CONCEPTUAL FRAMEWORK & applying an accounting policy that results in

ACCOUNTING STANDARDS useful information.

Lecture Aid Scope of the Conceptual Framework

By: Zeus Vernon B. Millan The Conceptual Framework is concerned with

general purpose financial reporting. General
Learning Objectives
purpose financial reporting involves the preparation of
• State the purpose, status, and scope of the general purpose financial statements. The
Conceptual Framework. Conceptual Framework provides the concepts
regarding the following:
• State the objective of financial reporting.
1. The objective of financial reporting
• Identify the primary users of financial
statements. 2. Qualitative characteristics of useful financial
information
• Explain briefly the qualitative characteristics
of useful information and how they are applied 3. Financial statements and the reporting entity
in financial reporting.
4. The elements of financial statements
• Define the elements of financial statements
5. Recognition and derecognition
and state their recognition criteria and their
derecognition. 6. Measurement

• State the measurement bases used in 7. Presentation and disclosure

financial reporting.
8. Concepts of capital and capital maintenance
Purpose of the Conceptual Framework
Objective of general purpose financial reporting
• The Conceptual Framework prescribes the
• The objective of general purpose financial
concepts for general purpose financial
reporting is to provide financial information
reporting. Its purpose is to:
about the reporting entity that is useful to
a. assist the International Accounting primary users in making decisions about
Standards Board (IASB) in developing providing resources to the entity.
Standards that are based on
• The objective of general purpose financial
consistent concepts;
reporting forms the foundation of the
b. assist preparers in developing Conceptual Framework.
consistent accounting policies when
Primary Users
no Standard applies to a particular
transaction or when a Standard allows • Primary users – are those who cannot
a choice of accounting policy; and demand information directly from reporting
entities. The primary users are:
c. assist all parties in understanding and
interpreting the Standards. (a) Existing and potential investors
Status of the Conceptual Framework (b) Lenders and other creditors.
• The Conceptual Framework is not a PFRS. • Only the common needs of primary users are
When there is a conflict between the met by the financial statements.
Conceptual Framework and a PFRS, the PFRS
will prevail. Qualitative Characteristics

• In the absence of a standard, management I. Fundamental qualitative characteristics

shall consider the Conceptual Framework in (1) Relevance
making its judgment in developing and
(a) Predictive value
Lecture Aid By: Zeus Vernon B. Millan
 (b) Feedback value phenomenon being depicted is
provided.
➢ Materiality – entity-specific aspect of
relevance b. Neutrality – information is selected or
presented without bias.
(2) Faithful representation
c. Free from error – there are no errors in
(a) Completeness
the description and in the process by
(b) Neutrality which the information is selected and
applied.
(c) Free from error
Enhancing Qualitative Characteristics
II. Enhancing qualitative characteristics
1. Comparability – the information helps users
(1) Comparability in identifying similarities and differences
(2) Verifiability between different sets of information.

(3) Timeliness 2. Verifiability – different users could reach

consensus as to what the information
(4) Understandability purports to represent.
Fundamental vs. Enhancing 3. Timeliness – the information is available to
• The fundamental qualitative characteristics users in time to be able to influence their
are the characteristics that make information decisions.
useful to users. 4. Understandability – users are expected to
• The enhancing qualitative characteristics have:
are the characteristics that enhance the a. reasonable knowledge of
usefulness of information business activities; and
Relevance b. willingness to analyze the
• Information is relevant if it can affect the information diligently.
decisions of users. Financial statements and the Reporting entity
• Relevant information has the following: Objective and scope of financial statements
a. Predictive value – the information can • The objective of general purpose financial
be used in making predictions statements is to provide financial information
b. Confirmatory value – the information about the reporting entity’s assets, liabilities,
can be used in confirming past equity, income and expenses that is useful in
predictions assessing:

c. Materiality – is an ‘entity-specific’ a. the entity’s ability to generate future

aspect of relevance. net cash inflows; and

Faithful Representation b. management’s stewardship over

economic resources.
• Faithful representation means the information
provides a true, correct and complete Reporting period
depiction of what it purports to represent. • Financial statements are prepared for a
• Faithfully represented information has the specific period of time (i.e., the reporting
following: period) and include comparative information
for at least one preceding reporting period.
a. Completeness – all information
necessary for users to understand the Going concern

