CFAS—FINALS REVIEWER departure shall be explained in the “Basis for

conclusions” on that standard

CONCEPTUAL FRAMEWORK FOR --The Conceptual Framework may be revised
FINANCIAL REPORTING from time to tome based on the IASB’s experience
working with it but, revisions do not
Conceptual Framework for Financial Reporting automatically result to changes in the standards
--prescribes the concepts for general purpose —not until after the IASB goes through its due
financial reporting. process of amending a standard.
PURPOSE:
1. ASSIST the International Accounting SCOPE OF THE CONCEPTUAL
Standards Board (IASB) in developing FRAMEWORK
Standards that are based on consistent --is concerned with general purpose financial
concepts reporting—involves the preparation of general
2. ASSIST preparers in developing consistent purpose financial statements.
accounting policy when no standard --provides the concepts for:
applies to a particular transaction or when 1. Objective of financial reporting
standard allows a choice of accounting 2. Qualitative characteristics of useful
policy financial information
3. ASSIST all parties in understanding and 3. Financial statements and the reporting
interpreting the standards entity
PROVIDES FOUNDATION FOR THE 4. Elements of Financial Statements
DEVELOPMENT OF STANDARDS THAT: 5. Recognition and derecognition
1. Promote transparency—enhancing the 6. Measurement
international comparability and quality of 7. Presentation and Disclosure
financial information 8. Concepts of capital and capital
2. Strengthen accountability—reducing maintenance
information gap
3. Contribute to economic efficiency— OBJECTIVE OF FINANCIAL REPORTING
helping investors identify opportunities --provide financial information about the reporting
and risks, improving capital allocation entity that is useful to existing and potential
--use of a single, trusted accounting investors, lenders, and other creditors in making
language lowers the cost of capital and decisions about providing resources to the entity
reduces international reporting costs. —this objective is the foundation of the
Conceptual Framework.
STATUS OF THE CONCEPTUAL PRIMARY USERS:
FRAMEWORK a. Existing and Potential Investors
--If there is a conflict between a standard and the b. Lenders (extend loans) and other
conceptual framework, the requirement of the creditors (extend other forms of
standard will prevail credit)
--these users cannot demand information
Hierarchy of guidance: directly from reporting entities and must
1. PFRS Accounting Standards rely on general purpose financial reports.
--Conceptual Framework
2. Judgement: General Purpose financial reporting caters to the
--shall consider: common needs of the primary users. Therefore,
a. Requirements in other PFRSs general purpose financial reports do not and
b. Conceptual Framework cannot provide all information needs of primary
--may consider: users.
a. Pronouncement by other standard- These users will need to consider other
setting bodies sources for their information needs (e.g general
b. Other accounting literature and economic conditions and expectations).
industry policies Focusing on common needs does not
--a standard sometimes contains requirements that prohibit the provision of additional information
depart from the Conceptual Framework, such that is most useful to a particular subset of
primary users.
 a. Liquidity—entity’s ability to pay short-
General Purpose Financial Reports do not directly term obligations and Solvency—entity’s
show the value of a reporting entity but provides ability to pay long-term obligations
information that helps users in estimating the b. Needs for additional financing and how
value of an entity wherein these judgements and successful it is likely to be in obtaining
estimates are governed by the concepts that in financing
established by the Conceptual Framework. c. Management’s stewardship on the use of
economic resources.
DECISIONS ABOUT PROVIDING --All of these contribute to the assessment of
RESOURCES TO THE ENTITY the entity’s ability to generate future cash
I. Primary users provide resources to entity flows. For example,
by involving on decisions on: a. Currently maturing receivables and
a. Buying, selling, or holding obligations help users assess the
investments timing of future cash flows
b. Providing or settling loans and b. The nature of economic resources
other credits helps users assess to whether it can
c. Exercising voting or similar rights produce future cash flows
that could influence management’s independently or only in
actions combination with other resources.
--these decision depend on the expected returns c. Overleverage (use of too much debt)
(e.g., investment income or repayment of loan). causes difficulty in obtaining
Expected returns depend on the assessment of additional financing.
entity’s d. Priorities and payment requirements
a. Prospects for future net cash inflows of claims help users predict how
b. Management Stewardship future cash flows will likely to be
--these assessments are based on: distributed among claims.
a. Economic resources of the entity, claims
against the entity and changes in those o Information on financial performance
resources and claims help users assess the entity’s ability to
b. Efficiency and effectiveness of the entity’s produce return from its economic
management utilized the entity’s economic resources. Return indicates how well the
resources management has efficiently and
effectively used the entity’s resources.
General Purpose Financial Reports provide o Information on the variability of returns
information about the entity’s: helps users in assessing the uncertainty of
a. Financial position (Balance Sheet)- future cash flows. (e.g., significant
information on economic resources fluctuations in reported profits indicate
(assets) and claims against the reporting financial instability and uncertainty of
entity (liabilities and equity) generating cash flows from operations)
b. Changes in economic resources and o Information based on accrual accounting
claim (Income Statement) - information provides a better basis for assessing an
on financial performance (income and entity’s financial performance.
expenses) and other transactions and o Information on past cash flows help users
events that lead to changes in financial assess the entity’s ability to generate
position. future cash flows by providing basis in
--these are referred as the Economic understanding the entity’s operating,
Phenomena according to the CF. investing, and financing activities.
o Information on the changes in economic
Information about the nature and amount of an resources and claims are necessary for a
entities economic resources and claims can help complete understanding regarding the
users identify the entity’s financial strengths and changes and its possible impact to the
weaknesses which can help users assess the entity’s future financial performance.
entity’s: o Information on how efficiently and
effectively the entity’s management has
discharged its responsibilities to use the
 entity’s economic resources help users IFRS Practice Statement 2—“Making
assess the entity’s management Materiality Judgement” –provides a non-
stewardship. It also helps in predicting mandatory guidance that entities may follow in
how efficiently and effectively the making materiality judgements—a four step
economic resources will be used in future process called “Materiality Process”
periods, helping in the assessment of the Step 1: Identify information that has a
entity’s prospects for future net cash potential to be material
inflows  Standards being developed by IASB
identifies the information needs of a wide
Thus, decision of primary users are based on range of primary users and considers
assessments of entity’s prospects for future balance between benefits to be derived
net cash inflows and management from the information and the cost
stewardship wherein these assessments are producing it .
based on the information about the entity’s  Cost is not a factor when making
financial position, financial performance, materiality judgements.
other changes in financial position, and  Consider the common information needs
utilization of economic resources. of primary users in addition to those
specified in the PFRSs
QUALITATIVE CHARACTERISTICS Step 2: Assess whether the information
--identifies the type of information that are likely identified in Step 1 is in fact, material
to be most useful to the primary users in making  Consider the following:
decisions using an entity’s financial report. a. Whether the information could
1. Fundamental Qualitative Characteristics— influence the users’ decisions on the
makes the information useful to users: basis of the financial statements as a
a. Relevance whole
b. Faithful Representation b. The nature and size of the item, or
2. Enhancing Qualitative Characteristics— both.
enhance the usefulness of information: c. Quantitative and qualitative factors
a. Comparability o Quantitative factors include the
b. Verifiability size of the impact of the item.
c. Timeliness Size can be assessed in relation
d. Understandability to a percentage of another
amount (e.g., total revenues) or
Fundamental Qualitative Characteristics a threshold amount
I. Relevance o Qualitative factors are
--if information can make a difference in the characteristics of the item
decisions of users. Relevant information has the which are: Entity-specific
following: qualitative factors (e.g., rarity
a. Predictive Value—help users in making of the item) and External quali
predictions about future outcomes factors (e.g., state of the
b. Confirmatory Value (Feedback Value)— economy)
help users in confirming their previous However, if an item is quantitatively material, the
predictions entity does not need to reassess it on the basis of
 MATERIALITY qualitative factors but, if the item is quantitatively
--information is material if omitting, not material, there is a need to reassess on the
misstating, or obscuring could reasonably basis of qualitative factors.
influence the decisions of primary users. Step 3: Organize the information within the
--is “entity-specific” aspect of relevance— draft financial statements in a way that
whereas materiality depends on the facts and communicates information clearly and concisely
circumstances surrounding a specific entity to primary users
--Materiality is a matter of judgement—the  Present information in a manner that
Conceptual Framework and Standards do not maximizes understandability to the
specify a uniform quantitative threshold for primary users
materiality. Step 4: Review the draft financial statements to
determine whether all material information has
been identified and materiality considered from methods for the same items.
a wide range perspective and in aggregate, on Comparability is the goal, while
the basis of the complete set of financial consistency is the means of achieving the
statements. goal.
