OBJECTIVE OF FINANCIAL REPORTING The objective of general-purpose financial reporting is to provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in making decisions about providing resources to the entity. a) General-purpose financial statements provide at the least cost the most useful information possible to a wide variety of users. b) Equity investors and creditors are the primary user groups and have the most critical and immediate needs for information in the financial statements. Investors and creditors need this information to assess a company’s ability to generate net cash inflows and to understand management’s ability to protect and enhance the assets of a company. c) The entity perspective means that the company is viewed as being separate and distinct from its investors (both shareholders and creditors). Therefore, the assets of the company belong to the company, not a specific creditor or shareholder. Financial reporting focused only on the needs of the shareholder—the proprietary perspective—is not considered appropriate. d) Decision-usefulness means that information contained in the financial statements should help investors assess the amounts, timing, and uncertainty of prospective cash inflows from dividends or interest, and the proceeds from the sale, redemption, or maturity of securities or loans. For investors to make these assessments, the financial statements and related explanations must provide information about the company’s economic resources, the claims to those resources, and the changes in them. Module 1 DEVELOPMENT OF FINANCIAL REPORTING FRAMEWORK AND STANDARD SETTING Overview: This module describes the environment that has influenced both the development and use of the financial accounting process. The chapter traces the development of financial accounting standards, focusing on the groups that have had or currently have the responsibility for developing such standards. Certain groups other than those with direct responsibility for developing financial accounting standards have significantly influenced the standard-setting process. World markets are becoming increasingly intertwined. And, due to technological advances and less onerous regulatory requirements, investors can engage in financial transactions across national borders, and to make investment, capital allocation, and financing decisions involving many foreign companies. As a result, an increasing number of investors are holding securities of foreign companies, and a significant number of foreign companies are found on national exchanges. The move toward adoption of international financial reporting standards has and will continue to facilitate this movement. Accounting is important for markets, free enterprise, and competition because it assists in providing information that leads to capital allocation. Reliable information leads to a better, more effective process of capital allocation, which in turn is critical to a healthier economy. Financial accounting is the process that culminates in the preparation of financial reports on the enterprise for use by both internal and external parties. Financial statements are the principal means through which a company communicates its financial information to those outside it. The financial statements most frequently provided are (1) the statement of financial position, (2) the income statement or statement of comprehensive income, (3) the statement of cash flows, and (4) the statement of changes in equity. Note disclosures are an integral part of each financial statement. Other means of financial reporting include the president’s letter or supplementary schedules in the corporate annual report, prospectuses, and reports filed with government agencies. The major standard-setters of the world, coupled with regulatory authorities, now recognize that capital formation and investor understanding is enhanced if a single set of high-quality accounting standards is developed. To facilitate efficient capital allocation, investors need relevant information and a faithful representation of that information to enable them to make comparisons across borders. A single, widely accepted set of high-quality accounting standards is a necessity to ensure adequate comparability. In order to achieve this goal, the following element must be present: a) b) c) d) e) f) g) h) A single set of high-quality accounting standards established by a single standard- setting body. Consistency in application and interpretation. Common disclosures. Common high-quality auditing standards and practices. A common approach to regulatory review and enforcement. Education and training of market participants. Common delivery systems (e.g., extensible Business Reporting Language—XBRL). A common approach to corporate governance and legal frameworks around the world. BRANCHES OF ACCOUNTING • Financial Accounting - is focused on the recording of business transactions and the periodic preparation of reports on financial position and results of operations. Financial accountants accord importance to existing accounting standards. • • • • • • Management Accounting, as defined by Institute of Management Accountants (IMA) is a profession that involves partnering in management decision making, devising planning and performance management systems, and providing expertise in financial reporting and control to assist management in the formulation and implementation of organization’s strategy. Cost Accounting deals with the collection, allocation and control of the cost of producing specific goods and services. Auditing is an independent examination that ensures the fairness and reliability of the reports that management submits to users outside the business entity. Government Accountings concerned with the identification of the sources and uses of government funds. Tax Accounting includes preparation of tax returns and the consideration of tax consequences of proposed business transactions. Accounting Education employs accountants either as researchers, professors or reviewers. They guarantee the continued development of the profession. STANDARD-SETTING ORGANIZATIONS The main international standard setting organization is the International Accounting Standards Board (IASB), based in London, United Kingdom. The IASB issues International Financial Reporting Standards (IFRS) which are used by most foreign exchanges. The two organizations that have a role in international standard-setting are the International Organization of Securities Commissions (IOSCO)and the IASB. a) The IOSCO does not set accounting standards; it is dedicated to ensuring that the global markets can operate in an efficient and effective basis. b) The member agencies have agreed to: 1. Cooperate to promote high standards of regulation in order to maintain just, efficient, and sound markets. 2. Exchange information on their respective experiences in order to promote the development of domestic markets. 3. Unite their efforts to establish standards and an effective surveillance of international securities transactions. 4. Provide mutual assistance to promote the integrity of the markets by a rigorous application of the standards and by effective enforcement against offenses. IOSCO recommends that its members allow multinational issuers to use IFRS in cross-folder offerings and listings, as supplemented by reconciliation, disclosure, and interpretation where necessary, to address outstanding substantive issues at a national or regional level. The international standard-setting structure is composed of the following four organizations: a) The IFRS foundation (22 trustees) provides oversight to the IASB, IFRS Advisory Council, and IFRS Interpretations Committee. It appoints members, reviews effectiveness, and helps in fundraising efforts for these organizations. b) The International Accounting Standards Board (IASB) consisting of 16 members, develops in the public interest, a single set of high-quality, enforceable, and global international financial reporting standards for general-purpose financial statements. c) The IFRS Advisory Council (30 or more members) provides advice and counsel to the IASB on major policies and technical issues. d) The IFRS Interpretations Committee (22 members) assists the IASB through the timely identification, discussion, and resolution of financial reporting issues within the framework of IFRS. In addition, as part of the governance structure, a Monitoring Board was created. It establishes a link between accounting standard-setters and those public authorities that generally oversee them (e.g. IOSCO). It also provides political legitimacy to the overall organization. The IASB has a thorough, open and transparent due processing establishing financial accounting standards. It consists of the following elements: a) An independent standard-setting board overseen by geographically and professionally diverse body of trustees. b) A thorough and systematic process for developing standards. c) Engagement with investors, regulators, business leaders, and the global accountancy profession at every stage of the process. d) Collaborative efforts with the worldwide standardsetting community. To implement its due process, the IASB follows specific