Lecture Aid By: Zeus Vernon B. Millan

 • Financial statements are normally prepared practical ability to avoid.” (CF 4.29) An
on the assumption that the reporting entity is obligation can be either legal
a going concern, meaning the entity has obligation or constructive obligation.
neither the intention nor the need to end its
• Transfer of an economic resource –
operations in the foreseeable future.
the obligation has the potential to
Reporting entity require the transfer of an economic
resource to another party. Such
• A reporting entity is one that is required, or
potential need not be certain or even
chooses, to prepare financial statements, and
likely – what is important is that the
is not necessarily a legal entity. It can be a
obligation already exists and that, in at
single entity or a group or combination of two
least one circumstance, it would
or more entities.
require the transfer of an economic
Elements of Financial Statements resource.

• Present obligation as a result of past

events – A present obligation exists as
a result of past events if:

• the entity has already obtained

economic benefits or taken an action;
• Asset is “a present economic resource and
controlled by the entity as a result of past
• as a consequence, the entity will or
events. An economic resource is a right that
may have to transfer an economic
has the potential to produce economic
resource that it would not otherwise
benefits.” (Conceptual Framework 4.3 & 4.4)
have had to transfer.
• Right – asset refers to a right, and not
(Conceptual Framework 4.43)
necessarily to a physical object, e.g.,
the right to use, sell, lease or transfer a Executory contracts
building.
• An executory contract “is a contract that is
• Potential to produce economic equally unperformed – neither party has
benefits – the right has a potential to fulfilled any of its obligations, or both parties
produce economic benefits for the have partially fulfilled their obligations to an
entity that are beyond the benefits equal extent.” (CF 4.56)
available to all others. Such potential
• An executory contract establishes a combined
need not be certain or even likely –
right and obligation to exchange economic
what is important is that the right
resources.
already exists and that, in at least one
circumstance, it would produce • The contract ceases to be executory when one
economic benefits for the entity. party performs its obligation.
• Control – means the entity has the ➢ If the entity performs first, the entity’s
exclusive right over the benefits of an combined right and obligation
asset and the ability to prevent others changes to an asset.
from accessing those benefits.
➢ If the other party performs first, the
• Liability is “a present obligation of the entity to entity’s combined right and obligation
transfer an economic resource as a result of changes to a liability.
past events.” (Conceptual Framework 4.26)
• “Equity is the residual interest in the assets of
• Obligation – An obligation is “a duty or the entity after deducting all its liabilities.”
responsibility that an entity has no (Conceptual Framework 4.63)

Lecture Aid By: Zeus Vernon B. Millan

 • Equity equals Assets minus Liabilities • The level of measurement uncertainty and
other factors can affect an item’s faithful
• Income is “increases in assets, or decreases
representation, but not necessarily its
in liabilities, that result in increases in equity,
relevance.
other than those relating to contributions from
holders of equity claims.” (Conceptual Measurement uncertainty
Framework 4.68)
• Measurement uncertainty exists if the asset or
• Expenses are “decreases in assets, or liability needs to be estimated. A high level of
increases in liabilities, that result in decreases measurement uncertainty does not
in equity, other than those relating to necessarily lead to the non-recognition of an
distributions to holders of equity claims.” asset or liability if the estimate provides
(Conceptual Framework 4.69) relevant information and is clearly and
accurately described and explained.
Recognition & Derecognition
• However, measurement uncertainty can lead
The recognition process
to the non-recognition of an asset or a liability
• Recognition is the process of including in the if making an estimate is exceptionally
statement of financial position or the difficult or exceptionally subjective.
statement(s) of financial performance an item
Derecognition
that meets the definition of one of the
financial statement elements (i.e., asset, • Derecognition is the removal of a previously
liability, equity, income or expense). This recognized asset or liability from the entity’s
involves recording the item in words and in statement of financial position.
monetary amount and including that amount
• Derecognition occurs when the item ceases
in the totals of either of those statements.
to meet the definition of an asset or liability.
Recognition criteria
Unit of account
• An item is recognized if:
• Unit of account is “the right or the group of
• it meets the definition of an asset, liability, rights, the obligation or the group of
equity, income or expense; and obligations, or the group of rights and
obligations, to which recognition criteria and
• recognizing it would provide useful
measurement concepts are applied.”
information, i.e., relevant and faithfully
(Conceptual Framework 4.48)
represented information.
Measurement bases
Relevance
1. Historical cost
• The recognition of an item may not provide
relevant information if, for example: 2. Current value