II. Verifiability
--includes keeping records as they are proof
that the event took place.
II. Faithful Representation --information is verifiable if different users
--mean the information provides a true, correct could reach a general agreement as to what the
and complete depiction of the economic information purports to represent.
phenomena that it purports to represent.  Direct Verification—involves direct
 Substance over form—treat items as they observation (e.g., counting of cash)
are. (e.g., when economic phenomenon’s  Indirect Verification—involves checking
substance differs its legal form, faithful the inputs to a model or formula or
representation requires the depiction of the recalculation of outputs using the same
substance) methods (e.g., checking the balances in the
 Completeness—all information (words ledger)
and numbers) necessary for users to III. Timeliness
understand the phenomenon being --Information is timely if it is available to
depicted is provided. Includes description users in time to be able to influence their
of the item’s nature, numerical depiction, decision—Timeliness = Relevance
and explanations of significant facts IV. Understandability
surrounding the item. --if information is presented in a clear and
 Neutrality—information is selected and concise manner
presented without bias. Supported by  Includes using simple and less technical
prudence—the use of caution when terms for users to understand.
making judgements under conditions of  Understandability does not mean the
uncertainty, such that assets or income are exclusion of complex matters to make
not overstated and liabilities and expense information understandable.
are not understated. Prudence does not  Financial reports are intended for users:
allow either understatement and a. Who have reasonable knowledge of
overstatement as it invalidates the faithful business activities
representation of financial statements b. Who are willing to analyze the
 Free from error—means there are no information diligently
errors in the description and in the process
by which the information is selected and The fundamental qualitative characteristics are
applied—it does not mean that information essential to the usefulness of information—
is perfectly accurate. An estimate should meaning information must be both relevant and
be described clearly including the faithfully represented
explanation of the process used in making
the estimate. The enhancing qualitative characteristics only
enhance usefulness of information that is both
Enhancing Qualitative Factors relevant and faithfully represented but cannot
I. Comparability make information that is irrelevant and erroneous
--comparison—helps users identify similarities to be useful. There is no prescribed order in
and differences between different sets of applying the enhancing qualitative characteristics.
information that are provided by:
a. Intra-comparability—a single entity THE COST CONSTRAINT –existing restriction
but different periods  Cost is a pervasive constraint on the
b. Inter-comparability—different entities entity’s ability to provide useful financial
in a single period information.
 Comparison is not uniformity  An optimum balance between costs and
 Although related, consistency and benefits is desirable such that costs do not
comparability are not the same. outweigh the benefits.
Consistency refers to the use of the same
------------------------------------------------------------ Going concern assumption— or the underlying
- assumption that the entity has neither the
intention nor need to end its operations in the
OBJECTIVE AND SCOPE OF FINANCIAL foreseeable future
STATEMENTS
--is to provide financial information about the  The reporting entity is the one required,
reporting entity’s assets, liabilities, equity, income, or chosen to prepare financial statements,
and expenses that is useful in assessing: and is not necessarily a legal entity.
a. Entity’s prospect for future net cash  Parent—the controlling entity
inflows  Subsidiary—the controlled entity
b. Management’s stewardship over economic  Consolidated Financial Statements—if
resource the reporting entity comprises both a
Information on such is provided in the: parent and its subsidiaries. The parent and
a. Statement of Financial Position (for its subsidiaries are viewed as a single
recognized assets, liabilities and equity) reporting entity.
b. Statement(s) of Financial Performance  Unconsolidated Financial Statements—
(for income and expenses) if the reporting entity is the parent alone.
c. Other statements and notes (additional  Combine Financial Statements—if
information on recognized and reporting entity comprises two or more
unrecognized assets and liabilities, on cash entities not linked by a parent-subsidiary
flows, on contributions/distributions to relationship.
owners and other relevant information)
THE ELEMENTS OF FINANCIAL
REPORTINGPERIOD—financial STATEMENTS
statements are prepared at a specified period to
provide: I. Assets—“what you have”
a. Information on assets, liabilities, and --is a present economic resource controlled by
equity that existed at the end or during the entity as a result of past events. An
the reporting period economic resource is a right that has the
b. Income and expenses for the reporting potential to produce economic benefits
period
 Comparative Information helps users 3 Aspects of the definition of an asset:
evaluate changes and trends—financial 1. Right
statements provide comparative --right that has the potential to produce
information for at least one preceding economic benefits
reporting period to allow users assess the a. Rights that correspond to an obligation of
information’s intra-comparability. another party
 Forward-looking information are  To receive
designed to provide information about past  To exchange economic resource
events. Information about possible future under favorable terms
transactions and other events are included  To benefit from an obligation of
only if it relates to the past information another party to transfer economic
presented in the financial statements that resource
are deemed to be useful to the users. b. Rights that do not correspond to an
---Financial statements do not provide obligation of another party
forward-looking information about  Over physical objects (e.g., rights
management’s expectations and to use PPE or rights to sell
strategies inventory)
---include information about events after  To use intellectual property
the end of reporting period if it is  Rights normally arise form law,
necessary to meet the objective of FSs. contract or similar means. However,
 Perspective adopted in Financial rights could arise from other means like
Statements—presented from the reporting creating a know-how (e.g., trade secret)
entity’s period. that is not in the public domain or through
 a constructive obligation created by entity does not control is not an asset of
another party. the entity or if an entity controls only a
 Not all rights are assets. To be an asset, a portion of the asset, the entity accounts
right must have the potential to produce only for that portion not the entire
for the entity’s economic benefits that are resource.
beyond the benefits available to other  Control stems from legally enforceable
parties. rights. However, ownership is not always
 An entity cannot have the right to obtain necessary for control to exist because
economic benefit from itself. Treasury control can arise from other rights. For
shares are not an entity’s assets. Debt and example, rent, is considered and asset even
equity instruments issued by a parent and if you do not legally own the space but
held by its subsidiaries are not assets (or because you have the exclusive right to use
liabilities) in the consolidated FS. the space and therefore controls the
 The asset is the rights not the physical benefits from it
object  Physical possession is not always
2. Potential to produce economic benefits necessary for control to exist.
--the present right that has potential to produce
economic benefits and not the future economic II. Liability
benefits that the right may produce. --is a present obligation of the entity to
 The right’s potential to produce economic transfer economic resource as a result of past
benefit need not to be certain or even events
likely—what’s important is that the right
exists and in at least one circumstance it 3 aspects of defining a liability:
would produce and economic benefit. 1. Obligation
 Under the revised conceptual framework, --is a duty or responsibility that an entity has
an asset can exist even if the probability no practical ability to avoid
that it will produce economic benefits is  Legal Obligation—results from a
low—although that low probability affects contract, legislation, etc.
decision on whether the asset is to be  Constructive Obligation—results from
recognized, how it is measured, what an entity’s actions that create a valid
information is to be provided about the expectation on other that the entity will
asset, and how that information is accept and discharge certain
provided. responsibilities
 The presence or absence of expenditure  An obligation is always owed to
is not necessary in determining the another party however, the identity of
existence of an asset. For example, the other party is not necessary known.
penalty for violation of law does not result  One party’s obligation normally
to an asset (bail). On the other hand, an corresponds to another party’s right.
asset can be obtained for free from However, this symmetry is not
donation. maintained at all time because the
3. Control standards sometimes contain different
--means the entity has the exclusive right recognition and measurement
over the benefits of an asset and the requirements for the liability of one
ability to prevent others from accessing party and the corresponding asset of
those benefits. If one party controls an the other party.
asset, no other party controls that asset.  The uncertainty to whether an
 Control does not mean that the entity can obligation exists depends to whether
ensure that the resource will produce the uncertainty is resolved, until
benefits in all circumstances but it means then, it is uncertain that the liability
that if the resource produces benefits, it is exists.
the entity who will obtain those benefits 2. Transfer of an economic resource
and not another party. --is the obligation that has the potential to
 Control indicates the extent to which an require transfer of economic resource to
entity should account for the economic another party and not the future economics
resource. For example, an asset that an that the obligation may cause to be transferred.