steps to develop a typical IFRS. a) Topics are identified and placed on the Board’s agenda. b) Research and analysis processing preliminary views of pros and cons are issued. c) Public hearings are held on the proposed standard. d) The Board evaluates research and public responses and issues an exposure draft. e) The Board evaluates the responses and changes the exposure draft, if necessary. Then the final standard is issued. The following characteristics of the IASB are meant to reinforce the importance of an open, transparent, and independent due process. a) Membership: The Board consists of 16 well-paid members, from different countries, serving 5-year renewable terms. b) Autonomy: The IASB is not part of any professional organization. It is appointed by and answerable only to the IFRS Foundation. c) Independence: Full-time IASB members must sever all ties with their former employer. Members are selected for their expertise in standard-setting rather than to represent a given country. d) Voting: Nine of 16 votes are needed to issue a new IFRS. The IASB issues three major types of pronouncements: a) International Financial Reporting Standards: To date the IASB has issued 13 standards. In addition, the previous international standard-setting body, the International Accounting Standards Committee (IASC) issued 41 International Accounting Standards (IAS). Those that have not been amended or superseded are considered under the umbrella of IFRS. b) Conceptual Framework for Financial Reporting: The IASB issued the Framework for the Preparation and Presentation of Financial Statements (referred to as the Framework) with the intent to create a conceptual framework that would serve as a tool for solving existing and emerging problems in a consistent manner. However, the Framework is not an IFRS and does not define standards for any measurement or disclosure issue. Nothing in the Framework overrides any specific IFRS. c) International Financial Reporting Interpretations: Interpretations are issued by the IFRS Interpretations Committee and are considered authoritative and must be followed. Twenty have been issued to date. These interpretations cover (1) newly identified financial reporting issues not specifically dealt with in IFRS, and (2) issues where unsatisfactory or conflicting interpretations have developed, or seem likely to develop, in the absence of authoritative guidance. The IASB has no regulatory mandate and no enforcement mechanism. It relies on other regulators to enforce the use of its standards. For example, the European Union requires publicly traded member country companies to use IFRS. Any company indicating that it prepares its financial statements in conformity with IFRS must use all of the standards and interpretations. The hierarchy of authoritative pronouncements is: IFRS, IAS, Interpretations issued by either the IFRS Interpretation Committee or its predecessor the IAS Interpretations Committee, the Conceptual Framework for Financial Reporting, and pronouncements of other standardsetting bodies that use a similar conceptual framework to develop accounting standards (e.g., U.S. GAAP). Financial Reporting Challenges Although IFRS are developed by using sound research and a conceptual framework that has its foundation in economic reality, a certain amount of pressure and influence is brought to bear by groups interested in or affected by IFRS. The IASB does not exist in a vacuum, and politics and special-interest pressure remain a part of the standard-setting process The expectations gap is the difference between what the public thinks accountants should do and what accountants think they can do. It has been highlighted by the many accounting scandals that have occurred. In order to meet the needs of society with highly transparent, clean, and reliable systems, considerable costs will be incurred. The significant financial reporting challenges facing the accounting profession are: a) Non-financial measurements such as customer satisfaction indexes, backlog information, and reject rates on goods purchased. b) Forward-looking information. c) Soft assets (intangibles). d) Timeliness. In accounting, ethical dilemmas are encountered frequently. The whole process of ethical sensitivity and selection among alternatives can be complicated by pressures that may take the form of time pressure, job pressures, client pressures, personal pressures, and peer pressures. And, there is no comprehensive ethical system to provide guidelines. Convergence to a single set of high-quality global financial reporting standards is a real possibility. For example, the IASB and the FASB (of the United States) have spent the last 12 years working to converge their standards. In addition, U.S. and European regulators have agreed to recognize each other’s standards for listing on the various world securities exchanges. As a result, costly reconciliation requerulents have been eliminated and hopefully will lead to greater comparability and transparency. Why the need for high-quality standards? 1. 2. 3. To facilitate efficient capital allocation. In order to ensure adequate comparability across borders, a single, widely accepted set of high-quality accounting standards is a necessity. Identify the elements involved: a) A single set of high-quality accounting standards established by a single standardsetting body b) Consistency in application and interpretation. c) Common disclosures. d) Common high-quality auditing standards and practices. e) Common approach to regulatory review and enforcement. f) Education and training of market participants. g) Common delivery systems. h) Common approach to corporate governance and legal frameworks around the world. Major standard-setters and regulatory authorities around the world recognize that capital formation and investor understanding will be enhanced by a single set of high-quality accounting standards. ACCOUNTING STANDARDS IN THE PHILIPPINES On November 18, 1981, the Philippine Institute of Certified Public Accountants (PICPA) created the Accounting Standards Council (ASC) to establish and improve accounting standards that will be generally accepted in the Philippines. The creation of the Council received the support of the following: the Securities and Exchange Commission (SEC) and the Central Bank of the Philippines (CB)-regulatory agencies where the financial statements are filed; the Professional Regulation Commission (PRC) through the Board of Accountancy—which supervises CPAs and auditors, and the Financial Executives Institute of the Philippines (FINEX)— which is the largest organization of financial executives who are responsible for the preparation of the financial statements. The ASC was composed of eight (8) members-four from PICPA including the designated Chairman; and one each from SEC, CB, PRC and FINEX.| The standards would generally be based on the following: existing practices in the Philippines, research or studies by the Council; locally or internationally available literature on the topic or subject; and statements, recommendations, studies or standards issued by other standardsetting bodies such as the International Accounting Standards Board (LASB) and the Financial Accounting Standards Board (FASB). The statements and interpretations issued by the Council represented represent generally accepted accounting principles in the Philippines. Accounting principles become generally accepted if they have substantial authoritative support from the relevant parties interested in the financial statements-the preparers and users, auditors and regulatory agencies. Financial Reporting Standards Council When created per Section 9(A) of the Rules and Regulations Implementing Republic Act No. 9298 otherwise known as the Philippine Accountancy Act of 2004, the Financial Reporting Standards Council (FRSC) shall be the new accounting standard setting body. The FRSC shall be composed of fifteen (15) members with a Chairman, who had been or presently a senior accounting practitioner in any of the scope of accounting practice and fourteen (14) representatives from the following: one each from the BOA, SEC, BSP, BIR, COA and a major organization composed of preparers and users of financial statements, and two representatives each from the accredited national professional organization of CPAs in public practice, commerce and industry, education/academe and government Module 2 CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING Overview A conceptual framework can be defined as a system of ideas and objectives that lead to the creation of a consistent set of rules and standards. Specifically, in accounting, the rule and standards set the nature, function and limits of financial accounting and financial statements. Different companies and countries follow different methods of financial accounting and reporting. This might not always be due to choose but also a requirement of the business model itself. For example, a company working with the distributorship model records its sale when the goods leave the factory against a purchase order from the distributor. On the other hand, a company working under the consignment sale model can record a sale only when goods are sold to customer (and not the sale channel intermediaries). As such, there arise differences in financial accounting and reporting, which magnify upon reaching the analysis and reporting stage The main reasons for developing an agreed conceptual framework are that it provides: o o o a framework for setting accounting standards; a basis for resolving accounting disputes; and fundamental principles which then do not have to be repeated in accounting standards. Having a fixed set of definitions of each line item, hence, becomes useful and rather indispensable to ensure conceptual consistency amongst the audience of the report. It also helps the potential investor better gauge and compare the performances of target companies, regardless of their physical location and differences in business models. The International Accounting Standards Board (Board) issued the revised Conceptual Framework for Financial Reporting (Conceptual Framework), a comprehensive set of concepts for financial reporting, in March 2018. It sets out, the objective of financial reporting; the qualitative characteristics of useful financial information; a description of the reporting entity and its boundary; definitions of an asset, a liability, equity, income and expenses; criteria for including assets and liabilities in financial statements (recognition) and guidance on when to remove them(derecognition); measurement bases and guidance on when to use them; and concepts and guidance on presentation and disclosure. STATUS AND PURPOSE OF THE CONCEPTUAL FRAMEWORK The Conceptual Framework for Financial Reporting (Conceptual Framework) describes the objective of, and the concepts for, general purpose financial reporting. The purpose of the Conceptual Framework is to: a) assist the International Accounting Standards Board (Board) to develop IFRS Standards (Standards) that are based on consistent concepts; b) assist preparers to develop consistent accounting policies when no Standard applies to a particular transaction or other event, or when a Standard allows a choice of accounting policy; and c) assist all parties to understand and interpret the Standards. The Conceptual Framework is not a Standard. Nothing in the Conceptual Framework overrides any Standard or any requirement in a Standard. To meet the objective of generalpurpose financial reporting, the Board may sometimes specify requirements that depart from aspects of the Conceptual Framework. If the Board does so, it will explain the departure in the Basis for Conclusions on that Standard. Objective, Usefulness and Limitations of General-Purpose Financial Reporting The objective of general-purpose financial reporting forms the foundation of the Conceptual Framework. Other aspects of the Conceptual Framework—the qualitative characteristics of, and the cost constraint on, useful financial information, a reporting entity concept, elements of financial statements, recognition and derecognition, measurement, presentation and disclosure—flow logically from the objective. The objective of general-purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions relating to providing resources to the entity. Those decisions involve decisions about: a) buying, selling or holding equity and debt instruments; b) providing or settling loans and other forms of credit; or c) exercising rights to vote on, or otherwise influence, management’s actions that affect the use of the entity’s economic resources. The decisions described depend on the returns that existing and potential investors, lenders and other creditors expect, for example, dividends, principal and interest payments or market price increases. Investors’, lenders and other creditors’ expectations about returns depend on their assessment of the amount, timing and uncertainty of (the prospects for) future net cash inflows to the entity and on their assessment of management’s stewardship of the entity’s economic resources. Existing and potential investors, lenders and other creditors need information to help them make those assessments. To make the assessments described in paragraph 1.3, existing and potential investors, lenders and other creditors need information about: a) the economic resources of the entity, claims against the entity and changes in those resources and claims; and b) how efficiently and effectively the entity’s management and governing board have discharged their responsibilities to use the entity’s economic resources. Many existing and potential investors, lenders and other creditors cannot require reporting entities to provide information directly to them and must rely on general purpose financial reports for much of the financial information they need. Consequently, they are the primary users to whom general purpose financial reports are directed. To a large extent, financial reports are based on estimates, judgements and models rather than exact depictions. The Conceptual Framework establishes the concepts that underlie those estimates, judgements and models. The concepts are the goal towards which the Board and preparers of financial reports strive. As with most goals, the Conceptual Framework’s vision of ideal financial reporting is unlikely to be achieved in full, at least not in the short term, because it takes time to understand, accept and implement new ways of analyzing transactions and other events. Nevertheless, establishing a goal towards which to strive is essential if financial reporting is to evolve to improve its usefulness. Economic Resources and Claims Information about the nature and amounts of a reporting entity’s economic resources and claims can help users to identify the reporting entity’s financial strengths and weaknesses. That information can help users to assess the reporting entity’s liquidity and solvency, its needs for additional financing and how successful it is likely to be in obtaining that financing. That information can also help users to assess management’s stewardship of the entity’s economic resources. Information about priorities and payment requirements of existing claims helps users to predict how future cash flows will be distributed among those with a claim against the reporting entity. Changes In Economic Resources and Claims Changes in a reporting entity’s economic resources and claims result from that entity’s financial performance and from other events or transactions such as issuing debt or equity instruments. To properly assess both the prospects for future net cash inflows to the reporting entity and management’s stewardship of the entity’s economic resources, users need to be able to identify those two types of changes. Financial Performance Reflected by Accrual Accounting Accrual accounting depicts the effects of transactions and other events and circumstances on a reporting entity’s economic resources and claims in the periods in which those effects occur, even if the resulting cash receipts and payments occur in a different period. This is important because information about a reporting entity’s economic resources and claims and changes in its economic resources and claims during a period provides a better basis for assessing the entity’s past and future performance than information solely about cash receipts and payments during that period. QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL INFORMATION The qualitative characteristics of useful financial information discussed in this chapter identify the types of information that are likely to be most useful to the existing and potential investors, lenders and other creditors for making decisions about the reporting entity on the basis of information in its financial report (financial information). Financial reports provide information about the reporting entity’s economic resources, claims against the reporting entity and the effects of transactions and other events and conditions that change those resources and claims. (This information is referred to in the Conceptual Frameworks information about the economic phenomena.) Some financial reports also include explanatory material about management’s expectations and strategies for the reporting entity, and other types of forward-looking information. If financial information is to be useful, it must be relevant and faithfully represent what it purports to represent. The usefulness of financial information is enhanced if it is comparable, verifiable, timely and understandable. Fundamental Qualitative Characteristics • o Relevance Relevant financial information can make difference in the decisions made by users. Information may be capable of making a difference in a decision even if some users choose not to take advantage of it or are already aware of it from other sources. Financial information can make • o • o • o • o • o difference in decisions if it has predictive value, confirmatory value or both. Faithful representation Financial reports represent economic phenomena in words and numbers. To be useful, financial information must not only represent relevant phenomena, but it must also faithfully represent the substance of the phenomena that it purports to represent. In many circumstances, the substance of an economic phenomenon and its legal form are the same. If they are not the