CONCEPTUAL FRAMEWORK AND REPORTING OBJECTIVE OF FINANCIAL REPORTING

STANDARD ● Foundation of the Conceptual Framework

● Provide financial information that is useful to
→ Prescribes the concepts for general purpose primary users in making decisions about
financial reporting. Its purpose is to providing resources to the entity.
● assist IASB in developing standards that are ● Decisions of primary users are based on
based on consistent concepts assessment of an entity's prospect for future
● assist prepares in developing consistent net inflows and management stewardship.
accounting policies when no standard applies Hence, users need information about an
to a transaction entity's financial position, financial
● and assists all parties in understanding and performance, and other changes in financial
interpreting standards. position, and assets utilization.

CONCEPTUAL FRAMEWORK
● Provide foundation for the development of Primary Users
standards that promote transparency,
strengthen accountability, and contribute to ● Existing and potential investors
economic efficiency ● Lenders and other creditors
● Do not provide requirements for specific - These users cannot demand specific information
transactions or events and must rely on general purpose financial reports
● Conceptual framework is not a standard. Any - Entity only provides the common needed data of
conflict between the two, standard will prevail most primary users
● This can be revised but not automatically
result to change of Standards not until the
General Purpose Financial Reporting
IASB due process
● Caters most of the common need of most
● Scope of Conceptual Framework
primary users
● General purpose financial reports do not
HIERARCHY OF REPORTING STANDARDS directly show the value of a reporting entity.
However, they provide information that helps
1. PFRSs users in estimating the value of an entity.
2. Judgment
a. Requirements in other PFRSs
General purpose financial reports provide information
dealing with similar transactions
b. Conceptual Framework on a reporting entity’s:
Management may also consider 1. Financial Position -information on resources
the ff. (assets) and claims against the reporting
a. Pronouncements issued by other entity (liabilities and equity). This can help
standard-setting bodies users in assessing entity's
b. Other accounting literature and
→Liquidity and solvency able to pay short and
industry practices
long-term obligations, respectively
→Needs for additional financing
SCOPE OF THE CONCEPTUAL FRAMEWORK
→ The Conceptual Framework is concerned with →Management's stewardship
general purpose financial reporting. General purpose 2. Changes in economic resources and claims-
financial reporting involves the preparation of general its changes result from : (a) information on
purpose financial statements. The framework financial performance (income and expenses)
provides the concept with regard to the following and (b) other events or transaction that leads
1. The objective of financial reporting to changes in financial position
2. Qualitative characteristics of useful financial ↪ Collectively, these are referred to under the
information Conceptual Framework as the economic phenomena.
3. Financial statements and the reporting entity
4. The elements of financial statements
5. Recognition and derecognition QUALITATIVE CHARACTERISTICS
6. Measurement ⇒ Identifies the most useful information to primary
7. Presentation and disclosure users in making decisions using an entity's financial
8. Concepts of capital and capital maintenance report. Applicable to information in FS and to financial
information provided in other ways
1. FUNDAMENTAL Qualitative Characteristics - specify a quantitative threshold since it is
these are characteristics that make information a judgment
useful to users. → Qualitative factors - characteristics of
A. RELEVANCE - can affect decisions of users item or context; (1) entity-specific
● Predictive value - making qualitative factors (2) external qualitative
predictions using past info factors
● Confirmatory value - confirming No hierarchy among factors, but an entity
previous decisions normally assesses an item first in
Materiality quantitative factors
● Information is material if omitting or ● If it is quantitatively material, no
misstating it could influence primary need to reassess qualitative
users’ decision factors
● ‘Entity-specific’ aspect of relevance, ● If not quantitatively material, needs
meaning materiality, depends on the facts to reassess qualitative factors
and circumstances surrounding a specific 3. Maximize understandability; Organize
entity. information within the draft financial
● Matter of judgment statements in a way that communicates
● IFRS Practice Statement 2 Making the information clearly and concisely to
Materiality Judgments provides a non primary users.
mandatory guidance that entities may 4. Review the draft financial statements to
follow, called the materiality process. determine whether all material information
The Four-Step Materiality Process has been identified and materiality
1. Cost-Benefit Principle; Identify considered from a wide perspective and in
information that has the potential aggregate, on the basis of the complete
to be material. set of financial statements. An item might
→ However, cost is not a be immaterial on its own, but might be
factor when making material in conjunction with other FS
materiality judgments information.
→The entity also
considers the common B. FAITHFUL REPRESENTATION - means the
information provides a true or correct and
information needs of
complete depiction of the economic phenomena
its primary users, in
that it purports to represent.
addition to those ● Completeness - must provide all
specified in the information needed in understanding
PFRSs. ● Neutrality - not manipulated or without
2. Assess whether the information bias
identified in Step 1 is, in fact, ● Free from error - accurate but not precise;
material. In making this supported by prudence (use of caution
assessment, the entity considers when making judgment)
the following:
2. ENHANCING Qualitative Characteristics
a. Whether the information
- enhance usefulness of information
could influence the users’ a. Comparability - to identify similarities and
decisions, on the basis of differences of different information through
the financial statements as intra-comparability or inter- comparability
a whole. b. Verifiability - different users should reach a
b. The item’s nature or size, or general agreement
both ● Direct verification - involves direct
observation (e.g counting of cash)
c. Quantitative and qualitative
● Indirect verification - involves checking the
factors inputs to a model or formula and
→ Quantitative factors - size of impact and recalculating the outputs using the same
can be assessed in relation to another methodology
amount of percentage or a threshold c. Timeliness - information is timely if it's available
to users in time to be able to influence their
amount. CF and the standard do not
decisions
 THE ELEMENTS OF FINANCIAL STATEMENTS
d. Understandability - presented in clear and concise
manner but does not mean excluding complex
matter The elements of financial statements are:

These relate to the entity’s financial position;

Applying Qualitative Characteristics
1. Assets
2. Liabilities
➤ The fundamental qualitative characteristics are 3. Equity
essential to the usefulness info; Information must be
both relevant and faithfully represented These relate to the entity’s financial performance;

➤ Enhancing qualitative information cannot make 4. Income

irrelevant information useful 5. Expenses

➤ One enhancing qualitative characteristic may be ● ASSETS - “a present economic resource

sacrificed to maximize another controlled by the entity as a result of past
events. An economic resource is a right that
➤ Cost constraint - pervasive constraint; providing has the potential to produce economic
information has cost; cost must equal benefits benefits.”

