessment of trends in financial information for predictive 1. Comparison shall be included for narrative and descriptive information when it is relevant to an understanding of the current period’s financial statements. ‘Comparative information shall be disclosed in respect of the previous period for all amounts reported in the financial statements except when a Standard or an Interpretation permits or requires otherwise. When the presentation or classification of items in the financial statements is amended, comparative amounts shall be reclassified unless the reclassification is impracticable. ‘When comparative amounts are reclassified, an entity shall disclose: fa. the nature of the reclassification; b. the amount of each item or class of items that is reclassified; and the reason for the reclassification. ‘When itis impracticable to reclassify comparative amounts, an entity shall disclose: a. the reason for not reclassifying the amounts; and b. the nature of the adjustments that would have been made if the amounts had been reclassified. 6 FINANCIAL STATEMENTS: PREPARATION, PRESENTATION, ANALYSIS, AND INTERPRETATION REPORTING PERIOD Finan statements shall be presented at least annually. When the date of an entity’s statement of financial position changes and the annual financial statements are presented for a period longer or shorter than one year, an entity shall disclose, in addition to the period covered by the financial statements, the following: a. the reason for using a longer or shorter period; and b. the fact that comparative amounts for the income statement, statement of changes in equity, cash flow statement and related notes are not entirely comparable. DISCLOSURE OF ACCOUNTING POLICIES Philippine Accounting Standard (PAS) 8, Accounting Policies, Changes int Accounting Estimates and Errors, prescribes the criteria for selecting and changing accounting policies, together with the accounting treatment and disclosure of changes in accounting policies, changes in accounting estimates and correction of errors. PAS 8 is intended to enhance the relevance and reliability of an entity’s financial statements, and the comparability of those financial statements over time and with the financial statements of other entities. Disclosure requirements for accounting policies, except those for changes in accounting policies, are set out in PAS 1, Presentation of Financial Statements. ACCOUNTING POLICIES Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements. _ Anny sn cos ne summary nt accounting polices: |. the measurement basis or (bases) Preparing the financial statements; Itis important for the users to be informed of the measurement basis or bases used in the financial statement, because the basis on which the financial statements are prepared significantly affect their analysis, The measurement bases are historical cost, current cost, net realizable value and fair or recoverable value. The widely used measurement basis is historical cost. Presentation of Financial Elements 6 ‘When more than one measurement basis is used in the financial statements, for example, when icular classes of assets are revalued, itis sufficient to provide an indication of the categories of s and liabilities to which each measurement basis is applied. financial In deciding whether a particular accounting policy should be disclosed, management considers sclose, in her disclosure would assist users in understanding how transactions, other events and condition reflected in the reporting financial performance and financial position. Disclosure of particular accounting policies is especially useful to users when those policies are in equity, d from alternatives allowed in the Standards and Interpretations. Each entity considers the nature of its operation and the policies that the users of its financial ments would expect to be disclosed for that type of entity. For example, an entity subject to 1e taxes would be expected to disclose its accounting policies for income taxes, including those plicable to deferred tax liabilities and assets. ' Policies, Bee siteria ‘When an entity has significant foreign operations or recognition of foreign exchange gains and with the es would be expected. Salle ‘When business combinations have occurred, the policies used for measurement of goodwill and Sag Snority interest are disclosed. a of “ ‘An accounting policy may be significant because of the nature of the entity's operation even if gets ounts for current and prior periods are not material. of other : 8 An entity shall disclose, in the summary of significant accounting policies or other notes, the e judgments, apart from those involving estimations management has made in the process of g policies, ‘applying the entity's accounting policies that have the most significant effect on the amounts recognized in the financial stetements When a Standard or an Interpretation specifically applies to a transaction, other event or E> applied odition, the accounting policy or policies applied to that item shall be determined by applying the sndard or Interpretation and considering any relevant Implementation Guidance issued by the ial Reporting Standard Council (FRSC). . In the absence of a Standard or an Interpretation that specifically applies to a transaction, other or