Conceptual Framework and Accounting Standards Purpose of Financial Reporting

Reviewer
- To provide financial information about the
Topic 1: Development of the Financial Reporting reporting entity that is useful to present and
Framework and Standard-Setting Bodies potential equity investors, lenders, and other
creditors in making decisions about providing
What is the Purpose of Accounting?
resources to the entity, and for other
- To generate general-purpose financial stakeholders to make decisions for the entity.
statements that provide information about - Since financial reports are used for decision
economic entities that is to be used as basis for making then there should be a standard way of
the formulation of economic decisions. reporting
- Accounting is important for markets, free
Objective of Financial Reporting
enterprise, and competition because it assists in
providing information that leads to capital a. General-purpose financial statements provide
allocation. Reliable information leads to a at the least cost the most useful information
better, more effective process of capital possible to a wide variety of users.
allocation, which in turn is critical to a healthier b. Equity investors and creditors are the primary
economy user groups and have the most critical and
immediate needs for information in the
Financial Accounting and Financial Statements
financial statements. Investors and creditors
Financial accounting is the process that culminates in need this information to assess a company’s
the preparation of financial reports on the enterprise ability to generate net cash inflows and to
for use by both internal and external parties. understand management’s ability to protect
and enhance the assets of a company.
Financial statements are the principal means through c. The entity perspective means that the company
which a company communicates its financial is viewed as being separate and distinct from its
information to those outside it. investors (both shareholders and creditors).
- the statement of financial position, Therefore, the assets of the company belong to
- the income statement or statement of the company, not a specific creditor or
comprehensive income shareholder. Financial reporting focused only
- the statement of cash flows on the needs of the shareholder—the
- the statement of changes in equity. proprietary perspective—is not considered
- Note disclosures are an integral part of each appropriate.
financial statement. d. Decision-usefulness means that information
contained in the financial statements should
Other means of financial reporting include the help investors assess the amounts, timing, and
president’s letter or supplementary schedules in the uncertainty of prospective cash inflows from
corporate annual report, prospectuses, and reports filed dividends or interest, and the proceeds from
with government agencies. the sale, redemption, or maturity of securities
The major standard-setters of the world, coupled with or loans. For investors to make these
regulatory authorities, now recognize that capital assessments, the financial statements and
formation and investor understanding is enhanced if a related explanations must provide information
single set of high-quality accounting standards is about the company’s economic resources, the
developed. claims to those resources, and the changes in
them.
Financial Reporting

Financial reporting – the communication of the set of

financial statements and other financial information.
Elements to facilitate efficient capital allocation, financial analysts, financial advisers and consultants,
ensure relevant information and faithful and the general public.
representation comparable across borders:
They use financial information for the following:
a. A single set of high-quality accounting standards
– Inactive users - to keep track of the enterprise’s
established by a single standard-setting body.
financial condition and performance so they can decide
b. Consistency in application and interpretation. to hold or sell their equity interest

c. Common disclosures. – Present and potential creditors – to assess the ability

of the enterprise to pay its loans and related interest
d. Common high-quality auditing standards and
practices. – Suppliers of goods/services – to determine if they will
receive payment when receivables are due
e. A common approach to regulatory review and
enforcement. – Employees – to assess the firm’s ability to provide
remuneration, retirement benefits and employment
f. Education and training of market participants.
opportunities
g. Common delivery systems (e.g., extensible Business
– Government agencies/regulators – to determine
Reporting Language—XBRL).
whether the firm is complying with prescribed rules and
h. A common approach to corporate governance and regulations, is paying the correct amount of taxes,
legal frameworks around the world. which help serve as basis for taxation policies and for
national income and similar statistics.
Users of Financial Information Internal Users and
External Users Financial Accounting is the branch of accounting that
focuses on information needs of external users.
Internal users – active owners of the business and
management

They use financial information for the following: Users of Financial Information Direct Users and
Indirect Users
– For internal decision-making purposes
Direct users – owners, managers, creditors, suppliers,
– To evaluate the entity’s performance customers, employees, and taxing authority. They use
– To make financial and operational plans financial information as a tool to protect their own
interest in the enterprise.
– To implement business decisions such as whether to
continue or to liquidate, to infuse capital or borrow Indirect users – regulatory agencies, labor unions,
from creditors, to change business strategies financial consultants, legal consultants. They use
financial information to provide advice to or protect the
– To determine whether demands of employees for interest of a direct user
improved remuneration and economic benefits will be
granted Accounting Entity

Managerial Accounting is the branch of accounting - A reporting entity is oftentimes called the
designed to meet the information needs of internal accounting entity.
users. - Accounting entity concept – separates the
personality of the enterprise from its owners
Users of Financial Information Internal Users and and other stakeholders.
External Users - An accounting entity is capable of controlling its
External users – inactive owners, creditors and lenders, own economic resources and incurring
suppliers, potential investors, taxing authorities, economic obligations
regulatory bodies, employees and employee unions,
 - Accounting reports need comparability
- Accounting reports need consistency such that
profit numbers in different countries for given
transactions will be reported similarly thus
providing credibility to the accounting reports
- There is need to bring into common basis, the
system of measurement of economic activities.

International Accounting Standards Committee (IASC)

The following international bodies publicly urged the

adoption of a single set of global accounting standards:

- World Bank (WB)

BRANCHES OF ACCOUNTING - International Monetary Fund (IMF)
Financial Accounting is the broadest branch of - International Organization of Securities
accounting focusing on the needs of external users. Commission (IOSCO)
Financial accountants accord importance to existing - Organization of Economic Cooperation
accounting standards. Development (OECD)

Management Accounting, as defined by Institute of In 1973, the IASC was created to develop global
Management Accountants (IMA) is a profession that accounting standards
involves partnering in management decision making, The IASC issued a set of uniform global accounting
devising planning and performance management standards called International Accounting Standards
systems, and providing expertise in financial reporting (IAS) and promoted the use and application of these
and control to assist management in the formulation standards.
and implementation of organization’s strategy. It serves
the information needs of the internal users.

Cost Accounting deals with the collection, allocation

and control of the cost of producing specific goods and
services.

Auditing is an independent examination that ensures

the fairness and reliability of the reports that
management submits to users outside the business
entity.

Government Accounting is concerned with the

identification of the sources and uses of government
funds.

Tax Accounting includes preparation of tax returns and

International Accounting Standards Board (IASB)
the consideration of tax consequences of proposed
business transactions. - Replaced IASC in year 2001
- IASB main objective is to develop a single set of
Accounting Education employs accountants either as
high-quality, understandable, and enforceable
researchers, professors or reviewers. They guarantee
global accounting standards to help participants
the continued development of the profession.
in the world’s capital markets and other users
make economic decisions.

The Need for International Accounting Standards

 - IASB has revised many IASs. (even after revision,
IAS that originated from the work of IASC
continue to be called IAS)
- IASB has issued new standards of its own, called IFRS FOUNDATION
International Financial Reporting Standards
(IFRS) - A not-for-profit international organization
- The IASB has no authority to require compliance responsible for developing a single set of high-
with its accounting standards. But through the quality global accounting standards, known as
help of international bodies mentioned earlier IFRS Standards.
(WB, IMF, IOSC, OECD) have enjoined regulators - IFRS Foundation Mission: “Our mission is to
in different countries to adopt the use of IAS standards that bring transparency,
and IFRS accountability, and efficiency to financial
markets around the world. Our work serves
The international standard-setting structure is the public interest by fostering trust, growth,
composed of: and long-term financial stability in the global
economy.”
a. The IFRS Foundation (22 trustees) provides oversight
- IFRS Standards are now required in more than
to the IASB, IFRS Advisory Council, and IFRS
140 jurisdictions, with many others permitting
Interpretations Committee. It appoints members,
their use
reviews effectiveness, and helps in fundraising efforts
for these organizations. Stages in IASB Due Process in Developing IFRS:
b. The International Accounting Standards Board (IASB) (1) Setting the agenda - Topics are identified and placed
(16 members) develops in the public interest, a single on the Board’s agenda.
set of high-quality, enforceable, and global international
financial reporting standards for general-purpose (2) Planning the project
financial statements. (3) Developing and publishing the discussion paper
c. The IFRS Advisory Council (30 or more members) - Research and analysis are conducted, and preliminary
provides advice and council to the IASB on major views of pros and cons are issued.
policies and technical issues.
(4) Developing and publishing the exposure draft
d. The IFRS Interpretations Committee (22 members)
assists the IASB through the timely identification, - The Board evaluates research and public responses
discussion, and resolution of financial reporting issues and issues an exposure draft.
within the framework of IFRS. (5) Developing and publishing the standard

- The Board evaluates the responses and changes the

exposure draft, if necessary.

(6) Issuance of the standard - The final standard is

issued

IASB and IFRS Interpretations Committee us the Due

Process Handbook of 2020 as their basis.