FINANCIAL STATEMENTS AND THE REPORTING The definition of asset has the following three
ENTITY aspects:
● The objective of general purpose financial a. Right - (a) rights that correspond to an
statements is to provide financial information obligation of another party e.g right to
about the reporting entity's financial position, receive cash, goods or services (b)
financial performance, and other statements rights that do not correspond to an
and notes. obligation of another party e.g rights
over physical objects
● Reporting Period; financial statements are
b. Potential to produce economic benefits
prepared for a specified period of time and
- the asset is the present right that has
provide information on assets, liabilities, and
the potential to produce economic
equity that existed at the end of the reporting
benefits and not the future economic
period, or during the reporting period, and
benefits that the right may produce
income and expenses for the reporting period. c. Control - the entity has the exclusive
● Information must be comparative, right over the benefits of an asset and
forward-looking, and perspective adopted in the ability from accessing those
FSs benefits.
● Going concern assumption - an underlying
assumption that is based on management's ● LIABILITY - present obligation of the entity
decision to transfer an economic resource as a result of
● Reporting Entity - can be single or group or past events
combination of two or more entities - transfer of economic benefits need not be
certain
An entity controls another entity:
1. Parent - controlling entity The definition of liability has ff. Three aspects
2. Subsidiary - controlled entity a. Obligation
➤ Consolidated Financial Statement - b. Transfer of an economic resource
combined report of parent and subsidiary c. Present obligation as a result of past
➤ Unconsolidated Financial Statement - events
report from parent only ● Obligation - duty or responsibility
that an entity has no practical ability to
➤ Individual Financial Statement - report from
avoid.
subsidiary only
a. Legal obligation - result from
contact, legislation, or other law
➤ Combined Financial Statement - report of
of operation
two or more entities not linked by
b. Constructive obligation - result
parent-subsidiary
from entity's action (e.g.,
 warranty, environmental recognized. Often, measurement requires
damages) estimation and thus subject to measurement
Executory Contract - a contract that is uncertainty.
equally unperformed by both parties ➤ Exist if the asset or liability needs to
or have partially fulfilled with equal be estimated
extent; combined right or obligation ➤ High level of measurement
Executed Contract - fulfilled by other uncertainty does not necessarily lead
party to non-recognition if it provides relevant
● EQUITY - residual interest after deducting information and is clearly and
assets from liabilities accurately described and explained
Reserves - amount set aside to protect ➤ However, it can lead to
the entity's creditors or shareholders non-recognition if making estimate is
from losses exceptionally difficult or subjective (can
affect faithful representation) or
● INCOME - revenue; increase in assets or especially if one or more of the
decrease in liabilities that result in increase in circumstances exist:
equity - Exceptionally wide range of
● EXPENSES - costs; decrease in assets or possible outcome and is difficult
increase in liabilities that result in decrease in to estimate
equity - Highly sensitive to small
changes
NOTE: The new conceptual framework - Exceptionally subjective
removes the notion of 'expected' and allocations of cash flows that do
'probability' of economic flow, and not relate solely to the asset or
'reliable measurement' liability being measured
Financial Position - balance sheet; assets,
liabilities and equity DERECOGNITION
Financial Performance - income statement; ● Removal of previously recognized asset or
income and expenses liability when the item no longer meets its
definition
RECOGNITION ● Derecognizes asset or liability that have
● The process of including the statement of expired, consumed, collected, fulfilled or
financial position or the statement(s) of transferred and continues to recognize any
financial performance an item that meets the assets or liabilities that have retained after
definition of one of the financial statement derecognizing
elements (i.e asset, liability, equity, income or
expense). UNIT OF ACCOUNT
● Involves recording the item in words and in ● "the right or the group of rights, the obligation
monetary amount or the group of obligations, or the group of
● Items are recognized if it meets the two rights and obligations, to which recognition
criteria: criteria and measurement concept are applied”
➤ Meets the definition of financial element; ● Can be an account title , a group of similar
and assets (e.g property plant and equipment), or
➤ Provides useful information (relevance and a group of assets and liabilities (e.g cash
faithfully represented information) generating unit)
● An asset (liability) can exist even if producing
(transferring) benefits has low probability, but MEASUREMENT
can affect the recognition, how it is measured, ● Measurement basis is needed since
what and how information is provided recognition requires quantifying item in
● Unresolved dispute of asset or liability will monetary items
mostly affect the recognition ● Standards prescribe specific measurement
● Existence uncertainty and low probability of an bases for different types of assets, liabilities,
inflow or outflow of economic benefits may income and expenses.
result in but does not automatically lead to the
non-recognition of asset or liability. Other Measurement bases describe by Conceptual
factors should be considered. Framework
1. Historical Cost - acquired (incurred) cost of
• Measurement uncertainty; an asset or assets (liability) plus (minus) transaction costs
liability must be measured for it to be
 - do not reflect changes in value but change is appropriate if it result to a
may need to be updated (e.g., more relevant information
depreciation, amortization cost) so, the ● Understandability. The more different
value can be changed measurement bases are used, the
- historical cost of an asset: more complex.
consideration paid to acquire the asset
plus transaction cost PRESENTATION AND DISCLOSURE
- historical cost of a liability; - Information about assets, liabilities, equity,
consideration received to incur the income and expenses is communicated
liability minus transaction costs through presentation and disclosure in the
2. Current Value - reflect changes in value at the financial statements.
measurement date Effective communication requires
● Fair Value -price that would be a. Focusing on presentation and
received to sell (paid) an asset disclosure objectives and principles
(liability) that reflects the perspective of rather than on rules
market participants at the b. Classifying information by grouping
measurement date similar items and separating dissimilar
● Value in use of assets and fulfillment items
value of liability - reflect entity's c. Aggregating information in a manner
assumption that is not obscured either by
➤ Value in Use - present value of excessive detail or by excessive
economic benefits from the use or summarization
ultimate disposal of asset
➤ Fulfillment Value - present value of - Objectives are specified in standards that strive for
economic resources to transfer or a balance between:
fulfilling liability a. Giving entities the flexibility to provide relevant
Both do not include transaction cost from acquiring or and faithfully represented information; and
incurring, but include transaction cost of disposal or b. Requiring information that has both
fulfillment intra-comparability (period to period within a
● Current Cost - cost at the single entity) and inter-comparability
measurement date plus (minus) (comparability within a single period across
transaction cost at that date different entities)
Entry Values Exit Values
Principles for effective communication considers:
Historical cost and Fair value, value in use a. Entity-specific information is more useful than
current cost and fulfillment value standardized description, also known as
'boilerplate'; and
b. Duplication of information is usually
Reflect prices in Reflect prices in selling unnecessary at it can make financial
acquiring assets or or using an asset or statement less understandable
incurring liability transferring or fulfilling
a liability

Definition Example

Considerations when selecting a measurement basis: Classification ➤ Sorting Accounts Receivable

a. The nature of information provided by a elements of FS
particular measurement basis with similar
b. The qualitative characteristics , the cost nature, function
constraint, and other factors. Considerations of and measurement
other factors rather than only a single isolated basis
factor. Example:
● Faithful representation. If measurement
of uncertainty is high to a particular Offsetting ➤ When asset Accounts receivable
measurement basis, consider other and liability with and accounts payable
measurement basis separate units of are netted and
● Comparability. Using the same accounts are presented in net
measurement basis consistently is combined and amount
important for comparability, but a only the net
 amount is
presented
➤Combines Measurement Current cost Does not require
Basis particular
dissimilar items,
measurement
hence not an basis
appropriate
practice
Notes:
→ Both capital maintenances exclude the distributions
Aggregation ➤Adding together All receivables (e.g., to, contributions from owners during the period.
of FS elements accounts receivable, → Capital Maintenance is essential in distinguishing
that share interest receivables) between return on capital and return of capital.
characteristics are aggregated and
and are included presented under Capital Maintenance Adjustments - the revaluation
in the same or restatement of assets and liabilities results in
classification "Trade and other increase or decrease in equity. Although these
➤ Summarizes receivables" increases or decreases meet the definition of income
large volume of or expense, they are not recognized in profit or loss
detail under certain concepts of capital maintenance.
Accordingly, these items are included in equity as
capital maintenance adjustments or revaluation
reserves.