condition, management shall use its judgment in developing and applying an accounting that results in information thar is relevant and reliable. ors to Consider in the Absence of a Standard peoenie! ‘The management shall consider the following guidelines in applying its judgment in developing hel accounting policy in the absence of specific Standard: i in int to i is oA 1. Adopt the accounting policy thar results in information that is relevant to the economic decision-making needs of users. e FINANCIAL STATEMENTS: PREPARATION, PRESENTATION, ANALYSIS, AND INTERPRETATION 2. Apply the accounting policy that results in reliable financial statements. Financial statements are reliable when they: a. represent faithfully the financial position, financial performance and cash flows of the entity; b. reflect the economic substance of transactions, other events and conditions, and not merely the legal forms c. are neutral, ic. free from bias; dare prudent; and ¢. are complete in all material respects. 3. Refer to, and consider the applicability of, the following sources: a. the requirements and guidance in Standards and Interpretations dealing with similar and related issues; and ; b. the definitions, recognition criteria and measurement concepts of assets, liabilities, : income and expenses in the Framework. 4. Consider the most recent pronouncement of other standard-setting bodies that use a similar conceptual framework to develop accounting standards, other accounting literature and r accepted industry practices, to the extend that these do not conflict with the sources in Philippine Financial Reporting Standards. Consistency of Accounting Policies ‘An entity shall select and apply its accounting policies consistently for similar ‘transactions, other events and conditions, unless a Standard or en Interpretation specifically requires or permits categorization of items for which different policies may be appropriate. .: Ifa Standard or an Interpretation requires or permits such categorization, an appropriate : ‘accounting policy shall be selected and applied consistently to each category. Changes in Accounting Policies ‘An entity shall change an accounting policy only if the change a. is required by a Standard or an Interpretation; or b. results in the financial statements providing reliable and more relevant information about effects of transactions, other events or conditions on the entity's financial position, finan performance and cash flows. Users of financial statements need to be able to compare the financial statements of an enti over time to identify trends in its financial position, financial performance and cash flows. The following are not changes in accounting policies: 1. The application of an accounting policy for transactions, other events or conditions d differ in substance from those previously occurrings and 2. The application of a new accounting policy for transactions, other events or conditions t did not occur previously or were immaterial. tion of Changes in Accounting Policies ments The following guidelines shall be observed when an entity changes its accounting policies of the 1. An entity shall account for a change in accounting policy resulting from initial application of a Standard in accordance with specific transitional provision, if any in that Standard. 2. Anentity that changes an accounting policy upon initial application of a Standard that does not include specific transitional provision applying t6 that change, or changes an accounting policy voluntarily, it shall apply the change retrospectively. In other words, change in accounting policies should be handled retroactively. Retrospective application means applying a new accounting policy to transactions as if that policy had always been applied. 3. When a change in accounting policy is applied retrospectively, the entity shall adjust the ‘opening balance of each affected component of equity for the earliest prior period presented and the other comparative amounts disclosed for each prior period presented as if the new accounting policy had always been applied id not imilar re and ces in ‘ion on Retrospective Application :nge in accounting policies should be handled retrospectively except when it is impracticable to determine the period-specific effect on comparative information for one or more prior periods presented; or ‘2. when it is impracticable to determine the cumulative effect at the beginning of the current period to all prior periods. ‘When it is impracticable to determine the period-specific of changing an accounting policy on sarative information for one or more prior periods presented, the entity shall apply the new counting policy to the carrying amounts of assets and liabilities as at the beginning of the earliest for which retrospective application is practicable, which may be the current period and shall a corresponding adjustment to the opening balance of each affected component of equity for period. The adjustment is usually made to retained earnings. However, the adjustment may be made to het component of equity. ‘When it is impracticable to determine the cumulative effect, at the beginning of the current but the |, of applying a new accounting policy to all prior periods, the entity shall adjust the comparative mancial ormation to apply the new accounting policy prospectively from the earliest data practicable. : [Applying a requirement is impracticable when the entity cannot apply if after making reasonable entity fort to do so. \CCOUNTING ESTIMATES as that ; A change in accounting estimate is an adjustment of the carrying amount of an asset or liabi ns that the amount of the periodic consumption of an asset, that results from the assessment of the present “status of and expected future benefits and obligations associated with, assets and liabilities. 