  The obligation’s potential to cause V. Expenses
transfer need not to be certain or even --are decreases in assets, or increases in
likely—what’s important is it exists liabilities, that result in decrease in equity,
and in at least one circumstance, it other than those relating to distributions from
would require the entity to transfer an holders of equity claims
asset.  Contributions and distributions are not
 A liability can exist even if the income and expenses but rather a direct
probability of a transfer of an adjustment to equity.
economic resource is low, although
that low probability affects decisions to RECOGNITION AND DERECOGNITION
its recognition and measurement. I. The Recognition Process
3. Present obligation as a result of past --is the process of including in the statement of
events financial position/ performance an item that
--a present obligation exists if: meets the definition of one of the financial
a. The entity has already obtained economic elements
benefits or taken action  Involves recording an item in words and
b. As a consequence, the entity will or may in monetary amount and including the
have to transfer an economic resource amount in the totals of either those
that would not otherwise have had to transactions
transfer  Carrying Amount—the amount to which
EXECUTORY CONTRACTS an element is recognized in the financial
---a contract that is equally unperformed— position.
neither party has fulfilled any of its obligations, or  Matching Costs and Income (Matching
both parties have partially fulfilled their Concept)—the simultaneous recognition
obligations to an equal extent. of an income results in simultaneous
 Establishes a combine right and obligation recognition of a related expense.
to exchange economic resources which are RECOGNITION CRITERIA:
independent and inseparable –constitute a a. It meets the definition of an asset, liability,
single asset or liability—the entity has an equity, income, and expense
asset if the terms of the contract are b. Recognizing it would provide useful
favorable; a liability if terms are information—relevant and faithfully
unfavorable. represented information.
 The contract ceases to be executory when --Items that meet the definition of a financial
one party performs it obligation. If the element but do not provide useful information
entity performs first, the combined right are nor recognized, vice versa.
and obligation changes into an asset; if  Accordingly, judgement is required
the other party performs first, it changes when deciding whether to recognize
into liability. an item, thus, recognition
III. Equity requirements in the standards may
--is the residual interest in the assets of the vary.
entity deducting all its liabilities.  Even if an item is unrecognized,
 The definition applies to all entities information about the item needs to
regardless of form be disclosed in the notes—
 Equity of a corporation maybe sub- unrecognized asset or unrecognized
classified into share capital, retained liability
earnings, or reserves in the statement Relevance
of financial position. Reserves refer to --the recognition of an item may not provide
amounts set aside for the protection of relevant information if:
entity’s creditors or stakeholders from a. It is uncertain whether the asset or liability
losses. exists
IV. Income b. An asset or liability exists but the
--are increases in assets, or decreases in probability of an inflow or outflow of
liabilities, that result in increases in equity, economic benefits is low
other than those relating to contributions from  Existence uncertainty or low probability of
holders of equity claims an inflow or outflow of economic benefits
 may result in, but does not automatically CHANGES IN THE CONCEPTUAL
lead to the non-recognition of an asset or FRAMEWORK
liability. I. Asset
 Measurement Uncertainty—the use of --defined as a present economic resource
reasonable estimates is essential part of controlled by the entity as a result of past
financial reporting and does not necessary events. An economic resource is a right that
undermine the usefulness of information. has the potential to produce economic
Even a high level of measurement benefits.
uncertainty does not preclude an estimate  Essential elements are:
from providing useful information if the a. Right
estimate is clearly and accurately b. Potential to produce economic benefits
described and explained. c. Control
 An exceptionally high measurement  the notion of an expected flow of future
uncertainty can affect the faithful economic benefits was deleted and
representation of an item. clarified that the asset is the right not the
ultimate inflow of economic benefits from
II. The Derecognition Process that right.
--is the removal of a previously recognized asset  Asset can exist even if the potential to
or liability from the entity’s statement of financial produce economic benefit is not certain or
position. even likely
 Occurs when the items no longer meet the On the recognition of an asset:
definition of an asset or liability, such as a. The item meets the definition of a financial
when the entity loses control of all or part statement element
of the asset or no longer has a present b. Recognizing it would provide useful
obligation for all or part of the liability. information—relevant and faithfully
On derecognition the entity: represented
a. Derecognizes assets, liabilities that have  The notion of a probability threshold was
expired or have been consumed, collected, deleted. What’s important is that in at least
fulfilled, or transferred and recognizes any one circumstance the asset will produce
resulting in income or expenses economic benefits
b. Continues to recognize any assets or  Also deleted the “reliable measurement”
liabilities after the derecognition. No criterion and states that even a high level
income or expense is normally recognized of measurement uncertainty does not
on the retained component unless there is preclude an asset from being recognized
a change in measurement basis. After as long as estimate is clearly and
derecognition, the retained component accurately described and explained.
becomes a unit of account separate from  The non-recognition of an asset does not
the transferred component. necessarily preclude an entity from
 Unit of Account—the right or the group of providing information about that
rights, obligations or group of obligations unrecognized asset in the notes
or the group or rights and obligations, to On the derecognition of an asset—if it has expired
which recognition criteria and or has been consumed, collected, and transferred.
measurement concepts are applied. “If an
entity transfers part of an asset or II. Liability
liability, the unit account changes at that -- is a present obligation of the entity to
time so that the transferred component transfer economic resource as a result of past
and the retained component become events
separate units of account.  The notion of “expected” flow of future
 Derecognition is not appropriate if the economic benefits is deleted
entity retains substantial control of a  The liability is the “obligation” not the
transferred asset—if there is only partial ultimate outflow of economic benefits
transfer, the entity derecognizes only the from the obligation
transferred component and continues to  Introduced the concept of “no practical
recognize retained component. ability to avoid”
III. Equity, Income, and Expenses
  Retained the definitions but removed the --is the price of an item at an active market
emphases that income includes both --is not adjusted for transaction costs
revenue and gains, and expenses include  Asset at Fair Value results in the
both expenses and losses. subsequent recognition of gains or losses
 Income and expenses are classified as from changes in FV
recognized in profit or loss or OCI  Asset at FV results in gain or loss on
 Removed expense recognition principles initial recognition if the market which the
of “systematic and rational allocation” asses is acquired is different from the
and “immediate recognition” market that is the source of the prices used
 Introduction of Unit of Account and in measuring the asset at FV
Executory Contracts  The initial gain or loss is the
consideration paid minus FV of the asset
MEASUREMENT acquired
--quantifying an item in monetary terms  Computation for gains or losses on the
derecognition of an asset at FV is the
MEASUREMENT BASES difference between Net Disposal
Proceeds, if any, and Asset’s FV
I. Historical Cost  Assets and Liabilities that are sensitive to
 The historical cost of an asset is the the market is appropriately measured at
consideration paid to acquire the asset FV
plus transaction costs  Asset that can be sold independently is
 The historical cost of a liability is the likely to be measure at FV
consideration received to incur the  Using Fair Value is verifiable and
liability minus transactions costs enhances comparability—same amount of
 Asset at Historical Cost results to the measure for identical asses (liabilities)
subsequent recognition of depreciation with different acquisition dates
and impairment b. Value in Use
 Asset (Liability) at Historical cost or --present value that an entity expects to derive
current cost does not result to gains or from the use of an asset or its ultimate disposal
loss on initial recognition unless the asset  Does not include transaction costs at
is impaired (liability is onerous) acquisition but includes transaction
 Historical Cost measurement includes costs expected to be incurred on the
transaction cost in acquiring an asset. ultimate disposal of an asset
 Use of historical is simpler but measuring c. Fulfilment Value
depreciation, impairment, or onerous --present value an entity expects to be obliged
liabilities can be subjective which lessens to transfer as it fulfils a liability’
verifiability  Does not include transaction costs at
 Gain or loss of an asset at Historical cost is acquisition but includes transactions
the difference between the net disposal costs expected to be incurred on the
proceeds, if any, and the asset’s historical fulfilment of a liability
cost adjusted for depreciation and CURRENT COST
impairment --the current cost of an asset is the cost at
 Financial Asset (Financial Liability) held measurement date comprising the consideration
solely for collecting (repaying contractual that would be paid at measurement date plus
cash flows) rather than trading activities transaction costs.