PAS 1 - PRESENTATION OF FINANCIAL

STATEMENTS
CONCEPTS OF CAPITAL AND CAPITAL
MAINTENANCE
→ It prescribes the basis for the presentation of
- The Conceptual Framework mentions two concepts
general purpose financial statements, its structure
of capital, namely:
guidelines and content's minimum requirements to
a. Financial concept of capital - capital is
ensure comparability (inter-comparability and intra-
regarded as the invested money or invested
comparability). The terminology of PAS 1 is suitable
purchasing power. Capital is synonymous with
for profit-oriented entities.
equity, net assets, or net worth.
b. Physical concept of capital - capital is
Financial Statements
regarded as the entity’s productive capacity,
● Structured presentation of an entity's financial
(e.g units of output per day)
position and result of its operation
● Pertain only to the entity not the industry
● End product of the financial reporting process
FINANCIAL PHYSICAL and the means by which the information
gathered and processed is periodically
Capital Invested money or Entity's productive communicated to users
Concept investment capacity ● General purpose financial statements - cater
purchasing price most of the common needs of a wide range of
external users (cannot demand specific
Concept used with the To the entity's
reports for their own needs)
for users maintenance of operating capability
concerned nominal invested
Purpose of Financial Statements
capital of purchasing
● To provide useful information useful to a wide
power of the
range of users in making economic decision
invested capital
● To show result of management stewardship
over the entity's resources
Capital Profit is earned it net Profit is earned
Maintenance assets at the end only if entity's Complete Set of General Purpose Financial
(or profit period exceeds the productive capacity Reporting Statement
determination) beginning period at the end period 1. Statement of Financial Position (or Balance
exceeds the Sheet)
beginning period
 2. Statement of Profit or loss and other
comprehensive income (not the same as
income statement)
4. Materiality and Aggregation
3. Statement of Changes in Equity ● Each material class of similar item (line
4. Statement of Cash Flows item) is presented separately.
5. Notes; ● Immaterial items can be aggregated
→ qualitative info to explain the quantitative 5. Offsetting
info 1-4 ● Not offsetting if it measure asset net
→comparative information in respect of the valuation allowance, for example,
allowances for obsolete inventories
preceding period
and of doubtful accounts on
6. Additional statement of financial position -
receivables, and accumulated PPE
required under certain instances
depreciation
● Shall not use it unless permitted by
GENERAL FEATURES OF FINANCIAL
PFRS
STATEMENTS
● Only permitted when it reflects
→Management is responsible for preparation and the
substance of the transaction
fair presentation of entity's FS in accordance to PFRS ● Example of offsetting: Using two bank
accounts in the same bank (not the
1. Fair presentation and compliance with the same is prohibited). If the other has
PFRS negative balance and the other is
● Make an explicit and unreserved positive, therefore offsetting is okay.
statement 6. Frequency of reporting
● Application of PFRS with additional ● Prepared at least annually
disclosure when necessary ● Changes in reporting period shall
● If management concludes that PFRS disclose the period covered, the reason
requirement compliance is misleading, for changing, and the fact that amount
PAS 1 permits departure from it if presented are not entirely comparable
relevant regulatory framework 7. Comparative Information
(prescribed by a government regulatory ● Minimum requirement for comparison
body) requires or allows such is two different statements and related
departure notes
● If it departs, the entity shall disclose ● PAS 1 permits addition to the minimum
which PFRS it departs, why, and the requirement
effect of departure ● Additional Statement of Financial
● Compliance or departure is written in Position - instances to add are:
the note section 1. Application of accounting
2. Going Concern policy retrospectively
● If there are uncertainties of going 2. Makes a retrospective
concern, it shall be disclosed restatement on items in its
● If entity is not a going concern, it shall financial position, or
be disclosed and the reason why, and 3. Reclassifies items in its FS
FS shall be prepared using another
→ These instances have a material
basis
effect on the information of statement
➤ Not a going concern if as of the
of financial position at the beginning of
reporting period date or the
the preceding period.
authorization of FS issuance,
8. Consistency of Presentation
management either:
● Retainment of one method from one to
a. Intends to liquidate the entity to
next period unless change is needed
cease trading
for a more relevant information
b. Has no realistic alternative but to do
so (e.g., bankruptcy)
STRUCTURE AND CONTENT OF FINANCIAL
3. Accrual Basis of Account
STATEMENT
● All FS shall use this except cash flow
statement, which uses cash basis to
1. Name of the reporting entity
know the amount of cash the company
2. For whom the statements (individual or group
has because it is easier to liquidate
entity)
(ability to pay short-term obligation)
 3. Date (end or covered period)
➤ Working capital =
4. Presentation currency
Current Assets - Current
5. Rounding level used (e.g., thousands, millions)
Liabilities
Notes;
Example:
➤ PAS 1 does not prescribe the order or
ABC Group
format in which an entity presents items,
Statement of Financial Position
➤ PAS 1 permits mixed presentation
As of December 31, 20x2 (in thousand of Philippine
especially if the entity's operation is diverse.
Peso)-
Current and Non-Current Assets or Liabilities

STATEMENT OF FINANCIAL POSITION

CURRENT ASSETS CURRENT LIABILITIES
➤The statement of financial position shows
the entity's financial condition (i.e., status of a. Expected to be a. Expected to be
assets, liabilities and equity) as at a certain realized, sold, or settled in the
date. It includes line items that present the consumed in the entity's normal
following amounts: entity's normal operating cycle;
a. Property, plant and equipment; operating cycle; b. Held primarily for
b. Investment property; b. Held primarily for trading;
c. Intangible assets; trading; c. Due to be settled
d. Financial assets (excluding (e), (h) and c. Expected to be within 12 months
(i)); realized within 12 after the reporting
e. Investments accounted for using the months after the period; or
equity method; reporting period d. entity does not
f. Biological assets; d. Cash or cash have the right at
g. Inventories; equivalent, unless the end of the
h. Trade and other receivables; restricted from being reporting period to
i. Cash and cash equivalents; exchanged or used to defer settlement of
j. Assets held for sale, including disposal settle a liability for at the liability for at
groups; least twelve months least twelve
k. Trade and other payables; after the reporting months after the
l. Provisions, period. reporting period.
m. Financial liabilities (excluding (k) and
(I));
n. Current tax liabilities and current tax
assets;
o. Deferred tax liabilities and deferred tax NON-CURRENT
assets;
p. Liabilities included in disposal groups; ● Used more than 1 year
● Includes deferrals
q. Non-controlling interests; and
r. Issued capital and reserves attributable
to owners of the Currently Maturing Long-Term Liabilities
● Must be presented as current liabilities
Presentation of Statement of Financial Position ● Example: A 10-year loan payable acquired 10
years ago must be fulfilled within this year.
Hence, it must be presented as current
CLASSIFIED UNCLASSIFIED
liabilities.
PRESENTATION PRESENTATION
● Exception is a refinancing agreement.
➤ shows distinction ➤ shows no distinction (Refinancing refers to the replacement of an
between current and between current and existing debt with new one but with different
non-current assets or noncurrent terms.) (defer settlement of currently maturing
liabilities long-term liability) when:
➤ most commonly used ➤ based on liquidity ➤ Refinancing agreement is fully
➤ highlights working completed on or before balance-sheet
capital and facilitates the date; or
computation of liquidity ➤ Refinancing agreement after
and solvency ratios balance sheet date but before FS are
authorized for issue
 ➤ According to their
➤ According to their function
nature
➤ Ex. Transportation ➤ Ex. Cost of sales,
Breach of Loan Contract
cost, advertising cost, distribution costs,
● A liability that is payable on demand is a
purchase of materials administrative expense
current liability
● Exception is if a lender provides on or before
➤ More difficult to apply
balance sheet date a grace period ending at
but has potential of
least 12 months after the balance sheet date
providing more relevant
to rectify the breach
information

