InterAcc 3 – Lecture Notes 1
Summary
Ref: Millan, and Valix, Peralta & Valix, all 2020 edition
Topic: Financial Statements
 Financial statements only provide financial information
 Remember the faithful representation and relevance
 Objectives of financial statements and financial reporting:
1. Financial statements – general purpose financial statements, to provide
information about financial position, financial performance, and cash flows.
2. Financial reporting – to provide financial information about reporting entity
that is useful in decision making
Specific objectives:
a. Provide information useful in making investing and credit decisions about
financing the assets
b. Provide information useful in assessing cash flow prospects
c. Provide information about entity resources, claims, and changes in
resources and claims (resources pertain to assets while claims pertain to
liabilities and equity)
 Financial reporting includes not only financial statements but also financial
highlights, summary of financial figures, analysis of financial statements and
significant ratios, also, nonfinancial information
 Financial statements report about:
1. Financial position – comprises assets, liabilities, and equity at particular
moment of time, thus pertains to liquidity, solvency, and need for additional
financing
2. Financial performance – comprises the revenue, expenses, and net income
or loss for a period of time, thus pertains to effectiveness and efficiency in
using resources. It may be called as results of operation
3. Cash flows – the cash receipts and cash payments arising from operating,
investing, and financing activities; thus, it is useful in determining the ability of
entity to generate cash and cash equivalents.
 General features of financial statements
1. Fair presentation and compliance with PFRSs – it is presumed that
compliance with PFRS results in fairly presented financial statements, it
requires the following
a. Selection and application of accounting policies in accordance with PFRSs
b. Presentation of information that is relevant and faithfully represented
c. Provide additional necessary disclosure
2. Going concern – entity is viewed as continuing in operation indefinitely in the
absence of evidence on the contrary, entity shall take into account all
available information about the future, which is at least, but not limited to, 12
months from reporting date. This concept may be abandoned when there are
uncertainties to maintain an entity on a going concern basis.
3. Accrual basis – all financial statements, which are for general purpose, are
prepared using accrual basis except statement of cash flows. Transactions
are recognized when occur and not when there is cash disbursements or
receipts.
4. Materiality and aggregation – (1) each material class of similar items are
presented separately, (2) dissimilar items are presented separately, and (3)
dissimilar items which are immaterial are aggregated. Information is material
if omitting, misstating or obscuring it could reasonably be expected to
influence economic decision of primary users. Factors of materiality:
a. Relative size
b. Nature of the item
5. Offsetting – only when is required or permitted by PFRSs. Example,
unrealized gain or loss from trading securities and translation of foreign
currency should have a separate item but are offset as permitted by PFRSs
except when one of them is material. It should be distinguished from getting
the net amount of a PPE item by deducting its depreciation.
6. Frequency of reporting – at least annually, if there is a change in reporting
period following should be disclosed:
a. Period covered
b. Reason
c. Facts that amounts are not entirely comparable
7. Comparative information – PAS 1 requires an entity to present comparative
information in respect of preceding period for all amounts reported in the
current period’s financial statements unless permitted or required.
Additional financial statements may be provided.
Third statement of financial position is required when:
a. Accounting policy is applied retrospectively
b. Retrospective restatement of items has been made
c. Reclassification of items
The result of which is that the entity shall present three statement of financial
position with different dates:
a. At the end of the current period
b. At the end of the previous period
c. At the beginning of the earliest comparative period
8. Consistency of presentation – accounting methods and practices shall be
applied on a uniform basis from period to period. Thus, presentation and
classification of items in the financial statements is retained from one period
to another, except when the following are present:
a. Change is required by PFRS
b. Change as a result in information that is reliable and more relevant
 Complete set of financial statements:
1.
2.
3.
4.
5.
Statement of financial position
Statement of profit or loss and other comprehensive income
Statement of changes in equity
Statement of cash flows
Notes, comprising a summary of significant accounting policies and other
explanatory information
6. Additional statement of financial position
Topic: Statement of Financial Position
 Provide information for evaluation of the following:
a. Liquidity – ability to meet currently maturing obligations
b. Solvency – availability of cash over longer term to meet maturing obligations
c. The need for additional financing
 Kinds of presentation:
a. Classified – current and noncurrent items are presented separately
b. Unclassified – no separation, but are presented in order of liquidity
The general rule is that classified will be used except when unclassified will
provide more reliable and relevant information.