ELEMENTS of the IASB Due Process in Developing IFRS:

a. An independent standard-setting board overseen by

geographically and professionally diverse body of
trustees.

b. A thorough and systematic process for developing

standards.
c. Engagement with investors, regulators, business 2. IASB decides where to conduct project alone or
leaders, and the global accountancy profession at every jointly with another standard setter
stage of the process. 3. Discussions of the working group are contained
in a discussion paper, including comprehensive
d. Collaborative efforts with the worldwide standard-
overview of the issue, possible approaches to
setting community.
address the issue, preliminary views of its
authors or the IASB, and an invitation to
comment. The discussion of all technical issues
takes place in public sessions (public meetings,
public hearings and public round tables) where
questions and answer sessions are conducted
4. IASB considers comments received on the
discussion paper, results of staff research and
recommendations, suggestions by the IFRS
Advisory Council, working groups and
accounting standard setters, suggestions from
public education sessions. Then an exposure
draft is developed and voted upon. The
Stages in IASB Due Process in Developing IFRS: exposure draft is the IASV’s main vehicle to
consult the interested public. Commend period
(1) Setting the agenda - Topics are identified and placed
for major projects 120 days, for IFRIC
on the Board’s agenda.
interpretations 60 days.
(2) Planning the project 5. Makes revisions on the draft after considering
the comments on the exposure draft. When
(3) Developing and publishing the discussion paper
deemed necessary, a second exposure draft is
- Research and analysis are conducted, and preliminary developed and published, following the same
views of pros and cons are issued. process as previously described. Upon reaching
conclusion on the issues covered in the
(4) Developing and publishing the exposure draft exposure draft, the pre-ballot IFRS is sent to
- The Board evaluates research and public responses selected parties for review. After which a near
and issues an exposure draft. (120 days major, 60days final draft is posted on the IASB website.
BALLOTING, which is circularizing the near final
(5) Developing and publishing the standard reporting standard to the IASB members
- The Board evaluates the responses and changes the requires individual final review and approval of
exposure draft, if necessary. the draft. The approved pronouncement is
posted to the IASB’s limited access website for
(6) Issuance of the standard - The final standard is an initial period of about 10 days, after which
issued the draft is freely available online.
6. After issuance of an IFRS, the IASB holds regular
IASB and IFRS Interpretations Committee us the Due
meetings with interested parties to address
Process Handbook of 2020 as their basis.
some i=unanticipated issues relating to
Stages of the IASB Due Process in Developing IFRS: implementation.

1. To address users’ demand for better quality Why the need for high-quality standards?
financial information, the IASB identifies an
1. To facilitate efficient capital allocation
issue or issues, and puts in its agenda after
considering the relevance of information to the 2. In order to ensure adequate comparability across
users and the reliability of the information tat borders, a single, widely accepted set of high-quality
could be provided, and the possibility of accounting standards is a necessity.
increasing convergence.
3. Identify the elements involved: The Standard Setting Bodies in the Philippines
Accounting Standards Council (ASC)
1. A single set of high-quality accounting standards
established by a single standard-setting body. The accounting standards developed by the ASC were
2. Consistency in application and interpretation. known as the Statement of Financial Accounting
3. Common disclosures. Standards (SFAS).
4. Common high-quality auditing standards and
The accounting standards would generally be based on
practices.
the following:
5. Common approach to regulatory review and
enforcement. – existing practices in the Philippines,
6. Education and training of market participants.
7. Common delivery systems. – research or studies by the Council;
8. Common approach to corporate governance – locally or internationally available literature on the
and legal frameworks around the world. topic or subject; and
IFRS includes the following: – statements, recommendations, studies or standards
(a) Specific International Financial Reporting Standards issued by other standard-setting bodies such as the
International Accounting Standards Board (LASB) and
(b) Interpretations made by the International Financial the Financial Accounting Standards Board (FASB).
Reporting Interpretations Committee (IFRIC, the body
that interprets the work of the IASB)

(c) International Accounting Standards (IAS) The Standard Setting Bodies in the Philippines
Accounting Standards Council (ASC)
(d) Interpretations made by the Standing
Interpretations Committee (SIC, the body that - In 1997 ASC decided to move fully to the
interprets the works of the IASC) International Accounting Standards (IAS)
- 1997 to 2000 ASC developed accounting
standards based on IAS (gradual transition from
SFAS to IAS and IFRS)
The Standard Setting Bodies in the Philippines
- 2001 ASC adopted most of the standards
Accounting Standards Council (ASC)
developed by IASC
- On November 18, 1981, the PICPA created the - 2005 the year of full adoption of the IAS in the
Accounting Standards Council (ASC) to establish Philippines
and improve accounting standards that will be
The SEC in Memorandum Circular #19 Series of 2004
generally accepted in the Philippines.
dated Dec 22, 2004 required the adoption of the IAS,
- The ASC was composed of eight (8) members:
PAS and IFRS in the audited Financial Statements
4 PICPA including the designated Chairman
1 SEC
1 CB
1 PRC The Standard Setting Bodies in the Philippines
1 FINEX. Financial Reporting Standards Council (FRSC)
4 representatives of PICPA: Education, Public - In 2006 the Financial Reporting Standards
Practice, Commerce & Industry, Government Council (FRSC) was established to replace and
takeover the functions of the ASC. (section 9(a)
of the Rules and Regulations Implementing
RA9298 Philippine Accountancy Act of 2004)
- FRSC was created by the Board of Accountancy
in 2006
- FRSC is composed of a chairman and 14
members representing BOA, SEC, BSP, BIR, COA
 and a major organization composed of (e) Approval vote of a standard or an interpretation by a
preparers and users of financial statements, and majority of the FRSC members
the accredited national professional
TOPIC 2: THE CONCEPTUAL FRAMEWORK FOR
organization of CPAs in the Philippines (which is
FINANCIAL REPORTING
presently PICPA)
Conceptual Framework for Financial Reporting
PRFS consists of:
The International Accounting Standards Board (Board)
(a) Specific Philippine Financial Reporting Standards
issued the revised CONCEPTUAL FRAMEWORK FOR
(PFRS), which are adopted from the IFRSs;
FINANCIAL REPORTING (Conceptual Framework), - a
(b) Philippine Accounting Standards (PAS), which are comprehensive set of concepts for financial reporting,
adopted from the IAS; and in March 2018.

(c) Philippine Interpretations, which are adopted from The Conceptual Framework describes the objective of,
the interpretations of the IFRIC and the SIC and and the concepts for, general purpose financial
reporting.
(d) Interpretations of the PIC (interprets the work of the
IASB) It has undergone a series of revisions based on the
IASB’s experience of working with it. The most recent
Philippine Financial Reporting Standards (PRFS)
revision was completed and published in March 2018.
PFRSs set out the recognition, measurement,
Purpose of the Conceptual Framework
presentation, and disclosure requirements dealing with
transactions and events that are important in general a) assist the International Accounting Standards Board
purpose financial transactions. (Board) to develop IFRS Standards (Standards) that are
based on consistent concepts;
PFRSs are developed through a due process that
involves members of PICPA, financial executives, b) assist preparers to develop consistent accounting
regulatory authorities, members of the academe and policies when no Standard applies to a particular
other interested individuals and organizations. transaction or other event, or when a Standard allows a
choice of accounting policy; and
Due Process in the Development of PRFS
c) assist all parties to understand and interpret the
PFRSs are developed through a due process that
Standards.
involves members of PICPA, financial executives,
regulatory authorities, members of the academe and The Conceptual Framework is not a Philippine Financial
other interested individuals and organizations. Reporting Standard, nor is it an International Financial
Reporting Standard. Whenever there is conflict
Steps in the Due Process of Development of PFRS
between the Conceptual Framework and an accounting
(a) Consideration of pronouncement of IASB; standard, the requirements of the accounting standards
will prevail
(b) Formation of a task force, when deemed necessary,
to give advise to the FRSC; STATUS OF THE CONCEPTUAL FRAMEWORK

(c) Issuing for comment an exposure draft approved by The Conceptual Framework is not a PFRS. When there is
a majority of the FRSC members; comment period will a conflict between the Conceptual Framework and a
be at least 60days, unless a shorter period (not less than PFRS, the PFRS will prevail.
30 days) is considered appropriate by the FRSC;
SP1.2 The conceptual framework is not a standard.
(d) Consideration of all comments received within the Nothing in the conceptual framework overrides any
comment period and, when appropriate, preparing a standard or any requirement in a standard.
comment letter to the IASB; and
In the absence of a standard, management shall
consider the Conceptual Framework in making its
judgment in developing and applying an accounting a) economic resources (assets), claims against the
policy that results in useful information. reporting entity (liabilities and equity) and changes in
those resources and claims (stmt of comprehensive
income); and
SCOPE OF THE CONCEPTUAL FRAMEWORK
b) how efficiently and effectively the entity’s
Chapter 1 The Objective of General Purpose Financial management and governing board have discharged
Reporting their responsibilities to use the entity’s economic
resources.
Chapter 2 Qualitative Characteristics of Useful Financial
Information These information are found in general purpose
financial reports.
Chapter 3 Financial Statements and the Reporting Entity
Accrual accounting recognizes the effects of
Chapter 4 The Elements of Financial Statements transactions during the reporting period when the
Chapter 5 Recognition and Derecognition changes in economic resources and claims occur rather
than only when cash is received or paid.
Chapter 6 Measurement
GENERAL PURPOSE FINANCIAL REPORTING
Chapter 7 Presentation and Disclosure
Financial reports are directed toward the common
Chapter 8 Concepts of Capital and Capital Maintenance information needs of existing and potential investors,
OBJECTIVE OF GENERAL PURPOSE FINANCIAL lenders and other creditors, employees, the
REPORTING government and its agencies, and the public.

The objective of general-purpose financial reporting Common information needs of the users of general-
forms the foundation of the Conceptual Framework. purpose financial reports is to evaluate the enterprise’s
liquidity, solvency, profitability and operating and
The objective of general-purpose financial reporting is financial flexibility.
to provide financial information about the reporting
entity that is useful to existing and potential investors, Operating and financial flexibility is the company’s
lenders and other creditors in making decisions relating ability to adjust to unexpected downturns in the
to providing resources to the entity. economic environment in which it operates or to take
advantage of profitable investment opportunities as
Those decisions involve decisions about: they arise.
a) buying, selling or holding equity and debt QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL
instruments; INFORMATION
b) providing or settling loans and other forms of credit; Fundamental qualitative characteristics
or
(1) Relevance
c) exercising rights to vote on, or otherwise influence,
management’s actions that affect the use of the entity’s (2) Faithful representation
economic resources. Enhancing qualitative characteristics
INFORMATION ON ECONOMIC RESOURCES, CLAIMS (1) Comparability
AND CHANGES
(2) Verifiability
To make the assessments of management’s stewardship
of the entity’s economic resources, existing and (3) Timeliness
potential investors, lenders and other creditors need (4) Understandability
information about the following:
 (b) The magnitude of the items to which the
information relates; or

(c) The error judged in particular circumstances of

omission or misstatement of information

Materiality is an entity- specific aspect of relevance. No

quantitative threshold has been set by the IASB to
determine when an item is material.