Presentation of Deferred Taxes

● Presented as non-current in a classified
presentation, irrespective of their expected NOTE: If an entity classifies expenses by function, it
date of reversal shall disclose additional information on the nature of
expenses
STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME OTHER COMPREHENSIVE INCOME (OCI)
➤Income and expenses for the period may ● May presented in net tax or gross of tax
be presented in either: ● Comprises items of income and expense
a. A single statement of profit or loss and (including reclassification adjustments) that
other comprehensive income are not recognized in profit or loss as required
(statement of comprehensive income); or permitted by other PFRS
or ● Amounts in OCI are usually accumulated as
b. Two statements - (1) a statement of separate components of equity
profit or loss (income statement) and Reclassification of adjustments - amounts
(2) a statement presenting from OCI reclassified to profit or loss
comprehensive income.
➤ PAS 1 requires an entity to present a. Gain is deduction to OCI and addition
information on the following: to profit or loss
a. Profit or loss b. Loss is addition to OCI and deduction
b. Other comprehensive income; and to profit or loss
c. Comprehensive income
➤ Presenting a separate income statement is Presentation of OCI - shall group items into
allowed as long as a separate statement reclassification adjustment is allowed and not allowed
showing comprehensive income is also
presented. Presenting only an income Types of OCI Reclassification
statement is prohibited adjustment

Profit or Loss a. Changes in revaluation Not allowed

● Income minus expenses, excluding the surplus
components of comprehensive income
● The excess of income over expenses is profit; b. Remeasurement of the Not allowed
while the deficiency is loss net defined benefit liability
● This method of computing for profit is called (asset) (e.g., employee
the “transaction approach” benefit)
● Not included in determining profit or loss
c. Fair Value changes in
1. Correction of prior period error
FVOCI
2. Change in accounting policy
- Equity instrument
3. Other comprehensive income Not allowed
(election)
4. Transactions with owner/s
- Debt instrument Allowed
(mandatory)
Presentation of Expense
NATURE OF EXPENSE FUNCTION OF
METHOD EXPENSE METHOD d. Translation difference in Allowed
foreign operations
 determination of costs of inventories, including use of
e. Effective portion of cash Allowed
cost formulas, and their subsequent measurement
flows
and recognition as asset then expense.

Total Comprehensive Income Inventories as assets;

● “The change in equity during a period resulting ● Finished goods
from transactions and other events, other than ● Work in progress
those changes resulting from transactions with ● Raw materials and manufacturing supplies
owners in their capacity as owners.” ➤ Ordinary course of business refers to the
● The sum of profit or loss and OCI necessary, normal or usual business activities of an
● Presented here is also the change in entity.
non-owner's equity during a periods; owner's
is excluded PAS 2 applies to all inventories except:
● Assets accounted for under other standards
STATEMENT OF CHANGES IN EQUITY a. Financial instruments (PAS 32 and
● Owner/s only PFRS 9)
● Shows the following: b. Biological assets and agricultural
a. Effect of change in accounting policy produce at the point of harvest (PAS
and correction of error retrospectively 41)
b. Total comprehensive income for the ● Assets not measured under the lower of cost
period or NRV under PAS 2
c. For each component of equity, a a. Inventories of producers of agricultural,
reconciliation between the carrying forest, and mineral products measured
amount at the beginning and end of at NRV in accordance with well
period, showing separately changes established practices in those
resulting from profit or loss, other industries.
comprehensive income, and b. Inventories of commodity
transaction with owners broker-traders measured at fair value
● PAS 1 allows the disclosure of dividends, and less costs to sell
the related amount per share, either in the
statement of changes in equity or in the notes. Cost of Inventories
a. Purchase cost - trade discounts, rebates, and
NOTES other similar items are deducted to purchase
● Provides qualitative information to the other cost
FS, therefore other FS should be b. Conversion cost - costs in converting raw
cross-referenced to the notes materials into finished goods (e.g., labor and
● Integral part of a complete FS production, exclude direct materials because it
● PAS 1 requires entity to present the notes in is already included in purchase cost)
system manner. It is structured as follows: c. Other cost - necessary in bringing inventories
1. General information on the reporting to their present location and condition (e.g.,
entity costs of factory management and
2. Statement of compliance with the maintenance cost of machines)
PFRS and Basis of preparation of FS
3. Summary of significant accounting Excluded in Cost
policies ● Abnormal waste
4. Disaggregation (breakdowns) of line ● Storage cost (but include those necessary in
items in the other FS and other the production process)
supporting information ● Administrative overheads
5. Other disclosure required by PFRS ● Selling costs
6. Other disclosure not required by PFRS
but is relevant in understanding of the →When a purchase transaction effectively contains a
FS
financing element, such as when payment of the
purchase price is deferred, the difference between the
PAS 2 - INVENTORIES
purchase price for normal credit terms and the
amount paid is recognized as interest expense over
→ Determination of costs to recognize as asset to the period of financing
expense is the primary issue in accounting
inventories. Hence, PAS 2 provides guidance in the
 →PAS 2 does not permit the use of a last-in, first out
(LIFO) cost formula.

COST FORMULAS NET REALIZABLE VALUE (NRV)

● Deal with the computation of cost of sales or ● Estimated selling price less the estimated cost
cost of goods sold and the ending inventory. of completion and estimated selling cost
● Applies matching concept ● Not equal to fair value - costs of sales
● Considered cost flow assumptions. Therefore, ● Different from fair value
not necessarily the actual flow of inventory. ● Inventories in FS must not be stated above
1. Specific identification NRV
● this shall be used for inventories that are not
ordinarily interchangeable (i.e., those that are
individually unique) Write-down
● those that are segregated for specific ● Residual from deducting costs from NRV,
projects. when cost > NRV
● Under this formula, specific costs are ● Written in an item-by-item basis; some
attributed to identified items of inventory. circumstances may be appropriate to group
● Accordingly, cost of sales represents the similar item
actual costs of the specific items sold while ● Not appropriate on classification basis
ending inventory represents the actual costs of ● If NRV subsequently increases, the previous
the specific items on hand. write down is reversed.
● Specific identification, however, is not ● Reversal of write-down shall not exceed
appropriate when inventories consist of large original write-down. Therefore, the inventory
number of items that are ordinarily shown in FS is cost plus original write-down
interchangeable.
→ "The amount of any reversal of any write-down of
2. First-In, First-Out (FIFO) - inventories shall be recognized as reduction in the
● Under this formula, it is assumed that amount of inventories recognized as expense in the
inventories that were purchased or produced period in which the reversal Inventories that are used
first are sold first, and therefore unsold in the construction of another asset are not expensed
inventories at the end of the period are those rather capitalized as cost of the constructed asset.
most recently purchased or produced.
● Accordingly, cost of sales represents costs Note: Total inventory shown in FS must be the lowest
from earlier purchases, while the cost of cost (lower of cost or NRV)
ending inventory represents costs from the
most recent purchases. PAS 7 STATEMENT OF CASH FLOWS