same, providing information only about the legal form would not faithfully represent the economic phenomenon. To be a perfectly faithful representation, a depiction would have three characteristics. It would be complete, neutral and free from error. Of course, perfection is seldom, if ever, achievable. The Board’s objective is to maximize those qualities to the extent possible. Enhancing qualitative characteristics Comparability, verifiability, timeliness and understandability are qualitative characteristics that enhance the usefulness of information that both is relevant and provides a faithful representation of what it purports to represent. The enhancing qualitative characteristics may also help determine which of two ways should be used to depict a phenomenon if both are considered to provide equally relevant information and an equally faithful representation of that phenomenon. Comparability Users’ decisions involve choosing between alternatives, for example, selling or holding an investment, or investing in one reporting entity or another. Consequently, information about a reporting entity is more useful if it can be compared with similar information about other entities and with similar information about the same entity for another period or another date. Comparability is the qualitative characteristic that enables users to identify and understand similarities in, and differences among, items. Unlike the other qualitative characteristics, comparability does not relate to a single item. A comparison requires at least two items. Verifiability Verifiability helps assure users that information faithfully represents the economic phenomena it purports to represent. Verifiability means that different knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a depiction is a faithful representation. Quantified information need not be a single point estimate to be verifiable. A range of possible amounts and the related probabilities can also be verified. Timeliness Timeliness means having information available to decision-makers in time to be capable of influencing their decisions. Generally, the older the information is the less useful it is. However, some information may continue to be timely long after the end of a reporting period because, for example, some users may need to identify and assess trends. • Understandability Classifying, characterizing and presenting information clearly and concisely makes it understandable. Financial reports are prepared for users who have a reasonable knowledge of business and economic activities and who review and analyze the information diligently. At times, even well-informed and diligent users may need to seek the aid of an adviser to understand information about complex economic phenomena. • The cost constraint on useful financial reporting o Cost is a pervasive constraint on the information that can be provided by financial reporting. Reporting financial information imposes costs, and it is important that those costs are justified by the benefits of reporting that information. There are several types of costs and benefits to consider. • Financial statements o Financial statements provide information about economic resources of the reporting entity, claims against the entity, and changes in those resources and claims, that meet the definitions of the elements of financial statements. The objective of financial statements is to provide financial information about the reporting entity’s assets, liabilities, equity, income and expenses that is useful to users of financial statements in assessing the prospects for future net cash inflows to the reporting entity and in assessing management’s stewardship of the entity’s economic resource. That information is provided: a) in the statement of financial position, by recognizing assets, liabilities and equity; b) in the statement(s) of financial performance, by recognizing income and expenses; and c) in other statements and notes, by presenting and disclosing information about: i. recognized assets, liabilities, equity, income and expenses, including information about their nature and about the risks arising from those recognized assets and liabilities; ii. assets and liabilities that have not been recognized, including information about their nature and about the risks arising from them; iii. cash flows; iv. contributions from holders of equity claims and distributions to them; and v. the methods, assumptions and judgements used in estimating the amounts presented or disclosed, and changes in those methods, assumptions and judgements. • Reporting period o Financial statements are prepared for a specified period of time (reporting period) and provide information about: a) assets and liabilities—including unrecognized assets and liabilities—and equity that existed at the end of the reporting period, or during the reporting period; and b) income and expenses for the reporting period. To help users of financial statements to identify and assess changes and trends, financial statements also provide o comparative information for at least one preceding reporting period. • Going concern assumption o Financial statements are normally prepared on the assumption that the reporting entity is a going concern and will continue in operation for the foreseeable future. Hence, it is assumed that the entity has neither the intention nor the need to enter liquidation or to cease trading. If such an intention or need exists, the financial statements may have to be prepared on a different basis. If so, the financial statements describe the basis used. THE ELEMENTS OF FINANCIAL STATEMENTS An asset is a present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits. This section discusses three aspects of those definitions: a) right; b) potential to produce economic benefits; and c) control. A liability is a present obligation of the entity to transfer an economic resource as a result of past events. For a liability to exist, three criteria must all be satisfied: a) the entity has an obligation; b) the obligation is to transfer an economic resource; and c) the obligation is a present obligation that exists as a result of past events. Equity is the residual interest in the assets of the entity after deducting all its liabilities. Equity claims are claims on the residual interest in the assets of the entity after deducting all its liabilities. In other words, they are claims against the entity that do not meet the definition of a liability. Such claims may be established by contract, legislation or similar means, and include, to the extent that they do not meet the definition of a liability: a) shares of various types, issued by the entity; and b) some obligations of the entity to issue another equity claim. Income is increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims. Expenses are decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims. Income and expenses are the elements of financial statements that relate to an entity’s financial performance. Users of financial statements need information about both an entity’s financial position and its financial performance. Hence, although income and expenses are defined in terms of changes in assets and liabilities, information about income and expenses is just as important as information about assets and liabilities. THE RECOGNITION PROCESS Recognition is the process of capturing for inclusion in the statement of financial position or the statement(s) of financial performance an item that meets the definition of one of the elements of financial statements—an asset, a liability, equity, income or expenses. Recognition involves depicting the item in one of those statements—either alone or in aggregation with other items—in words and by a monetary amount and including that amount in one or more totals in that statement. The amount at which an asset, a liability or equity is recognized in the statement of financial position is referred to as its ‘carrying amount’. The statement of financial position and statement(s) of financial performance depict an entity’s recognized assets, liabilities, equity, income and expenses in structured summaries that are designed to make financial information comparable and understandable. An important feature of the structures of those summaries is that the amounts recognized in a statement are included in the totals and, if applicable, subtotals that link the items recognized in the statement. Recognition links the elements; the statement of financial position and the statement(s) of financial performance as follows (see Diagram 5.1): a) in the statement of financial position at the beginning and end of the reporting period, total assets minus total liabilities equal total equity; and b) recognized changes in equity during the reporting period comprise: i. income minus expenses recognized in the statement(s) of financial performance; plus ii. contributions from holders of equity claims, minus distributions to holders of equity claims. The statements are linked because the recognition of one item (or a change in it carrying amount) requires the recognition or derecognition of one or more other items (or changes in the carrying amount of one or more other items). For