2. Faithful representation - information represents

faithfully the transaction and other events it purports to
represent or could reasonable be expected to
represent.

- requires that the amounts and descriptions of

information presented on the financial statements
reflect the actual results of the transactions completed
FUNDAMENTAL VS ENHANCING
by the enterprise.
The fundamental qualitative characteristics are the
To be faithful representation, the information must be:
characteristics that make information useful to users.
1) Complete
The enhancing qualitative characteristics are the
characteristics that enhance the usefulness of 2) Neutral - impartial and not biased towards the
information particular needs or desires of users
FUNDAMENTAL QUALITATIVE CHARACTERISTICS 3) Free from error – no errors or omissions in its
description and in the process of producing the
1. Relevance – Knowledge of the information would
information
affect the decision or evaluation of the user.
ENHANCING QUALITATIVE CHARACTERISTICS
Relevant information have confirmatory value and/or
predictive value. 1. Comparability – a quality of information that enables
users to identify similarities and differences between at
Confirmatory value - the financial information enable
least two sets of economic circumstances.
users to confirm earlier expectation about the
enterprise Achieving comparability is the objective of IAS 1
Presentation of Financial Statements
Predictive value – the financial information helps users
formulate more intelligent predictions about the future. IAS 1 prescribes the basis for the presentation of FS to
ensure comparability both with the entity’s FS of
Financial reporting is concerned with information that is
previous periods and with the FS of other entities.
material or significant enough to influence the
economic decision of users. Intra-comparability – refers to comparability within the
reporting entity for at least two reporting periods
Information is material if omitting, misstating or
obscuring it could reasonably be expected to influence It is achieved by adhering to the principle of
decisions that the primary users of a specific reporting consistency. Consistency is the application of the same
entity’s general purpose FS make on the basis of those accounting policies from period to period to identify
FS (ED/2017/6 Definition of Material) actual similarities and differences in performance and
financial position.
Materiality depends on:
Inter-comparability – refers to comparability between
(a) The nature of the item
and among enterprises. It is more difficult to achieve.
The IASB addressed this issue by narrowing down Cost is a pervasive constraint on the information that
alternative treatments to a minimum number. can be provided by financial reporting. Reporting
financial information imposes costs, and it is important
If a change in accounting policy is made according to
that those costs are justified by the benefits of reporting
new IASB reporting standards or to enhance relevance
that information.
and faithful representation, the entity must properly
disclose in the notes to FS so that readers will not be A constraint is a practical exception to the application
misled by the change. of sound accounting theory. As such, it is an excuse not
to apply rigidly what is required by current accounting
2. Verifiability – information can be replicated using the
standards.
same measurement methods and applying the same
process. The presentation of relevant information is constrained
by the cost of obtaining the information.
To help users, it may be necessary to disclose the
underlying assumptions, the methods of compiling the The benefits derived from information should exceed
information, the measurement technique or bases and the cost of providing it.
other factors that support the information.

Quantified information need not be a single point

FINANCIAL STATEMENTS AND THE REPORTING ENTITY
estimate to be verifiable. A range of possible amounts
and the related probabilities can also be verified. Financial statements are a particular form of general
purpose financial report that provide information about
Enhances the representational faithfulness of
the reporting entity’s assets, liabilities, equity, income
information
and expense that is useful to users in assessing the
3. Timeliness – availability of information to users is prospects for future net cash inflows to the reporting
early enough to be used for the economic decisions entity; and the management’s stewardship of the
which the information might influence. entity’s economic resources. (Conceptual Framework,
paragraph 3.1 and 3.2)
The relevance of an information may be lost if there is
undue delay in reporting the information. The information presented in the financial statements
pertains to:
4. Understandability – Classifying, characterizing and
presenting information clearly and concisely makes it a) the entity’s financial position, with recognized assets,
understandable. liabilities and equity;

No matter how well the information is presented, it will b) the entity’s financial performance, with recognized
be useless if the user does not understand it. income and expenses; and

Understandability depends on two factors: c) information about:

➢ The quality of the information i. recognized assets, liabilities, equity, income and
expenses, including information about theirnature and
➢ The quality of the user
about the risks arising from those recognized assets and
For information to be useful, it must be expressed in liabilities;
terminologies adapted to the users’ range of
ii. assets and liabilities that have not been recognized,
understanding.
including information about their nature andabout the
Users also have the responsibility to understand the risks arising from them;
contents of the FS. Information about complex matters
iii. cash flows;
should not be excluded fromt eh FS simply because they
may not be understood by the users. iv. contributions from and distributions to enterprise
owners; and
THE COST CONSTRAINT ON USEFUL FINANCIAL
REPORTING
v. the methods, assumptions and judgements used in Consolidated financial statements – the financial
estimating the amounts presented or disclosed, and statements of a reporting entity comprising both the
changes in those methods, assumptions and parent and its subsidiaries.
judgements.
Parent – an entity that exercises control over another
Reporting period entity called a “subsidiary”.

Financial statements are prepared for a specified period The subsidiary’s own financial statements provide
of time (reporting period) and provide information separate information about the assets, liabilities, equity,
about: income and expenses of that particular subsidiary.

a) assets and liabilities—including unrecognized assets Unconsolidated financial statements may also be
and liabilities—and equity that existed at the end of the prepared about the parent’s assets, liabilities, equity,
reporting period, or during the reporting period; and income and expenses. The unconsolidated FS cannot
substitute the consolidated FS when the parent is
b) income and expenses for the reporting period.
required to present the latter.
To help users of financial statements to identify and
Combined financial statements – fs of a reporting
assess changes and trends, financial statements also
entity comprising two or more entities that are not
provide comparative information for at least one
linked by a parent-subsidiary relationship. (pars. 3.11
preceding reporting period.
and 3.12)
Information on transactions and other events that
THE ELEMENTS OF FINANCIAL STATEMENTS
occurred after the reporting period is also provided in
the FS if such information is necessary to meet the
objective of the financial statements.

Going concern assumption

Financial statements are normally prepared on the

assumption that the reporting entity is a going concern
and will continue in operation for the foreseeable
future.

It is assumed that the entity has neither the intention

nor the need to enter liquidation or to cease trading.

If the intention or need to enter liquidation or to cease

trading exists, the financial statements may have to be
prepared on a different basis. If so, the financial
statements describe the basis used.

THE REPORTING ENTITY

Reporting Entity – is the one that is required, or ELEMENTS RELATING TO FINANCIAL POSITION - ASSET
chooses, to prepare financial statements. It is not
necessarily a legal entity. An asset is a present economic resource controlled by
the entity as a result of past events. An economic
A reporting entity can be any of the following: resource is a right that has the potential to produce
(a) A single entity; economic benefits. This section discusses three aspects
of those definitions:
(b) A portion of an entity; or
a) Right – asset refers to a right, and not necessarily to a
(c) More than one entity physical object.
b) Potential to produce economic benefits – the right Equity claims are claims on the residual interest in the
has a potential to produce economic benefits for the assets of the entity after deducting all its liabilities. In
entity that are beyond the benefits available to all other words, they are claims against the entity that do
others. not meet the definition of a liability.

c) Control – means the entity has the exclusive right Such claims may be established by contract, legislation
over the benefits of an asset and the ability to prevent or similar means, and include, to the extent that they do
others from accessing those benefits not meet the definition of a liability:

ELEMENTS RELATING TO FINANCIAL POSITION - a) shares of various types, issued by the entity; and
LIABILITY
b) some obligations of the entity to issue another equity
A liability is a present obligation of the entity to transfer claim.
an economic resource as a result of past events. For a
ELEMENTS RELATING TO FINANCIAL PERFORMANCE
liability to exist, three criteria must all be satisfied:

a) the entity has an obligation;

b) the obligation is to transfer an economic resource;

and

c) the obligation is a present obligation that exists as a

result of past events.

Three aspects in the definition of a liability

1. Obligation – An obligation is “a duty or responsibility

that an entity has no practical ability to avoid.” (CF 4.29)
An obligation can be either legal obligation or
constructive obligation.
RECOGNITION and DERECOGNITION
2. Transfer of an economic resource – the obligation
RECOGNITION
has the potential to require the transfer of an economic
resource to another party. Such potential need not be Recognition is the process of including in the face of the
certain or even likely – what is important is that the financial statement an item that meets the definition of
obligation already exists and that, in at least one one of the elements of financial statements—an asset, a
circumstance, it would require the transfer of an liability, equity, income or expenses.
economic resource.
Carrying amount is the amount at which an asset, a
3. Present obligation as a result of past events – A liability or equity is recognized in the statement of
present obligation exists as a result of past events if: financial position.
a. the entity has already obtained economic benefits or An item is recognized in the financial statements if:
taken an action; and
(a) It meets the definition of an asset, liability, equity,
b. as a consequence, the entity will or may have to income or expenses;
transfer an economic resource that it would not
otherwise have had to transfer. (b) It provides useful information that is relevant and
faithfully represented;
ELEMENTS RELATING TO FINANCIAL POSITION -
EQUITY (c) The benefits of the information provided to the users
justify the costs of obtaining, providing and using
Equity is the residual interest in the assets of the entity
after deducting all its liabilities. the information; and

(d) It is measurable
 (i) Fair value

(ii) Value in use and fulfillment value

(iii) Current cost

MEASUREMENT - HISTORICAL COST

Historical cost provide monetary information about

assets, liabilities and related income and expenses,
using information derived, at least in part, from the
DERECOGNITION price of the transaction or other event that gave rise to
them.
Derecognition is the removal of all or part of a
recognized asset or liability from an entity’s statement The historical cost of
of financial position.
Assets – the value of costs incurred in acquiring or
Derecognition occurs when the item no longer meets creating the asset, comprising the consideration paid to
the definition of an asset or of a liability: (par 5.26) acquire or create the asset plus transactions costs (par.
6.5) Liabilities - the value of the consideration received
a) for an asset, derecognition normally occurs when the
to incur or take on the liability minus transactions costs
entity loses control of all or part of the recognized asset;
(par. 6.5)
and
In some cases , the deemed historical cost of an asset or
b) for a liability, derecognition normally occurs when
liability at initial recognition is its current value at that
the entity no longer has a present obligation for all or
date, which is used as a starting point for subsequent
part of the recognized liability.
measurement at historical cost
An entity derecognizing a part of an asset or liability and
The historical cost of an asset is updated over time to
retaining another part of it shall not recognize in profit
depict, if applicable (par. 6.7)
or loss an income or expense relating to the portion
retained, unless the portion retained is remeasured or (a) The consumption of a part or all of the economic
reclassified. In such a case, the income or expense resource (depreciation, amortization,);
results from the remeasurement or reclassification of
the retained portion. (b) Payments received that extinguish part or all of the
asset; (collections)
MEASUREMENT
(c) Impairment (reflecting the effect of events that
Elements recognized in financial statements are cause the carrying amount to be no longer recoverable);
quantified in monetary terms. This requires the and
selection of a measurement basis.
(d) Accrual of interest to reflect any financing
The measurement basis selected must be one that component
results to provision of the most relevant and faithful
representation of the information.

