CONCEPTUAL FRAMEWORK AND ACCOUNTING
STANDARDS
QUIZ 2
CHAPTER 3 - PART 1
BASIS FOR THE PRESENTATION
OF THE FINANCIAL STATEMENTS
●
●
●
●
FINANCIAL STATEMENTS
●
STATEMENT
INCOME
The means by which the information
accumulated and processed in financial
accounting is periodically communicated to
the users
The end-product or main output of the
financial accounting process
The structured financial representation of
the financial position and financial
performance of an entity
●
●
●
COMPONENTS
STATEMENTS
●
●
●
●
●
FINANCIAL
An entity shall prepare and present general
purpose
financial
statements
in
accordance with the International Financial
Reporting Standards.
General purpose financial statements or
simply financial statements are those
intended to meet the needs of users who
are not in a position to require an entity to
prepare reports tailored to their particular
information needs.
OF
FINANCIAL
Statement of financial position as the end
of the period
Statement of comprehensive income for
the period
Statement of changes in equity for the
period
Statement of cash flows for the period
Notes, compromising a summary of
significant accounting policies and other
explanatory information.
●
Presents information on the balances of
assets, liabilities, and equity as at the end
of the reporting period.
Useful to various users of accounting
information in assessing the economic
resources that an enterprise controls, its
financial structure, its liquidity and solvency
and its capacity to adapt to changes in the
environment in which it operates.
Presents the financial performance of an
entity during a reporting period.
It is an expanded form of the income
statement because it encompasses both
profit and loss and other comprehensive
income.
Information presented helps users to
assess the entity’s ability to generate cash
and the potential changes in economic
resources that the enterprise is likely to
control in the future.
Presents the summarized transactions
affecting the balance of equity accounts,
such as profit or loss, other comprehensive
income, contributions from owners and
distributions to owners.
STATEMENT OF CASH FLOW
●
●
Presents information on the inflows and
outflows of cash and cash equivalents
during the period.
The information presented assists users in
assessing an entity’s ability to remain
solvent and provide returns to investors
and creditors.
NOTES TO THE FINANCIAL STATEMENTS
●
●
STATEMENT OF FINANCIAL POSITION
●
COMPREHENSIVE
STATEMENTS OF CHANGES IN EQUITY
●
GENERAL
PURPOSE
STATEMENTS
OF
●
●
Presents relevant financial information
pertaining to the entity’s activities that
cannot be presented on the face of the
financial statements
Include a description of the basis of the
presentation of financial statements and
summary of significant accounting policies,
information required by the PFRS or IFRS
that is not presented on the face of the
financial statements and additional
information that will help the users better
understand the information presented in
any of the financial statements.
It provides narrative description or
disaggregation of items presented in the
financial statements and information about
items that do not qualify for recognition.
Used to report information that does not fit
into the body of the statements in order to
enhance the understandability of the
statements.
diamla, foronda, gan 1
OBJECTIVE OF FINANCIAL STATEMENTS
●
●
The objective of general-purpose financial
statements is to provide information about
the financial position, performance and
cash flows of an enterprise that is useful to
a wide range of users in making economic
decisions.
Financial statements also show the results
of the management’s stewardship of the
resources entrusted to it.
FINANCIAL
STATEMENTS
PROVIDE
INFORMATION ABOUT THE FOLLOWING:
★
★
★
★
Assets
Liabilities
Equity
Income and Expenses, including gains and
losses
★ Contributions by and distributions to
owners
★ Cash flows
●
●
●
REQUIREMENTS FOR AN ADDITIONAL
STATEMENT OF FINANCIAL POSITION
●
●
●
●
●
●
Inclusion of a statement of financial
position at the beginning of the preceding
period whenever an entity restates its
comparative
prior
period
financial
statements.
Restatement of comparative prior period is
necessary when there is any of the
following:
Retrospective application of a change in
accounting policy
Restatement of financial statements
because of prior period errors discovered.
Reclassification of an element in a financial
statement.
The requirement for a restatement of prior
year’s financial statements and inclusion of
a restated statement of financial position as
at the beginning of the preceding period
presented achieves the objective of
comparability.
ACCOUNTING POLICIES
●
●
The
specific
principles,
bases,
conventions, rules and practices applied by
an entity in preparing and presenting
financial statements.
EXAMPLES
★ Criteria to determine which financial
instruments
qualify
as
cash
equivalents.
★ Characteristics
of
elements
compromising Investments Property.
●
●
●
●
●
●
●
●
●
●
●
●
★ Characteristics
of
elements
compromising PPE.
★ Measurement model for a class of
PPE.
★ Use of weighted average method to
determine the cost of inventory.
★ Measuring inventories at the Lower of
Cost or Net Realizable Value.
When an IFRS specifically applies to a
transaction, other event or condition, the
accounting policy or policies applied to that
item shall be determined by applying the
IFRS.
IFRSs set out accounting policies that the
IASB has concluded result in financial
statements containing relevant and reliable
information about the transactions, other
events and conditions to which they apply.
Those policies need not be applied when
the effect of applying them is immaterial.
However, it is inappropriate to make, or
leave uncorrected, immaterial departures
from IFRSs to achieve a particular
presentation of an entity’s financial
position, financial performance or cash
flows.