38 FINANCIAL STATEMENTS: PREPARATION, PRESENTATION, ANALYSIS, AND INTERPRETATION Change in accounting estimates result from new information or new development and, accordingly not correetion of errors. By its nature, revision of an estimate does not relate to prior periods. Estimation involves judgment based on the latest available, reliable information. For example, estimates may be required on the determination of the following: a. bad debts b. inventory obsolescence c.. fair value of financial assets or financial liabilities 4. useful lives of depreciable assets e. warranty obligations “The use of reasonable estimates is an essential part of the preparation of financial statements and doe not undermine their reliability. ‘A change in the measurement basis applied is a change in accounting policy and not a change ig estimates. in accous When itis difficult to distinguish a change in an accounting policy from a change in accounting estimates, the change is treated as a change in accounting estimates Treatment of Change in Accounting Estimates “The effect of a change in accounting estimate shall be recognized prospectively by including it in profit or loss i a. The period of the change, if the change affect that period onlys or b. The period of the change and future period, if the change affects both. Prospective application means recognizing the effect of the change in the accounting estimate in the current and future period affected by the change. In other words, the effect of change in accounting estimates is shown as part of the profit and Joss of the current period or future periods affected by the change. For example, change in the estimate of the amount of bad debts affect only the current period's profit or loss and therefore is recognized in the current period. However, a change ia the estimated life of depreciable assets affects depreciation expense for the current period and for each future period during the asset’s remaining useful life. In both cases, the effect of the change relating to the current period is recognized as income or expense in the current period. The effect, ifany, on future period is recognized as income or expense in those future periods. Disclosure of Change in Accounting Policy “Anentity shall disclose the nature and amount of a change in an accounting estimate that has an. effect in the current period or is expected to have an effect in future periods, except for the disclosure of the effect on future period when it is impracticable to estimate that effect. amount of file effect in future periods is not disclosed because estimating itis impracticable, shall disclose that fact. IRS include the effect of mathematical mistakes, mistakes in applying accounting policies, ar misinterpretations of facts, and fraud. period errors are omissions from, and misstatement in, the entity’ financial statements so msore prior periods arising from a failure to use OF misese of, reliable information that seas available when financial statements for those period where authorized for issues and shuld reasonably be expected to have been Or eained and taken into account in the preparasion ged presentation of those financial statements can arse in respect ofthe recognition, measure and presentation or disclosure of elements entity shall correct material prior period errors retrospectively in the firs set of financial HY Shorized for issued after thei discovery by: sestating the comparative amount for the Prior period(s) presented in which error occurred; or che error occurred before the earliest prior period presented, restating the opening balances se nssets Liabilities and equity for the earliest Prior presented. cher words, errors should be handled retroactively O° retrospectively. Retrospective restatement she the recognition, measurement and disclosure of amounts of elements of financial ane fe, prior period error had never occusted. ion of Retrospective Restatement tecioe period error shall be corrected BY retrospective restatement except shen tis impracticable ro determine the period spectre effect; ot wen isis impracticable to determine the cumulative effect of the error. correction of a prior period error is excluded jeom profit or loss for the period in which orrejevovered. Any information presented about rior period, including any historical 1s ¢ financial data, is restated as far back as is practicable. 