3. Weighted Average - Statement of cash flows and it provides information

● Under this formula, cost of sales and ending about:
inventory are determined based on the ➤ the sources and utilization (i.e., historical
weighted average cost of beginning inventory changes) of cash and cash equivalents
and all inventories purchased or produced ➤ quality of earnings
during the period. ➤ enhances inter-comparability
● may be calculated on a periodic basis, or as
each additional purchase is made, depending → Presented in cash basis income - (expense) is
upon the circumstances of the entity. recognized only when collected (paid). Hence, only
transaction that affected cash and cash equivalent are
→ The cost formulas refer to "cost flow assumptions," reported; non-cash are excluded.
meaning they pertain to the flow of costs (i.e., from
inventory to cost of sales) and not necessarily to the ● Cash either cash on hand or cash on bank
actual physical flow of inventories. ● Cash Equivalents short term, highly liquid
→Same cost formula shall be used for all inventories investments that are acquired within 3 months
with similar nature and use. Different cost formulas or less before maturity date
may be used for inventories with different nature or ● Cash Flows inflows (sources) and outflows
use. However, a difference in geographical location of (uses) of cash and cash equivalents
inventories, by itself, is not sufficient to justify the use
of different cost formulas. (PAS 2.26)
 → PAS 7 does not require any particular method. But it encourages direct method because it provides information
that may be useful in estimating cash flows. In practice, indirect method is commonly used because it is easier to
apply.

INDIRECT METHOD

Asset other than cash Liabilities

➤ Increase Asset → Deduct ➤ Increase Liabilities → Add
➤ Decrease Asset → Add ➤ Decrease Liabilities → Deduct

Changes in ownership interest in business

→ Acquisition and disposals of subsidiaries or other business units:
● Investing Activities - resulting to loss or obtaining of control
● Financing Activities - do not result to
● loss or obtaining control

Cash flows excluded from the activities PAS 8 ACCOUNTING POLICIES, CHANGES IN
● Cash flows on movements between "cash" ACCOUNTING ESTIMATES AND ERRORS
and "Cash equivalents" are not presented
separately because these are part of the → PAS 8 prescribes the criteria for selecting,
entity's cash management rather than its applying, and changing accounting policies
operating investing and financing activities. and the accounting and disclosure of changes
● Bank overdrafts that cannot be offset to cash in accounting policies, changes in accounting
are presented as financing activities. estimates and correction of prior period errors.
● Cash flow in foreign exchange is reported to → These are intended to enhance the
reconcile cash and cash equivalents at the relevance, reliability, and comparability of the
and the end of the period. But, separate entity’s financial statements.
activities section.
 ● Current period errors - errors of
Errors current period; corrected by correcting
→ An FS do not comply to PFRS if they entries
contain either material (can cause FS ● Prior period errors- errors of one or
misstated) or immaterial errors made more prior period; corrected by
intentionally to achieve a particular retrospective restatement, if
presentation. This is considered fraud. Errors impracticable, prospective application
can be: is allowed
● Errors of commission - doing → Both are discovered either during the
something wrong current period or after but before FS are
● Errors of omission - not doing authorized for issue.
something that should have been done

PAS 10 EVENTS AFTER THE REPORTING

Type of errors according to period occurrence PERIOD
→ PAS 10 prescribes the accounting for, and e. The discovery of fraud or errors
disclosures of, events after the reporting that indicate that the financial
period, including disclosures regarding the statements are incorrect.
date when the FS were authorized for issue. (PAS 10.9)

Events after the Reporting Period Non-adjusting events after the reporting period
● Those events, favorable and ● do not require adjustments of amounts
unfavorable, that occur between the in the financial statements. However,
end of the reporting period and the they are disclosed if they are material.
date when the FS are authorized for Examples of non-adjusting events:
issue a. Changes in fair values, foreign
● Events after the reporting period until exchange rates, interest rates
FS are authorized for issue or market prices after the
● Date of authorization is when the reporting period.
management authorizes the FS for b. Casualty losses (e.g, fire,
issue regardless of whether such storm, or earthquake) occurring
authorization is for further approval or after the reporting period but
final issuance to users before the financial statements
were authorized for issue.
Two types of events after the reporting c. Litigation arising solely from
period: events occurring after the
1. Adjusting events after the reporting reporting period.
period - are events that provide d. Significant commitments or
evidence of conditions that existed at contingent liabilities entered
the end of the reporting period. after the reporting period, eg.,
2. Non-adjusting events after the significant guarantees.
reporting period - are events that are e. Major ordinary share
indicative of conditions that arose after transactions and potential
the reporting period. ordinary share transactions
after the reporting period.
Adjusting events after the reporting period f. Major business combination
● Adjusting events, as the name after the reporting period.
suggests, require adjustments of g. Announcing, or commencing
amounts in the financial statements, the implementation of, a major
Example of adjusting events: restructuring after the reporting
a. The settlement after the period.
reporting period of a court case h. Announcing a plan to
that confirms that the entity has discontinue an operation after
a present obligation at the end the reporting period.
of reporting period. i. Change in tax rate enacted
b. receipt of information after the after the reporting period.
reporting period indicating that j. Declaration of dividends after
an asset was impaired at the the reporting period (PAS
end of reporting period. 10.22)
c. The determination after the Dividends
reporting period of the cost of ● Dividends declared after the reporting
asset purchased, or the period are not recognized as liability at
proceeds from asset sold, the end of reporting period because no
before the end of reporting present obligation exists at the end of
period. reporting period.
d. d. The determination after the Going Concern
reporting period of the amount ● PAS 10 prohibits the preparation of
of profit-sharing or bonus financial statements on a going
payments, if the entity had a concern basis if management
present legal or constructive determines after the reporting period
obligation at the end of either that it intends to liquidate the
reporting period to make such entity or to cease trading, or that it has
payments. no realistic alternative but to do so.
 PAS 12 INCOME TAXES

→ PAS 12 prescribes the accounting for income taxes. Income taxes refer to taxes that are based on
taxable profits.
→ Not all income is liable for tax, only those that are taxable profit (taxable loss). Hence, government do not
base taxes on accounting profit (loss), Income taxes refers to taxes that are based on taxable profits.

● Income tax expense - total amount included to determine P/L; computed using PFRS also called tax
expense or tax income
● Current tax expense - payable (recoverable) taxes to BIR based on taxable profit; computed using tax laws;
also called current tax

Varying treatment of economic activities between PFRS and tax laws result to:
1. Permanent differences - arise when income and expenses enter in the computation of either accounting
profit or taxable profit but not both; do not have future tax consequences
2. Temporary differences - difference between the carrying amount of an asset or liability in the statement of
financial position and its tax base; have future tax consequences; either:

● Tax base - amount of asset or liability that is taxable

● Current tax liability - unpaid current taxes
● Current tax asset - excess tax payments over the current tax due

