PAS 1
Presentation of Financial Statements
Introduction
Philippine Accounting Standards (PAS) 1 Presentation of Financial Statements prescribes the basis for
the presentation of general purpose financial statements, the guidelines for their structure, and the
minimum requirements for their content to ensure comparability.
Types of comparability
•
Intra-comparability (horizontal or inter-period) – refers to the comparability of financial
statements of the same entity but from one period to another.
•
Inter-comparability (dimensional) – refers to the comparability of financial statements
between different entities.
Comparability requires consistency in the adoption and application of accounting policies and in the
presentation of financial statements, e.g., the use of line-item descriptions and account titles, either
within a single entity from one period to another or across different entities.
PAS 1 applies to the preparation and presentation of general purpose financial statements. The
recognition, measurement and disclosure requirements for specific transactions and other events are
set out in other PFRS.
The terminology used in PAS 1 is suitable for profit-oriented entities. If non-profit organizations apply
PAS 1, they may need to amend the line-item and financial statement descriptions.
Financial Statements
Financial statements are the “structured representation of an entity’s financial position and results of
operations”. (PAS 1.9)
General purpose financial statements (‘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”. (PAS 1.7)
General purpose financial statements cater to most of the common needs of a wide range of external
users. General purpose financial statements are the subject matter of the Conceptual Framework and
PFRSs.
Purpose of Financial Statements
1. Primary objective: To provide information about the financial position, financial performance,
and cash flows of an entity that is useful to a wide range of users in making economic decisions.
2. Secondary objective: To show the results of management’s stewardship over the entity’s
resources.
To meet the objective, financial statements provide information about an entity’s:
a. Assets (economic resources);
b. Liabilities (economic obligations);
c. Equity;
d. Income;
e. Expenses;
f.
Contributions by, and distributions to, owners; and
g. Cash flows.
General Features of Financial Statements
1) Fair Presentation and Compliance with PFRSs
Fair presentation is faithfully representing, in the financial statements, the effects of
transactions and other events in accordance with the definitions and recognition criteria for assets,
liabilities, income and expenses set out in the Conceptual Framework.
Compliance with the PFRSs is presumed to result in fairly presented
financial statements.
Fair presentation also requires the proper selection and application
of accounting policies,
proper presentation of information, and
provision of additional disclosures whenever relevant to
the
understanding of the financial statements.
Inappropriate accounting policies cannot be rectified by mere
disclosure.
PAS 1 requires an entity whose financial statements comply with PFRSs to make an explicit and
unrestricted statement of such compliance in the notes. However, an entity shall not make such
statement unless it complies with all the requirements of PFRSs.
Illustration: Excerpt from a note to financial statement:
There may be cases wherein an entity’s management concludes that compliance with a PFRS
requirement is misleading. In such cases, PAS 1 permits a departure from a PFRS requirement if the
relevant regulatory framework requires or allows such a departure.
Illustration: Departure from a PFRS requirement
2)
Going Concern
Financial statements are normally prepared on a going concern basis unless the entity has an
intention to liquidate or
has no other alternative but to do so.
When preparing financial statements, management shall
assess the entity’s ability to
continue as a going concern,
taking into account all available information about the future, which is
at least, but not limited to, 12 months from the reporting date.
If the entity has a history of profitable operations and ready access to financial resources,
management may
conclude that the entity is a going concern without detailed
analysis.
If there are material uncertainties on the entity’s ability to
those uncertainties shall be
disclosed.
3)
continue as a going concern,
Accrual Basis of Accounting
All financial statements shall be prepared using the accrual basis of
the statement of
cash flow which is prepared using cash basis.
4)
accounting except for
Materiality and Aggregation
Each material class of similar items is presented separately. A class of similar items is called a
“line item”. Dissimilar items are presented separately unless they are immaterial. Individually
immaterial items are aggregated with other items.
5)
Offsetting
Assets and liabilities or income and expenses are presented separately and are not offset, unless
offsetting is required or permitted by a PFRS.
Offsetting is permitted when it reflects the substance of the transaction. Examples of offsetting:
1. Presenting gains or losses from sales of assets net of the related selling expenses.
2. Presenting at net amount the unrealized gains and losses arising from trading securities
and from translation of foreign currency denominated assets and liabilities, except if
they are material.
3. Presenting a loss from a provision net of a reimbursement from a third party.
Measuring assets net of valuation allowances is not offsetting. For example, deducting allowance for
doubtful accounts from accounts receivables or deducting accumulated depreciation from a building
account is not offsetting.