In the ABSENCE OF AN IFRS that
specifically applies to a transaction, other
event or condition, management shall use
its judgement in developing and applying
an accounting policy that results in
information that is:
Relevant to the economic decision-making
needs of users; and
Reliable, in that the financial statements:
represents faithfully the financial position,
financial performance and cash flows of the
entity.
reflect the economic substance of
transaction, other events and conditions,
and not merely the legal form;
are neutral, i.e., free from bias;
are prudent; and
are complete in all material respects.
In making the judgment, management shall
refer to, and consider the applicability of,
the following sources in descending order:
the requirement in IFRSs dealing with
similar and related issues; and
the definitions, recognition criteria and
measurement concepts for assets,
liabilities, income and expense in the
Conceptual Framework for Financial
Reporting (Conceptual Framework)
In making the judgment, management may
also
consider
the
most
recent
pronouncements of other standard-setting
bodies that use a similar conceptual
framework
to
develop
accounting
diamla, foronda, gan 2
standards, other accounting literature and
accepted industry practices.
GENERAL FEATURES
●
●
●
●
●
●
●
●
●
The following are the general features for
the presentation of financial statements:
Fair presentation and compliance with
IFRS/PFRS
Going Concern
Accrual Basis of Accounting
Materiality and Aggregation
Offsetting
Frequency of Reporting
Comparative Information
Consistency of Presentation
●
●
●
●
FAIR PRESENTATION AND COMPLIANCE
WITH IFRS
●
●
●
●
●
●
●
●
●
●
Financial statements shall PRESENT
FAIRLY position, financial performance
and cash flow of an entity.
Fair presentation requires the faithful
representation
of
the
effects
of
transactions, other events and conditions in
accordance with the definitions and
recognition criteria for assets, liabilities,
income and expenses set out in the
Conceptual Framework for Financial
Reporting (Conceptual Framework)
The application of IFRSs, with additional
disclosure when necessary, is presumed to
result in financial statements that achieve a
fair presentation.
An entity whose financial statements
comply with IFRSs shall make an
EXPLICIT and UNRESERVED statement
of such compliance in the notes.
An entity shall not describe financial
statements as complying with IFRSs
unless they comply with all the
requirements of IFRSs.
In virtually all circumstances, an entity
achieves a fair presentation by compliance
with applicable IFRSs.
A fair presentation also requires an entity:
to select and apply accounting policies in
accordance with IAS 8.
to
present
information,
including
accounting policies, in a manner that
provides relevant, reliable, comparable and
understandable information.
to provide additional disclosures when
compliance with the specific requirements
in IFRSs is insufficient to enable users to
understand the impact of particular
transactions, other events and conditions
on the entity’s financial position and
financial performance.
●
●
●
●
●
●
An entity cannot rectify inappropriate
accounting principles used or by notes or
explanatory material.
In the extremely rare circumstances in
which management concludes that
compliance with a requirement in an IFRS
would be so misleading that it would
conflict with the objective of financial
statements set out in the Conceptual
Framework, the entity shall depart from that
requirement if the relevant regulatory
framework requires, or otherwise does not
prohibit, such a departure.
When an entity departs from a requirement
of an IFRS, it shall disclose:
that management has concluded that the
financial statements present fairly the
entity’s
financial
position,
financial
performance and cash flows;
that it has complied with the applicable
IFRSs, except that it has departed from a
particular requirement to achieve a fair
presentation.
the title of the IFRS from which the entity
has departed, the nature of the departure,
including the treatment that the iFRS would
require, the reason why that treatment
would be so misleading in the
circumstances that it would conflict with the
objective of financial statements set out in
the Conceptual Framework, and the
treatment adopted; and
for each period presented, the financial
effect of the departure on each item in the
financial statements that would have been
reported in complying with the requirement.
When an entity has departed from a
requirement of an IFRS in a prior period,
and that departure affects the amounts
recognized in the financial statements for
the current period, it shall make the
required disclosures.
Example: an entity departed in a prior
period from a requirement in an IFRS for
the measurement of assets or liabilities and
that departure affects the measurement of
changes in assets and liabilities recognized
in the current period’s financial statements.
In the extremely rare circumstances in
which management concludes that
compliance with a requirement in an IFRS
would be so misleading that it would
conflict with the objective of financial
statement set out in the Conceptual
Framework, but the relevant regulatory
framework prohibits departure from the
requirement, the entity shall, to the
maximum extent possible, reduce the
diamla, foronda, gan 3
●
●
●
●
●
●
●
perceived
misleading
aspects
of
compliance by disclosing;
the title of the IFRS in question, the nature
of the requirement, and the reason why
management
has
concluded
that
complying with that requirement is so
misleading in the circumstances that it
conflicts with the objective of financial
statements set out in the Conceptual
Framework; and
for each period presented, the adjustment
to each item in the financial statements that
management has concluded would be
necessary to achieve a fair presentation.
An item of information would conflict with
the objective of financial statements when
it does not represent faithfully the
transactions, other events and conditions
that it either purports to represent or could
reasonably be expected to represent and,
consequently, it would be likely to influence
economic decisions made by users of
financial statements.
When assessing whether complying with a
specific requirement in an IFRS would be
so misleading that it would conflict with the
objective of financial statements set out in
the Conceptual Framework, management
considers;
why the objective of financial statements is
not
achieved
in
the
particular
circumstances; and
how the entity’s circumstances differ from
those of other entities that comply with the
requirement.