→ PAS 12 permits offsetting of deferred tax assets ➤ Levied by the same taxation authority
and liabilities only if,
➤ Legally enforceable right to offset current → PAS 12 permits offsetting of current tax assets and
tax and liability; and liabilities only if:
 ➤ Legally enforceable right; → Except cost of opening new facility,
➤ Intention to realize in net basis introducing new product or service, new
business location or new class customers, and
Presentation in Statement of Comprehensive administration and general overheads.
Income
→ Tax consequences are accounted for the same ● Recognition of initial cost stops when the item
way as the related transactions or events. Thus, is in the location and condition necessary
➤ If transaction is recognized in profit or loss, ● Cost of PPE is the cash equivalent at the
as well as its tax effect recognition date. If deferred payment
➤ If transaction is recognized outside profit or (installment), the excess amount is interest.
loss (e.g., OCI and equity), as well as its tax ● Acquisition through exchange:
effect Tax effect recognized directly in equity is → Additional Cost
accounted for as direct adjustment to related 1. Replacement Cost
component of equity. - Replaced parts carrying amount
is derecognized as loss
PAS 16 PROPERTY, PLANT AND EQUIPMENT - If replaced part cannot be
determined, replacement part is
→ prescribes the accounting treatment for used as indication
PPE 2. Major Inspections
→ addresses the principal issues of - Major inspection cost is
recognition as assets, measurement of capitalized while previous
carrying amount and recognition of inspection cost is derecognized
depreciation charges.
➤ If it has commercial substance, cost is
PAS 16 applies to all items of PPE except: measured using:
a. Assets classified as held for sale 1. Fair value of asset given up
b. Biological assets other than bearer plants but 2. Fair value of asset received; if 1 can't
not produce on bearer plants be determined
c. Exploration and evaluation assets 3. Carrying amount of asset given up; if 2
d. Mineral rights and mineral reserves can't be determined
(non-renewable resources) ➤ If exchange lacks commercial use, use
number 3.
Characteristics of PPE
● Tangible assets; Subsequent Measurement
● Used in normal operation; and a. Cost Model
● Long-term in use (>1 yr.) b. Revaluation Model
→ entities can choose either of the two, and
Recognition then apply the accounting policy to an entire
1. Future economic benefits will flow to the entity; class of PPE.
and
2. Cost can be measured reliably COST MODEL - cost less any accumulated
● Spare-parts, stand-by equipment and depreciation and any accumulated impairment losses
servicing equipment are PPE if it meets
its definition. If not, then recognized as Depreciation
inventory. ● Each significant part of item of PPE is
● Safety and environmental equipment depreciated separately.
are PPE. It does not increase the ● Depreciation is recognized as expense, unless
future benefits, but it is necessary in it is included in the cost of producing another
obtaining future benefits of other asset.
assets. ● Depreciation starts when used.
● Depreciation stops when:
Initial Measurement a. Derecognized (sold or disposed); or
→ Measured at cost b. Classified as held for sale; or
a. Purchase price c. Fully depreciated; however, if the
b. Direct costs of bringing the asset to residual value decreases below the
the location and condition carrying amount, the decrease is
c. Initial estimate of dismantlement, recognized as an additional
removal and site restoration costs depreciation
 ● Carrying amount (Book Value) - recognized
asset amount after deducting accumulated
depreciation and impairment loss
● Depreciation does not cease when the asset
becomes idle or is retired from active use.
● Land and building are accounted separately.
Land is not depreciated while building is
depreciated.

Subsequent accounting for revaluation surplus

➤ Non-depreciable revalued asset,
transferred directly to retained earning when
derecognized
➤ If depreciable, a portion is transferred
➤ Does not prescribe any method. It depends periodically to retained earning when used
on the management's judgment, but the
choice must be the method that best reflects
the expected pattern of consumption.
➤ Prohibits the use of depreciation based on
revenue
or
➤ Requires annual review of depreciation
method, useful life and residual value. Any
changes are treated as changes in accounting
estimates

REVALUATION MODEL
● Fair value less any subsequent accumulated Derecognition of PPE
depreciation and impairment losses a. It is disposal; or
● Frequency of revaluation: b. No future economic benefits expected from the
➤ If fair value fluctuates significantly, asset's use or disposal
annually → Gain or loss = Net Disposal Proceeds - Carrying
➤ If fair value does not fluctuate Amount
significantly, every 3-5 years.
● Revaluation applied to entire class of PPE Note; If the asset derecognized is revalued, any
● Revalued simultaneously. If not possible, use balance in the related revaluation surplus is
rolling basis (i.e., one asset after another) transferred directly to retained earnings and will not
affect the amount of gain or loss recognized in profit
Accounting for Revaluations or loss.
→ An increase or decrease in the carrying amount of
PPE resulting from revaluation is recognized in OCI PAS 19 EMPLOYEE BENEFITS
and equity under "Revaluation Surplus" account.
Except: ● Prescribes the accounting for employee
a. Impairment gain - increase to carrying benefits by employers, EXCEPT employee
amount; reversal of previous impairment loss benefits within the scope of PFRS 2
b. Impairment loss - below carrying amount; Share-based Payment and reporting by
excess credit balance in the Revaluation employee benefit plans to which PAS 26
Surplus applies.
→ Revaluation Surplus - excess from carrying
amount Employee benefits
● “All forms of consideration given by an entity in
exchange for service rendered by employees
or for the termination of employment”
● can be in any form; cash, goods, or services
and may be provided to either the employees
or their dependents
 →RECOGNITION: employee benefits
are recognized as EXPENSE when
Contributory Non-contributory
employees have rendered service,
EXCEPT to the extent that the Both employee and Only the employer
employee benefits form part of the cost employer contribute contributes
of another asset.
● Employee benefits already earned by Funded Non-funded
employees but not yet paid are recognized as
LIABILITIES. fund is transferred to a No fund is transferred to a
FOUR CATEGORIES OF EMPLOYEE BENEFITS trustee to manage the trustee thus, the employer
UNDER PAS 19 fund and obliged to pay has obligations of paying
A. Short-term employee benefits the benefits; have the benefits
B. Post-employment benefits third-party
C. Other long-term employee benefits
D. Termination benefits
Profit-sharing and bonus plans - additional
Short-term employee benefits incentives given to eligible employees
● due to be settled within 12 months after the
end of the period in which the employees have Classification of Post-Employee Benefits
rendered the related services ● Defined Contribution Plan
● Examples: Salaries, wages, SSS, paid leaves, - employer commits to make fixed
profit-sharing, bonuses, non-monetary benefits contributions to a fund that will be used
(free goods or services to pay for the retirement benefits of the
employees
- Risk of fund insufficiency rests w/ the
→ GENERAL ACCOUNTING employee
REQUIREMENTS ● Defined Benefit Plan
● When Work is Done: These benefits - employer commits to pay a definite
are recorded as an expense (or as part amount of retirement benefits, which
of the cost of something else) and as a can be determined using a plan
formula
liability. This happens when the
- Risk of fund insufficiency rests w/ the
employee actually does the work and employer
earns these benefits.
● Not Paid Yet: If the benefits are earned
Defined Contribution Defined Benefit Plan
but not paid out yet, they're shown as Plan
something the company owes, like an
"IOU." ➤ Based on the total ➤ Based on a definite
● If payments exceed the benefits contribution amount
earned by employees, the excess is
recognized as a prepaid asset. ➤ Contribute to fund to ➤ Specified payment
● Short-term employee benefits are save for retirement amount of retirement
recognized periodically. for example,
salaries are usually paid every 15th ➤ Insufficiency rest with ➤ Insufficiency rest with
and 30th of the month the employee the employer

Entitlement to paid absences may be either: ➤ Straightforward ➤ Requires actuarial

a. Accumulating - unused entitlement in the computation assumption
current period can be claimed in the future
period ➤ Undiscounted amount ➤ Discounted amount
i. Vesting - all unused entitlements are
monetized
ii. Non-vesting - unused entitlements
are not monetized
b. Non-accumulating - for current period only