are measured at amortized cost (historical --the current cost of liability is the consideration
cost) received for an equivalent liability at
 Asset used in combination with other measurement date minus transaction costs.
assets to produce cash flow is likely to be  Historical Cost measurement includes
measure at Historical Cost transaction cost in acquiring an asset.
 Asset (Liability) at Historical cost or
II. Current Value current cost does not result to gains or
--reflect changes in values at measurement loss on initial recognition unless the asset
dates is impaired (liability is onerous)
a. Fair Value
  Measurement at Current Cost enhances and measurement basis for presentation and
comparability but reduces verifiability disclosure
and understandability.
OFFSETTING
MORE THAN ONE MEASUREMENT BASIS --occurs when an asset and a liability with
The use of different measurement basis is applied separate units of account are combined and only
in such a way that: the net amount is presented.
a. A single measurement basis is used in the --is not generally appropriate as it combines
statement of financial position and dissimilar items.
statement(s) of financial performance
b. Additional information is disclosed in the AGGREGATION
notes for a different measurement basis --the adding together of assets, liabilities, equity,
However, in some cases it may be appropriate to: income, or expenses that have shared
a. Use a current value measurement basis characteristics and are included in the same
for the asset or liability in the statement of classification
financial position
b. A different measurement basis for the CONCEPTS OF CAPITAL AND CAPITAL
related income and expenses in the MAINTENANCE
statement of profit or loss.
In such cases, related total income or 1. Financial Concept of Capital—capital is
expense may need to be allocated to both regarded as the invested money or invested
profit or loss and OCI. purchasing power. Capital is synonymous with
equity, net assets, or net worth
CASH-FLOW-BASED MEASUREMENT  Used if users are primarily concerned
TECHNIQUES with the maintenance of nominal
--is one way to make estimates—such invested capital or purchasing power
techniques are not measurement bases but of invested capital
rather used in applying a measurement basis.  Financial Capital Maintenance—
 The single amount in making an profit is earned if the net assets at the
estimate is usually one from within the end of the period exceeds the net
central part of the range (central assets at the beginning period, after
estimate) excluding distributions to, and form
contribution from, owners during the
1. Statistical Mean (expected value or period. Can be measured in nominal
probability-weighted average) monetary units or units of constant
--average amount which gives more purchasing power
weight to the outcomes that are more
likely. Expected value is not intended to 2. Physical Concept of Capital—capital is
predict the ultimate cash inflow (outflow) regarded as the entity’s productive capacity.
from the asset (liability)  Used if the primary concern is the
2. Statistical Median (Maximum amount entity’s operating capability
that is more likely than not to occur)  Physical Capital Maintenance—
--middle amount which reflects the profit is earned only if the entity’s
probability of an inflow or outflow to be productive capacity at the end of the
no more than that amount period exceeds the productive capacity
3. Statistical Mode (Most likely outcome) at the beginning of the period, after
--the amount that occurs the highest excluding any distributions to, or
number within the range which reflects contributions from, owners during the
the single most likely ultimate inflow period
(outflow) from the asset (liability)
PAS 1: Presentation of Financial
CLASSIFICATION Statements
--refers to the sorting of assets, liabilities, equity,
income or expense with similar nature, function, PAS 1 key points:
--prescribes the basis for the presentation of must to provide the related notes for that
general purpose financial statements, the additional statement of comprehensive income.
guidelines for their structure, and the minimum -- PAS 1 requires particular disclosures to be
requirements for their content to ensure presented either in the notes or on the face of the
comparability other financial statements (e.g., footnote
 COMPARABILITY: compare financial disclosures). Other disclosures are addressed by
systems in purpose of tracking progress other PFRSs.
--applies to the preparation and presentation and --PAS 1 does not prescribe the order or format of
preparation of general purpose financial presenting items in the statement of financial
statements. The recognition, measurements and position.
disclosure for specific transactions and other --PAS 1 also permits mixed presentation, i.e,
events are set out in other PFRSs. presenting some assets and liabilities using a
--PAS 1 terminologies are suitable for profit current/non-current classification and others in
oriented entities. If non-profit organizations apply order of liquidity. This may be appropriate when
PAS 1, they may need to amend the line-item and the entity has diverse operations. Whichever
financial statement descriptions. method is used, PAS 1 requires the disclosure of
--Reports that are presented outside of the items that are expected to recovered or settled (a)
financial statements, such as financial reviews by within 12 months and (b) beyond 12 months,
management, environmental reports and value- after reporting period.
added statements are outside the scope of PFRSs. --PAS 1.68: The operating cycle of an entity is the
--PAS 1 requires an entity whose financial time between the acquisition of assets for
statements comply with PFRSs to make an processing and their realization in cash or cash
explicit and unreserved statement of such equivalents.
compliance in the notes. However, an entity shall When the entity’s normal operating cycle is not
not make such statement unless it complies with clearly identifiable, it is assumed to be 12
ALL the PFRSs requirements. months.
--PAS 1 permits a departure from a PFRSs --PAS 1 requires an entity to present information
requirement if the relevant regulatory framework on the following:
requires or allows such departure. (Law vs a. Profit or loss
Standard—Law prevails) b. Other comprehensive income
Regulatory framework refers to the c. Comprehensive income
accounting principles and other financial Presenting separate income statement is
reporting requirements prescribed by a allowed as long as a separate statement
government regulatory body. showing comprehensive income is also
--Departure from a PFRSs requirement shall: presented (i.e., “Two-statement presentation”)
 Disclose the management’s conclusion as Presenting only an income statement is
to the fair presentation of the financial prohibited.
statements --PAS 1 prohibits the presentation of
 All other requirements of the PFRSs are extraordinary items in the profit or loss and
complied with other comprehensive income or in the notes.
 The title of the PFRSs from which the
entity has departed --PAS 1.7:
 The financial effect of the departure  Other comprehensive income
--PAS 1 requires an entity to present comparative “comprises items of income and
information in respect of the preceding period expense (including reclassification
for all amounts reported in the current period’s adjustments) that are not recognized in
financial statements, unless another PFRS profit or loss as required or permitted
requires otherwise. by other PFRSs.