If other entities in similar circumstances
comply with the requirement, there is a
rebuttable presumption that the entity’s
compliance with the requirement would not
be so misleading that it would conflict with
the objective of financial statements set out
in the Conceptual Framework.
●
●
●
●
●
●
●
●
ACCRUAL BASIS OF ACCOUNTING
●
●
GOING CONCERN
●
●
●
When preparing financial statements,
management shall make an assessment of
an entity’s ability to continue as a going
concern.
An entity shall prepare financial statements
on a going concern basis unless
management eithers intends to liquidate
the entity or to cease trading, or has no
realistic alternative but to do so.
When management is aware, in making its
assessment, of material uncertainties
related to events or conditions that may
cast significant doubt upon the entity’s
ability to continue as a going concern, the
entity shall disclose those uncertainties.
When an entity does not prepare financial
statements ion a going concern basis, it
shall:
disclose that fact;
the basis on which it prepared the financial
statements; and
the reason why the entity is not regarded
as a going concern.
In assessing whether the going concern
assumption is appropriate, management
takes into account all available information
about the future, which is at least, but is not
limited to, twelve months from the end of
the reporting period.
The degree of consideration depends on
the facts in each case.
When an entity has a history of profitable
operations and ready access to financial
resources, the entity may reach a
conclusion that the going concern basis of
accounting is appropriate without detailed
analysis.
In other cases, management may need to
consider a wide range of factors relating to
current and expected profitability, debt
repayment schedules and potential
sources of replacement financing before it
can satisfy that the going concern basis is
appropriate.
An entity shall prepare its financial
statements, except for cash flow
information, using the accrual basis of
accounting.
When the accrual basis of accounting is
used, an entity recognizes items as assets,
liabilities, equity, income and expenses
(the elements of financial statements)
when they satisfy the definitions and
recognition criteria for those elements in
the Conceptual Framework.
MATERIALITY AND AGGREGATION
●
●
●
●
An entity shall present separately each
material class of similar items.
An entity shall present separately items of
a dissimilar nature or function unless they
are immaterial,
Financial
statements
result
from
processing large numbers of transactions
or other events that are aggregated into
classes according to their nature or
function.
The final stage in the process of
aggregation and classification is the
presentation of condensed and classified
diamla, foronda, gan 4
●
●
●
●
●
●
●
●
data, which form line items in the financial
statements.
If a line item is not individually material, it is
aggregated with other items either in those
statements or in the notes.
An item that is not sufficiently material to
warrant separate presentation in those
statements
may
warrant
separate
presentation in the notes.
When applying this and other IFRSs an
entity
shall
decide,
taking
into
consideration all relevant facts and
circumstances,
how
it
aggregates
information in the financial statements,
which include the notes.
An entity shall not reduce the
understandability of its financial statements
by obscuring material information with
immaterial information or by aggregating
material items that have different natures or
functions.
Some IFRSs specify information that is
required to be included in the financial
statements, which include the notes.
An entity need not to provide a specific
disclosure required by an IFRS if the
information resulting from that disclosure is
not material.
This is the case even if the IFRS contains
a list of specific requirements or describes
them as minimum requirements.
An entity shall also consider whether to
provide additional disclosures when
compliance with the specific requirement in
IFRS is insufficient to enable users of
financial statements to understand the
impact of particular transactions, other
events and conditions on the entity’s
financial
position
and
financial
performance.
●
●
FREQUENCY OF REPORTING
●
●
●
●
●
●
●
●
Offsetting means deducting one item from
another item of different nature and
presenting only the net on the face of the
financial statements.
An entity shall not offset assets and
liabilities or income and expenses, unless
required or permitted by an IFRS.
An entity reports separately both assets
and liabilities, and income and expenses.
Offsetting in the statements of profit or loss
and other comprehensive income or
financial position, except when offsetting
reflects the substance of the transaction or
other event, detracts from the ability of
users both to understand the transactions,
other events and conditions that have
An entity shall present a complete set of
financial statements at least ANNUALLY.
When an entity changes the end of its
reporting period and presents financial
statements for a period longer or shorter
than one year, an entity shall disclose, in
addition to the period covered by the
financial statements;
the reason for using a longer or shorter
period, and
the fact that amounts presented in the
financial statements are not entirely
comparable
Normally, an entity consistently prepares
financial statements for a one-year period.
COMPARATIVE INFORMATION
●
●
●
OFFSETTING
●
occurred and to assess the entity’s future
cash flows.
Measuring assets net of valuation
allowances - for example, obsolescence
allowances on inventories and doubtful
debts allowances on receivables - is not
offsetting.
Offsetting is allowed and applied when
presenting on the net basis reflects the
substance of the transaction or other event.
●
●
Except when IFRSs permit or require
otherwise, an entity shall present
comparative information in respect of the
preceding period for all amounts reported
in the current period's financial statements.
An entity shall include comparative
information for narrative and descriptive
information if it is relevant to understanding
the current period’s financial statements.
An entity shall present, as a minimum, two
statements of financial position, two
statements of profit and loss and other
comprehensive income, two separate
statements of profit and loss (if presented),
two statements of cash flows and two
statements of changes in equity, and
related notes.