• it is uncertain whether an asset or liability a. Fair value

exists; or
b. Value in use and fulfilment value
• an asset or liability exists, but the probability
c. Current cost
of an inflow or outflow of economic benefits is
low. (Conceptual Framework 5.12) Historical cost
• However, the presence of one or both of the • The historical cost of:
foregoing does not automatically lead to the
non-recognition of an item. Other factors a. an asset is the consideration paid to
should also be considered. acquire the asset plus transaction
costs.
Faithful representation

Lecture Aid By: Zeus Vernon B. Millan

 b. a liability is the consideration received • Current cost and historical cost are entry
to incur the liability minus transaction values (i.e., they reflect prices in acquiring an
costs. asset or incurring a liability), whereas fair
value, value in use and fulfilment value are
• Historical cost is updated over time to depict
exit values (i.e., they reflect prices in selling or
the following:
using an asset or transferring or fulfilling a
a. Depreciation, amortization, or liability).
impairment of assets
Considerations when selecting a measurement
b. Collections or payments that basis
extinguish part or all of the asset or
• When selecting a measurement basis, it is
liability
important to consider the following:
c. Unwinding of discount or premium
a. The nature of information provided by a
when the asset or liability is measured
particular measurement basis (e.g.,
at amortized cost
measuring an asset at historical cost may lead
Fair value to the subsequent recognition of depreciation
or impairment, while measuring that asset at
• Fair value is “the price that would be received fair value would lead to the subsequent
to sell an asset, or paid to transfer a liability, in recognition of gain or loss from changes in fair
an orderly transaction between market value).
participants at the measurement date.”
(Conceptual Framework 6.12) b. The qualitative characteristics, the cost-
constraint, and other factors (e.g., a
Value in use and fulfilment value particular measurement basis may be more
• Value in use is “the present value of the cash verifiable or more costly to apply than the
flows, or other economic benefits, that an other measurement bases).
entity expects to derive from the use of an Measurement of Equity
asset and from its ultimate disposal.”
(Conceptual Framework 6.17) • Total equity is not measured directly. It is
simply equal to difference between the total
• Fulfilment value is “the present value of the assets and total liabilities.
cash, or other economic resources, that an
entity expects to be obliged to transfer as it • Because different measurement bases are
fulfils a liability.” (Conceptual Framework 6.17) used for different assets and liabilities, total
equity cannot be expected to be equal to the
Current cost entity’s market value nor the amount that can
• The current cost of: be raised from either selling or liquidating the
entity.
a. an asset is “the cost of an equivalent asset at
the measurement date, comprising the • Equity is generally positive, although some of
consideration that would be paid at the its components can be negative. In some
measurement date plus the transaction costs cases, even total equity can be negative such
that would be incurred at that date.” as when total liabilities exceed total assets.

b. a liability is “the consideration that would be Presentation and Disclosure

received for an equivalent liability at the • Information is communicated through
measurement date minus the transaction presentation and disclosure in the financial
costs that would be incurred at that date.” statements.
(Conceptual Framework 6.21) • Effective communication makes information
Entry values vs. Exit values more useful. Effective communication
requires:
Lecture Aid By: Zeus Vernon B. Millan
 a. focusing on presentation and • Physical concept of capital – capital is
disclosure objectives and principles regarded as the entity’s productive capacity,
rather than on rules. e.g., units of output per day.

b. classifying information by grouping Overview of Accounting

similar items and separating dissimilar
Definition of Accounting
items.
• Accounting is “the process of identifying,
c. aggregating information in a manner
measuring, and communicating economic
that it is not obscured either by
information to permit informed judgment and
excessive detail or by excessive
decisions by users of information.”
summarization.
(American Association of Accountants)
Presentation and disclosure objectives and
principles Three important activities
• The objectives are specified in the Standards. 1. Identifying - the process of analyzing events and
transactions to determine whether or not they will
• The principles include:
be recognized. Only accountable events are
a. the use of entity-specific information recognized.
is more useful that standardized
2. Measuring - involves assigning numbers, normally
descriptions, and
in monetary terms, to the economic transactions
b. duplication of information is usually and events.
unnecessary.
3. Communicating - the process of transforming
Classification economic data into useful accounting
information, such as financial statements and
• Classifying means combining similar items
other accounting reports, for dissemination to
and separating dissimilar items.
users.
• Offsetting of assets and liabilities is generally
Types of Events
not appropriate.
1. External events – events that involve an external
Classification of income and expenses
party.
• Income and expenses are classified as
a. Exchange (reciprocal transfer) –
recognized either in:
reciprocal giving and receiving
a. profit or loss; or
b. Non-reciprocal transfer – “one way”
b. other comprehensive income. transaction