--PAS 1 permits entities to provide comparative  General purpose financial statements
information in addition to the minimum (financial statements) are “those
requirement. intended to meet the needs of users
e.g., an entity may provide a third who are not in a position to require an
statement of comprehensive income. In this case, entity to prepare reports tailored to
however, the entity need not to provide a third their particular information needs”
statement for the other financial statements, but
  Reclassification adjustments “are authorized for issue, and the related
amounts reclassified to profit or loss in amount per share
the current period that were recognized i. The amount of any cumulative
in other comprehensive income in the preference dividends not
current or previous periods. recognized
 Total comprehensive income is: the 6. Other disclosures not required by PFRSs
change in equity during a period but the management deems relevant to the
resulting from transactions and other understanding of the financial statements.
events, other than those changes
resulting from transactions with PAS 1: Notes
owners in their capacity as owners.
--PAS 1 allows the disclosure of dividends, and --The objective of PAS 1 is to prescribe the basis
the related amount per share, either in the for presentation of general purpose financial
statement of changes in equity or in the notes. statements to ensure comparability.
Note: “Non-owner” changes in equity are  Comparability requires consistency in the
presented in the statement of comprehensive adoption and of accounting policies in the
income while “owner” changes (e.g., presentation of financial statements.
contributions by and distributions to owners) Types of Comparability:
are presented in the statement of changes in 1. Intra-comparability (horizontal or inter-
equity. period)- refers to the comparability of
--PAS 1 refers to the discussion and presentation financial statements of the same entity but
of statement of cashflows to PAS 7 Statement of from one period to another.
Cash Flows 2. Inter-comparability (dimensional)- refers
--PAS 1 requires an entity to present the notes on a to the comparability of financial
systematic manner. Notes are normally structured statements between different entities.
as follows:
1. General information on the reporting entity FINANCIAL STATEMENTS
2. Statement of compliance with the PFRSs --are structured representation of an entity’s
and Basis of preparation of financial financial position and results of its operations.
statements. (PAS 1.9)
3. Summary of material accounting policy --are the end product of the financial reporting
information process and the means by which the information
4. Disaggregation (breakdowns) of the line gathered and processed is periodically
items in the other financial statements and communicated to users.
other supporting information. --General purpose financial statements cater to
5. Other disclosure required by PFRSs, such most of the common needs of a wide range of
as: external users.
a. Contingent liabilities and ---are the subject matter of the Conceptual
unrecognized contractual Framework and PFRSs.
commitments PURPOSE OF FINANCIAL STATEMENTS:
b. Non-financial disclosures, e.g., the Primary Objective: To provide information
entity’s financial risk management about the financial position, performance, and
objectives and policies cash flows of an entity that is useful to a wide
c. Events after the reporting date, if range of users in making economic decisions.
material Secondary Objective: To show results of
d. Changes in accounting policies and management’s stewardship over the entity’s
accounting estimates and resources.
correction or prior period errors Financial statements provide information
e. Related party disclosure about an entity’s:
f. Judgments and estimations a. Assets (economic resources)
g. Capital management b. Liabilities (economic obligations)
h. Dividends declared after the c. Equity
reporting period but before the d. Income
financial statements were e. Expenses
 f. Contributions by, and distributions to, including the basis used and the reason why
owners the entity is not a going concern.
g. Cash flows
---these information helps users assess the entity’s 3. Accrual Basis of Accounting
prospects for future met cash inflows. --All financial statements are prepared
using accrual basis except for the statement
COMPLETE SET OF FINANCIAL of cash flows which is prepared using cash
STATEMENTS: basis.
1. Statement of financial position (or
“balance sheet”) 4. Materiality and Aggregation
2. Statement of profit or loss and other --material class of similar items (line item) and
comprehensive income (or “statement of dissimilar items are presented separately.
comprehensive income”) --immaterial items are put together.
3. Statement of changes in equity
4. Statement of cash flows 5. Offsetting
5. Notes (or “notes to financial statements) --the entity uses its economic resources to pay
(5a) Comparative information its obligations.
6. Additional statement of financial position --is permitted when it reflects the nature of the
(required only when certain instances transaction.
occur) Examples of offsetting:
a. Presenting gains or losses from sales of
assets net of the related selling expenses.
GENERAL FEATURES OF FINANCIAL b. Presenting at net amount the unrealized
STATEMENTS gains and losses arising from trading
1. Fair Presentation and Compliance with securities and from translation of foreign
PFRSs currency denominated assets and
--Fair presentation is faithfully liabilities, except if they are immaterial.
representing. (in accordance with the c. Presenting a loss form a provision net of a
definition and recognition criteria set out reimbursement from a third party.
in the Conceptual Framework). --measuring assets net of valuation
--Fair presentation requires: allowances is not offsetting. For example,
a. proper selection and application of deducting allowance for doubtful accounts
accounting policies from accounts receivables or deducting
b. proper presentation of information, accumulated depreciation from a building
c. provision of additional disclosures account is not offsetting.
whenever relevant to the
understanding of financial 6. Frequency of reporting
statements. --financial statements are prepared at least
NOTE: Inappropriate accounting policies annually.
cannot be rectified by mere disclosure. --entity’s change in reporting period to a
period longer than a year shall disclose:
2. Going Concern a. Period covered by the FS
--underlying assumption that the entity b. Reason for using a longer or shorter
continues its operations in a foreseeable period
future. c. Fact that amounts presented in the FSs
--if the entity has a history of profitable are not entirely comparable.
operations and ready access to financial
resources, management may conclude that the 7. Comparative Information
entity is a going concern. --As a minimum, an entity presents two of
--If there are material uncertainties on the each of the statements and related notes.
entity’s ability to continue, those For example, when an entity presents its 2022
uncertainties shall be disclosed. current year financial statements, the 2021
--if the entity is not a going concern, its preceding year financial statements shall also
financial statements shall be prepared using be presented as comparative information.
another basis which shall be disclosed
 --preceding financial statements are --The PFRSs only apply to the financial
presented as comparative information to statements and not necessarily to the other
track progress. information.
--The following shall be displayed prominently
ADDITIONAL STATEMENT OF and repeatedly whenever relevant to the
FINANCIAL POSITION instances are as understanding of the information presented:
follows: a. Name of the reporting entity
a. The entity applies an accounting policy b. Whether the statements are for individual
retrospectively, makes a retrospective or group of entities
restatement of items in its financial c. The date of the end of the reporting period
statements, or reclassifies items in its or the period covered by the FS
financial statements d. Presentation currency
b. The instance in (a) has a material effect e. Level of rounding used (thousands,
on the information in the statement of millions, etc.)
financial position at the beginning of the --The statement of financial position is dated as at
preceding period. the end of the reporting period while the other
--if any of the instances aforementioned occur, financial statements are dated for the period that
the entity shall present three statements of they cover.
financial position as follows:
Statement of Date MANAGEMENT’S RESPONSIBILITY OVER
Financial Position FINANCIAL STATEMENTS
Current Year As at December 31, --Management is responsible for an entity’s
20x2 financial statements. The responsibility
Preceding Year As at December 31, encompasses:
(comparative 20x1 a. The preparation and fair presentation of
information)s financial statements in accordance with the
Additional As at January 1, PFRSs
20x1 b. Internal control over financial reporting
--The opening (additional) statement of c. Going concern assessment
financial position is dated as at the beginning d. Oversight over the financial reporting
of the preceding period even if the entity process
presents comparative information for earlier e. Review and approval of financial
periods. No need to present the related notes statements
to the opening statement. --Responsibilities are expressly stated in the
“Statement of Management’s Responsibility for
8. Consistency of presentation Financial Statements” which is attached as cover
--presentation and classification of items in the letter to the financial statements.
financial statement is retained from one period
to the next unless there is a change in STATEMENT OF FINANCIAL POSITION
presentation: --shows the entity’s financial condition (i.e.,
a. Is required by a PFRSs assets, liabilities, and equity) as at a certain date.
b. Results in information that is reliable and --entity may modify the descriptions used and
more relevant. sequence of their presentation to suit the nature of
--a change in presentation requires the the entity and its transactions.
reclassification of items in the comparative --additional line items may be presented whenever
information. If material, the entity shall provide relevant to the understanding of the entity’s
“additional statement of financial position” financial position.