In some cases, narrative information
provided in the financial statements for the
preceding period continues to be relevant
in the current period.
For example, an entity discloses in the
current period details of a legal dispute, the
outcome of which was uncertain at the end
of the preceding period and is yet to be
resolved. Users may benefit from the
disclosure of information that the
uncertainty existed at the end of the
preceding period and from the disclosure of
information about the steps that have been
diamla, foronda, gan 5
●
●
●
●
●
●
●
●
taken during the period to resolve the
uncertainty.
When an enterprise makes retrospective
adjustment for any one or combination of
the following.
Change in accounting policy
Correction of prior period errors; and
Reclassification or amendment of items in
the financial statements.
Three statement of financial position shall
be presented, namely as at;
The end of the current period
The end of the immediate prior period; and
The beginning of the preceding period.
CONSISTENCY OF PRESENTATION
●
●
●
●
●
●
●
●
●
●
An entity shall retain the presentation and
classification of items in the financial
statement from one period to the next
unless;
it is apparent, following a significant change
in the nature of the entity’s operations or a
review of its financial statements, that
another presentation or classification would
be more appropriate having regard to the
criteria for the selection and application of
accounting policies in IAS 8; or
an IFRS requires a change in presentation
The manner of presentation of financial
statements shall be retained from period to
period, unless the changed presentation is
more useful to the users and enhances the
relevance of information.
If the presentation is changed, comparative
financial statements for the prior period
shall be represented, unless impracticable
to do so.
When an entity reclassifies comparative
amounts, it shall disclose;
the nature of reclassification;
the amount of each item or class of items
that is reclassified; and
the reason for the reclassification
When it is impracticable to reclassify
comparative amounts, an entity shall
disclose the reason for not reclassifying the
amount and the nature of the adjustments
that would have been made if the amount
had been reclassified.
IDENTIFICATION
STATEMENTS
●
OF
THE
●
●
●
●
●
●
●
●
FUNDAMENTALLY RELATED FINANCIAL
STATEMENTS
●
●
●
FINANCIAL
An entity shall clearly identify the financial
statements and distinguish them from other
information in the same published
document. IFRSs apply only to financial
statements, and not necessarily to other
information presented in an annual report,
a regulatory filing, or another document.
Therefore, it is important that users can
distinguish information that is prepared
using IFRSs from other information that
may be useful to users but is not the subject
of those requirements.
An entity shall clearly identify each financial
statement and the notes. In addition, an
entity shall display the following information
prominently, and repeat it when necessary
for the information presented to be
understandable:
the name of the reporting entity or other
means of identification, and any charge in
that information from the end of the
preceding reporting period;
whether the financial statements are of an
individual entity or a group of entities;
the date of the end of the reporting period
or the period covered by the set of financial
statements or notes;
the presentation currency; and
the level of rounding used in presenting
amounts in the financial statements.
An entity often makes financial statements
more understandable by presenting
information in thousands or millions of units
of the presentation currency.
This is acceptable as long as the entity
discloses the level of rounding and does
not omit material information.
●
●
The financial statements are fundamentally
related because they relate to the effects of
the same sets of transactions completed by
the enterprise during the reporting period.
STATEMENT OF COMPREHENSIVE
INCOME - the profit is the net effect of
income and expenses presented in the
profit section which is transferred to the
appropriate equity account in the
Statement of Changes in Equity.
STATEMENT OF CHANGES IN EQUITY presents the changes in each major equity
component during the period and reconcile
the beginning equity component balances
with the ending equity component
balances, the latter being presented as he
final figures and are brought forward as
equity account balances in the Statement
of Financial Position.
STATEMENT OF CASH FLOWS presents information on cash inflows and
outflows of cash and cash equivalents.
OPERATING cash flow activities involved
the determination of profit.
diamla, foronda, gan 6
●
●
INVESTING cash flow activities present
inflows and outflows of cash affecting noncurrent assets.
FINANCING cash flow activities are those
that arise from transactions with non-trade
lenders as well as owners of the equity.
LIMITATIONS
STATEMENTS
●
●
●
●
OF
●
●
●
●
●
●
●
FINANCIAL
The real worth of the business is not
reflected in the financial statements
because of the use of different
measurement bases.
The financial statements present values
that are a mixture of different levels of
purchasing power.
Due to some measurement uncertainties,
some financial statement elements are not
recognized because only events and
transactions capable of measurement and
have met the recognition criteria can be
reflected.
Information such as moral efficiency of
company personnel, the strategic location
of the company’s production facilities and
markets, the enterprise’s contribution to the
development and deterioration of the
environment are reported nowhere in the
financial statements.
THE SECURITIES
COMMISSION
●
THE
AND
EXCHANGE
The national government regulatory
agency charged with supervision of the
corporate sector with the original function
of regulating the sale and registration of
securities.
Mandate: Development and regulation of
the corporate and capital market toward:
Good corporate governance;
Protection of investors;
Widest participation of ownership; and
Democratization of wealth
Requires the submission of an annual
report by companies together with financial
statements certified by an independent
CPA.
Requires for internal record keeping and
internal controls to be complied with by
entities.