Aggregation c. External event other than transfer – an

event that involves changes in the
• Aggregation is “the adding together of assets, economic resources or obligations of an
liabilities, equity, income or expenses that entity caused by an external party or
have shared characteristics and are included external source but does not involve
in the same classification.” (Conceptual transfers of resources or obligations.
Framework 7.20)
2. Internal events – events that do not involve an
Concepts of Capital and Capital Maintenance external party.
• Financial concept of capital – capital is a. Production – the process by which
regarded as the invested money or invested resources are transformed into
purchasing power. Capital is synonymous with finished goods.
equity, net assets, and net worth.

Lecture Aid By: Zeus Vernon B. Millan

 b. Casualty – an unanticipated loss from Basic Accounting Concepts
disasters or other similar events.
• Double-entry system – each accountable
Measurement event is recorded in two parts – debit and
credit.
• The several measurement bases used in
accounting include, but not limited to, the • Going concern - the entity is assumed to
following: carry on its operations for an indefinite period
of time.
1. historical cost,
• Separate entity – the entity is treated
2. fair value,
separately from its owners.
3. present value,
• Stable monetary unit - amounts in the
4. realizable value, financial statements are stated in terms of a
common unit of measure; changes in
5. current cost, and purchasing power are ignored.
6. sometimes inflation-adjusted costs. • Time Period – the life of the business is
• The most commonly used is historical cost. divided into series of reporting periods.
This is usually combined with the other • Materiality concept – information is material
measurement bases. Accordingly, financial if its omission or misstatement could
statements are said to be prepared using a influence economic decisions.
mixture of costs and values.
• Cost-benefit – the cost of processing and
Valuation by fact or opinion communicating information should not
• When measurement is affected by estimates, exceed the benefits to be derived from it.
the items measured are said to be valued by • Accrual Basis of accounting – effects of
opinion. transactions are recognized when they occur
• When measurement is unaffected by (and not as cash is received or paid) and they
estimates, the items measured are said to be are recognized in the accounting periods to
valued by fact. which they relate.

Basic purpose of accounting • Historical cost concept – the value of an

asset is determined on the basis of
• The basic purpose of accounting is to provide acquisition cost.
information about economic activities
intended to be useful in making economic • Concept of Articulation – all of the
decisions. components of a complete set of financial
statements are interrelated.
Types of accounting information classified as to
users’ needs • Full disclosure principle – financial
statements provide sufficient detail to
• General purpose accounting information - disclose matters that make a difference to
designed to meet the common needs of most users, yet sufficient condensation to make
statement users. This information is governed the information understandable, keeping in
by the Philippine Financial Reporting mind the costs of preparing and using it.
Standards (PFRS).
• Consistency concept – financial statements
• Special purpose accounting information - are prepared on the basis of accounting
designed to meet the specific needs of policies which are applied consistently from
particular statement users. This information is one period to the next.
provided by other types of accounting, e.g.,
managerial accounting, tax basis accounting, • Matching – costs are recognized as expenses
etc. when the related revenue is recognized.
Lecture Aid By: Zeus Vernon B. Millan
 • Residual equity theory – this theory is 2. Practice in Commerce and Industry - refers
applicable where there are two classes of to employment in the private sector in a
shares issued, ordinary and preferred. The position which involves decision making
equation is “Assets – Liabilities – Preferred requiring professional knowledge in the
Shareholders’ Equity = Ordinary Shareholders’ science of accounting and such position
Equity.” requires that the holder thereof must be a
CPA.
• Fund theory – the accounting objective is the
custody and administration of funds. 3. Practice in Education/Academe –
employment in an educational institution
• Realization – the process of converting non-
which involves teaching of accounting,
cash assets into cash or claims for cash.
auditing, management advisory services,
• Prudence (Conservatism) – the inclusion of a finance, business law, taxation, and other
degree of caution in the exercise of the technically related subjects.
judgments needed in making the estimates
4. Practice in the Government – employment or
required under conditions of uncertainty ,
appointment to a position in an accounting
such that assets or income are not overstated
professional group in the government or in a
and liabilities or expenses are not
government–owned and/or controlled
understated.
corporation where decision making requires
• Financial accounting - focuses on general professional knowledge in the science of
purpose financial statements. accounting, or where civil service eligibility as
a CPA is a prerequisite.
• Management accounting – focuses on
special purpose financial reports for use by an Philippine Financial Reporting Standards (PFRSs)
entity’s management.
The Philippine Financial Reporting Standards (PFRSs)
• Cost accounting - the systematic recording are Standards adopted by the Financial and
and analysis of the costs of materials, labor, Sustainability Reporting Standards Council
and overhead incident to production. (FSRSC), the official accounting standard-setting
body in the Philippines, from the International
• Auditing - the process of evaluating the Financial Reporting Standards (IFRSs). The IFRSs
correspondence of certain assertions with consist of the following:
established criteria and expressing an opinion
thereon. • IFRS Accounting Standards;