6)
Frequency of reporting
Financial statements are prepared at least annually. If an entity changes its reporting period to a period
longer shorter than one year, it shall disclose the following:
a. The period covered by the financial statements;
b. The reason for using a longer or shorter period; and
c. The fact that amounts presented in the financial statements are not entirely comparable.
7)
Comparative information
PAS 1 requires an entity to present comparative
information in respect of the preceding
period for all amounts reported in the current period’s financial
statements, unless another
PFRS requires otherwise.
As a minimum, an entity presents two of each of the
statements and related notes. For
example, when an
entity presents its 20x2 current year financial statements, the 20x1 preceding
year financial statements shall also be presented as comparative
information.
Additional Statement of financial position
As mentioned earlier, a complete set of financial statements includes an additional statement of
financial position when certain instances occur. Those instances are as follows:
a. The entity applies an accounting policy retrospectively, makes a restrospective restatement of
items in its financial statements, or reclassifies items in its financial statements; and
b. The instance in (a) has a material effect on the information in the statement of financial position
at the beginning of the preceding period.
8)
Consistency of presentation
The presentation and classification of items in the financial statements is retained from one period to
the next unless a change presentation:
a. Is required by a PFRS; or
b. Results in information that is reliable and more relevant.
Structure and content of financial statements
Each of the financial statements shall be presented with equal prominence and shall be clearly identified
and distinguished from other information in the same published document. For example, financial
statements are usually included in an annual report, which also contains other information. The PFRSs
apply only to the financial statements and not necessarily to the other information.
The following information shall be displayed prominently and repeatedly whenever relevant to the
understanding of the information presented:
a. The name of the reporting entity
b. Whether the statements are for the individual entity or for a group of entities
c. The date of the end of the reporting period or the period covered by the financial statements
d. The presentation currency
e. The level of rounding used (e.g., thousands, millions, etc.)
Illustration: A heading for a financial statement is shown below:
The statement of financial position is dated as at the end of the reporting period while other financial
statements are dated for the period that they cover.
PAS 1 requires particular disclosures to be presented either in the notes or on the face of the other
financial statements (e.g., footnote disclosures). Other disclosures are addressed by other PFRSs.
Management’s Responsibility over Financial Statements
The management is responsible for an entity’s financial statements. The responsibility encompasses:
a. The preparation and fair presentation of financial statements in accordance with PFRSs;
b. Internal control over financial reporting;
c. Going concern assessment;
d. Oversight over the financial reporting process; and
e. Review and approval of financial statements.
The responsibilities are expressly stated in a document called “Statement of Management’s
Responsibility for Financial Statements,” which is attached to the financial statements as a cover letter.
This document is signed by the entity’s
a. Chairman of the Board (or equivalent),
b. Chief Executive Officer (or equivalent), and
c. Chief Financial Officer (or equivalent)
Statement of Financial Position
The statement of financial position shows the entity’s financial condition (i.e., status of assets, liabilities
and equity) as at a certain date. It includes line items that present the following amounts:
a. Property, plant and equipment;
b. Investment property;
c. Intangible assets;
d. Financial assets (excluding (e), (h) and (i));
e. Investments accounted for using the equity method;
f.
Biological assets;
g. Inventories;
h. Trade and other receivables;
i.
Cash and cash equivalents;
j.
Assets held for sale, including disposal groups;
k. Trade and other payables;
l.
Provisions;
m. Financial liabilities (excluding (k) and (l));
n. Current tax liabilities and current tax assets;
o. Deferred tax liabilities and deferred tax assets;
p. Liabilities included in disposal groups;
q. Non-controlling interests; and
r.
Issued capital and reserves attributable to owners of the parent. (PAS 1.54)
PAS 1 does not prescribe the order or format of presenting items in the statement of financial position.
The foregoing is simply a list of items that are sufficiently different in nature or function to warrant
separate presentation.
Presentation of statement of financial position
A statement of financial position may be presented in a “classified” or an “unclassified” manner.
a. A classified presentation shows distinctions between current and noncurrent assets and current
and noncurrent liabilities.
b. An unclassified presentation (also called ‘based on liquidity’) shows no distinction between
current and noncurrent items.
A classified presentation shall be used except when an unclassified presentation provides information
that is reliable and more relevant. When that exception applies, assets and liabilities are presented in
order of liquidity (this is normally the case for banks and other financial institutions).