CLASSIFICATION
OF
REPORTING
ENTITIES BASED ON THE APPLICABLE
PHILIPPINE
FINANCIAL
REPORTING
FRAMEWORKS
CLASSIFICATION OF ENTITIES (RULE 68,
SRC)
● Large and/or publicly accountable entities;
● Medium-sized entities;
●
●
Small entities
Micro entities
LARGE AND/OR PUBLICLY ACCOUNTABLE
ENTITIES
Those that meet any of the following criteria:
● Total assets of more than P350M or total
liabilities of more than P250M;
● Required to file financial statements under
Part II of SRC, Rule 68;
● In the process of filing their financial
statements for the purpose of issuing any
class of instruments in a public market;
● Holders of secondary licenses issued by
regulatory agencies
MEDIUM-SIZED ENTITIES
Those that meet all of the following criteria:
● Total assets of more than P100M to P350M
or liabilities of more than P100M to P250M
(for a parent reporting entity, the amounts
are based on the consolidated figures);
● Not required to file their financial
statements under Part II of Rule 68;
● Not in the process of filing their financial
statements for the purpose of issuing any
class of the instruments in a public market;
and
● Not holders of secondary licenses issued
by the regulatory agencies
SMALL ENTITIES
Those that meet all of the following criteria:
● Total liabilities of between P3M and P100M
or liabilities of between P3M and P100M
(for a parent reporting entity, the amounts
are based on the consolidated figures);
● Not required to file their financial
statements under Part II of Rule 68;
● Not in the process of filing their financial
statements for the purpose of issuing any
class of the instruments in a public market;
and
● Not holders of secondary licenses issued
by the regulatory agencies
MICRO ENTITIES
Those that meet all of the following criteria:
● Total assets and total liabilities of less than
P3M;
● Not required to file financial statements
under Part II of Rule 68;
● Not in the process of filing their financial
statements for the purpose of issuing any
class of instruments in a public market; and
● Not holders of secondary licenses issued
by regulatory agencies
diamla, foronda, gan 7
APPLICABILITY
OF
PHILIPPINE
FINANCIAL REPORTING FRAMEWORKS
Full PFRS/IFRS
PFRS for Small and Medium-sized Entities
(PFRS/IFRS for SMEs)
PFRS for Small Entities
Income Tax Reporting
●
FULL PFRS/IFRS
● For larger and/or publicly accountable
entities;
● Banks, insurance companies, and other
entities which are holders of secondary
licenses issued by regulatory agencies
shall also apply the requirements of their
respective regulatory bodies
●
●
●
●
●
PFRS/IFRS FOR SMEs
● For medium-sized entities
● Medium sized entities which may choose to
prepare the FS following either FULL
PFRS/IFRS or PFRS/IFRS FOR SMEs:
● A subsidiary of parent reporting under Full
PFRS/IFRS;
● A subsidiary of a foreign parent that will
move towards Full PFRS/IFRS;
● A significant joint venture or associate that
is part of a group that is reporting under Full
PFRS/IFRS;
● A branch office or regional operating
headquarter of a foreign company reporting
under Full PFRS/IFRS;
● A subsidiary that is mandated to report
under Full PFRS/IFRS;
● An entity that has short-term projection that
it will breach the quantitative threshold set
in the criteria for a medium-sized entity,
provided that the event that caused the
change in classification is considered is
considered “significant and continuing”;
● An entity that has been preparing FS under
Full PFRS/IFRS and decide to liquidate;
● Other entities that the SEC may consider
as valid exceptions from mandatory
adoption of PFRS for SMEs.
A medium-sized entity, belonging to any of the
above, opting to adopt the Full PFRS/IFRS instead
of the PFRS for SMEs, shall include in its Notes to
the Financial Statements the facts supporting its
adoption of the Full PFRS/IFRS.
PFRS FOR SMALL ENTITIES
● Applicable for reporting entities classified
as Small Entities;
● Small entities that have operations or
investments in another country with
different functional currency shall apply
●
●
●
●
●
●
●
●
instead the PFRS/IFRS for SMEs or the
Full PFRS/IFRS.
Small entities falling under any of the
following, may at their option apply the
PFRS/IFRS for SMEs or Full PFRS/IFRS
instead of PFRS for Small Entities:
A subsidiary of parent reporting under Full
PFRS/IFRS or PFRS/IFRS for SMEs;
A subsidiary of a foreign parent that will
move towards Full PFRS/IFRS or
PFRS/IFRS for SMEs;
A significant joint venture or associate that
is part of a group that is reporting under Full
PFRS/IFRS or PFRS/IFRS for SMEs;
A branch office or regional operating
headquarter of a foreign company reporting
under Full PFRS/IFRS or PFRS/IFRS for
SMEs;
An entity that has short-term projection that
it will breach the quantitative threshold set
in the criteria for a small entity, provided
that the event that caused the change in
classification is considered is considered
“significant and continuing”;
An entity that has a concrete plan to
conduct an initial public offering within the
next two years;
An entity that has been preparing FS under
Full PFRS/IFRS for SMEs and decide to
liquidate; and
Other entities that the SEC may consider
as valid exceptions from mandatory
adoption of PFRS for Small Entities.
Small Entities which opted to apply the
PFRS for SMEs or Full PFRS under any of
the foregoing grounds shall include in its
FS the facts supporting their adoption of
the PFRS for SMEs for Full PFRS.
INCOME TAX REPORTING
● Micro entities have the option of adopting
either the PFRS for Small Entities or the
income tax basis.