STRUCTURE AND CONTENT OF PRESENTATION OF STATEMENT OF

FINANCIAL STATEMENTS FINANCIAL POSITION
--Financial statements shall be presented with a. A classified presentation shows distinctions
equal prominence and shall be clearly between current and noncurrent assets and
identified and distinguished from other liabilities
information in the same published document. --shall be used except when an unclassified
presentation provides information that is reliable
and more relevant. When that exception applies, realized or settled within 12 months after
assets and liabilities are presented in order of reporting period.
liquidity. e.g., non-operating assets and liabilities
--highlights an entity’s working capital and -- Deferred taxes and liabilities are always
facilitates the computation of liquidity and presented as noncurrent in a classified statement
solvency ratios of financial position regardless of their expected
b. An unclassified presentation also called as dates of reversal
“based on liquidity” shows no distinction
between current and noncurrent assets and REFINANCING AGREEMENT
liabilities --Refinancing: refers to the replacement of an
existing debt with a new one but with different
CURRENT ASSETS AND CURRENT terms
LIABILITIES --debtor is under a financial distress called
--as long as it is within the operating cycle “troubled debt restructuring”
A. Current Assets a. Noncurrent Liability:
a. Expected to be realized, sold, or consumed in --with unconditional right to refinance the liability
the entity’s operating cycle --without unconditional right to refinance the
b. Held primarily for trading liability but refinancing was made ON or
c. Expected to be realized within 12 months after BEFORE year-end
reporting period
d. Cash or cash equivalent, unless restricted from b. Current Liability:
being exchanged or used to settle a liability for at --Without unconditional right to refinance the
least 12 months after the reporting period liability
--Without unconditional right to refinance the
B. Current Liabilities liability but refinancing was made AFTER year
a. Expected to be settled in the entity’s normal end
operating cycle *DATE OF ISSUANCE DOESN’T MATTER
b. Held primarily for trading
c. Due to be settled within 12 months after LIABILITIES PAYABLE ON DEMAND
reporting period --Liabilities that are payable upon the demand of
d. The entity does not have the right at the end of the lender is classified as current
the reporting period to defer settlement of the --a long term obligation may become on demands
liability for at least 12 months after reporting as a result of breach of a loan covenant:
period
*ALL OTHER ASSETS AND LIABILITIES a. Current Liability
ARE CLASSIFIED AS NONCURRENT --No grace period was agreed upon
--is demandable immediately
--Operating cycle of an entity is the time between --Grace period was agreed upon AFTER
the acquisition of assets for processing and their BALANCE SHEET DATE
realization in cash or cash equivalents. When the --Grace period is received after the reporting date
entity’s operating cycle is not clearly identifiable, --Grace period was given on or before balance
it is assumed to be 12 months. sheet date which was less than 12 months

--Assets and Liabilities that are realized or settled b. Noncurrent Liability

as a part of the entity’s normal operating cycle --Grace period was agreed upon
are presented as current even if they are expected --Grace period is received by the reporting period
to be realized or settled beyond 12 months after --Grace period was given on or before balance
the reporting period. sheet date which was equal or more than 12
e.g., trade receivables, inventory, trade months
payables, and some accruals for employee
and other operating costs STATEMENT OF PROFIT OR LOSS AND
OTHER COMPREHENSIVE INCOME
--Assets and Liabilities that do not form part of --Income and expenses for the period may be
the entity’s normal operating cycle are presented presented in either:
as current only when they are expected to be
a. single statement profit or loss and other are presented in the
comprehensive income (statement of equity section of the
comprehensive income) statement of financial
position.
b. Two Statements:
1. a statement of profit or loss (income Transactions with Recognized directly in
statement) owners (e.g., issuance equity. Transactions
2. a statement presenting comprehensive of share capital, during the period are
income declaration of presented in the
dividends, and the statement of changes
BASIC FORMULAS like) in equity.
A. SINGLE STATEMENT PRESENTATION:
Revenue-Expense=Profit or Loss+ Other The profit or loss section shows line items that
Comprehensive Income= Comprehensive Income present the
following amounts for the period:
B. TWO STATEMENT a. revenue, presenting separately interest revenue;
1. Revenue-Expenses=Profit or Loss b. finance costs;
2. Profit or Loss+ Other Comprehensive Income= c. gains and losses arising from the derecognition
Comprehensive Income of financial assets measured at amortized cost;
d. impairment losses and impairment gains on
PROFIT OR LOSS financial
--is income less expenses, excluding the e. gains and losses on reclassifications of financial
components of other comprehensive income assets from amortized cost or fair value through
--Profit: excess of income over expenses other comprehensive income to fair value through
--Loss: deficiency profit or loss;
--Transaction Approach: method of computing f. share in the profit or loss of associates and joint
for profit or loss ventures;
Income and expenses are usually recognized in g. tax expense; and
profit or loss unless: h. result of discontinued operations.
a. they are items of other comprehensive
income Additional line items shall be presented whenever
b. they are required by other PFRSs to be relevant to the understanding of the entity’s
recognized outside Profit or Loss financial performance. The nature and amount of
Transaction Accounting material items of income or expense shall be
Correction of Prior Direct adjustment to disclosed separately.
period error the beginning balance
of retained earnings. Circumstances that would give rise to the separate
The adjustment is disclosure of items of income and expense
presented in the include:
statement of changes a. write-downs of inventories to net realizable
in equity. value or of property, plant and equipment to
recoverable amount, as well as reversals of such
Change in accounting Similar treatment to write-downs;
policy correction of prior b. restructurings of the activities of an entity and
period error. reversals of any provisions for restructuring costs;
Other comprehensive Changes during the c. disposals of items of property, plant and
income period equipment;
are presented in the d. disposals of investments;
"other e. discontinued operations;
comprehensive f. litigation settlements; and
income" section of the g. other reversals of provisions.
statement of
comprehensive
PAS 1 prohibits the presentation of
income.
extraordinary items in the statement of profit or
Cumulative balances
loss and other comprehensive income or in the f. Changes in fair value of a financial liability
notes designated at fair value through profit or loss
(FVPL) that are attributable to changes in credit
PRESENTATION OF EXPENSES risk;
Expenses may be presented using either of the g. Changes in the time value of option when the
following methods: option's intrinsic value and time value are
a. Nature of expense method separated and only the changes in the intrinsic
--Under this method, expenses are aggregated value is designated as the hedging instrument; and
according to their nature (e.g., depreciation, h. Changes in the value of the forward elements of
purchases of materials, transport costs, employee forward contracts when separating the forward
benefits and advertising costs) and are not, element and spot element of a forward contract
reallocated according to their functions within the and designating as the hedging instrument only
entity. the changes in the spot element, and changes in
b. Function of expense method the value of the foreign currency basis spread of a
--Cost of sales method - Under this method, an financial instrument when excluding it from the
entity classifies expenses according to their designation of that financial instrument as the
function (e.g., cost of sales, distribution costs, hedging instrument.
administrative expenses, and other functional
classifications). At a minimum, cost of sales shall Amounts recognized in OCI are usually
be presented separately from other expenses. accumulated as separate components of equity.
For example, cumulative changes in revaluation
The nature of expense method is simpler to surplus are accumulated in a "Revaluation
apply because it eliminates considerable surplus" account, which is presented as a separate
judgment needed in reallocating expenses component of equity; cumulative gains and
according to their function. However, an entity losses from investments in FVOCI and from
shall choose whichever method it deems will translation of foreign operation are also
provide information that is reliable and more accumulated in separate equity accounts.
relevant, taking into account historical and
industry factors and the entity's nature. RECLASSIFICATION ADJUSTMENTS
Items of OCI include reclassification adjustments.