• Tax accounting - the preparation of tax a. International Financial Reporting

returns and rendering of tax advice, such as Standards (IFRSs);
the determination of tax consequences of
b. International Accounting Standards (IASs);
certain proposed business endeavors.
and
• Government accounting - refers to the
c. Interpretations
accounting for the government and its
instrumentalities, placing emphasis on the • IFRS for SMEs Accounting Standard; and
custody of public funds, the purposes for
• IFRS Sustainability Disclosure Standards
which those funds are committed, and the
responsibility and accountability of the The need for reporting standards
individuals entrusted with those funds.
• Entities should follow a uniform set of
Four sectors in the practice of accountancy generally acceptable reporting standards
when preparing and presenting financial
1. Practice of Public Accountancy - involves
statements; otherwise, financial statements
the rendering of audit or accounting related
would be misleading.
services to more than one client on a fee
basis.
Lecture Aid By: Zeus Vernon B. Millan
 • The term “generally acceptable” means that 6. Additional statement of financial position
either: (required only when certain instances occur)

a. the standard has been established by General features

an authoritative accounting rule-
1. Fair Presentation and Compliance with PFRSs -
making body; or
The application of PFRSs, with additional disclosure
b. the principle has gained general when necessary, is presumed to result in financial
acceptance due to practice over time statements that achieve a fair presentation.
and has been proven to be most
2. Going concern - An entity is not a going concern if,
useful.
as of the financial reporting date or prior to the date of
• The process of establishing financial authorization of the financial statements for issue,
accounting standards is a democratic process management either:
in that a majority of practicing accountants
a. Intends to liquidate the entity or to cease
must agree with a standard before it becomes
trading, or
implemented.
b. Has no realistic alternative but to do so.
PAS 1 Presentation of Financial Statements
• The assessment of going concern is at least
Objective of PAS 1
12 months.
PAS 1 prescribes the basis for presentation of general
3. Accrual Basis of Accounting - An entity shall
purpose financial statements to improve
prepare its financial statements, except for cash flow
comparability both with the entity's financial
information, using the accrual basis of accounting.
statements of previous periods (intra-comparability)
and with the financial statements of other entities 4. Materiality & Aggregation - Each material class of
(inter-comparability). similar items must be presented separately in the
financial statements.
General purpose financial statements
5. Offsetting - Assets and liabilities, and income and
• General purpose financial statements are
expenses, shall not be offset unless required or
those intended to serve users who do not have
permitted by a PFRS.
the authority to demand financial reports
tailored for their own needs. General purpose • Measuring assets net of valuation allowances,
financial statements cater to most of the for example, obsolescence allowances on
common needs of a wide range of external inventories, allowances for doubtful accounts
users. General purpose financial statements on receivables, and accumulated
are the subject matter of the Conceptual depreciation on property, plant, and
Framework and the PFRSs. equipment are not offsetting.
Complete set of financial statements 6. Frequency of reporting – An entity shall present a
complete set of financial statements (including
1. Statement of financial position
comparative information) at least annually.
2. Statement of profit or loss and other
• When an entity changes the end of its
comprehensive income
reporting period and presents financial
3. Statement of changes in equity statements for a period longer or shorter than
one year, an entity shall disclose the following:
4. Statement of cash flows
1. The period covered by the financial
5. Notes
statements,
(5a) comparative information in respect of the
2. The reason for using a longer or
preceding period; and
shorter period, and