● The following at a minimum, shall consist
the micro entities’ FS;
➔ The Statement of Management’s
Responsibility;
➔ Auditor’s Report;
➔ Statement of Financial Position;
➔ Statement of Income; and
➔ Notes to Financial Statements
● All these components must cover a twoyear comparative period.
● The management of micro entities using a
reporting framework other than PFRS for
Small Entities shall assess the applicability
of the basis of accounting considering the
nature of the entity, the objective of the
diamla, foronda, gan 8
●
financial statements and the requirements
of the law or regulators.
The SEC requires the reporting entity to
adopt a higher framework should the
prescribed thresholds for total assets or
liabilities fall within different classification of
the reporting entity.
CHAPTER 4
PREPARING THE FINANCIAL
STATEMENTS
COMPONENTS FINANCIAL STATEMENTS
a. STATEMENT OF FINANCIAL POSITION:
b.
c.
d.
e.
the financial position of the entity as of a
given reporting date, comprising assets,
liabilities and equity.
STATEMENT OF COMPREHENSIVE
INCOME: The performance of an entity for
a given reporting period. Two components
of comprehensive income are presented:
profit or loss and other comprehensive
income.
STATEMENT OF CASH FLOWS: The
historical changes in cash and cash
equivalents during a reporting period.
STATEMENT OF CHANGES IN EQUITY:
Events that cause changes in equity and
include profit or loss, other comprehensive
income and transactions with owners of the
enterprise.
NOTES
TO
THE
FINANCIAL
STATEMENTS: The accounting policies
adopted by the management, schedules to
support the balances presented on the face
of the financial statements and other
information that may be relevant to the
users but is not appropriately presented on
the face of the financial statements.
RESPONSIBILITY
PRESENTATION
STATEMENTS
●
●
●
FOR
OF
THE
FINANCIAL
Financial statements portray the economic
activities and the result of the economic
activities undertaken by the enterprise
during a reporting period. Financial
statements are generated internally by an
enterprise and are communicated to those
who would use them as the basis for
economic decisions.
Financial statements are basically the
representation
of
the
company’s
management.
The presentation of financial statements is
affected to a large extent by the accounting
policies adopted by the management.
Accounting policies are the specific
●
principles, bases, conventions, rules and
practices applied by an entity in preparing
financial statements. The accounting
policies adopted by the management
should be in compliance with the financial
reporting frameworks discussed in the
previous chapter. Financial statements that
are in compliance with the appropriate
reporting framework are presumed to be
fairly presented and comparable with
financial statements of other enterprises
within the same classification.
Financial statements, except the statement
of cash flows, are prepared applying the
accrual basis.
STATEMENT OF FINANCIAL POSITION
● The statement of financial position, which
●
●
is conventionally called the balance sheet,
presents the financial position of an
enterprise as of a given date.
It presents three elemental assets,
liabilities and equity
Philippine Accounting Standards (PAS 1)
1, Presentation of Financial Statements,
requires the presentation of assets and
liabilities following the current and noncurrent classification, unless presentation
based on liquidity provides information that
is more relevant to the users. This means
that as a general rule asset are classified
under either assets or non-current assets.
Likewise, liabilities are classified under
either current liabilities or non-current
liabilities. This manner of presentation aids
the users to evaluate more readily the
availability of the enterprise to meet its
current obligations.
CURRENT AND NON-CURRENT ASSETS
● An asset is classified as a current asset if it
satisfies any one of the following criteria
(paragraph 66, IAS 1 Presentation of
Financial Statements):
(a) It is expected to be realized in, or is
intended for sale or consumption in
the entity's normal operating cycle;
(b) It is held primarily for the purpose of
being traded;
(c) It is expected to be realized within
twelve months after the reporting
period; or
(d) It is cash or cash equivalent, unless
it is restricted from being
exchanged or used to settle a
liability for at least twelve months
from the end of the reporting period.
diamla, foronda, gan 9
●
●
All other assets that do not meet any of the
foregoing criteria are classified as noncurrent assets.
The operating cycle of an entity is the time
between the acquisition of assets for
processing and their realization in cash or
cash equivalents, When the entity’s normal
operating cycle is not clearly identifiable, it
is assumed to be twelve months
(paragraph 68, IAS 1). A manufacturing
entity’s normal operating cycle is presented
overleaf.
ASSET
REASON FOR
CLASSIFICATION AS
CURRENT ASSET
CASH
Unless otherwise
described, presumed
to be unrestricted.
TRADE
RECEIVABLES
(Accounts and Notes
Receivable arising
from sale of goods or
rendering of services)
Expected to be
realized in the entity’s
normal operating
cycle.
INVENTORIES
Expected to be sold in
the entity’s normal
operating cycle.
PREPAID EXPENSES Expected to be
consumed in the
entity’s normal
operating cycle.
FINANCIAL ASSETS Held primarily for the
AT FAIR VALUE
purpose of being
THROUGH PROFIT
traded.