If the function of expense method is used, Reclassification adjustments "are amounts
additional disclosures on the nature of expenses reclassified to profit or loss in the current period
shall be provided, including depreciation and that were recognized in other comprehensive
amortization expense and employee benefits income in the current or previous periods."
expense. This information is useful in predicting --amounts reclassified from OCI to profit or loss
future cash
flows. Reclassification adjustments arise, for example,
OTHER COMPREHENSIVE INCOME (OCI) on a foreign operation, derecognition of debt
Other comprehensive income "comprises items of instruments measured at FVOCI, or when a cash
income and expense including reclassification flow hedge becomes ineffective or affects profit or
adjustments) that are not recognized in profit or loss.
loss as required or permitted by other
PFRSs." (PAS 1.7) On derecognition (or when the cash flow hedge
The components of other comprehensive income becomes ineffective), the cumulative gains and
include the following: losses that were accumulated in equity on these
a. Changes in revaluation surplus; items are reclassified from OCI to profit or loss.
b. Remeasurements of the net defined benefit The amount reclassified is called the
liability (asset); reclassification adjustment.
c. Gains and losses on investments designated or
measured at fair value through other A reclassification adjustment for a gain is a
comprehensive income (FVOCI); deduction in OCI and an addition to profit or
d. Gains and losses arising from translating the loss. This is to avoid double inclusion in total
financial statements of a foreign operation; comprehensive income. On the other hand, a
e. Effective portion of gains and losses on hedging reclassification adjustment for a loss is an addition
instruments in a cash flow hedge; to OCI and a deduction from profit or loss.
 Total comprehensive income is the sum of profit
Reclassification adjustments do not arise on or loss and other comprehensive income. It
changes in revaluation surplus, derecognition of comprises all 'non-owner' changes in equity.
equity instruments designated at FVOCI, and Presenting information on comprehensive income,
remeasurements of the net defined benefit and not just profit or loss, helps users better
liability (asset). assess the overall financial performance of the
entity.
On derecognition, the cumulative gains and
losses that were accumulated in equity on these STATEMENT OF CHANGES IN EQUITY
items are transferred directly to retained The statement of changes in equity shows the
earnings, rather than to profit or loss as following information:
reclassification adjustment. a. Effects of change in accounting policy
(retrospective application) or correction of prior
PRESENTATION OF OCI period error (retrospective restatement);
The other comprehensive income section shall b. Total comprehensive income for the period;
group items of OC into the following: a. and
a. Those for which reclassification adjustment is c. For each component of equity, a
allowed; and b. reconciliation between the carrying amount at
b. Those for which reclassification adjustment is the beginning and the end of the period
not allowed. showing separately changes resulting from:
a. profit or loss;
The entity's share in the OCI of an associate or b. other comprehensive income; and
join venture accounted for under the equity c. transactions with owners, e.g., contributions
method shall also be presented separately and also by and distributions to owners.
grouped according to the classification above
Retrospective adjustments and retrospective
Type of OCI Reclassification restatements are presented in the statement of
Adjustment? changes in equity as adjustments to the opening
Changes in revaluation NO balance of retained earnings rather than as
surplus changes in equity during the period.
Remeasurements of NO
the net defined benefit Components of equity include, for example, each
liability (asset) class of contributed equity, the accumulated
Fair value changes in balance of each class of other comprehensive
FVOCI income and retained earnings. (PAS 1.108)
- equity instrument NO --PAS 1 allows the disclosure of dividends, and
(election) the related amount per share, either in the
- debt instrument YES statement of changes in equity
(mandatory) ------------------------------------------------------------
Translation differences YES --------
on foreign operations Note:
Effective portion of YES "Non-owner" changes in equity are presented
cash flow hedges in the statement of comprehensive income
while "owner" changes (e.g., contributions by
Items of OCI, including reclassification and distributions to owners) are presented in the
adjustments, may be presented at either net of tax statement of changes in equity. This is to
or gross of tax. provide better information by aggregating items
with shared characteristics and separating items
TOTAL COMPREHENSIVE INCOME with different characteristics.
Total comprehensive income is "the change in ------------------------------------------------------------
equity during a period resulting from --------
transactions and other events, other than those
changes resulting from transactions with owners STATEMENT OF CASH FLOWS
in their as owners”
PAS 1 refers the discussion and presentation of 6. Other disclosures not required by PFRSs but
statement of cash flows to PAS 7 Statement of the management deems relevant to the
Cash Flows. understanding of the financial statements.
NOTES
--The notes provide information in addition to Notes are prepared in a necessarily detailed
those presented in the other financial statements manner. More often than not, they are
--It is an integral part of a complete set of voluminous and occupy a bulk portion of the
financial statements. All the other financial financial statements. For that reason only
statements are intended to be read in conjunction excerpts of notes to the financial statements are
with the notes. Accordingly, information in the provided below, sufficient to give you an idea on
other financial statements shall be cross- how the concepts discussed above are presented in
referenced to the notes. the notes
--PAS 1 requires an entity to present the notes
in a systematic manner. Notes are normally --It presents:
structured as follows: a. information regarding the basis of
1. General information on the reporting entity. preparation of financial statements
This includes the domicile and legal form b. information required by the PFRSs
of the entity, its country of incorporation c. other information not required by PFRSs but
and the address of its registered office (or is relevant to users of financial statements
principal place of business, if different
from the registered office) and a
description of the nature of the entity's
operations and its principal activities.
2. Statement of compliance with the PFRSs and
Basis of preparation of financial statements.
3. Summary of material accounting policy
information.
This includes narrative descriptions of the
line items in the other financial statements,
their recognition criteria, measurement
bases, derecognition, transitional
provisions, and other relevant information.
4. Disaggregation (breakdowns) of the line
items in the other financial statements and
other supporting information.
5. Other disclosures required by PFRSs, such PAS 2: INVENTORIES
as (the list is not exhaustive): --PAS 2 prescribes the accounting treatment for
a. Contingent liabilities and unrecognized inventories.
contractual commitments. --PAS 2 recognized that a primary issue in the
b. Non-financial disclosures, e.g., the entity's accounting for inventories is the determination of
financial risk management objectives and policies. cost to be recognized as asset and carried
c. Events after the reporting date, if material. forward until it is expensed
d. Changes in accounting policies and accounting --PAS 2 provides guidance in the determination
estimates and corrections of prior period errors. of cost inventories, including the use of cost
e. Related party disclosure. formulas, and their subsequent measurement
f. Judgments and estimations. and recognition as expense
g. Capital management
h. Dividends declared after the reporting period --PAS 2 applies to all inventories except for the
but before the financial statements were following:
authorized for issue, and the related amount per 1. Assets accounted for under other standards:
share. a. Financial Instruments (PAS 32 and PFRS 9)
i. The amount of any cumulative preference b. Biological assets and agricultural produced at
dividends not recognized. the point of harvest (PAS 41)
2. Assets not measured under the lower of cost
or net realizable value (NRV) under PAS 2:
a. Inventories of producers of agricultural, forest, 3. Other Costs necessary in bringing the
and mineral products measured at net realizable inventories to their present location and
value in accordance with well-established condition.
practices in those industries.