There can be a situation that some assets and liabilities are classified and others
are presented in order of liquidity, this is called “mixed presentation” which is
permitted by PAS 1.
 Classified presentation highlights working capital and facilitates the computation
of liquidity and solvency
“Working Capital = Current Assets – Current Liabilities”
 Current assets
a. Cash and cash equivalents unless restricted (it is still current even though
restricted as long as it is realizable for at least 12 months after reporting
period, more than 12 months = non-current)
b. Held primarily for trading
c. Realizable within 12 months after the reporting period
d. Realizable within normal operating cycle
 Current liability
a. Settleable within normal operating cycle
b. Held primarily for trading
c. Settleable within 12 months after reporting period
d. Entity does not have unconditional right to defer settlement for at least 12
months after reporting period
 Non-current – the residual definition which means if it cannot be qualified as
current then it is non-current
 Operating cycle refers to the time between acquisition of assets for processing
and their realization, when not identifiable it is assumed as 12 months
 Asset and liability that do not form part of operating cycle are presented as
current only when they are realizable or settleable within 12 months after
reporting period
 Deferred tax assets and liabilities are always presented as noncurrent
 Refinancing agreement – replacement of existing debt with a new one but with
different terms and normally entails a fee or penalty
Troubled debt restructuring – refinancing where debtor is under financial distress
Loan facility – credit line
The long-term obligation when refinancing is:
a. Completed after reporting period and before the financial statements are
authorized for issue – Current
b. Refinancing is not at the discretion of the entity or there is no arrangement for
refinancing – Current
c. Other conditions – noncurrent:
1. Entity has a discretion to refinance under existing loan facility
2. Entity has a unilateral right to defer payment
3. Others which are not qualified to become current
 When liability is payable on demand – current regardless of agreement to make it
noncurrent, example long-term obligation has become payable on demand due
to breach even if the creditor agreed not to demand
It must become payable on demand after reporting period and before
authorization for issue in order to become current
If by the end of reporting period (for example December 31), creditor provide
grace period ending at least 12 months after reporting period, within which the
entity can rectify breach and during which the lender cannot demand immediate
repayment – noncurrent
 The rule – the rule is that when entity has or has acquired right to defer payment
before, it is noncurrent. When entity has no right to defer payment, it is current.
The right is abandoned when entity has breached the loan provision.
 When grace period or the right to defer is acquired before or at the end of
reporting period, it is noncurrent. When after reporting period, it is current
 Estimated liabilities – obligations which exist at the end of the reporting period
although the amount is not definite, may be classified as current or noncurrent
 Contingent liability – a possible obligation that arises from past event and whose
existence will be confirmed only by the occurrence or nonoccurrence of one or
more uncertain future events not wholly within the control of the entity, not
recognized
Range of outcome:
1. Probable – likely to occur, rule of thumb or more than 50%
2. Possible – less likely to occur, 50% or less
3. Remote – least likely to occur, 10% or less
a. When contingent liability is probable and measurable, it is recognized as
“provision”
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b. When contingent liability is only probable but not measurable or vice versa or
when it is only possible, it is only disclosed
c. When contingent liability is remote, it is ignored
Contingent asset – possible asset that arises from past event and whose
existence will be confirmed only by the occurrence or nonoccurrence of one or
more future events not wholly within the control of entity
a. When contingent asset is realized or is 100% chance of occurrence, it is
recognized as asset but it is not anymore contingent.