The choice of the measurement basis is determined The historical cost of a liability is updated over time to
considering both initial measurement (at the date of depict, if applicable (par. 6.8):
creation) and subsequent measurement (date of (a) fulfillment of part or all of the liability;
reporting).
(b) the effect of events that increase its value, to the
Measurement bases: extent that the liability becomes onerous (which means
(a) historical cost, that the historical cost is no longer sufficient to depict
the obligation);
(b) Current cost .
(c) accrual of interest to reflect any financing (a) Estimates of future cash flows;
component
(b) Possible variations in amounts or timing;
The measurement of financial assets and financial
(c) The time value of money;
liabilities initially at historical cost and subsequently
considering subsequent changes due to interest, (d) Risk premium or risk discount (which is the price for
receipts or payments and impairment, is in effect bearing the uncertainty in the cash flows);
applying ang arriving at the financial asset’s or financial
liability’s amortized cost. The amortized cost of a (e) Other factors, such as enterprise liquidity
financial asset or financial liability reflects estimates of Fair value is not increased or decrease by transactions
future cash flows, discounted at a rate determined at costs, it does not consider the transaction costs on the
initial recognition (based on par. 6.9) disposal of asset or settlement of liability.

MEASUREMENT – CURRENT VALUE MEASUREMENT – CURRENT VALUE – VALUE IN USE

Current value provide monetary information about AND FULFILLMENT VALUE
assets, liabilities and related income and expenses, Value in use (for asset) is “the present value of the cash
using information updated to reflect conditions at the flows or other economic benefits that an entity expects
measurement date. to derive from the use of an asset and its eventual
Because of the updating, current values of assets and disposal” (par. 6.17)
liabilities reflect changes, since the previous Fulfillment value (for liability) is the present value of
measurement date, in estimates of cash flows and other the cash, or other economic resources, that an entity
factors reflected in those current values. expects to be obliged to transfer to the counterparty
Unlike historical cost, the current value of an asset or and other parties as it fulfills a liability (par. 6.17)
liability is not derived, even in part, from the price of Value in use and fulfillment value include the present
the transaction or other event that gave rise to the value of transaction costs relating to ultimate disposal
asset or liability of asset or fulfilling the liability. They consider estimates
Current value measurement bases include: of future cash flows, possible variations in amounts or
timing, time value of money, risk premium or risk
a) fair value; discount, and such other factors that reflect entity-
specific assumptions (pars 19 and 20)
b) value in use and fulfilment value for liabilities; and
MEASUREMENT – CURRENT VALUE – CURRENT COST
c) current cost
Current cost of an asset is “the cost of an equivalent
MEASUREMENT – CURRENT VALUE – FAIR VALUE
asset at the measurement date, comprising the
Fair value is “the price that would be received to sell an consideration that would be paid at the measurement
asset, or paid to transfer a liability, in an orderly date plus the transaction costs that would be incurred
transaction between market participants to which the at that date.”
entity has access at the measurement date” (par. 6.12)
Current cost of a liability is “the consideration that
Fair value reflects the perspective of market would be received for an equivalent liability at the
participants (buyer and seller) acting in their economic measurement date minus the transaction costs that
best interest (par. 61.13) would be incurred at that date.”

If an asset or liability does not have active market, some ENTRY VALUES AND EXIT VALUES
measurement techniques will have to be applied, such
Entry values are measurement bases on the date of
as cash-flow measurement techniques, that reflect the
acquisition, creation or incurrence.
following factors (par. 6.14):
Exit values are measurement bases on the date of This type of measurement basis is applicable for assets
measurement (subsequent to acquisition or and liabilities that produce cash flows directly (those
incurrence), disposal, or settlement. that can be sold independently). Thus financial assets
that are held for trading, financial assets that are held
Historical cost and current cost are entry values
for sale, and assets that are held for capital
Fair value in use and fulfillment value are exit values appreciation, or for leasing out to others, based on
market rentals, are preferably measure at current value.
CONSIDERATIONS WHEN SELECTING A MEASUREMENT
BASIS MEASUREMENT OF EQUITY

When selecting a measurement basis, it is important to The total carrying amount of equity (total equity) is not
consider the following: measured directly. It equals the total of the carrying
amounts of all recognized assets less the total of the
a. The nature of information provided by a particular carrying amounts of all recognized liabilities.
measurement basis (e.g., measuring an asset at
historical cost may lead to the subsequent recognition
of depreciation or impairment, while measuring that
PRESENTATION AND DISCLOSURE
asset at fair value would lead to the subsequent
recognition of gain or loss from changes in fair value). An entity reports its financial position and financial
performance and other financial information in its
b. The qualitative characteristics, the cost-constraint,
financial statements.
and other factors (e.g., a particular measurement basis
may be more verifiable or more costly to apply than the Information in the financial statements must be both
other measurement bases). relevant and faithfully represented and requires the
following (par. 7.2)
INITIAL MEASUREMENT AND SUBSEQUENT
MEASUREMENT (a) Focusing on presentation and disclosure objectives
and principles rather than on rules;
Initial recognition
(b) Classifying information in a manner that groups
At initial recognition, the cost of an asset acquired or of
similar items and separates dissimilar items; and
a liability incurred is normally similar to fair value at
that date, unless transaction costs are significant. (c) Aggregating information to make it not obscured
either by unnecessary detail or by excessive aggregation
Subsequent to initial recognition
PRESENTATION AND DISCLOSURE - FOCUSING ON
Subsequent to initial recognition, the measurement
PRESENTATION AND DISCLOSURE OBJECTIVES
basis is normally the same measurement basis at initial
recognition. An entity must communicate effectively the information
in financial statements to its intended users.
Using uniform basis at initial recognition and
subsequent measurement avoids recognizing income or Balance is needed between
expense at the time of the first subsequent
(a) Giving entities flexibility to provide relevant and
measurement solely because of a change in
faithfully represented financial statement elements;
measurement basis (par. 6.78)
and
MEASUREMENT – CURRENT VALUE
(b) Achieving comparability within an enterprise for two
Use of current value different reporting periods and comparability across
enterprises for a single reporting period
When the value of an asset is sensitive to market
factors or other risks, the most relevant information is PRESENTATION AND DISCLOSURE – CLASSIFYING
provided by measuring the asset or liability at fair value INFORMATION
if such can be directly observable, or value in use or
current cost if the value cannot be directly observed.
Classification is the sorting of assets, liabilities, equity, CONCEPTS OF CAPITAL MAINTENANCE
income or expenses based on shared characteristics for
The capital maintenance concept views profit as the
presentation and disclosure purposes. Such
excess of the capital at the end of the period over the
characteristics include—but are not limited to—the
capital at the beginning of the period, after excluding
nature of the item, its role (or function) within the
the effects of contributions from and distributions to
business activities conducted by the entity, and how it is
the owners during the reporting period.
measured.
Net worth method of measuring profit - the capital
Classification of assets and liabilities
maintenance concept
Classification is applied to the unit of account selected
Under the capital maintenance concept, focus is on
for an asset or liability.
return on capital, where only inflows of net assets in
However, it may sometimes be appropriate to separate excess of amounts needed to maintain capital may be
an asset or liability into components that have different regarded as profit (or loss if expenses exceed income)
characteristics and to classify those components
CONCEPTS OF CAPITAL MAINTENANCE
separately.
Financial capital maintenance concept