example: a) the recognition of income occurs at the same time as: i. the initial recognition of an asset, or an increase in the carrying amount of an asset; or ii. the derecognition of a liability, or a decrease in the carrying amount of a liability. b) the recognition of expenses occurs at the same time as: i. the initial recognition of a liability, or an increase in the carrying amount of a liability; or ii. the derecognition of an asset, or a decrease in the carrying amount of an asset. How recognition links the elements of financial statements value—of an item being measured. Applying a measurement basis to an asset or liability creates a measure for that asset or liability and for related income and expenses. Historical Cost Historical cost measures provide monetary information about assets, liabilities and related income and expenses, using information derived, at least in part, from the price of the transaction or other event that gave rise to them. Unlike current value, historical cost does not reflect changes in values, except to the extent that those changes relate to impairment of an asset or a liability becoming onerous. Current Value Current value measures provide monetary information about assets, liabilities and related income and expenses, using information updated to reflect conditions at the measurement date. Because of the updating, current values of assets and liabilities reflect changes, since the previous measurement date, in estimates of cash flows and other factors reflected in those current values. Unlike historical cost, the current value of an asset or liability is not derived, even in part, from the price of the transaction or other event that gave rise to the asset or liability. Current value measurement bases include: Recognition Criteria Only items that meet the definition of an asset, a liability or equity are recognized in the statement of financial position. Similarly, only items that meet the definition of income or expenses are recognized in the statement(s) of financial performance. However, not all items that meet the definition of one of those elements are recognized. Not recognizing an item that meets the definition of one of the elements makes the statement of financial position and the statement(s) of financial performance less complete and can exclude useful information from financial statements. On the other hand, in some circumstances, recognizing some items that meet the definition of one of the elements would not provide useful information. An asset or liability is recognized only if recognition of that asset or liability and of any resulting income, expenses or changes in equity provides users of financial statements with information that is useful. Derecognition Derecognition is the removal of all or part of recognized asset or liability from an entity’s statement of financial position. Derecognition normally occurs when that item no longer meets the definition of an asset or of a liability a) for an asset, derecognition normally occurs when the entity loses control of all or part of the recognized asset; and b) for a liability, derecognition normally occurs when the entity no longer has a present obligation for all or part of the recognized liability. MEASUREMENT BASES Elements recognized in financial statements are quantified in monetary terms. This requires the selection of a measurement basis. A measurement basis is an identified feature—for example, historical cost, fair value or fulfilment a) fair value; b) value in use and fulfilment value for liabilities; and c) current cost Measurement of Equity The total carrying amount of equity (total equity) is not measured directly. It equals the total of the carrying amounts of all recognized assets less the total of the carrying amounts of all recognized liabilities. Presentation and Disclosure as Communication Tools A reporting entity communicates information about its assets, liabilities, equity, income and expenses by presenting and disclosing information in its financial statements. Effective communication of information in financial statements makes that information more relevant and contributes to a faithful representation of an entity’s assets, liabilities, equity, income and expenses. It also enhances the understandability and comparability of information in financial statements. Just as cost constrains other financial reporting decisions, it also constrains decisions about presentation and disclosure. Hence, in making decisions about presentation and disclosure, it is important to consider whether the benefits provided to users of financial statements by presenting or disclosing particular information are likely to justify the costs of providing and using that information. Classification Classification is the sorting of assets, liabilities, equity, income or expenses based on shared characteristics for presentation and disclosure purposes. Such characteristics include—but are not limited to—the nature of the item, its role (or function) within the business activities conducted by the entity, and how it is measured. Classification of Assets and Liabilities Classification is applied to the unit of account selected for an asset or liability. However, it may sometimes be appropriate to separate an asset or liability into components that have different characteristics and to classify those components separately. That would be appropriate when classifying those components separately would enhance the usefulness of the resulting financial information. For example, it could be appropriate to separate an asset or liability into current and noncurrent components and to classify those components separately. Offsetting Offsetting occurs when an entity recognizes and measures both an asset and liability as separate units of account, but groups them into a single net amount in the statement of financial position. Offsetting classifies dissimilar items together and therefore is generally not appropriate. Classification of Equity To provide useful information, it may be necessary to classify equity claims separately if those equity claims have different characteristics Classification of Income and Expenses Classification is applied to: a) income and expenses resulting from the unit of account selected for an asset or liability; or b) components of such income and expenses if those components have different characteristics and are identified separately. For example, a change in the current value of an asset can include the effects of value changes and the accrual of interest. It would be appropriate to classify those components separately if doing so would enhance the usefulness of the resulting financial information. Profit or Loss and Other Comprehensive Income Income and expenses are classified and included either: a) in the statement of profit or loss; or b) outside the statement of profit or loss, in other comprehensive income. The statement of profit or loss is the primary source of information about an entity’s financial performance for the reporting period. That statement contains a total for profit or loss that provides a highly summarized depiction of the entity’s financial performance for the period. Many users of financial statements incorporate that total in their analysis either as a starting point for that analysis or as the main indicator of the entity’s financial performance for the period. Nevertheless, understanding an entity’s financial performance for the period requires an analysis of all recognized income and expenses— including income and expenses included in other comprehensive income—as well as an analysis of other information included in the financial statements. Aggregation Aggregation is the adding together of assets, liabilities, equity, income or expenses that have shared characteristics and are included in the same classification. Aggregation makes information more useful by summarizing a large volume of detail. However, aggregation conceals some of that detail. Hence, a balance needs to be found so that relevant information is not obscured either by a large amount of insignificant detail or by excessive aggregation. CONCEPTS OF CAPITAL A financial concept of capital is adopted by most entities in preparing their financial statements. Under a financial concept of capital, such as invested money or invested purchasing power, capital is synonymous with the net assets or equity of the entity. Under a physical concept of capital, such as operating capability, capital is regarded as the productive capacity of the entity based on, for example, units of output per day. Concepts of Capital Maintenance and the Determination of Profit The concepts of capital in paragraph 8.1 give rise to the following concepts of capital maintenance: a) Financial capital maintenance. Under this concept a profit is earned only if the financial (or money) amount of the net assets at the end of the period exceeds the financial (or money) amount of net assets at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period. Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power. b) Physical capital maintenance. Under this concept a profit is earned only if the physical productive capacity (or operating capability) of the entity (or the resources or funds needed to achieve that capacity) at the end of the period exceeds the physical productive capacity at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period. The concept of capital maintenance is concerned with how an entity defines the capital that it seeks to maintain. It provides the linkage between the concepts of capital and the concepts of profit because it provides the point of reference by which profit is measured; it is a prerequisite for distinguishing between an entity’s return on capital and its return of capital; only inflows of assets in excess of amounts needed to maintain capital may be regarded as profit and therefore as a return on capital. Hence, profit is the residual amount that remains after expenses (including capital maintenance adjustments, where appropriate) have been deducted from income. If expenses exceed income the residual amount is a loss. The physical capital maintenance concept requires the adoption of the current cost basis of measurement. The financial capital maintenance concept, however, does not require the use of a basis of measurement. Selection of the basis under this concept is dependent on the type of financial capital that the entity is seeking to maintain. Under the concept of financial capital maintenance where capital is defined in terms of nominal monetary units, profit represents the increase in nominal money capital over the period. Thus, increases in the prices of assets held over the period, conventionally referred to as holding gains, are, conceptually, profits. They may not be recognized as such, however, until the assets are disposed of in an exchange transaction. When the concept of financial capital maintenance is defined in terms of constant purchasing power units, profit represents the increase in invested purchasing power over the period. Thus, only that part of the increase in the prices of assets that exceeds the increase in the general level of prices is regarded as profit. The rest of the increase is treated as a capital maintenance adjustment and, hence, as part of equity. Under the concept of physical capital maintenance when capital is defined in terms of the physical productive capacity, profit represents the increase in that capital over the period. All price changes affecting the assets and liabilities of the entity are viewed as changes in the measurement of the physical productive capacity of the entity; hence, they are treated as capital maintenance adjustments that are part of equity and not as profit. • contributions by and distributions to owners in their capacity as owners; and cash flows. • That information, along with other information in the notes, assists users of financial statements in predicting the entity's future cash flows and their timing and certainty. COMPONENTS OF FINANCIAL STATEMENTS A complete set of financial statements comprises: • • • • • Module 4 PRESENTATION OF FINANCIAL STATEMENTS (IAS 1, IAS7) Overview: Financial statements are a structured representation of the financial position and financial performance of an entity. General purpose financial statements (referred to as ‘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. IAS 1 sets out overall requirements for the presentation of financial statements, guidelines for their structure and minimum requirements for their content. It requires an entity to present a complete set of financial statements at least annually, with comparative amounts for the preceding year (including comparative amounts in the notes). An entity whose financial statements comply with IFRS Standards must make an explicit and unreserved statement of such compliance in the notes. An entity must not describe financial statements as complying with IFRS Standards unless they comply with all the requirements of the Standards. The application of IFRS Standards, with additional disclosure, when necessary, is presumed to result in financial statements that achieve a fair presentation. IAS 1also deals with going concern issues, offsetting and changes in presentation or classification. OBJECTIVE OF THE FINANCIAL STATEMENTS The objective of financial statements is 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. Financial statements also show the results of the management’s stewardship of the resources entrusted to it. To meet this objective, financial statements provide information about an entity’s: • • • • assets; liabilities; equity; income and expenses, including gains and losses; • a statement of financial position as at the end of the period; a statement of profit or loss and other comprehensive income for the period; a statement of changes in equity for the period; a statement of cash flows for the period; notes, comprising significant accounting policies and other explanatory information; comparative information in respect of the preceding period a statement of financial position as at the beginning of the preceding period when an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements Statement of Financial Position A statement of financial position presents the assets, liabilities, and equity. Assets An entity must normally present a classified statement of financial position, separating current and noncurrent assets and liabilities. Only if a presentation based on liquidity provides information that is reliable and more relevant may the current/noncurrent split be omitted. An entity shall classify an asset as current when: • • • • It expects to realize the asset, or intends to sell or consume it, in its normal operating cycle It holds the asset primarily for the purpose of trading It expects to realize the asset within twelve months after the reporting period The asset is cash or a cash equivalent (as defined in IAS 7) unless the asset is restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period. Normal Operating Cycle –The time between the acquisition of assets for processing and their realization cash or cash equivalents. When the entity’s normal operating cycle is not clearly identifiable, its duration is assumed to be twelve months. Line items under current assets are • • • • Cash and cash equivalents Trade and other receivables Financial asset at Fair Value through Profit of Loss Inventories • Prepaid expenses The caption “noncurrent assets” is a residual definition. PAS 1 provides that an entity shall classify all other assets as noncurrent. The following are examples of non-current assets: • • • • Property, plant, and equipment Intangible assets Investment property Financial assets that are not expected to be realized in cash in the entity’s normal operating cycle or within twelve months after the reporting period Liabilities An entity shall classify a liability as current when: • • • • It expects to settle the liability in its normal operating cycle It holds the liability primarily for the purpose of trading The liability is due to be settled within twelve months after the reporting period The entity does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period Current liabilities include • • • • • Trade and other payables Current provisions Short-term borrowings Current portion of long-term debt Current tax liability An entity shall classify all other liabilities as non-current, such as: • • Long term notes payable that are due beyond 12 months from the end of the reporting period Bonds payable that are due beyond twelve months after the reporting period Long-term notes payable that are due within twelve months after the reporting period, but which terms is extended on a long-term basis and negotiation has been competed before the end of the reporting period. An entity classifies its financial liabilities as current when they are due to be settled within twelve months after the end of the reporting period, even if: • • The original term was for a period longer than twelve months; and The intention is supported by an agreement to refinance, or reschedule the payments, on a long-term basis is completed after the end of the reporting period and completed before the financial statements are authorized for issue. If the entity has the discretion to refinance, or to roll over the obligation for at least twelve months after the end of the reporting period under an existing loan facility, it classifies the obligation as non-current, even if it would be due within a shorter period. If a liability has become payable on demand because an entity has breached an undertaking under a long-term loan agreement on or before the end of the reporting period, the liability is current, even if the lender has agreed, after the end of the reporting period and before the authorization of the financial statements for issue, not to demand payment as a consequence of the breach. However, the liability is classified as non-current if the lender agreed by the end of the reporting period to provide a period of grace ending at least 12 months after the end of the reporting period, within which the entity can rectify the breach and during which the lender cannot demand immediate repayment. Equity Equity is the residual interest in the assets of the entity after deducting all the liabilities. Simply put, equity means net asset or total assets