b. When contingent asset is probable, it is disclosed
c. When contingent asset is either possible or remote, it is ignored
The reason is asset connotes control and probable does connote control. The
recognition of a contingent asset will result to an income that has an uncertainty
to be realized
Equity – net assets or residual interests
Share capital – par value multiplied by total shares issued
Subscribed share capital – subscribed only, not yet fully paid therefore not yet
issued
Subscription receivable – deduction from related subscribed share capital but is
present as current assets when collectible within one year
Share premium – excess over par value multiplied by total shares issued
Retained earnings – cumulative periodic net income or loss, dividend
distributions, prior period errors, changes in accounting policy, and other capital
adjustments
Unappropriated – free for any purpose
Appropriated – restricted for its special purpose
Revaluation surplus – excess of sound value over carrying amount
Treasury shares – entity’s own shares that have been issued but later reacquired
but not canceled, not an asset but a deduction from total shareholder’s equity
Elements
1. Entity’s own shares – if not, then it is financial asset at FVOCI or FVPL
2. Have been issued first – entity cannot reacquire it if it is still on its discretion
3. Reacquired – it must be reacquired from shareholders
Reserves
Distributable – portion of equity that can be distributed as dividends, retained
earnings
Non-distributable – portion of equity that cannot be distributed to shareholders in
any form during the lifetime of entity
Examples
1. Share premium
2. Retained earnings appropriated
3. Revaluation surplus
4. OCI reserve
 PAS 1 par 54 only states the minimum line items and therefore not exclusive, par
55 provides that there can be an additional line items when such is relevant
Judgment basis:
1. Nature and liquidity of assets
2. Function of assets within entity
3. Amount, nature, and timing of liabilities
 Forms, not specified by PAS 1:
1. Report form
2. Account form
Topic: Notes to Financial Statements
 Notes to financial statements provide narrative description or disaggregation of
items presented in the financial statements and information about items that do
not qualify for recognition
 PAS 1 par 112 provides the purposes of notes:
1. Present information about the basis of preparation of the financial statements
and the specific accounting policies
2. Disclose the information required by PFRS that is not presented in the
financial statements
3. Provide additional information which is not presented in financial statements
but is relevant to an understanding of the financial statements
 Notes are normally structured as follows:
1. General information on the reporting entity – domicile and legal form, country
of incorporation and address of registered office or principal place, and
description of nature of entity’s operation
2. Statement of compliance with the PFRSs and basis of preparation of financial
statements – PAS 1 par 16 provides reporting entity must comply with each
PFRSs in order to describe that its financial statement is complying with
PFRS
3. Summary of significant accounting principles – includes narrative descriptions
of line items in other financial statements, their recognition criteria,
measurement bases, derecognition, transitional provisions, and other relevant
information
4. Disaggregation of the line items in other financial statements and other
supporting information
5. Other disclosures required by PFRSs such as:
a. Contingent liabilities and unrecognized contractual commitments
b. Nonfinancial disclosures such as the entity’s financial risk management
objectives and policies
c. Events after the reporting date, if material
d. Changes in accounting policies and accounting estimates and corrections
of prior period errors
e. Related party disclosures
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f. Judgements and estimates
g. Capital management
h. Dividends declared after reporting period but before financial statements
were authorized for issue, and the related amount per share
i. Amount of any cumulative preference dividends not recognized
6. Other disclosures not required by PFRSs but management deems relevant
Accounting policies – “specific principles, bases, conventions, rules, and
practices applied by an entity in preparing and presenting financial statements
Hierarchy of standards:
1. PFRS, PAS, and PI
2. Judgment
When making judgment:
 Shall consider the following
a. Requirements in other PFRSs dealing with similar transactions
b. Conceptual framework
 May consider the following:
a. Pronouncements issued by other standard-setting bodies such as
FASB, AASB, NACAS, etc.