Under this concept, profit is measured as the excess of

the financial (or money) amount of the net assets at the
That would be appropriate when classifying those end of the period over the financial (or money) amount
components separately would enhance the usefulness of the net assets at the beginning of the period (par.
of the resulting financial information. For example, it 8.3a)
could be appropriate to separate an asset or liability
Under this concept a profit is earned only if the financial
into current and non-current components and to
(or money) amount of the net assets at the end of the
classify those components separately.
period exceeds the financial (or money) amount of net
PRESENTATION AND DISCLOSURE – AGGREGATION assets at the beginning of the period, after excluding
any distributions to, and contributions from, owners
Aggregation is “the adding together of similar financial
during the period.
statement elements that have shared characteristics
and are included in the same classification” (par. 7.20) Under this concept, increases in the prices of assets
held over the period (holding gains), are conceptually
Aggregation summarizes large volume of details, hence,
profits, however they may not be recognized as profits
information is not obscured by so many details, which,
until the assets are disposed of.
when considered necessary, are present in the Notes
Financial capital maintenance can be measured in either
CONCEPTS OF CAPITAL
nominal monetary units or units of constant purchasing
Based on the information needs of the users, a power.
reporting entity should select the appropriate concept
CONCEPTS OF CAPITAL MAINTENANCE
of capital. Capital may be viewed based on the financial
concept of capital or the physical concept of capital. Physical capital maintenance concept
(par. 8.1)
Under this concept, a profit is earned only if the physical
Financial Concept of Capital productive capacity (or operating capability) of the
entity for the resources of funds needed to achieve that
Under this concept, capital is synonymous with the net
capacity) at the end of the period exceeds the physical
assets or equity of the enterprise.
productive capacity at the beginning of the same
Physical Concept of Capital period, after excluding the effects of transactions with
owners (par. 8.3b)
Under this concept, capital is viewed as the operating
capacity of the enterprise (e.g. units of output per day)
Under this concept, all price changes affecting assets  notes, comprising significant accounting policies
and liabilities are treated as capital maintenance and other explanatory information;
adjustment that are not part of profit but are part of  comparative information in respect of the
equity. preceding period
 a statement of financial position as at the
CFAS TOPIC 3: REVIEWER beginning of the preceding period when an
entity applies an accounting policy
OBJECTIVE OF FINANCIAL STATEMENTS
retrospectively or makes a retrospective
The objective of financial statements is to provide restatement of items in its financial statements,
information about the financial position, financial or when it reclassifies items in its financial
statements
performance and cash flows of an entity that is useful to
STATEMENT OF FINANCIAL POSITION
a wide range of users in making economic decisions.
A statement of financial position presents information
Financial statements also show the results of the
on the balances of assets, liabilities, and equity as at the
management’s stewardship of the resources entrusted
end of the reporting period.
to it. To meet this objective, financial statements
provide information about an entity’s: (paragraph9 IAS1 This statement, when evaluated together with the other
Presentation of Financial Statements) components of the FS, is useful to various users of
accounting information in assessing the economic
• assets;
resources that an enterprise controls, its financial
• liabilities;
• equity; structure, its liquidity and solvency and its capacity to
• income and expenses, including gains and losses; adapt to changes in the environment in which it
• contributions by and distributions to owners in their operates.
capacity as owners; and
ASSETS
• cash flows
OBJECTIVES OF IAS 1 (PAS 1) An entity must normally present a classified statement
of financial position, separating current and noncurrent
Financial statements are the responsibility of the
assets and liabilities.
company’s management.
An entity shall classify an asset as current when:
International Accounting Standards (IAS) 1 Presentation
of Financial Statements presents the basis for the • It expects to realize the asset, or intends to sell or
presentation of financial statements. consume it, in its normal operating cycle
• It holds the asset primarily for the purpose of trading
The objective of IAS 1 is to present the basis for the
• It expects to realize the asset within twelve months
presentation of the general purpose financial after the reporting period
statements to ensure comparability of an enterprise’s • The asset is cash or a cash equivalent (as defined in
financial statements with financial statements of other IAS 7) unless the asset is restricted from being
enterprises and with financial statements of the same exchanged or used to settle a liability for at least twelve
enterprise for different reporting periods. Thus, both months after the reporting period.
inter-comparablity and intra-comparability are
addressed by IAS 1

COMPONENTS OF FINANCIAL STATEMENTS

A complete set of financial statements comprises:

 a statement of financial position as at the end

of the period;
 a statement of profit or loss and other
comprehensive income for the period;
 a statement of changes in equity for the period;
 a statement of cash flows for the period;
 • The entity does not have an unconditional right to
defer settlement of the liability for at least twelve
months after the reporting period.
An entity classifies its financial liabilities as current
when they are due to be settled within twelve months
after the end of the reporting period, even if:
• The original term was for a period longer than twelve
months; and
• The intention is supported by an agreement to
refinance, or reschedule the payments, on a long term
basis is completed after the end of the reporting period
and completed before the financial statements are
authorized for issue
Current liabilities include

• Trade and other payables

• Current provisions
Normal Operating Cycle – is the time between the • Short-term borrowings
acquisition of assets for processing and their realization • Current portion of long-term debt
in cash or cash equivalents. When the entity’s normal • Current tax liability
operating cycle is not clearly identifiable, its duration is An entity shall classify all other liabilities as non-current,
assumed to be twelve months. such as:
Line items under current assets are • Long term notes payable that are due beyond 12
months from the end of the reporting period
• Cash and cash equivalents • Bonds payable that are due beyond twelve months
• Trade and other receivables after the reporting period
• Financial asset at Fair Value through Profit of Loss • Long-term notes payable that are due within twelve
• Inventories months after the reporting period, but which terms is
• Prepaid expenses extended on a long-term basis and negotiation has been
The caption “noncurrent assets” is a residual definition. competed before the end of the reporting period.
PAS 1 provides that an entity shall classify all other
assets as non-current. The following are examples of
non-current assets:
EQUITY
• Property, plant, and equipment
• Intangible assets Equity is the residual interest in the assets of the entity
• Investment property after deducting all the liabilities. Simply put, equity
• Financial assets that are not expected to be realized in means net asset or total assets minus total liabilities.
cash in the entity’s normal operating cycle or within
twelve months after the reporting period The account name in reporting the equity of an entity
LIABILITIES depends on the form of the business organization:

An entity shall classify a liability as current when: Sole proprietorship - Owner’s equity

• It expects to settle the liability in its normal operating Partnership - Partner’s equity
cycle Corporation - Stockholders’ equity or shareholders’
• It holds the liability primarily for the purpose of equity
trading • The liability is due to be settled within twelve
months after the reporting period FORMATS OF THE STATEMENT OF FINANCIAL
POSITION
Account form, which looks like a T account, where Comprehensive income is the change of equity during a
assets are listed on the left side of the statement while period other than changes resulting from transactions
liabilities and equity are listed on the right side with owners in their capacity as such. Comprehensive
income includes profit or loss and other comprehensive
Report form presents the assets, liabilities, and equity
income.
in a continuous format. Liabilities are presented after
total assets and equity accounts are listed after the Profit and Loss is the total income less expenses
liabilities section excluding the components of other comprehensive
income.
Financial position form emphasizes working capital of
the firm. In this format, net assets are equal to the Other comprehensive income comprises Items of
equity. income and expenses including reclassification
adjustments that are not included in Profit and Loss as
REQUIREMENT FOR AN ADDITIONAL STATEMENT OF
required by a standard or interpretation. There are two
FINANCIAL POSITION
types of OCI items:
IAS 1 requires the inclusion of a statement of financial
- those that are reclassified to profit or loss and
position as at the beginning of the preceding period
whenever an entity restates its comparative prior - those that are reclassified to Retained Earnings.
period financial statements.
PROFIT AND LOSS SHALL INCLUDE LINE ITEMS THAT
Restatement of comparative prior period is necessary PRESENT THE FOLLOWING AMOUNTS FOR THE
when there is any of the following: PERIOD:

(a) Retrospective application of a change in accounting • revenue, presenting separately interest revenue
policy calculated using the effective interest method and
insurance revenue
(b) Restatement of FS because of prior period errors
• gains and losses arising from the derecognition of
discovered; and
financial assets measured at amortized cost
(c) Reclassification of an element in financial • insurance service expenses from contracts issued
statements. within the scope of IFRS 17
• income or expenses from reinsurance contracts held
The requirement for restatement of prior year’s FS and • finance costs
inclusion of a restatement statement of financial • impairment losses (including reversals of impairment
position as at the beginning of the preceding period losses or impairment gains) determined in accordance
presented achieves the objective of comparability w/Sec 5.5 IFRS 9
• insurance finance income or expenses from contracts
issued within the scope of IFRS 17
STATEMENT OF COMPREHENSIVE INCOME • finance income or expenses from reinsurance
A statement of comprehensive income presents the contracts held
financial performance of an entity during a reporting • share of the profit or loss of associates and joint
period. ventures accounted for using the equity method
• if a financial asset is reclassified out of the amortized
It is an expanded form of income statement because it cost measurement category so that it is measured at
encompasses both profit or loss and other fair value through profit or loss, any gain or loss arising
comprehensive income. from a difference between the previous amortized cost
of the financial asset and its fair value at the
The information presented in the statement of
reclassification date (as defined in IFRS 9)
comprehensive income helps users to assess the
• if a financial asset is reclassified out of the fair value
entity’s ability to generate cash and the potential
through other comprehensive income measurement
changes in economic resources that the enterprise is
category so that it is measured at fair value through
likely to control in the future.
profit or loss, any cumulative gain or loss previously
recognized in other comprehensive income that is
reclassified to profit or loss;
• tax expense
• a single amount for the total of discontinued
operations
Other comprehensive income comprises Items of
income and expenses including reclassification Function of expense or cost of sales method – Classifies
adjustments that are not included in Profit and Loss as expenses according to their function as part of cost of
required by a standard or interpretation. sales or, for example, the cost of distribution or
2 types of OCI items: administrative activities.
- those that are reclassified to profit or loss and
- those that are reclassified to Retained Earnings.