PAS 1 also permits a mixed presentation, i.e., presenting some assets and liabilities using a current/noncurrent classification and others in order of liquidity. This may be appropriate when the entity has
diverse operations.
Whichever method is used, PAS 1 requires the disclosure of items that are expected to be recovered or
settled (a) within 12 months and (b) beyond 12 months, after the reporting period. A classified
presentation highlights an entity’s working capital and facilitates the computation of liquidity and
solvency ratios.
Current assets and Current liabilities
All other assets and liabilities are classified as noncurrent.
“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 12 months”. (PAS 1.68)
Assets and liabilities that are realized or settled as part of the entity’s normal operating cycle (e.g., trade
receivables, inventory, trade payables, and some accruals for employee and other operating costs) are
presented as current, even if they are expected to be realized or settled beyond 12 months after the
reporting period.
Assets and liabilities that do not form part of the entity’s normal operating cycle (e.g., non-operating
assets and liabilities) are presented as current only when they are expected to be realized or settled
within 12 months after the reporting period.
Deferred tax assets and liabilities are always presented as noncurrent items in a classified statement of
financial position, regardless of their expected dates of reversal.
Examples:
Refinancing agreement
A long-term obligation that is maturing within 12 months after the reporting period is classified as
current, even if a refinancing agreement to reschedule payments on a long-term basis is completed after
the reporting period but before the financial statements are authorized for issue.
However, the obligation is classified as noncurrent if the entity expects, and has the discretion, to
refinance it on a long-term basis under an existing loan facility.
If refinancing is not at the discretion of the entity (for example, there is not arrangement for
refinancing), the financial liability is current.
 Refinancing refers to the replacement of an existing debt with a new one but with different
terms, e.g., an extended maturity date or a revised payment schedule. Refinancing normally
entails a fee or penalty. A refinancing where the debtor is under financial distress is called
“troubled debt restructuring”.
 Loan facility refers to a credit line.
Illustration:
Entity A’s current reporting date is December 31, 20x1. A bank loan taken 10 years ago is maturing on
October 31, 20x2.
Analysis: A currently maturing obligation (i.e., due within 12 months after the reporting date) is
classified as current even if that obligation used to be noncurrent. Therefore, the loan is presented as a
current liability in Entity A’s December 31, 20x1 statement of financial position.
On January 15, 20x2, Entity A enters into a refinancing agreement to extend the maturity date of the
loan to October 31, 20x7. Entity A’s financial statements are authorized for issue on March 31, 20x2.
Analysis: Continuing with the general rule, a currently maturing obligation is classified as current even if
a refinancing agreement, on a long-term basis, is completed after the reporting period and before the
financial statements are authorized for issue. Accordingly, the loan is nevertheless presented as a
current liability.
Under the original terms of the loan agreement, Entity A has the unilateral right to defer (postpone) the
payment of the loan up to a maximum period of 5 years from the original maturity date. Entity A expects
to exercise this right after the reporting period date but before the financial statements are authorized
for issue.
Analysis: Entity A has the discretion (i.e., unilateral right) to refinance the obligation on a long-term basis
under an existing loan facility (i.e., the unilateral right is included in the original terms of the loan
agreement). Accordingly, the loan is classified as noncurrent.
Liabilities payable on demand
Liabilities that are payable upon the demand of the lender are classified as current.
A long-term obligation may become payable on demand as a result of a breach of a loan provision. Such
an obligation is classified as current even if the lender agreed, after the reporting period and before the
authorization of the financial statements for issue, not to demand payment. This is because the entity
does not have an unconditional right to defer settlement of the liability for at least twelve months after
the reporting period.
However, the liability is noncurrent if the lender provides the entity by the end of the reporting period
(e.g., on or before December 31) a grace period ending at least twelve months after the reporting
period, within which the entity can rectify the breach and during which the lender cannot demand
immediate repayment.
Illustration:
In 20x1, Entity A took a long-term loan from a bank. The loan agreement requires Entity A to maintain a
current ratio of 2:1. If the current ratio falls below 2:1, the loan becomes payable on demand. On
December 31, 20x1 (reporting date), Entity A’s current ratio was 1.8:1, below the agreed level. Entity A’s
financial statements were authorized for issue on March 31, 20x2.