38 FINANCIAL STATEMENTS: PREPARATION, PRESENTATION, ANALYSIS, AND INTERPRETATION When it is impracticable to determine the amount of an error for all prior periods, the entity restates the comparative information prospectively from the earliest date practicable. Disclosure of Prior Period Errors An entity shall disclose the following: 1. the nature of prior period errors; 2. the amount of the correction for each prior period presented; 3. each financial statement line item affected; 4. basic and diluted earnings per share if applicable; 5. the amount of correction at the beginning of the earlier prior period presenced and 6. if retrospective restatement is impracticable for a particular prior period, the circumstances that led to the existence of that condition and a description of how and from when the error ' has been corrected. Impracticability of Retrospective Restatement of Prior Period Errors ‘The following instances may indicate the impracticability to adjust comparative information for ‘one or more prior periods to achieve comparability with the current period: the data may not have been collected in prior periods in a way that allows either retrospective application of a new accounting policy or retrospective restatement to correct prior periods the entity makes estimates in applying an accounting policy to elements of financial statements recognized or disclosed in respect of transactions, other events or conditions. In order, therefore, to apply retrospectively a new accounting policy or correc: a prior period: error, itis required that the information a. provides evidence of circumstances that existed on the date at which the transaction, oth events or conditions occurred; and would have been available when the financial statements for that prior period were authoriz. for issue. b. is meant by the principle of offsetting? What are disclosed when comparative amounts are reclassified? Describe Philippine Accounting Standard *PAS) 1. ee racreok PAST, . What is meant by accounting pol Bho are covered by PAS 1? State the factors to consider in the absence Discuss the purpose of financial ofa Standard. seements. ‘When shall an entity change its accounting What comprise the complete set of policies? ci ments? i nancial statements? How are changes in accounting policies Discuss the concept of fair presentation. handled? Discuss. ‘What should be disclosed in case an . Give the limitation of retrospective entity departed from compliance with application. Philippine Financial Reporting Standards (PERSs)? When is the principle of consistency abandoned? Describe the concept of materiality and aggregation, Define accounting estimates. How is change in accounting estimates treated? What is meant by accounting errors? How are accounting errors handled? True or False struc if the starement is correct. If you believe otherwise, write false and state your reason 1. To correct the prior period error, an entity should make retrospective restatement of its financial statement though it would be impracticable to determine the cumulative effect of the error, 2. An entity may depart from the requirements of a specific Standard in any instance if compliance would be in conflict with the objective of financial statements resulting to misleading financial statements. 3. Philippine Accounting Standard 1 provides guidelines for the proper presentation of general Purpose financial statements in order to provide desired information to specific user. 4. The fair presentation requirement of the Standard implies that the financial statements are absolutely correct in presenting the monetary values of the different accounting elements. 5. An entity that applies the requirements of the Standards are presumed to have achieved fair presentation. 6. When compliance with the requirements of PFRS becomes misleading and in conflict with the objective of financial statements, the management should exclude the information, } FINANCIAL STATEMENTS: PREPARATION, PRESENTATION, ANALYSIS, AND INTERPRETATION —— 7. Anentity may change the presentation of its financial statements when it fees the necessity of adopting a change. —— 8. Prior period errors are handled currently and retrospectively, unless itis impracticable to do otherwise. —— 9. When the cumulative effect of the prior period error becomes impracticable to determine, the management does not have to make retrospective restatement. 10. In case there is no applicable Standard that governs the presentation of certain event, the ‘management shall adopt a policy that will provide relevant and reliable information 1.2 — True or False ‘Write true if the statement is correct. If you believe otherwise, write false and state your reason briefly. _—— 1. The application of accounting policies on events that differ in substance from previous events is a change in accounting policies. —— 2. Change in accounting policy should be handled currently and prospectively. —— 3. The entity shall restate the beginning balance of cach component of equity and other ‘comparative amounts if there is a change in accounting policy. —— 4. Change in accounting policies is synonymous with change in accounting estimates. —— 5. Consistency of accounting policies mandates that policies shall be consistency applied on similar transactions unless a Standard allows different applicable and appropriate policies. _—— 6. Philippine Accounting Standard (PAS) 1 outlines the presentation of finarcial statements, valuation procedures of the various accounting elements and disclosure of related party transactions. _—— 7. The provisions and requirements set in PAS 1 are intended to apply to special purpose financial reports like income tax computations