Components of OCI that will be reclassified

subsequently to profit, or loss include the following:

• Unrealized gain or loss on debt investments measured

at fair value through other comprehensive income
• Unrealized gain or loss from derivative contracts STATEMENT OF CHANGES IN EQUITY
designated as cash flow hedge
• Translation gains and losses of foreign operations A statement of changes in equity presents the
Components of OCI that will be reclassified summarized transactions affecting the balances of
subsequently to retained earnings include the equity accounts, such as profit or loss, other
following: comprehensive income, contributions from owners and
distributions to owners.
• Unrealized gain or loss on equity investments
measured at fair value through other comprehensive An entity shall present a statement of changes in equity
income showing in the statement:
• Change in Revaluation Surplus
• Total comprehensive income for the period, showing
• Remeasurement gains and losses for defined benefit
separately the total amounts attributable to owners of
plans
the parent and to non-controlling interests
• Change in fair value arising from credit risk for
• For each component of equity, the effects of
financial liabilities measured at fair value through profit
retrospective application or retrospective restatement
or loss
recognized in accordance with PAS 8
An entity shall present either an analysis of expenses
• For each component of equity, a reconciliation
using a classification based on either:
between the carrying amount at the beginning and the
- the nature of expenses or end of the period, separately (as a minimum) disclosing
changes resulting from:
- their function within the entity, – profit or loss;
whichever provides information that is reliable and – other comprehensive income; and
more relevant.
– transactions with owners in their capacity as owners,
Nature of expense method – Expenses are aggregated showing separately contributions by and distributions to
in the income statement according to their nature and owners and changes in ownership interests in
are not reallocated among various functions within the subsidiaries that do not result in a loss of control.
entity.
An entity shall present, either in the statement of
changes in equity or in the notes, the amount of
dividends recognized as distributions to owners during
the period, and the related amount per share.
 STATEMENT OF CASH FLOWS receipts or payments, and items of income or expense
associated with investing or financing cash flows. start
A statement of cash flows presents information on the
with the profit or loss before tax and then adjust it for
inflows and outflows of cash and cash equivalents
the effect of:
during the reporting period.
- Working capital changes over the period
Cash flow information provides users of financial (inventories, operating receivables, payables);
statements with a basis to assess the ability of the - Non-cash items (depreciation, unrealized
entity to generate cash and cash equivalents and the foreign exchange gains or losses, etc.);
needs of the entity to utilize those cash flows. - Items associated with investing or financing
activities
Classification Information on the inflows and outflows
of cash and cash equivalent classified into

1. operating activities,

2. investing activities, and

3. financing activities.

Cash flows from operating activities - from the

principal revenue-producing activities of the entity.
Examples:
• cash receipts from the sale of goods and the rendering
of services; Cash flows from Investing Activities - the cash flows
• cash receipts from royalties, fees, commissions and derived from the acquisition and disposal of long-term
other revenue; assets and other investment not included in cash
• cash payments to suppliers for goods and services; equivalents. Only expenditures that result in a
• cash payments to and on behalf of employees; recognized asset in the statement of financial position
• cash payments or refunds of income taxes unless they are eligible for classification as investing activities.
can be specifically identified with financing and
investing activities; and Examples of cash flows arising from investing activities
• cash receipts and payments from contracts held for are:
dealing or trading purposes. • cash payments to acquire property, plant and
An entity may hold securities and loans for dealing or equipment, intangibles and other long-term assets.
trading purposes, in which case they are similar to These payments include those relating to capitalized
inventory acquired specifically for resale. Therefore, development costs and self-constructed property, plant
cash flows arising from the purchase and sale of dealing and equipment;
or trading securities are classified as operating activities. • cash receipts from sales of property, plant and
Similarly, cash advances and loans made by financial equipment, intangibles and other long-term assets;
institutions are usually classified as operating activities • cash payments to acquire equity or debt instruments
since they relate to the main revenue-producing activity of other entities and interests in joint ventures (other
of that entity. than payments for those instruments considered to be
PRESENTATION OF CASH FLOWS cash equivalents or those held for dealing or trading
purposes);
An entity shall report cash flows from operating • cash receipts from sales of equity or debt instruments
activities using either: of other entities and interests in joint ventures (other
• the direct method, whereby major classes of gross than receipts for those instruments considered to be
cash receipts and gross cash payments are disclosed; or cash equivalents and those held for dealing or trading
• the indirect method whereby profit or loss is adjusted purposes);
for the effects of transactions of a non-cash nature, any • cash advances and loans made to other parties (other
deferrals or accruals of past or future operating cash than advances and loans made by a financial
institution); • cash receipts from the repayment of
advances and loans made to other parties (other than
advances and loans of a financial institution);
• cash payments for futures contracts, forward
contracts, option contracts and swap contracts except Taxes on Income - Cash flows arising from taxes on
when the contracts are held for dealing or trading income shall be separately disclosed and shall be
purposes, or the payments are classified as financing classified as cash flows from operating activities unless
activities; and they can be specifically identified with financing and
• cash receipts from futures contracts, forward investing activities.
contracts, option contracts and swap contracts except
NOTES TO THE FINANCIAL STATEMENTS
when the contracts are held for dealing or trading
purposes, or the receipts are classified as financing This section presents relevant financial information
activities. pertaining the entity’s activities that cannot be
presented on the face of the financial statements.
Cash Flows from Financing Activities - include cash
The notes must:
transactions affecting non-trade liabilities, and
shareholders’ equity. Examples of cash flows arising • Present information about the basis of preparation of
from financing activities are: the financial statements and the specific accounting
policies used;
• cash proceeds from issuing shares or other equity
• Disclose any information required by PFRSs that is not
instruments;
presented on the face of the statement of financial
• cash payments to owners to acquire or redeem the
position, income statement, statement of changes in
entity’s shares;
equity, or statement of cash flows
• cash proceeds from issuing debentures, loans, notes,
• Provide additional information that is not presented
bonds, mortgages and other shortterm or long-term
on the face of the statement of financial position,
borrowings;
income statement, statement of changes in equity, or
• cash repayments of amounts borrowed; and
statement of cash flows that is deemed relevant to an
• cash payments by a lessee for the reduction of the
understanding of any of them.
outstanding liability relating to a lease.
Notes should be cross-referenced from the face of the
financial statements to the relevant note. The notes
Interest and Dividends - Cash flows from interest and
should normally be presented in the following order:
dividends received and paid shall each be disclosed
• A statement of compliance with PFRSs
separately. Each shall be classified in a consistent
• A summary of significant accounting policies applied,
manner from period to period as either operating,
including:
investing or financing activities.
– The measurement basis (or bases) used in preparing
Interest paid and interest and dividends received may the financial statements; and
be classified as operating cash flows because they enter
– The other accounting policies used that are relevant
into the determination of profit or loss. Alternatively,
to an understanding of the financial statements.
interest paid and interest and dividends received may
be classified as financing cash flows and investing cash • Supporting information for items presented on the
flows respectively, because they are costs of obtaining face of the statement of financial position, income
financial resources or returns on investments. statement, statement of changes in equity, and
statement of ash flows, in the order in which each
Dividends paid may be classified as a financing cash flow
statement and each line item is presented.
because they are a cost of obtaining financial resources.
• Other disclosures, including:
Alternatively, dividends paid may be classified as a
– Contingent liabilities and unrecognized contractual
component of cash flows from operating activities in
commitments
order to assist users to determine the ability of an entity
to pay dividends out of operating cash flows.
– Non-financial disclosures, such as the entity's financial IAS 1 enumerates the following general features for the
risk management objectives and policies. presentation of financial statements:

Disclosure of judgments - an entity must disclose, in the a. Fair presentation and compliance with IFRS / PFRS
summary of significant accounting policies or other
b. Going concern
notes, the judgments, apart from those involving
estimations, that management has made in the process c. Accrual basis of accounting
of applying the entity's accounting policies that have
the most significant effect on the amounts recognized in d. Materiality and aggregation
the financial statements. e. Offsetting
ACCOUNTING POLICIES f. Frequency of reporting
Accounting policies are the specific principles, bases, g. Comparative information
conventions, rules and practices applied by an entity in
preparing and presenting financial statements h. Consistency of presentation
(definition under IAS 8 Accounting Policies, Changes in A. FAIR PRESENTATION AND COMPLIANCE WITH PFRS
Accounting Policies and Errors)
Financial statements shall present fairly the financial
Hierarchy in the formation of accounting policies: position, financial performance and cash flows of an
1) Apply the specific requirements of the PFRS or entity.
Interpretation that specifically applies to a transaction, The application of IFRS with additional disclosures,
event or condition when necessary, is presumed to result in financial
2) In the absence of a Standard or Interpretation that statements that achieve a fair presentation. (paragraph
specifically applies to a transaction, event or condition, 15, IAS 1 )
management shall use its judgement in developing and Fair presentation requires an entity to (para. 17, IAS 8):
applying an accounting policy that results in information
that meets the qualitative characteristics described in a. Select accounting policies based on PAS / IAS 8
the Conceptual Framework (para.8-10, IAS 8). Accounting Policies, Changes in Accounting Estimates
and Errors, observing the hierarchy in formulating
In applying its judgment in selecting from different accounting policies;
accounting methos to form part of its policies, the
management shall refer to, and consider applicability of b. Present information, including accounting policies, in
the following sources in descending order (paragraph a manner that provides relevant, reliable, comparable
11, IAS 8) and understandable information; and