b. Inventories of commodity broker-traders The following are excluded from the cost of
measured at fair value less cost to sell. inventories and are expensed in the period in
which they are incurred:
INVENTORIES a. Abnormal amounts of wasted materials, labor
Assets: or other production costs;
1. Held for Sale in the ordinary course of b. Storage costs, unless those costs are necessary
business (FINISHED GOODS) in the production process before a further
Ordinary Course- necessary, normal or usual production stage (e.g., the storage costs of partly
business activities of an entity. finished goods may be capitalized as cost of
2. In the process of production for such sale inventory, (work in progress and raw materials)
(WORK IN PROCESS) but the storage costs of completed goods are
3. In the form of materials or supplies to be expensed);
consumed in the production process or in the c. Administrative overheads that do not
rendering of services (RAW MATERIALS AND contribute to bringing inventories to their present
MANUFACTURING SUPPLIES) location and condition; and
d. Selling costs (e.g., freight out and
Examples of inventories: advertisement costs).
a. Merchandise purchased by a trading entity When a purchase transaction effectively contains a
and held for resale. financing element, such as when payment of the
b. Land and other property held for sale in the purchase price is deferred, the difference between
ordinary course of business. the purchase price for normal credit terms and the
c. Finished goods, goods undergoing amount paid is recognized as interest expense over
production, and raw materials and supplies the period of the financing.
awaiting use in the production process by a COST FORMULA
manufacturing entity. 1. SPECIFIC INDENTIFICATION
Ordinary course of business refers to the Shall be used for inventories that are not
necessary, normal or usual business activities of ordinarily interchangeable and those segregated
an entity. for specific projects
- Specific costs are attributed to identified items
MEASUREMENT of inventory
Inventories are measured at the lower of cost and - Cost of Sales- represents actual costs of the
net realizable value specific items sold
- Ending Inventory- represents actual costs of
COST the specific items on hand
1. Purchase Cost - Not appropriate when inventories consist of
 Purchase Price net of trade discounts and large number of items that are ordinarily
other rebates interchangeable
 Import duties - Simply multiply UNITS on HAND by ACTUAL
 Non-refundable or non-recoverable UNIT COST
purchase taxes
 Transport 2. FIRST-IN, FIRST-OUT (FIFO)
 Handling and other costs directly -Inventories purchased or produced first are sold
attributable to the acquisition of the first, the unsold inventories at the end of the
inventory period are those most recently purchased or
2. Conversion Costs produced
--Necessary in converting Raw Materials into - Cost of Sales - represents actual costs from
Finished Goods earlier purchases
 Costs of direct labor - Ending Inventory- represents actual costs from
 Production Overhead the most recent purchases

3. WEIGHTED AVERAGE
-Cost of Sales and Ending Inventory are CAPITALIZED AS COST OF
determined based on the weighted average cost of CONSTRUCTED ASSET
beginning inventory and all inventories purchased --Inventories that are used in the construction
or produced during the period. of another asset is not expensed but rather
capitalized as cost of the constructed asset.
NET REALIZABLE VALUE (NRV) --Example: Inventories used in constructing a
- Per PAS 2.6, this is the estimated selling price building. The cost will form part of the building
in the ordinary course of business less the cost and will be included in the depreciation.
estimated costs of completion and the estimated
costs necessary to make the sale. FOR DISCLOSURES:
--Refers to the net amount that an entity expects 1. Accounting policies adopted in measuring
to realize from the sale of inventory in the inventories, including the cost formula used;
ordinary course of business. 2. Total carrying amount of inventories and the
- This is entity-specific value. It may not equal to carrying amount in classifications appropriate to
fair value less costs to sell. the entity;
--The use of lower of cost and NRV in measuring 3. Carrying amount of inventories carried at fair
inventories is in line with the basic accounting value less costs to sell;
concept that an asset shall not be carried at an 4. Amount of inventories recognized as an
amount that exceeds its recoverable amount. expense during the period;
--If the cost of an inventory is written down to 5. Amount of any write-down of inventories
NRV due to damage, obsolescence, declined recognized as an expense in the period;
prices or estimated costs to complete or sell have 6. Amount of any reversal of write-down that is
increases, the write down is recognized as an recognized as a reduction in the amount of
expense. inventories recognized as expense in the period;
- If the NRV subsequently increases, the previous 7. Circumstances or events that led to the reversal
write down is reversed, and said reversal shall not of a write-down of inventories; and
exceed its original write down so that the new 8. Carrying amount of inventories pledged as
carrying amount is lower of the cost and revised security for liabilities.
NRV.
----The cost of inventory may exceed its INVENTORIES:
recoverable amount, if for example, the 1. Land or any other assets can be classified as
inventory is damaged, becomes obsolete, prices part of inventories if the entity is engaged in
have declined, or estimated costs to complete or buying and selling of this kind of property such as
to sell the inventory have decreased. In these real estate business.
circumstances, the cost of inventory is written 2. Work-in-Process refers to the products that are
down to NRV. Write-down is recognized as yet to be completed and transferred to the entity's
expense. warehouse. Although not yet finished, they will
--Write down of inventories are usually carried out already be part of the entity's inventory items.
on an item-by-item basis. 3. All finished goods that are already available for
sale will form part of inventories.
EXPENSE RECOGNITION OF 4. For trading businesses, inventory items will
INVENTORIES only comprise of the goods purchased or known
(Recognition as an expense) as merchandise inventories.
--The carrying amount of an inventory that is 5. For manufacturing businesses, 3 types of items
sold is charged as expense in the period in included in the inventory account:
which the related revenue is recognized. a. Raw Materials
--The write-down of inventories to NRV and all b. Work-In-Process
losses of inventories are recognized as expense in c. Finished Goods
the period the write-down or loss occurs. 6. Ownership of Goods:
--The amount of any reversal of any write-down *When the company has the title to the goods,
of inventories, arising from an increase in net regardless of their location
realizable value shall be recognized as a reduction *If goods are still in TRANSIT, the freight terms
in the amount of inventories recognized as an is considered in determining the ownership of
expense in the period in which the reversal occurs. Inventories
--Whoever owns the goods during its shipment --does not maintain records of inventories
should also PAY for the Freight Charges. during the year and relies on physical count at
FOB SHIPPING POINT-------------FREIGHT the end of the accounting period
COLLECT - buyer made the actual payment for --used for low prices but maintained in large
the freight quantities such as groceries, hardware
• TITLE is transferred to the BUYER UPON
SHIPMENT OF GOODS 2. Perpetual Inventory Systems
• The BUYER is responsible for the delivery -maintains a detailed record of inventories
charges -applicable to high value inventories such as cars,
• Such COST will be considered as FREIGHT IN jewelry
and will become part of the initial cost of the -facilitates purchasing and production planning
inventory -ensures adequate on-hand inventories

• TITLE is transferred to the BUYER ONLY

UPON RECEIPT OF THE GOODS AT THE
POINT OF DESTINATION
• The SELLER is responsible for the delivery
charges
• Such COST will be considered as FREIGHT
OUT and will become part of OPERATING
EXPENSES
INVENTORIES UNDER CONSIGNMENT:
--Consignment- an agreement between two
parties wherein the consignor is contracting
consignee to sell the goods on its behalf.
--OWNERSHIP of GOODS remains with
CONSIGNOR.
 Goods held on consignment - ordinarily
associated with CONSIGNEE thus,
inventory account will NOT FORM
PART of ITS Inventories
 Goods out on consignment - ordinarily
associated with CONSIGNOR thus,
inventory account will FORM PART of
ITS Inventories

INCLUDED IN THE INVENTORY:

1. Goods in transit and sold FOB Destination
2. Goods in transit and purchased FOB Shipping
point
3. Goods out on consignment
4. Goods purchased under bill and hold
arrangement
5. Segregated normal order goods
6. Goods purchased under installment basis
7. Goods sold with buyback arrangements
8. Goods purchased with refund offers
9. Goods owned and on hand (exclude goods held
on consignment)
10. Goods in the hands of salesmen or agents
11. Goods held by customers on approval or trial

INVENTORY SYSTEMS:
1. Periodic Inventory Systems