Case 1:
On January 5, 20x2, the bank gives Entity A a chance to rectify the breach of loan agreement within the
next 12 months and promised not to demand immediate repayment within this period.
Analysis: The loan is classified as current liability because the grace period is received after the
reporting date.
Case 2:
On December 31, 20x1, the bank gives Entity A a chance to rectify the breach of loan agreement within
the next 12 months and promises not to demand immediate repayment within this period.
Analysis: The loan is classified as noncurrent liability because the grace period is received by the
reporting date.
Statement of Profit or Loss and Other Comprehensive Income
Income and expenses for the period may be presented in either:
a. A single statement of profit or loss and other comprehensive income (statement of
comprehensive income); or
b. Two statements – (1) a statement of profit or loss (income statement) and (2) a statement
presenting comprehensive income.
These presentations have the following basic formats:
Single Statement Presentation
Two-Statement Presentation
PAS 1 requires an entity to present information on the following:
a. Profit or loss;
b. Other comprehensive income; and
c. Comprehensive income
Presenting a separate income statement is allowed as long as a separate statement showing
comprehensive income is also presented (i.e., ‘Two-statement presentation’). Presenting only an income
statement is prohibited.
Profit or loss
Profit or loss is income less expenses, excluding the components of other comprehensive income. The
excess of income over expenses is profit; while the deficiency is loss. This method of computing for
profit or loss is called the “transaction approach”.
Income and expenses are usually recognized in profit or loss unless:
a. They are items of other comprehensive income; or
b. They are required by other PFRSs to be recognized outside of profit or loss.
The following are not included in determining the profit or loss for the period:
The profit or loss section shows line items that present the following amounts for the period:
a. Revenue, presenting separately interest revenue;
b. Finance costs;
c. Gains and losses arising from the derecognition of financial assets measured at amortized cost;
d. Impairment losses and impairment gains on financial assets;
e. Gains and losses on reclassifications of financial assets from amortized cost or fair value through
other comprehensive income to fair value through profit or loss;
f.
Share in the profit or loss of associates and joint ventures;
g. Tax expense; and
h. Result of discontinued operations.
Additional line items shall be presented whenever relevant to the understanding of the entity’s financial
performance. The nature and amount of material items of income or expense shall be disclosed
separately. Circumstances that would give rise to the separate disclosure of items of income and
expense include:
a. Write-downs of inventories to net realizable value or of property, plant and equipment to
recoverable amount, as well as reversals of such write-downs;
b. Restructurings of the activities of an entity and reversals of any provisions for restructuring
costs;
c. Disposals of items of property, plant and equipment;
d. Disposals of investments;
e. Discontinued operations;
f.
Ligation settlements; and
g. Other reversals of provisions.
PAS 1 prohibits the presentation of extraordinary items in the statement of profit or loss and other
comprehensive income or in the notes
Presentation of Expenses
Expenses may be presented using either of the following methods:
a. Nature of expense method – under this method, expenses are aggregated according to their
nature (e.g., depreciation, purchase of materials, transport costs, employee benefits and
advertising costs) and are not reallocated according to their functions within the entity.
b. Function of expense method (Cost of sales method) – under this method, an entity classifies
expenses according to their function (e.g., cost of sales, distribution costs, administrative
expenses, and other functional classifications). At a minimum, cost of sales shall be presented
separately from other expenses.
The nature of expense method is simpler to apply because it eliminates considerable judgment needed
in reallocating expenses according to their function. However, an entity shall choose whichever method
it deems will provide information that is reliable and more relevant, taking into account historical and
industry factors and the entity’s nature.
If the function of expense method is used, additional disclosures on the nature of expenses shall be
provided, including depreciation and amortization expense and employee benefits expense. This
information is useful in predicting future cash flows.
Nature of expense method
Function of expense method
Other comprehensive income
Other comprehensive income “comprises items of income and expense (including reclassification
adjustments) that are not recognized in profit or loss as required or permitted by other PFRSs”. (PAS 1.7)
The components of other comprehensive income include the following:
a. Changes in revaluation surplus;
b. Remeasurements of the net defined benefit liability (asset);
c. Gains and losses on investments designated or measured at fair value through other
comprehensive income (FVOCI);
d. Gains and losses arising from translating the financial statements of a foreign operation;
e. Effective portion of gains and losses on hedging instruments in a cash flow hedge;
f.