(a) The requirements in PFRS and IFRS dealing with c. Provide additional disclosures when compliance with
similar and related issues; and the specific requirements in IFRSs is insufficient to
enable users to understand the impact of particular
(b) The definitions, recognition criteria and transactions, other events and conditions on the
measurement concepts for assets, liabilities, income entity’s financial position and financial performance.
and expenses in the Conceptual Framework.
PAS 1 acknowledges that, in extremely rare
The management may also consider the most recent circumstances, management may conclude that
pronouncements of other standard setting bodies that compliance with a PFRS requirement would be so
use a similar conceptual framework to develop misleading that it would conflict with the objective of
accounting standards, other accounting literature and financial statements set out in the Framework.
accepted industry practices to the extent that these do
not conflict with the sources enumerated above (based In such a case, the entity is required to depart from the
on paragraph 12, IAS 8) PFRS requirement, with detailed disclosure of the
nature, reasons, and impact of the departure. The
GENERAL FEATURES disclosure includes (para. 20 IAS 1):
(a) That management has concluded that the FS present reviewing the basis for measurement of assets and
fairly the entity’s financial position, financial liabilities.
performance and cash flows;
C. ACCRUAL BASIS
(b) That it has complied with applicable IFRSs, except
An entity shall prepare its financial statements, except
that it has departed from a particular requirement to
for cash flow information, using the accrual basis of
achieve a fair presentation;
accounting.
(c) The title of the IFRS from which the entity has
When the accrual basis of accounting is used, an entity
departed, the nature of the departure, including the
recognizes items as assets, liabilities, equity, income
treatment that the IFRS would require, the reason why
and expenses (the elements of financial statements)
the treatment would be misleading in the
when they satisfy the definitions and recognition
circumstances that it would conflict with the objective
criteria for those elements in the Conceptual
of financial statements set out in the Conceptual
Framework
Framework, and the treatment adopted; and
D. MATERIALITY AND AGGREGATION
(d) For each period presented, the financial impact of
the departure on each item in the FS that would have An entity shall present separately each material class of
been reported in complying with the requirement similar items.
B. GOING CONCERN An entity shall present separately items of a dissimilar
nature or function unless they are immaterial.
An entity shall prepare financial statements on a going
concern basis unless management either intends to If a line item is not individually material, it is aggregated
liquidate the entity or to cease trading or has no with other items either in those statements or in the
realistic alternative but to do so. notes.
An entity preparing PFRS financial statements is An item that is not sufficiently material to warrant
presumed to be a going concern. separate presentation in those statements may warrant
separate presentation in the notes. But if the resulting
Going concern means that the accounting entity is
disclosure is not material, an entity need not provide a
viewed as continuing in operation indefinitely in the
specific disclosure even if required by PFRS.
absence of evidence to the contrary
E. OFFSETTING
When financial statements are not prepared on a going
concern basis, the following shall be disclosed in the An entity shall not offset assets and liabilities or income
notes to fs: and expenses, unless required or permitted by an IFRS.
(a) The fact that the FS are not prepared on a going An entity reports separately both assets and liabilities,
concern basis; and income and expenses.
(b) The basis on which the FS are prepared; and Measuring assets net of valuation allowances—for
example, obsolescence allowances on inventories and
(c) The reasons why the enterprise is not considered to
doubtful debts allowances on receivables—is not
be a going concern
offsetting.
In assessing whether the enterprise is a going concern
F. FREQUENCY OF REPORTING
entity, the management should assess the ability of the
enterprise to continue operations for a period of at An entity shall present a complete set of financial
least, but not limited to, twelve (12) months. statements (including comparative information) at least
annually.
When management is aware of significant uncertainties
that may cast doubt upon the entity’s ability to continue When an entity changes the end of its reporting period
as a going concern, the management may consider and presents financial statements for a period longer or
shorter than one year, an entity shall disclose, in
addition to the period covered by the financial For example, an entity may present a third statement of
statements: profit or loss and other comprehensive income (thereby
presenting the current period, the preceding period and
• the reason for using a longer or shorter period, and
one additional comparative period). However, the
• the fact that amounts presented in the financial
entity is not required to present a third statement of
statements are not entirely comparable.
financial position, a third statement of cash flows or a
Normally, an entity consistently prepares financial
third statement of changes in equity (i.e. an additional
statements for a one-year period. However, for
financial statement comparative). The entity is required
practical reasons, some entities prefer to report, for
to present, in the notes to the financial statements, the
example, for a 52-week period. This Standard does not
comparative information related to that additional
preclude this practice
statement of profit or loss and other comprehensive
G. COMPARATIVE INFORMATION income.

MINIMUM COMPARATIVE INFORMATION WHEN A THIRD STATEMENT OF FINANCIAL POSITION

IS REQUIRED
Except when IFRSs permit or require otherwise, an
entity shall present comparative information in respect An entity shall present a third statement of financial
of the preceding period for all amounts reported in the position as at the beginning of the preceding period in
current period’s financial statements. addition to the minimum comparative financial
statements if it makes retrospective adjustment for any
An entity shall present, as a minimum, two statements one or combination of the following:
of financial position, two statements of profit or loss
and other comprehensive income, two separate (a) change in accounting policy;
statements of profit or loss (if presented), two
(b) correction of prior period error/s; and
statements of cash flows and two statements of
changes in equity, and related notes (c) reclassification or amendment of items in the
financial statements
An entity shall include comparative information for
narrative and descriptive information if it is relevant to Under these circumstances, an entity shall present
understanding the current period’s financial three statements of financial position as at:
statements. In some cases, narrative information
(a) the end of the current period;
provided in the financial statements for the preceding
period(s) continues to be relevant in the current period. (b) the end of the preceding period; and
For example, an entity discloses in the current period
details of a legal dispute, the outcome of which was (c) the beginning of the preceding period.
uncertain at the end of the preceding period and is yet H. CONSISTENCY OF PRESENTATION
to be resolved. Users may benefit from the disclosure of
information that the uncertainty existed at the end of An entity shall retain the presentation and classification
the preceding period and from the disclosure of of items in the financial statements from one
information about the steps that have been taken accounting period to the next.
during the period to resolve the uncertainty. Change is allowed under the following circumstances:

(a) it is apparent, following a significant change in the

nature of the entity’s operations or a review of its
financial statements, that another presentation or
ADDITIONAL COMPARATIVE INFORMATION classification would be more appropriate having regard
An entity may present comparative information may to the criteria for the selection and application of
consist of one or more statements but need not accounting policies in IAS 8; or
comprise a complete set of financial statements. (b) an IFRS requires a change in presentation
When an entity reclassified comparative amounts, it are acquired at different dates. Such purchase costs
shall disclose: albeit at different dates are the basis of the
presentation of these assets in the statement of
(a) the nature of the reclassifications
financial position and of the computation of
(b) the amount of each item or class of items that is depreciation expenses in the statement of
reclassified; and comprehensive income. If the inflation rate is relatively
high, the amounts reported in the financial statements
(c) the reason for the reclassification (par. 41, IAS 1) will appear inordinately low since under the cost model,
When it is impracticable to reclassify comparative the assets are not adjusted for inflation. Hence, the
amounts, an entity shall disclose the reason for not amounts reflected in the financial statements are
reclassifying the amount and the nature of the mixture of pesos with different levels of purchasing
adjustments that would have been made if the amount power.
had been reclassified (par. 42, IAS 1)

IDENTIFICATION OF THE FINANCIAL STATEMENTS Measurement Uncertainty - The use of reasonable

The financial statements shall be identified clearly and estimates is an essential part of the preparation of
distinguished from other information in the same financial information. In some cases, the level of
published document (paragraph 49, IAS 1). uncertainty involved in estimating a measure of an asset
or liability may be so high that it may be questionable
The following information shall be displayed whether the estimate would provide a sufficiently
prominently and repeated, when necessary, for a faithful representation of that asset or liability and of
proper understanding of the information presented any resulting income, expenses or changes in equity.
(par51 IAS 1)
Not always comparable across companies - Different
(a) The name of the reporting entity and other means of companies may apply different accounting policies and
identification, and any change in that information from use different accounting periods. While accounting
the preceding financial statement date; policies are disclosed in the financial statements, the
(b) Whether the financial statements cover the users of financial statements can hardly adjust the
individual entity or a group of entities; reported figures in the financial statements for
comparability. Any one period may vary from the
(c) the statement of financial position date or the period normal operating results of a business due to
covered by the financial statements, whichever is seasonality effects.
appropriate to the component of the financial
statements; Non-Financial Information are not recorded - The notes
to financial statements provide textual description of
(d) The presentation currency; and what was reported in the face of the financial
statements. However, the financial statements do not
(e) The level of rounding used in presenting amounts in
report the level of corporate governance of the
the financial statements.
company, the moral and efficiency of company
LIMITATIONS OF THE FINANCIAL STATEMENTS personnel or business ethics, the effect of the business
to the environment, or the company’s contribution to
Use of different measurement bases - Elements
the local community. Financial statements may report
recognized in financial statements are quantified in
high net income but fail to indicate its degrading effect
monetary terms. Consideration of the qualitative
to the environment.
characteristics of useful financial information and of the
cost constraint is likely to result in the selection of No predictive value - The financial statements report
different measurement bases for different assets, past events, but they do not provide any value that
liabilities, income and expenses. predict what will happen in the future. A company may
report billions of incomes in the preceding years, yet a
Inflationary Effects - Assets measured at historical costs
reflect the level of purchasing power when those assets
newly elected president of the country cancels its (g) Prepare, approve, amend or repeal rules, regulations
contract on which it was relying. and orders, and issue opinions and provide guidance on
and supervise compliance with such rules, regulations
The Securities and Exchange Commission
and orders;
The Securities and Exchange Commission (SEC) is the
(h) Enlist the aid and support of and/or deputize any
national government regulatory agency charged with
and all enforcement agencies of the Government, civil
supervision of the corporate sector.
or military as well as any private institution,
Republic Act 8799 Securities Regulation Code corporation, firm, association or person in the
reemphasizes the requirement for the submission of an implementation of its powers and functions under this
annual report by companies, together with financial Code;
statements, certified by an independent certified public
(i) Issue cease and desist orders to prevent fraud or
accountant. It also requires for internal record keeping
injury to the investing public;
and internal controls to be complied with by entities.
(j) Punish for contempt of the Commission, both direct
and indirect, in accordance with the pertinent
SRC Rule 68 provide for the general guides to financial provisions of and penalties prescribed by the Rules of
statements preparation, responsibility to financial Court;
statements, qualifications and reports of independent
(k) Compel the officers of any registered corporation or
auditors and review of their quality assurance.
association to call meetings of stockholders or members
FUNCTIONS OF THE SECURITIES AND EXCHANGE thereof under its supervision;
COMMISSION (SEC)
(l) Issue subpoena duces tecum and summon witnesses
Under Section 5 of the Securities Regulation Code, Rep. to appear in any proceedings of the Commission and in
Act. 8799, the Commission shall have, among others, appropriate cases, order the examination, search and
the following powers and functions: seizure of all documents, papers, files and records, tax
returns, and books of accounts of any entity or person
(a) Have jurisdiction and supervision over all under investigation as may be necessary for the proper
corporations, partnerships or associations who are the disposition of the cases before it, subject to the
grantees of primary franchises and/or a license or provisions of existing laws;
permit issued by the Government;
(m) Suspend, or revoke, after proper notice and hearing
(b) Formulate policies and recommendations on issues the franchise or certificate of registration of
concerning the securities market, advise Congress and corporations, partnerships or associations, upon any of
other government agencies on all aspects of the the grounds provided by law; and
securities market and propose legislation and
amendments thereto; (n) Exercise such other powers as may be provided by
law as well as those which may be implied from, or
(c) Approve, reject, suspend, revoke or require which are necessary or incidental to the carrying out of,
amendments to registration statements, and the express powers granted the Commission to achieve
registration and licensing applications; the objectives and purposes of these laws.
(d) Regulate, investigate or supervise the activities of CLASSIFICATION OF REPORTING ENTITIES BASED ON
persons to ensure compliance; THE APPLICABLE PHILIPPINE FINANCIAL REPORTING
(e) Supervise, monitor, suspend or take over the FRAMEWORKS
activities of exchanges, clearing agencies and other
SROs;