Defined Benefit Plan Accounting Procedure

POST-EMPLOYEE BENEFITS
● Payable after the completion of employment Step 1. Determine the deficit or surplus
(e.g., retirement plans and pension plans)
 FVPA - PV of DBO (Deficit) Surplus
Future Value of Plan Asset (FVPA) - the balance
of any fund set aside for the payment of the
➤ If FVPA < PV of DBO, the difference is
retirement benefits.
deficit
Present Value of Defined Benefit Obligation (PV
➤ If FVPA > PV of DBO, the difference is
surplus of DBO) - represents the entity's obligation for the
accumulated retirement benefits earned by
employees to date

Step 2. Determine the Net Defined Benefit Liability Step 3. Determine the Benefit Cost
(Asset)
➤ If deficit, then net defined benefit liability
➤ If surplus, then net defined benefit asset is the
lower of the surplus and asset ceiling

Definition of Terms 5. Actuarial gain or loss - changes in PV of

DBO resulting from changes in actuarial
1. Current Service Cost - increase in the PV of assumptions
DBO resulting from employee service in - Actuarial Assumption - give value or
current period best estimate of the variables that will
2. Past Service Cost - change in the PV of DBO determine the ultimate cost of providing
resulting from a plan amendment or post-employment benefits
curtailment 1. Demographic assumptions - e.g.,
3. Gain or loss on settlement - difference mortality, health condition
between PV of DBO and the settlement price 2. Financial assumptions - i.e.,
4. Interest cost on the defined benefit liability discount rate and future salary levels
(asset) - change in the net defined benefit ➤ Discount rate used to
liability (asset) during the period that arises discount post-employment
from the passage of time benefits obligation is based on
high quality corporate bonds. If
no deep market, use
government bonds
.

6. Return on plan of assets - investment Multi-employer plan - unrelated employers

income earned by the plan assets during the contribute to common fund
year after deducting the cost of managing the State Plan - established by law and operated by
fund gov't; absence of one definition is not a state plan
Insurance Plan - employer pays insurance premium
to fund a post-employee benefit Types of government grants according to
attached condition
OTHER LONG-TERM EMPLOYEE BENEFITS
● Due to be settled beyond 12 months after the 1. Grants related to assets - primary condition
end of the reporting period other than is to acquire or construct long-term assets
post-employment and termination benefits 2. Grants related to income - grants other than
● Accounted similar to defined benefit plan. those related to assets
However, all the components are recognized
in profit or loss. Measurement
Monetary Grants
TERMINATION BENEFITS ➤Amount of cash received;
● Employer's act of terminating an employee as ➤ Fair value of amount receivable
a result, either: Non-Monetary Grants (land and other
➤Entity's decision to terminate an resources)
employee before the normal retirement ➤ fair value of the non-monetary asset
date; or received
➤ Employee's decision to accept the ➤ Alternatively, at nominal amount
benefits in exchange of termination Fair value
● Employee's request for termination, is ● The price that would be received to sell an
considered post-employee benefits asset or paid to transfer a liability in an orderly
● Termination benefits are accounted: transaction between market participants at the
➤ If payable within 12 months, same as measurement date
short-term employee benefits
➤ If payable beyond 12 months, same as Grants in the form of loan, such as:
long-term employee benefits a. Forgivable loan - measured the carrying
➤ If are in substance, enhancement to amount of the loan forgiven
post-employee benefits, same as b. Loan at below-market rate of interest or
post-employee benefits zero interest - measured at the discounted
amount
PAS 20 ACCOUNTING FOR GOVERNMENT
GRANTS AND DISCLOSURE OF GOVERNMENT Accounting
ASSISTANCE ➤ PAS 20 uses income approach in which
● Government grants (sometimes called grant is recognized in P/L.
subsidies, subventions, premiums) are ➤ Not automatically that when you received
assistance received from the government in the grant, it is recognized in P/L.
the form of transfers of resources in exchange ➤ Uses matching concept
for compliance with certain conditions. ➤ Recognized in P/L in systematic basis as
● PAS 20 does not apply to: accounting for related condition expenses are recognized.
government grants under hyperinflationary Analyze the recognition of income in the
economies, tax benefits, government following cases:
participation in the ownership of the entity; and a. Grants related to depreciable assets
PAS 41 b . Grants related to non-depreciable
assets
c. Grants received as financial aid for
expenses or losses
The depreciation method used for computing related
must also be the same for computing grants.
Recognition
a. Conditions will be complied; and
b. Grants will be received
 ● In statement of cash flows, the cash flows from the receipt of the grant and the purchase of the related asset
are presented separately, even if the entity uses the net presentation

Presentation of Grants related to income

Statement of comprehensive income (profit or loss section)
Gross presentation Net presentation

- Income from the grant is reported separately or - Deducted from the related expense
included in ‘other income’

Repayment of Grants
● Treated as change in accounting estimate
● There are government assistances that are not recognized as government grants. These are whose:
1. Value cannot be reasonably measured; or
2. Cannot be distinguished from the entity's normal trading transactions
Examples are:
a. Tax benefits
b. Free technical or marketing advice
c. Provision of guarantees
d. Government procurement policy that is responsible for a portion of the entity's sales
● If significant, only disclosed.

PAS 21 THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES

● Two ways of conducting foreign activities

1. Foreign currency transactions - import or export transactions that are to be settled in a foreign
currency
2. Foreign operations - overseas branch will normally maintain its accounting records and prepare its
financial statements in a foreign currency.
Functional Currency
● The currency of the primary economic environment in which the entity operates.
● The currency that is mostly used by the entity's operation and not necessary the country's currency
● Factors to consider:
➤ Currency of sales and cost
➤ Currency of cash flows from financing and operating activities
● Cannot be changed once determined, unless necessary. The changes are then treated prospectively.
● All currencies other than the entity's functional currency are foreign currencies.

Presentation Currency - currency used in presenting FS

FOREIGN CURRENCY TRANSACTIONS

Initial Recognition using spot exchange rate at the date of transaction

Subsequent Recognition ➤Monetary items - retranslated using closing rate

➤Nonmonetary items measured at historical cost - exchange rate at the date of
transaction
➤Nonmonetary items at fair value - exchange rate at the date when the fair value
was determined
 Hence, nonmonetary items do not need translation at the end of the reporting
period.

● Monetary items - amount received or paid in fixed or determinable (e.g., cash, receivables, payables)
● Non-monetary items - do not give rise to monetary items (e.g., inventories, prepaid assets, PPEs)
● Exchange Differences - the difference of translating one currency into another currency at different
exchange rates
Recognition of exchange difference:
a. Monetary items - recognized in P/L
b. Nonmonetary items - recognition of exchange component is the same as how gain or loss are
identified, whether in OCI or P/L
● When foreign currency transaction occurred in one period and settles in another:
➤ Exchange difference between the transaction date and end of reporting period
➤ Then, exchange difference between the previous reporting period and settlement date.

FOREIGN OPERATIONS
● A subsidiary, associated, joint venture or branch that is based in foreign country and using foreign currency.
● Before financial statements of the branch is incorporated to the FS of main branch or other necessary
translations (e.g., gov't requirements), it is translated using the procedures below.

Translation of Financial Statements

a. Assets and liabilities are translated using closing rate at the date of balance sheet
b. Income and expense are translated, using spot exchange rates
c. All resulting exchange differences are recognized in OCI.
→ Average rate for the period may be used, except when exchange rates fluctuate significantly.

PAS 23 BORROWING COST

● Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying
asset are capitalized as cost of that asset.
● Borrowing cost is capitalized to qualifying asset - long term to get ready for use or sale

Types of borrowing cost:

1. Interest expense
2. Finance charge on finance leases
3. Exchange differences on borrowings in foreign currencies
→ Other borrowing cost not used for qualifying asset is expense.