OR LOSS (For
example, investments
in shares of stock or
investments in debt
instruments of other
entities that are
currently being traded
in capital markets and
are intended to be sold
currently)
NON-TRADE
RECEIVABLES
COLLECTIBLE
WITHIN 12 MONTHS
(for example:
dividends receivable,
interest receivable,
and advances to
Expected to be
realized within twelve
months after the
reporting period
officers due currently)
The following are examples of non-current assets:
(a) Property, Plant and equipment, which
include land, building, equipment, furniture
and fixtures, tools, if used in the normal
operations of the entity or if intended to be
used in the operations of the entity in the
future.
(b) Intangible assets, such as patents,
franchise, trademarks, customer list, which
provide economic benefit and rights to the
entity for a period of more than twelve
months.
(c) Investment Property, which includes land
or building that are held for appreciation in
value, for rental to others for an
undetermined future use.
(d) Financial assets that are not expected to be
realized in cash in the entity’s normal
operating cycle or within 12 months after
the reporting period, such as long-term
advances to officers and key employees,
other non-trade receivables which are
collectible after at least twelve months after
the reporting period, financial assets at fair
value through other comprehensive
income, debt investments at amortized cost
and investments in associates.
CURRENT AND NON-CURRENT LIABILITIES
● Current liabilities include obligations which
meet any of the following criteria
(paragraph 69, IAS 1):
(a) It is expected to be settled in the
entity’s normal operating cycle;
(b) It is held primarily for the purpose of
being traded;
(c) It is due to be settled within 12
months after the reporting period; or
(d) The entity does not have an
unconditional
right
to
defer
settlement of the liability for at least
12 months after the reporting
period.
The following are examples of obligations normally
classified as current liabilities:
LIABILITY
REASON FOR
CLASSIFICATION AS
CURRENT LIABILITY
TRADE PAYABLES
Expected to be settled
(Accounts payable and in the entity’s normal
Notes Payable which
operating cycle
arise from purchase of
goods or services in
the normal course of
diamla, foronda, gan 10
business)
ACCRUED EXPENSE
Expected to be settled
in the entity’s normal
operating cycle
DIVIDENDS
PAYABLE
Expected to be settled
12 months after the
reporting period
UNEARNED
REVENUES
Expected to be settled
in the entity’s normal
operating cycle
LONG-TERM NOTES
PAYABLE DUE
WITHIN 12 MONTHS,
maturity date is
extended for a period
of 5 years from original
maturity date.
Arrangement for the
extension of maturity
date is completed after
the reporting period.
The entity does not
have an unconditional
right to postpone
settlement of the
obligation for at least
12 months after the
reporting period.
●
All other liabilities that do not meet any of
the foregoing criteria are classified as noncurrent liabilities. Examples of obligations
that are generally classified as non-current
liabilities are as follows:
(a) Long term notes payable that are
due beyond 12 months from the
end of the reporting period;
(b) Bonds payable that are due beyond
twelve months after the reporting
period;
(c) Long-term notes payable that are
due within twelve months after the
reporting period, but which terms
are extended on a long-term basis
and
negotiation
has
been
completed before the end of the
reporting period.
EQUITY
● The equity of a corporate form is presented
according to a source.
● Components of Shareholder’s Equity:
- Contributed capital
- Retained earnings
- Cumulative other comprehensive
income
CONTRIBUTED CAPITAL
● Share capital
⭑ Preference share capital
⭑ Ordinary share capital
● Share premium/additional contributed
capital
RETAINED EARNINGS
● represent cumulative profits earned by the
corporation reduced by the dividend
declared.
CUMULATIVE
OTHER
COMPREHENSIVE
INCOME
● presents change in equity arising from nonowner transactions that do not pass
through the profit or loss but are taken to
other comprehensive income of the
corporation.
● Examples:
⭑ Revaluation
surplus
from
revaluation increment based on
independent appraisal of PPE and
intangible assets,
⭑ Unrealized gain or losses on
investments at FVOCI,
⭑ Foreign currency translation gains
and losses of assets and liabilities
of a foreign operation,
⭑ Actuarial gains and losses on
defined
benefit
employee
retirement plans.
FORMS OF THE STATEMENT
FINANCIAL POSITION
●
●
●
ACCOUNT FORM - resembles the Taccount
REPORT FORM - a continuous format of
presenting all three elements. Liabilities are
presented immediately after total assets
and equity accounts are listed after
liabilities.
FINANCIAL
POSITION
FORM
emphasized the working capital of the firm
STATEMENT
INCOME
●
●
●
OF
OF
COMPREHENSIVE
Presents the performance of the entity for
a given period of time:
Two elements:
⭑ INCOME, and
⭑ EXPENSES
The statement presenting the financial
performance of an entity is an expanded
statement in 2 sections:
⭑ Profit or Loss section
⭑ Other
comprehensive
income
section
FORMS OF SCI
●
ONE-STATEMENT FORM - includes both
the profit or loss and the other
comprehensive income.
diamla, foronda, gan 11
●
TWO-STATEMENT
FORM
one
statement for the profit or loss and another
statement for the comprehensive income.
METHODS OF PRESENTING CASH FLOWS
FROM OPERATING ACTIVITIES
●
EARNINGS PER SHARE
●
If an entity’s capital structure is composed
of more than one class of share capital, the
profit which serves as the numerator for the
computation shall be reduced by the
preference dividends as follows:
⭑ If the Preference Share (PS) is
cumulative, the annual dividend
requirement, whether declared or
not, shall be deducted from the
profit to arrive at p-profit attributable
to Ordinary Shareholders (OS).