b. Other accounting literatures (such as this book, Valix Financial
Accounting books, etc.) and industry practices
Change in accounting policy – PAS 8 requires a consistent application of
accounting policies but permits a change in accounting policies only if it is
required by PFRS or will result in reliable and more relevant information
Example
a. Change in cost formula for inventories
b. Change in model of measuring investment property
c. Change in the model of measuring PPE
d. Change in business model for classifying financial assets
e. Change in the method of recognizing revenue from long-term construction
contracts
f. Change to a new policy as a result of a new PFRS
g. Change in financial reporting framework
Not a change of policy:
a. Application of an accounting policy for transactions, other events or conditions
that differ in substance from those previously occurring
b. Application of a new accounting policy for transactions, other events or
conditions that did not occur previously or were immaterial
Accounting for changes in accounting policy, in order of priority:
1. Transitional provision in a PFRS – the accounting is given by the PFRS
2. Retrospective application – adjusting the opening balance of each affected
component of equity (mainly, it is the retained earnings) for the earliest prior
period presented and other comparative amounts disclosed for each prior
period presented as if the new accounting policy had always been applied. If
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impracticable for all periods, policy is applied at the beginning of the earliest
period for which retrospective application is practicable which may be the
current period.
3. Prospective application – if impracticable at the beginning, policy is applied at
the earliest date practicable
Impracticable – if the prior period effects cannot be determined or if it requires
significant estimates and assumptions to have been made when prior period
financial statements were prepared and these are impossible to determine in
the current period
Voluntary change in accounting policy – it refers to adoption of amended version
of pronouncement of a standard setting body other than IASB, which the entity
has previously adopt the unamended pronouncement of such body.
It shall be accounted using retrospective application because transitional
provision is provided by PFRS.
Change in reporting entity – (according to FASB) change that results in financial
statements that, in effect, are those of a different reporting entity
It is limited only to:
1. Presenting consolidated or combined financial statements in place of financial
statements of individual entities
2. Changing specific subsidiaries that make up the group of entities for which
consolidated financial statements are presented
3. Changing the entities included in combined financial statements
It shall be accounted using retrospective application (SFAS 154)
Under PAS 8 there are only 2 accounting changes, change in accounting policy
and change in accounting estimate. Therefore, any event that cause changes in
business combination under PFRS 3 and consolidated financial statements
under PFRS 10 is not a change in reporting entity
Accounting estimates – measurements that are reasonably estimated, such as
those applied to:
1. NRV of inventories
2. Depreciation
3. Bad debts
4. FV of financial instruments
5. Provisions
These estimates are revised when there is a change in circumstances such that
new information or more experience is obtained, therefore, there is a change in
accounting estimates
Change in accounting estimates – adjustment of carrying amount of an asset or a
liability, or the amount of the periodic consumption of an asset, that results from
the assessment of the present status of, and expected future benefits and
obligations associated with, assets and liabilities. Changes in accounting
estimates result from new information or new development and, accordingly, are
not corrections of errors
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Example
a. Change in depreciation or amortized method
b. Change in estimated useful life or residual value of a depreciable asset
c. Change in the required balance of allowance for uncollectible accounts or
impairment losses
d. Change in estimated warranty obligations and other provisions
Accounting for change in accounting estimates:
Using prospective application
Under prospective application, beginning balance of retained earnings and the
previous financial statements are not restated. Therefore, the effects are
recognized in profit or loss, either in:
a. Period of change
b. Period of change and future periods, if both periods are affected
Procedure for accounting for change in accounting estimates:
1. Determine the carrying amount of the asset as at the beginning of the period
of change, January 1 for annual calendar year or April for 2nd quarter of
quarterly interim period
2. Depreciate the determined carrying amount taking into account any changes
in depreciation method, useful life, or residual value
Change in accounting policy vs change in accounting estimate:
1. Normally results from a change in measurement basis
2. Normally results from changes on how expected inflows or outflows of
economic benefits are realized from assets or incurred liabilities
In case of difficulty in distinguishing between these two, the change is treated as
change in accounting estimate
Errors – the misapplication of accounting policies, mathematical mistakes,
oversights or misinterpretations of facts, and fraud
Financial statements are not complying with PFRS if they contain either:
1. Material errors – errors that cause the financial statements to be misstated
2. Intentional immaterial error or fraud
Types of errors according to ways of doing:
a. Error of commission – doing something wrong
b. Error of omission – not doing that should have been done
Type of errors according to period of occurrence:
a. Current period errors – errors discovered either during current period or after
reporting period but before the financial statements were authorized for issue
b. Prior period errors – errors in one or more prior periods but discovered either
in current periods or after reporting period but before the financial statements
were authorized for issue
Prior period errors are corrected using retrospective restatement
Retrospective restatement – correcting a prior period error as if the error had
never occurred
Means:
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1. Restating the comparative amounts for the prior period/s presented in which
the error occurred
2. Restating the opening balances of assets, liabilities, and equity for the earliest
prior period presented, if the error occurred before the earliest period
presented
If retrospective is not practicable, prospective is allowed
General/broad types of errors:
1. Errors in principle – intentional or unintentional, arise from:
a. Lack of knowledge of accounting standards or procedures,
b. Misuse of available information
c. Misinterpretation of accounting standards
2. Clerical and similar errors – generally these are mathematical mistakes,
oversights, or misinterpretation of facts, specifically these are:
a. Transplacement error or Slide
b. Transposition error
c. Error of omission – forgot to record a transaction
d. Error of commission – recording of transaction twice or partially
e. Compensating errors – overstatement of a sale is compensated with
overstatement of expense or erroneous credit is compensated with
erroneous debit, this error is not revealed by trial balance
f. Accounting system error – a bug in computer program
g. Counterbalancing and non-counterbalancing errors
Errors may be only affecting real accounts (SFP) or nominal accounts (SCI),
these are corrected through reclassification entries from wrong account to
appropriate account
When both SFP and P/L are affected by errors, these are either:
a. Counterbalancing errors – the errors in the one period are automatically
corrected or offset in the next period, common happen in:
1. Inventory
2. Purchases
3. Sales
4. Prepayment and unearned items
5. Accruals for income and expense
b. Non-counterbalancing errors – not automatically corrected, the error is carried
by every period if remain undiscovered, examples:
1. Misstatement of depreciation
2. Erroneous capitalization of cost that should be expensed outright
3. Non-capitalization of capitalizable cost
Effect on SFP and P/L
Assume error is committed in 2019
Counterbalancing error
2019
2020
2021
P/L
Overstatement
Understatement
None
SFP
Erroneous
Non-counterbalancing error
2019
P/L
Overstatement
SFP
Erroneous
None
None
2020
None
Erroneous
2021
None
Erroneous
 Events after reporting period – events, favorable and unfavorable, that occur
between end of reporting period and the date when financial statements are
authorized for issue (exclude the date of the end of reporting period, include the
date of authorization)
Date of authorization of the financial statements – refers to the authorization
ordered by management regardless if such authorization is final or subject to
further approval
Two types of events after reporting period:
1. Adjusting events – events that provide evidence of conditions that existed at
the end of reporting period
It requires adjustments of amounts in financial statements
Example:
a. After reporting period (after December 31, it may be January 5), there is a
settlement of a court case that confirms that the entity has a present
obligation at the end of reporting period (on December 31) – it would be as
if the liability arises during the reporting period since the file of case
happen on the same period
b. After reporting period, there is a receipt of information indicating
impairment of asset at the end of the reporting period such as bankruptcy
of customer in relation to trade receivable or an evidence of NRV of
inventories
c. Cost of asset purchased or proceeds of asset sold before/at the end of
reporting period are determined after the reporting period but before
authorization to issue FS
d. After reporting period, amount of profit-sharing or bonus payments are
determined and such payments make entity to have present obligation at
the end of reporting period
e. Discovery of fraud or errors after reporting period and before authorization
to issue
2. Non-adjusting events – events that are indicative of conditions that arose after
reporting period
No adjustments of amounts are required
a. Changes in FV, FXRates, interest rates, or market prices after reporting
period
b. Casualty losses occurring after the reporting period but before
authorization to issue
c. Litigation arising solely from events occurring after reporting period – the
file of case happens after reporting period and not before/at
d. Significant commitments or contingent liabilities entered after reporting
period
e. Major ordinary share transactions and potential ordinary share
transactions after reporting period
f. Major business combination after reporting period
g. Announcing, or commencing the implementation of, a major restructuring
after reporting period
h. Announcing a plan to discontinue an operation after reporting period
i. Change in tax enacted after reporting period
j. Declaring of dividends after reporting period