minus total liabilities. The account name in reporting the equity of an entity depends on the form of the business organization: Forms of the Statement of Financial Position A statement of financial position may be prepared using any of the following formats: • • • Account form, which looks like a T account, where assets are listed on the left side of the statement while liabilities and equity are listed on the right side Report form presents the assets, liabilities, and equity in a continuous format. Liabilities are presented after total assets and equity accounts are listed after the liabilities section Financial position form emphasizes working capital of the firm. In this format, net assets are equal to the equity. Statement of Comprehensive Income Comprehensive income is the change of equity during a period other than changes resulting from transactions with owners in their capacity as such. Comprehensive income includes profit or loss and other comprehensive income. Profit and Loss is the total income less expenses excluding the components of other comprehensive income. It shall include line items that present the following amounts for the period: • • • • • revenue, presenting separately interest revenue calculated using the effective interest method and insurance revenue gains and losses arising from the derecognition of financial assets measured at amortized cost insurance service expenses from contracts issued within the scope of IFRS 17 income or expenses from reinsurance contracts held finance costs • • • • • • • • impairment losses (including reversals of impairment losses or impairment gains) determined in accordance with Section 5.5 of IFRS 9 insurance finance income or expenses from contracts issued within the scope of IFRS 17 finance income or expenses from reinsurance contracts held share of the profit or loss of associates and joint ventures accounted for using the equity method if a financial asset is reclassified out of the amortized cost measurement category so that it is measured at fair value through profit or loss, any gain or loss arising from a difference between the previous amortized cost of the financial asset and its fair value at the reclassification date (as defined in IFRS 9) if a financial asset is reclassified out of the fair value through other comprehensive income measurement category so that it is measured at fair value through profit or loss, any cumulative gain or loss previously recognized in other comprehensive income that is reclassified to profit or loss; tax expense a single amount for the total of discontinued operations Other comprehensive income comprises Items of income and expenses including reclassification adjustments that are not included in Profit and Loss as required by a standard or interpretation. There are two types of OCI items, those that are reclassified to profit or loss and those that are reclassified to Retained Earnings. OCI includes the following Components of OCI that will be reclassified subsequently to profit, or loss include the following: • • • Unrealized gain or loss on debt investments measured at fair value through other comprehensive income Unrealized gain or loss from derivative contracts designated as cash flow hedge Translation gains and losses of foreign operations Components of OCI that will be reclassified subsequently to retained earnings include the following: • • • • Unrealized gain or loss on equity investments measured at fair value through other comprehensive income Change in Revaluation Surplus Remeasurement gains and losses for defined benefit plans Change in fair value arising from credit risk for financial liabilities measured at fair value through profit or loss An entity shall disclose the following items in the statement of comprehensive income as allocations of profit or loss for the period: • • Profit or loss for the period attributable to Minority interest and Owners of the parent. Total comprehensive income for the period attributable to Minority interest and Owners of the parent. Statement of comprehensive income present income and expense for a given reporting period. An entity shall present all items of income and expense recognized in a period: • • In a single statement of comprehensive income, or In two statements: a statement displaying components of profit or loss (separate income statement) and a second statement beginning with profit or loss and displaying components of other comprehensive income (statement of comprehensive income). An entity shall present either an analysis of expenses using a classification based on either the nature of expenses or their function within the entity, whichever provides information that is reliable and more relevant. Nature of expense method –Expenses are aggregated in the income statement according to their nature and are not reallocated among various functions within the entity. Function of expense or cost of sales method –Classifies expenses according to their function as part of cost of sales or, for example, the cost of distribution or administrative activities. An entity classifying expenses by function shall disclose additional information on the nature of expenses, including depreciation and amortization expense and employee benefits expense. An entity shall not present any items of income and expense as extraordinary items, either on the face of the income statement or in the notes Statement of Changes in Equity An entity shall present a statement of changes in equity showing in the statement: • • • Total comprehensive income for the period, showing separately the total amounts attributable to owners of the parent and to non‑controlling interests For each component of equity, the effects of retrospective application or retrospective restatement recognized in accordance with PAS 8 For each component of equity, a reconciliation between the carrying amount at the beginning and the end of the period, separately (as a minimum) disclosing changes resulting from: ➢ profit or loss; ➢ ➢ other comprehensive income; and transactions with owners in their capacity as owners, showing separately contributions by and distributions to owners and changes in ownership interests in subsidiaries that do not result in a loss of control. An entity shall present, either in the statement of changes in equity or in the notes, the amount of dividends recognized as distributions to owners during the period, and the related amount per share. Statement of Cash Flows Cash flow information provides users of financial statements with a basis to assess the ability of the entity to generate cash and cash equivalents and the needs of the entity to utilize those cash flows. Classification The statement of cash flows presents information on the inflows and outflows of cash and cash equivalent classified into operating activities, investing activities, and financing activities. Cash flows from operating activities are primarily derived from the principal revenue‑producing activities of the entity. Examples of cash flows from operating activities are: • • • • • • cash receipts from the sale of goods and the rendering of services; cash receipts from royalties, fees, commissions and other revenue; cash payments to suppliers for goods and services; cash payments to and on behalf of employees; cash payments or refunds of income taxes unless they can be specifically identified with financing and investing activities; and cash receipts and payments from contracts held for dealing or trading purposes. An entity may hold securities and loans for dealing or trading purposes, in which case they are similar to inventory acquired specifically for resale. Therefore, cash flows arising from the purchase and sale of dealing or trading securities are classified as operating activities. Similarly, cash advances and loans made by financial institutions are usually classified as operating activities since they relate to the main revenue‑producing activity of that entity. Investing activities are the cash flows derived from the acquisition and disposal of long-term assets and other investment not included in cash equivalents. Only expenditures that result in a recognized asset in the statement of financial position are eligible for classification as investing activities. Examples of cash flows arising from investing activities are: • • cash payments to acquire property, plant and equipment, intangibles and other long‑term assets. These payments include those relating to capitalized development costs and self‑constructed property, plant and equipment; cash receipts from sales of property, plant and equipment, intangibles and other long‑term assets; • • • • • • cash payments to acquire equity or debt instruments of other entities and interests in joint ventures (other than payments for those instruments considered to be cash equivalents or those held for dealing or trading purposes); cash receipts from sales of equity or debt instruments of other entities and interests in joint ventures (other than receipts for those instruments considered to be cash equivalents and those held for dealing or trading purposes); cash advances and loans made to other parties (other than advances and loans made by a financial institution); cash