Lecture Aid By: Zeus Vernon B. Millan

 3. The fact that amounts presented in the Current Assets
financial statements are not entirely
• An entity shall classify an asset as current
comparable.
when:
7. Comparative Information
1. it expects to realize the asset or
An entity shall present comparative information in intends to sell or consume it, in its
respect of the preceding period for all amounts normal operating cycle;
reported in the current period’s financial statements,
2. it holds the asset primarily for the
unless other standards permit or require otherwise.
purpose of trading;
8. Consistency of presentation - An entity shall
3. it expects to realize the asset within
retain the presentation and classification of items in
twelve months after the reporting
the financial statements from one period to the next
period; or
unless:
4. the asset is cash or a cash equivalent
a. it is apparent that another
unless the asset is restricted from
presentation or classification would be
being exchanged or used to settle a
more appropriate following a
liability for at least twelve months after
significant change in the nature of the
the reporting period.
entity’s operations or a review of its
financial statements; or Current Liabilities
b. a PFRS requires a change in An entity shall classify a liability as current when:
presentation.
1. it expects to settle the liability in its
Additional Statement of financial position normal operating cycle;
• An additional statement of financial position 2. it holds the liability primarily for the
is presented as at the beginning of the purpose of trading;
preceding period when an entity:
3. the liability is due to be settled within
1. Applies an accounting policy twelve months after the reporting
retrospectively, or period; or
2. Makes a retrospective restatement of 4. the entity does not have the right at the
items in its financial statements, or end of the reporting period to defer
settlement of the liability for at least
3. reclassifies items in its financial
twelve months after the reporting
statements.
period.
…..and the effect of the event to the statement of
Currently maturing long-term liabilities
financial position as at the beginning of the preceding
period is material. • General rule: Currently maturing long term
liabilities are presented as current liabilities.
Statement of financial position
• Exception: The entity has the right, at the end
A statement of financial position may be presented as
of the reporting period, to roll over the
either
obligation for at least twelve months after the
1. Classified – showing distinctions reporting period under an existing loan facility
between current and noncurrent – non-current liability
assets and liabilities, or
Breach of loan agreement
2. Unclassified (based on liquidity) –
• General rule: A liability that is payable on
showing no distinction between
demand is a current liability.
current and noncurrent items

Lecture Aid By: Zeus Vernon B. Millan

 • Exception: It is presented as non-current r. Issued capital and reserves attributable to
liability if the lender provides the entity, on or owners of the parent
before the balance sheet date, a grace
Order/ Format of Presentation
period ending at least 12 months after the
balance sheet date to rectify a breach of loan • PAS 1 does not prescribe the order or format
covenant. in which an entity presents items.
Presentation of Deferred taxes Statement of profit or loss and other
comprehensive income
• Deferred tax liabilities (assets) are presented
as noncurrent items in a classified statement • An entity shall present all items of income and
of financial position, irrespective of their expense recognized in a period:
expected dates of reversal.
1. in a single statement of profit or loss
Minimum line items in the statement of financial and other comprehensive income; or
position
2. in two statements: (1) a statement
a. Property, plant and equipment; displaying the profit or loss section
only (separate ‘statement of profit or
b. Investment property;
loss’ or ‘income statement’) and (2) a
c. Intangible assets; second statement beginning with
profit or loss and displaying
d. Financial assets (excluding amounts shown
components of other comprehensive
under (e), (h) and (i));
income.
e. Investments accounted for using the equity
Extraordinary items
method;
• PAS 1 prohibits the presentation of any items
f. Biological assets;
of income or expense as extraordinary items in
g. Inventories; the statement(s) presenting profit or loss and
other comprehensive income or in the notes.
h. Trade and other receivables;
Other comprehensive income for the period
i. Cash and cash equivalents;
a. Changes in revaluation surplus
j. Assets (or disposal groups) classified as held
for sale in accordance with PFRS 5; b. Unrealized gains and losses on investments in
FVOCI securities
k. Trade and other payables;
c. Remeasurements of the net defined benefit
l. Provisions; liability (asset)
m. Financial liabilities (excluding amounts shown d. Gains and losses arising from translating the
under (k) and (l)); financial statements of a foreign operation
n. Liabilities and assets for current tax, as e. Effective portion of gains and losses on
defined in PAS 12 Income Taxes; hedging instruments in a cash flow hedge
o. Deferred tax liabilities and deferred tax assets, • OCI may be presented either (a) net of tax or
as defined in PAS 12; (b) gross of tax.
p. Liabilities included in disposal groups Reclassification adjustments
classified as held for sale in accordance with
PFRS 5; • Reclassification adjustments are amounts
reclassified to profit or loss in the current
q. Non-controlling interests, presented within period that were recognized in other
equity; and comprehensive income in the current or
previous periods.
Lecture Aid By: Zeus Vernon B. Millan
 Financial statement presentation