Capitalization starts when it meets all the conditions:

a. Incurs expenditures for the asset;
b. Incurs borrowing cost; and
c. Activities necessary to prepare the asset for its intended use or sale are being undertaken
→ Interest incurred during the suspended period are not capitalized, instead expense.
→ Capitalization ceases when qualifying asset is substantially complete or shall no longer incur borrowing
cost, whichever comes first.

ACCOUNTING FOR BORROWING COST

● Specific borrowing - funds borrowed only for the qualifying asset

CAPITALIZED BC = Actual BC - Investment Income
● General borrowing - funds borrowed for multiple purposes
Capitalized BC = Ave. Expenditures x Capitalization Rate
A.E = ∑expenditures x Months Outstanding / 12months
C.R = Total interest on General Borrowings / Total general borrowings
→ Compare the value of actual BC vs. capitalized BC, the lowest value will be capitalized as general borrowing
cost.
Cost of Qualifying Asset = Expenditures + borrowing cost
 PAS 24 RELATED PARTIES
● PAS 24 prescribes the guidelines in identifying related party relationships, transactions, outstanding
balances and commitments, and the necessary for these items.
● Related parties have the ability to affect the financial and operating decision of the other party through
control, significance influence or joint control.

Importance of disclosures of related parties

➤Its transactions or existence can affect an entity's financial position and performance
➤ To help users better assess the risks and opportunities surrounding the entity
➤ For transparency because there might be a conflict of interest

DISCLOSURES
➤ Close Family Members
➤Parent-subsidiary relationship
➤ Subsidiary discloses the parent name, even if no transaction happened in the period.
➤ Key management personnel - those persons having authority for controlling CEO, CFO, COO
➤ Discloses his compensation by breaking down respectively into: short-term, post-employment, other
long-term, termination; and share-based payment
➤ Related party transaction
→ Discloses:
a. Nature or related party relationship
b. Nature terms and amount of the transaction and outstanding balances
c. Doubtful debts on the outstanding balances
→ Outstanding balances are disclosed in individual FS, and eliminated in consolidated FS.
➤ Government-related entities - entity that is controlled, jointly controlled or significantly influenced by a
government
→ Discloses if there is related party transaction
a. Name of the gov't and the nature of the relationship
b. Nature and amount of each individually significant transaction
c. Other transactions that are collectively significant but are individually insignificant.

PAS 26 ACCOUTING AND REPORTING RETIREMENT BENEFITS PLANS

➤ Preparation of FS of retirement benefits plans to account and report all participants of the plan, instead of
individual. Hence, PAS 26 views retirement benefits plan as a reporting entity.
➤ also called pension schemes, superannuation schemes, retirement benefit schemes
➤ Applies to all retirement benefits plan, except gov't social security type arrangements and employee
benefits other than retirement benefits.
➤ Hybrid plans are considered defined benefit plans.

FS of Defined Contribution Plan contains the ff.:

a. a statement of net asset available for benefits
b. a statement of changes in net asset available for benefits; and
c. accompanying notes to the FS

FS of Defined Benefit Plan contains either of the ff.: (actuarial report is needed)
1. a. net asset available for benefits
b. actuarial PV of promised retirement benefits, distinguishing vested and non-vested; and
c. resulting excess or deficit

2. statement of net asset available for benefits including either:

a. note disclosing the APV of PRV, distinguishing vested or non-vested benefits; or
b. a reference to this information in an accompanying actuarial report
➤ Plan assets are measured at fair value.
 PAS 27 SEPARATE FINANCIAL STATEMENTS

● Accounting and disclosure requirements for investments in subsidiaries, associates and joint ventures, when
entity prepares separate FS
● No entity is mandated to produce FS
● Applicable if entity chooses to prepare or is required by law

Separate FS is an addition to:

a. consolidated FS; or
b. FS of entity with an investment in associates or joint ventures using equity method under PAS 28

Preparation of Separate FS:

● Prepared in accordance to applicable PFRS, except/however that investment in subsidiaries, associates or
joint ventures are accounted for either:
a. at cost; or
b. in accordance of PFRS 9; or
c. using equity method under PAS 28
● Entity shall apply the same accounting for each category of investment.
● The measurement used for investment in separate FS is the same to non-separate FS.

PAS 28 INVESTMENT IN ASSOCIATES AND JOINT VENTURE

Associate is an entity, which the investor has significant influence.

Significant influence
➤ Power to participate in financial and decision but has no control or joint control
➤ Exist if investor holds 20% ≤ 50% voting power
➤ Investor may have significant influence if <20% or may not have significant influence even if >20%,
unless it provides any of the ff. evidences:
a. Representation on the governing body of the investee
b. Participation in policy-making process
c. Material transactions between the entity and its investee
d. Interchange of managerial personnel; or e. Provision of essential technical information

ACCOUNTING FOR INVESTMENTS IN ASSOCIATES

Using equity method

➤ Initial recognition - cost
➤Subsequent adjustment - share in the investee's changes in equity (e.g. P/L, dividends, OCI)
Application of the Equity Method

➤Investor start using when it obtains significant influence; and

➤ Stops when loses significant influence

On acquisition, investment cost and share of net fair value of are accounted as follows:
➤ If cost > FV, the excess is included in the carrying amount of the investment
➤ If cost < FV, deficiency is included in income

If FS reporting period and accounting policies of the investee and investor do not coincide, investee adjust his
accounting policies before investor uses, and prepare FS that coincide to the investor reporting period (difference
should not exceed 3 months).

Preference Share - priority dividends

➤ Cumulative PS → deduct 1 yr. dividends, declared or not
➤ PS computation is not based on latest share but to the past shares

● In losses, investor discontinues sharing losses when his investment becomes 0.

● If the investee reports profit, resume recognition of shares only after its share in the profit equals share of
losses unrecognized.
● Investor is exempted using equity method if exempted in preparing consolidated FS
● Investment in associate or joint venture with a portion of other PFRS or PAS, the remaining portion is
accounted using equity method.
● If investment in joint venture is in accordance to PAS 28 by referring to PFRS 11, then use the equity
method.

PAS 29 FINANCIAL REPORTING IN HYPERINFLATIONARY ECONOMIES

➤ Restatement applies if an entity's functional currency is that of a hyperinflationary economy.

➤No prescribe absolute rate to recognize hyperinflation. It is a matter of judgment.

Indicators of hyperinflation:

a. General population keep its wealth in non-monetary assets or in a stable foreign currency
b. General population regards monetary amounts in terms of stable foreign currency
c. Sales and purchases on credit take place at expected loss of purchasing power of credit period
d. Interest rates, wages and prices are linked to a price index; and
e. Cumulative inflation rate over 3 years is approaching, or >100%

Core principle
➤ Restate FS using the measuring unit current at the end of the period or General Price Index (GPI)
➤ Restate also the comparative FS, whether monetary or non-monetary items
➤ Prohibits the presentation of this information as a supplement to unrestated FS
Restatement of Statement of Financial Position

a. Monetary items → not restate

b. Non-monetary items at FV or NRV → not restated
c. Non-monetary items at historical cost → restated

GPI reflects the inflation hence reflect general purchasing power

Statement of Comprehensive Income and Cash Flows - restate all amount

● Gain or loss on the net monetary position due to restatement (historical amount - restated amount) is
recognized in P/L.
● Retained earnings - balancing figure after restatement