⭑ If the PS is non-cumulative, only the
dividend on preference share that
has been declared during the
period shall be deducted from profit
to arrive at profit attributable to OS.
STATEMENT OF CASH FLOWS
●
Presents information on the inflows and
outflows of cash equivalents, classified into
operating activities, investing activities, and
financing activities.
OPERATING ACTIVITIES
● Include all transactions and other events
that enter into determination of income in
profit or loss. Examples:
● Collections from customers
● Payment to suppliers
● Payment to employees for wages and
salaries
● Payment to government for taxes
● Payment to lenders for interest
INVESTING ACTIVITIES
● Include all cash transactions affecting
assets not normally identified with normal
operating cycle. Examples:
⭑ Granting of non-trade loans and
collecting them
⭑ Acquiring
and
disposing
investments in non-current financial
assets, and
⭑ Acquiring and disposing PPE and
intangible assets
NON-CASH ACTIVITIES
● Non-cash activities that significantly affect
assets and liabilities are not presented in
the face of the statement of cash flows but
may be presented in the accompanying
notes to the financial statements.
●
DIRECT METHOD
⭑ Enumerates the major classes of
gross operating receipts and
payments.
⭑ Reconstructions are made based
on income statement accounts and
changes in account balances in the
statement of financial position to
arrive at the amounts shown as
receipts
and
payment
for
operations.
INDIRECT METHOD
⭑ Present cash flows from operations
by reconciling profit or loss before
income tax top operating cash
flows.
⭑ Adjustments are made for income
and expenses not involving cash or
receipts or cash payments.
⭑ Examples:
Depreciation,
amortization of intangible assets,
gains and losses on sale of noncash assets and gains and losses
on debt extinguishment.
DEPRECIATION AND AMORTIZATION
● Added back to profit
● Reduces profit without any cash outflow.
GAINS
● Deducted from profit because they are
already included in the proceeds or
payment is classified under either investing
or financing activities
INCREASE/DECREASE IN A/R
● Increases in AR is deducted from profit
because it arises from revenue without
cash collections.
● Decrease in A/R is added to profit because
the revenue has been recognized in a prior
year but the cash collection is made only
during the year.
INCREASE/DECREASE IN INVENTORIES
● Increase is deducted from profit because
increase in inventories results from
purchase of goods, which in effect causes
a decrease in the cash balance.
● Decrease in inventories is added to profit
because it represents an expense in the
current year from a purchase made last
year.
diamla, foronda, gan 12
INCREASE/DECREASE
IN
PREPAID
EXPENSES
● Increase is deducted from profit because it
results from payment of cash this year, but
the expense is to be incurred in subsequent
period and is not yet deducted from current
year’s income.
● Decrease in prepaid expense is added
because it results from incurrence of
expense this year, with payment already
made in a prior year.
INCREASE/DECREASE IN A/P
● Increase in AP and accrued expense is
added to net income because it is
presumed to have resulted from current
year purchases or expenses that were
deducted to arrive at profit but cash patent
is to be made in a subsequent period.
● Decrease in these accounts is deducted
because the related expense had been
reported in a prior year but it required cash
outflow during this year.
STATEMENT OF CHANGES IN EQUITY
●
●
●
Shows the movement of each equity
component during a reporting period.
Final figures of these equity components
are presented in the statement of financial
position under the equity portion
The statements provide one column for
each equity component.
NOTES TO THE FINANCIAL STATEMENTS
●
●
To achieve completeness, information that
cannot be appropriately presented in the
face of the financial statements is
presented in the notes to the FS.
Includes:
A. The basis for the presentation of FS
including a summary of significant
accounting policies,
B. Supporting schedules for line items
presented
on
the
financial
statements,
C. Other
disclosures,
including
contingent liabilities, contractual
commitments, and events after the
reporting period which may be
relevant to the decisions to be
made by and evaluation of the
users.
EFFECTS OF EVENTS
REPORTING PERIOD
●
AFTER
●
●
period and the date when financial
statements are authorized for issue.
The date of issuance of the FS is the date
when the management of the enterprise
approves and authorizes the issue of the
FS.
Two types of events that can be identified:
⭑ ADJUSTING EVENTS - events that
provide conditions that existed at
the end of the reporting period.
⭑ NON-ADJUSTING EVENTS events that are indicative of
conditions that arose after the
reporting period.
ADJUSTING
EVENTS
REPORTING PERIOD
●
●
AFTER
THE
Confirms a condition that already exists at
the reporting date.
The entity shall adjust the amounts
recognized in its FS to reflect this type of
subsequent events in order to reclassify an
information, or to recognize a financial
statement element that was not previously
recognized.
EXAMPLES OF ADJUSTING EVENTS
a. The settlement after the reporting period of
a court case that confirms that the entity
had a present obligation at the reporting
date.
b. The receipt of information after the
reporting period indicating that an asset
was impaired at the reporting date.
c. The determination after the reporting date
of the amount of profit-sharing or bonus
payments, if the entity had a present legal
obligation or constructive obligation to
make such payments as a result of events
before the end of the reporting period.
d. The discovery of fraud or errors which slow
that the FS are incorrect.
THE
Events after the reporting period are those
events, favorable and unfavorable that
concur between the end of the reporting
diamla, foronda, gan 13