and general-purpose finarcial statements. —— 8. The reason for not reclassifying shall not be indicated in the notes since disclosure has been made already of the nature of the adjustment if the amounts had been reclassified. —— 9. Financial statements shalll be presented at least twice a year. 10. The reporting period may be less but not more than one year. 1.3 — True or False Write true if the statement is correct. If you believe otherwise, write false and state your reason briefly. —— 1. Once an entity complies with the requirements of PFRSs, there is no need to make an explicit and unreserved statement of the compliance in the notes. —— 2. The concept of compliance means compliance with PFRS requirements on presentati and valuation except disclosure. —— 3. Financial statements are unstructured representation of the financial position, financi performance and cash flows of an entity. The management shall adopt a policy that will provide relevant and reliable information in case there is no specific Standard that is applicable to such event or transaction . There is a need to amend the description used in a particular Line item in its financi statements when non-profit entities will apply PAS 1 Comparative amounts may not be reclassified in the financial statements ifthe presentation of items has been amended, Fair presentation implies faithful representation of assets, liabilities, income and expenses notwithstanding the principle of materiality and cost effectiveness. Iris safe to assume that financial statements presented in accordance with the requirements of the Philippine Financial Reporting Standards (PFRSs) are fairly presented. 1. When an entity presents financial information including its policies in a manner that provides relevant, reliable, comparable and understandable information is an indication that it is complying with PFRSs requirements. |. Fair presentation of financial statements requires compliance with PFRSs and disclosure requirements, having the qualitative characteristics and providing explanatory notes. — True or False ‘rue ifthe statement is correct. If you believe otherwise, write false and state your reason briefly. 1. The needs of the economic decision makers should be given foremost consideration in departing from specific requirements in the Standard. Financial statements shall be prepared on the basis of going concern notwithstanding the intention of the management to liquidate the entity. The reason why the entity is not considered as a going concern in the preparation of the financial statement does not have to be disclosed provided the basis of preparation has been clearly indicated in the notes. Assets and liabilities, and income and expenses may be offset if the management believes it otherwise. The principle of consistency requires that items in the financial statements shall be retained from one period to the next notwithstanding the objective of the financial statements. The principle of consistency presentation should be abandoned when there is an immaterial change in the nature of entity's operation. [An entity is allowed to abandon the principle of consistency in presentation when changed presentation will provide reliable and more relevant information to users. _ When an entity departed from the requirements of PFRSs, it has to disclose that it has complied with applicable Standards except that it has departed from a particular requirement to achieve a fair presentation. [A business entity may depart from the PERSs, provided it presents financial statements that will answer the specific needs of certain user. ‘An item that did not represent faithfully the transaction would be in conflict with the ‘objective of financial statement 6 FINANCIAL STATEMENTS: PREPARATION. PRESENTATION, ANALYSIS, AND INTERPRETATION 1.5 - True or False Write true if the statement is correct. If you believe otherwise, bricfl write false and state your reason 1, When an entity made changes in the presentation, it may not reclassify its comparative wren ation since the change is made currently and will be handled prospectively- 2, Omissions of items are considered material if they could collectively but not individually influence the economic decision of users. 3, The Standard requires that if a line item is not individual with other items in the financial statements. lly material, it should be aggregated .d using the accrual basis of accounting. 4, All the financial statements shall be prepare d events are recognized as cash is 5. Under the accrual basis of accounting, transactions an received or paid. Inappropriate accounting policies are explanatory materials. 7. Departure from compliance with the certain requirement of PFRSs i sr 8, The amount of omission is P1,000,000 is considered material 9, The materiality of an item depends solely on the size item. 10. each material class of similar items shall be aggregat corrected by means of disclosure in the notes of ictly prohibited. L111 Under the principle of materiality, in the financial statements. 1.6 - True or False ‘Write true if the statement is correct. If you believe otherwise, write false and state your reas briefly. sets out the criteria for selecting and changing accounti 1g treatment and disclosure.

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