(f) Impose sanctions for the violation of laws and the

rules, regulations and orders issued pursuant thereto;
 • Not in the process of filing their financial statements
for the purpose of issuing any class of instrument in a
LARGE AND/OR PUBLICLY ACCOUNTABLE ENTITIES public market
Large entities are those with total assets of more than • Not holders of secondary licenses issued by regulatory
P350 million or total liabilities of more than P250 agencies. Large and/or public interest entities shall use
million. the PFRS, as adopted by the Commission, as their
financial reporting framework. However, a set of
Publicly accountable entities are those that meet any of financial reporting framework other than the full PFRS
the following criteria: may be allowed by the Commission for certain sub-class
(e.g., banks, insurance companies) of these entities
• Holders of secondary licenses issued by regulatory
upon consideration of the pronouncements or
agencies
interpretations.
• Required to file financial statements under Part II of
SRC Rule 68
MEDIUM-SIZED ENTITIES FINANCIAL REPORTING
• In the process of filing their financial statements for
FRAMEWORK
the purpose of issuing any class of instrument in a
public market Medium-sized entities shall use as their financial
• Imbued with public interest as the SEC may consider reporting framework the PFRS for SMEs as adopted by
in the future the SEC. However, the following medium-sized entities
Large and/or public interest entities shall use the PFRS, shall be exempt from the mandatory adoption of the
as adopted by the Commission, as their financial PFRS for SME’s and may instead apply, at their option,
reporting framework. the full PFRS:
However, a set of financial reporting framework other • An SME which is a subsidiary of a foreign parent
than the full PFRS may be allowed by the Commission company reporting under the full PFRS
for certain sub-class (e.g., banks, insurance companies) • An SME which is a subsidiary of a foreign parent
of these entities upon consideration of the company which will be moving towards International
pronouncements or interpretations. Financial Reporting Standards pursuant to the foreign
country’s published convergence plan
• An SME either as a significant joint venture or
associate, which is part of a group that is reporting
under the full PFRS
• An SME which is a branch office or regional operating
headquarter of a foreign company reporting under the
full PFRS
• An SME which has a subsidiary that is mandated to
report under the full PFRS
• An SME which has a short-term projection that shows
that it will breach the quantitative thresholds set in the
MEDIUM-SIZED ENTITIES criteria for an SME. The breach is expected to be
significant and continuing due to its long-term effect on
Medium-sized entities are those that meet all of the the company’s asset or liability size
following criteria: • An SME which has a concrete plan to conduct an
• Total assets of more than P100 million to P350 million initial public offering within the next two years
or total liabilities of more than P100 million to P250 • An SME which has been preparing financial
million. If the entity is a parent company, the said statements using full PFRS and has decided to liquidate
amounts shall be based on the consolidated figures. • Such other cases that the Commission may consider
• Not required to file financial statements under Part II as valid exceptions from the mandatory adoption of
of SRC Rule 68 PFRS for SMEs
SMALL ENTITIES
Small entities are those that meet all of the following • A small entity which has been preparing financial
criteria: statements using full PFRS or PFRS for SMEs and has
decided to liquidate
• Total assets of between P3 million to P100 million or
• Such other cases that the Commission may consider
total liabilities between P3 million to P100 million. If the
as valid exceptions from the mandatory adoption of
entity is a parent company, the said amounts shall be
PFRS for SMs
based on the consolidated figures.
MICRO ENTITIES
• Are not required to file financial statements under
Part II of SRC Rule 68 Micro entities are those that meet all of the following
• Are not in the process of filing their financial criteria:
statements for the purpose of issuing any class of
• Total assets and liabilities are below P3 million
instruments in a public market
• Are not required to file financial statements under
• Are not holders of secondary licenses issues by
Part II of SRC Rule 68
regulatory agencies
• Are not in the process of filing their financial
statements for the purpose of issuing any class of
SMALL ENTITIES FINANCIAL REPORTING FRAMEWORK
instruments in a public market
Small entities shall use their financial reporting • Are not holders of secondary licenses issues by
framework the PFRS for SEs as adopted by the regulatory agencies
Commission. However, entities who have operations or MICRO ENTITIES FINANCIAL REPORTING FRAMEWORK
investments that are based or conducted in a different
Micro entities have the option to use as their financial
country with different functional currency shall not
reporting framework either the income tax basis or
apply this framework and should instead apply the full
PFRS for SEs, provided however, that the financial
PFRS or PFRS for SMEs.
statements shall at least consist of the Statement of
The following small entities shall also be exempt from Management’s Responsibility (SMR), Auditor’s Report,
the mandatory adoption of the PFRS for SEs and may Statement of Financial Position, Statement of Income
instead apply, as appropriate, the full PFRS or PFRS for and Notes to Financial Statements, all of which cover
SMEs: the 2-year comparative periods, if applicable.

• A small entity which is a subsidiary of a foreign parent In the event where an entity breaches the prescribed
company reporting under the full PFRS or PFRS for SMEs threshold in terms of total assets or total liabilities and
• A small entity which is a subsidiary of a foreign parent thus it falls within a different classification, the Audited
company which will be moving towards International Financial Statements of said entity shall be prepared in
Financial Reporting Standards or IFRS for SMEs pursuant accordance with the higher framework.
to the foreign country’s published convergence plan
• A small entity either as a significant joint venture or
associate, which is part of a group that is reporting TOPIC 4: EVENTS AFTER THE REPORTING PERIOD
under the full PFRS or PFRS for SMEs
• A small entity which is a branch office or regional Events after the Reporting Period
operating headquarter of a foreign company reporting Events after the reporting period are “those events,
under the full PFRS or PFRS for SMEs favorable or unfavorable, that occur between the end
• A small entity which has a subsidiary that is mandated of the reporting period and the date that the financial
to report under the full PFRS or PFRS for SMEs statements are authorized for issue.”
• A small entity which has a short-term projection that
shows that it will breach the quantitative thresholds set
in the criteria for a small entity. The breach is expected Two types of events after the reporting period
to be significant and continuing due to its long-term
effect on the company’s asset size 1. Adjusting events after the reporting period – are
those that provide evidence of conditions that existed
at the end of the reporting period.
2. Non-adjusting events after the reporting period – 4. Major ordinary share transactions and potential
those that are indicative of conditions that arose after ordinary share transactions after the reporting period.
the reporting period
5. Major business combination after the reporting
period.

6. Announcing a plan to discontinue an operation after

the reporting period.
Date of authorization of the financial statements
7. Declaration of dividends after the reporting period
This date is the date when management authorizes the
financial statements for issue regardless of whether Disclosures
such authorization for issue is for further approval or for
• Date of authorization for issue
final issuance to users.
• Adjusting events
Examples of adjusting events:
• Material Non-adjusting events
1. The settlement after the reporting period of a court
case that confirms that the entity has a present
obligation at the end of reporting period.
Disclosure
2. The receipt of information after the reporting period
indicating that an asset was impaired at the end of Non-adjusting events should be disclosed if they are of
reporting period. For example: such importance that non- disclosure would affect the
ability of users to make proper evaluations and
i. The bankruptcy of a customer that occurs after the decisions. The required disclosure is (a) the nature of
reporting period may indicate that the carrying amount the event and (b) an estimate of its financial effect or a
of a trade receivable at the end of reporting period is statement that a reasonable estimate of the effect
impaired. cannot be made. [IAS 10.21]
ii. The sale of inventories after the reporting period may A company should update disclosures that relate to
give evidence to their net realizable value at the end of conditions that existed at the end of the reporting
reporting period period to reflect any new information that it receives
after the reporting period about those conditions. [IAS
3. The determination after the reporting period of the
10.19]
cost of asset purchased, or the proceeds from asset
sold, before the end of reporting period. Companies must disclose the date when the financial
statements were authorised for issue and who gave
4. The discovery of fraud or errors that indicate that the
that authorisation. If the enterprise's owners or others
financial statements are incorrect.
have the power to amend the financial statements after
Examples of non-adjusting events normally requiring issuance, the enterprise must disclose that fact. [IAS
disclosures: 10.17]

1. Changes in fair values, foreign exchange rates,

interest rates or market prices after the reporting
FORMULAS FOR VARIOUS PRESENTATION IN THE
period.
FINANCIAL STATEMENTS
2. Casualty losses (e.g., fire, storm, or earthquake)
STATEMENT OF FINANCIAL POSITION:
occurring after the reporting period but before the
financial statements were authorized for issue. Working Capital = current assets – current liabilities
3. Litigation arising solely from events occurring after Net Assets = non-current assets – non-current liabilities
the reporting period.
Preference Share Capital = par/stated value x issued
preference shares
Ordinary Share Capital = par/stated value x issued
ordinary shares

Contributed Capital = ordinary share capital +

preference share capital – treasury shares

Retained Earnings:

Retained Earnings, beg XXX

Add: Net Income (-Loss) XXX

Less: Dividends (XXX)

Retained Earnings XXX

Shareholder’s Equity

= Assets – Liabilities or

= Contributed Capital + Retained Earnings

Basic Earnings Per Share

=Net Income – Preferred Dividends / Weighted Average

Shares Outstanding

STATEMENT OF COMPREHENSIVE INCOME

Cost of Goods Sold

= Inventory, beg + Purchases + Freight in – Inventory,

end

Operating Expense