• All items that meet the definition of inventory

are presented on the statement of financial
position as one line item under the caption
“Inventories.” The breakdown of this line item
(as finished goods, WIP and Raw materials) is
disclosed in the notes.

• Inventories are normally presented in a

Total comprehensive income
classified statement of financial position as
Total comprehensive income comprises all current assets.
components of
Measurement
1. Profit or loss; and
• Inventories are measured at the lower of cost
2. Other comprehensive income. and net realizable value (NRV).
Presentation of Expenses • The cost of inventories comprise all costs of
purchase, costs of conversion and other
1. Nature of expense method
costs incurred in bringing the inventories to
2. Function of expense method their present location and condition.

• If an entity classifies expenses by function, it • Net realizable value (NRV) is the estimated
shall disclose additional information on the selling price in the ordinary course of business
nature of expenses less the estimated costs of completion and
the estimated costs necessary to make the
Disclosure of dividends
sale.
• Dividends declared by an entity are
Costs that are EXPENSED when incurred
disclosed either in the (a) notes or (b)
statement of changes in equity. 1. Abnormal amounts of wasted materials,
labor or other production costs.
Order of presentation of disclosures in the Notes
2. Selling costs, for example, advertising and
1. Statement of compliance with PFRSs;
promotion costs and delivery expense or
2. Summary of significant accounting policies freight out.
applied;
3. Administrative overheads that do not
3. Supporting information for items presented contribute to bringing inventories to their
in the other financial statements; and present location and condition.

4. Other disclosures. 4. Storage costs, unless those costs are

necessary in the production process before a
PAS 2 Inventories further production stage, (e.g., the storage
Inventories are assets: costs of partly finished goods may be
capitalized as cost of inventory, but the
a. Held for sale in the ordinary course of storage costs of completed finished goods are
business (Finished Goods); expensed).
b. In the process of production for such sale Cost Formulas
(Work In Process); or
1. Specific identification - shall be used for
c. In the form of materials or supplies to be inventories that are not ordinarily
consumed in the production process or in interchangeable (i.e., used for inventories that
the rendering of services (Raw materials are unique). Cost of sales is the cost of the
and manufacturing supplies). specific inventory that was sold.
Lecture Aid By: Zeus Vernon B. Millan
 2. FIFO – cost of sales is based on the cost of
inventories that were purchased first.
Consequently, ending inventory represents
the cost of the latest purchases.

3. Weighted Average Cost – cost of sales is

based on the average cost of all inventories
purchased during the period.

➢ Wtd. Ave. Cost = (TGAS in pesos ÷

TGAS in units)

Write down of inventories

• Inventories are usually written down to net

realizable value on an item by item basis.

• If the cost of an inventory exceeds its NRV, the

inventory is written down to NRV, the lower
amount. The excess of cost over NRV
represents the amount of write-down.

Reversal of write-downs

• The amount of reversal to be recognized

should not exceed the amount of the original
write-down previously recognized.

Recognition as an expense

• The carrying amount of an inventory that is

sold is charged as expense (i.e., cost of sales)
in the period in which the related revenue is
recognized. Likewise, the write-down of
inventories to NRV and all losses of
inventories are recognized as expense in the
period the write-down or loss occurs.

Lecture Aid By: Zeus Vernon B. Millan