Changes in fair value of a financial liability designated at fair value through profit or loss (FVPL)
that are attributable to change in credit risk;
g. Changes in the time value of option when the option’s intrinsic value and time value are
separated and only the changes in the intrinsic value is designated as the hedging instrument;
and
h. Changes in the value of the forward elements of forward contracts when separating the forward
element and spot element of a forward contract and designating as the hedging instrument only
the changes in the spot element, and changes in the value of the foreign currency basis spread
of a financial instrument when excluding it from the designation of that financial instrument as
the hedging instrument. (PAS 1.7)
Amounts recognized in OCI are usually accumulated as separate components of equity. For example,
cumulative changes in revaluation surplus are accumulated in a “Revaluation surplus” account, which is
presented as a separate component of equity; cumulative gains and losses from investments in FVOCI
and from translation of foreign operation are also accumulated in separate equity accounts.
Reclassification adjustments
Items of OCI include reclassification adjustments.
Reclassification adjustments “are amounts reclassified to profit or loss in the current period that were
recognized in other comprehensive income in the current or previous periods”. (PAS 1.7)
Reclassification adjustments arise, for example, on disposal of a foreign operation, derecognition of
debt instruments measured at FVOCI, or when a cash flow hedge becomes ineffective or affects profit or
loss.
On derecognition (or when the cash flow hedge becomes ineffective), the cumulative gains and losses
that were accumulated in equity on these items are reclassified from OCI to profit or loss. The amount
reclassified is called the reclassification adjustment.
Reclassification adjustments do not arise on changes in revaluation surplus, derecognition of equity
instruments designated at FVOCI, and remeasurements of the net defined benefit liability (asset).
On derecognition, the cumulative gains and losses the were accumulated in equity on these items are
transferred directly to retained earnings, rather than to profit or loss as a reclassification adjustment.
Presentation of OCI
The other comprehensive income section shall group items of OCI into the following:
a. Those which reclassification adjustment is allowed; and
b. Those for which reclassification adjustment is not allowed.
The entity’s share in the OCI of an associate or joint venture accounted for under the equity method
shall also be presented separately and also grouped according to the classifications above.
Items of OCI, including reclassification adjustments, may be presented at either net of tax or gross of
tax.
Illustration: Statement of comprehensive income
Statement of Changes in Equity
The statement of changes in equity shows the following information:
a. Effects of change in accounting policy (retrospective application) or correction of prior
period error (retrospective restatement);
b. Total comprehensive income for the period; and
c. For each component of equity, a reconciliation between the carrying amount at the
beginning and the end of the period, showing separately changes resulting from:
i.
Profit or loss;
ii.
Other comprehensive income; and
iii.
Transactions with owners, e.g., contributions by and distributions to owners.
Retrospective adjustments and retrospective restatements are presented in the statement of changes in
equity as adjustments to the opening balance of retained earnings rather than as changes in equity
during the period.
Components of equity include, for example, each class of contributed equity, the accumulated balance
of each class of other comprehensive income and retained earnings.
PAS 1 allows the disclosure of dividends, and the related amount per share, either in the statement of
changes in equity or in the notes.
Notes
The notes provides information in addition to those presented in the other financial statements. It is an
integral part of a complete set of financial statements. All the other financial statements are intended to
be read in conjunction with the notes. Accordingly, information in the other financial statements shall
be cross-referenced to the notes.
PAS 1 requires an entity to present the notes in a systematic manner. Notes are normally structured as
follows:
1) General information on the reporting entity.
This includes the domicile and legal form of the entity, its
country or incorporation and
the address of its registered office
(or 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 significant accounting policies.
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
supporting
information.
other financial statements and other
5) Other disclosures required by PFRSs, such as (the list is not exhaustive)
a. Contingent liabilities and unrecognized contractual commitments.
b. Non-financial disclosures, e.g., 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 disclosure.
f.
Judgments and estimations.
g. Capital management.
h. Dividends declared after the reporting period but before the financial statements were
authorized for issue, and the related amount per share.
i.
The amount of any cumulative preference dividends not recognized.
6) Other disclosures not required by PFRSs but the management deems relevant to the
understanding of the financial statements.
Notes are prepared in a necessarily detailed
voluminous and occupy a bulk portion of the
manner. More often than not, they are
financial statements.
Illustration 1: General information, Basis of preparation and Statement of compliance
Illustration 2: Summary of significant accounting policies
Illustration 3: Significant judgments, estimates and assumptions
Illustration 4: Supporting information for a line item in the statement of financial position