receipts from the repayment of advances and loans made to other parties (other than advances and loans of a financial institution); cash payments for futures contracts, forward contracts, option contracts and swap contracts except when the contracts are held for dealing or trading purposes, or the payments are classified as financing activities; and cash receipts from futures contracts, forward contracts, option contracts and swap contracts except when the contracts are held for dealing or trading purposes, or the receipts are classified as financing activities. Financing activities include cash transactions affecting non-trade liabilities, and shareholders’ equity. Examples of cash flows arising from financing activities are: • • • • • cash proceeds from issuing shares or other equity instruments; cash payments to owners to acquire or redeem the entity’s shares; cash proceeds from issuing debentures, loans, notes, bonds, mortgages and other short-term or long‑term borrowings; cash repayments of amounts borrowed; and cash payments by a lessee for the reduction of the outstanding liability relating to a lease. Interest and dividends Cash flows from interest and dividends received and paid shall each be disclosed separately. Each shall be classified in a consistent manner from period to period as either operating, investing or financing activities. Interest paid and interest and dividends received may be classified as operating cash flows because they enter into the determination of profit or loss. Alternatively, interest paid and interest and dividends received may be classified as financing cash flows and investing cash flows respectively, because they are costs of obtaining financial resources or returns on investments. Dividends paid may be classified as a financing cash flow because they are a cost of obtaining financial resources. Alternatively, dividends paid may be classified as a component of cash flows from operating activities in order to assist users to determine the ability of an entity to pay dividends out of operating cash flows. Taxes on Income Cash flows arising from taxes on income shall be separately disclosed and shall be classified as cash flows from operating activities unless they can be specifically identified with financing and investing activities. Presentation of Cash Flows An entity shall report cash flows from operating activities using either: • • the direct method, whereby major classes of gross cash receipts and gross cash payments are disclosed; or the indirect method whereby profits or loss is adjusted for the effects of transactions of a non‑cash nature, any deferrals or accruals of past or future operating cash receipts or payments, and items of income or expense associated with investing or financing cash flows. Under the direct method, information about major classes of gross cash receipts and gross cash payments may be obtained either: • • from the accounting records of the entity; or by adjusting sales, cost of sales (interest and similar income and interest expense and similar charges for a financial institution) and other items in the statement of comprehensive income for: ➢ changes during the period in inventories and operating receivables and payables; ➢ other non‑cash items; and ➢ other items for which the cash effects are investing or financing cash flows. Under the indirect method, the net cash flow from operating activities is determined by adjusting profit or loss for the effects of: • • • changes during the period in inventories and operating receivables and payables; non‑cash items such as depreciation, provisions, deferred taxes, unrealized foreign currency gains and losses, and undistributed profits of associates; and all other items for which the cash effects are investing or financing cash flows. Based on the foregoing, the following guidelines may be used in adjusting accrual basis net income to the cash basis net income under the indirect method: Investing and financing activities are presented using direct method, separating major classes of gross cash receipts and gross cash payments arising from these activities. Notes to the Financial Statements The notes must: • • • Present information about the basis of preparation of the financial statements and the specific accounting policies used; Disclose any information required by PFRSs that is not presented on the face of the statement of financial position, income statement, statement of changes in equity, or statement of cash flows Provide additional information that is not presented on the face of the statement of financial position, income statement, statement of changes in equity, or statement of cash flows that is deemed relevant to an understanding of any of them. Notes should be cross-referenced from the face of the financial statements to the relevant note. The notes should normally be presented in the following order: • • • • A statement of compliance with PFRSs A summary of significant accounting policies applied, including: ➢ The measurement basis (or bases) used in preparing the financial statements; and ➢ The other accounting policies used that are relevant to an understanding of the financial statements. Supporting information for items presented on the face of the statement of financial position, income statement, statement of changes in equity, and statement of ash flows, in the order in which each statement and each line item is presented. Other disclosures, including: ➢ Contingent liabilities and unrecognized contractual commitments ➢ Non-financial disclosures, such as the entity’s financial risk management objectives and policies. Disclosure of judgments -an entity must disclose, in the summary of significant accounting policies or other notes, the judgments, apart from those involving estimations, that management has made in the process of applying the entity's accounting policies that have the most significant effect on the amounts recognized in the financial statements. HIERARCHY IN THE FORMATION OF ACCOUNTING POLICIES 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. 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: ➢ ➢ ➢ ➢ ➢ represent faithfully the financial position, financial performance and cash flows of the entity; reflect the economic substance of transactions, other events and conditions, and not merely the legal form; are neutral, free from bias; are prudent; and are complete in all material respects. In making the judgement described above, management shall refer to, and consider the applicability of, the following sources in descending order: • • the requirements in IFRSs dealing with similar and related issues; And the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Conceptual Framework for Financial Reporting (Conceptual Framework). Management may also consider the most recent pronouncements of other standard‑setting bodies that use a similar conceptual framework to develop accounting standards, other accounting literature and accepted industry practices, to the extent that these do not conflict with the sources mentioned above. GENERAL FEATURES IN THE PRESENTATION OF THE FINANCIAL STATEMENTS Fair Presentation and Compliance with PFRS Financial statements shall present fairly the financial position, financial performance and cash flows of an entity. In virtually all circumstances, an entity achieves a fair presentation by compliance with applicable IFRSs. 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. 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). A fair presentation also requires an entity: • • • to select and apply accounting policies in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. IAS 8 sets out a hierarchy of authoritative guidance that management considers in the absence of an IFRS that specifically applies to an item. 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 policies either by disclosure of the accounting policies used or by notes or explanatory material. PAS 1 acknowledges that, in extremely rare circumstances, management may conclude that compliance with an PFRS requirement would be so misleading that it would conflict with the objective of financial statements set out in the Framework. In such a case, the entity is required to depart from the PFRS requirement, with detailed disclosure of the nature, reasons, and impact of the departure. Going Concern An entity shall prepare financial statements on a going concern basis unless management either intends to liquidate the entity or to cease trading or has no realistic alternative but to do so. An entity preparing PFRS financial statements is presumed to be a going concern. Going concern means that the accounting entity is viewed as continuing in operation indefinitely in the absence of evidence to the contrary. 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 on a going concern basis, it shall disclose that fact, together with the basis on which it prepared the financial statements and the reason why the entity is not regarded as a going concern. Accrual Basis 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. 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. But if the resulting disclosure is not material, an entity need not provide a specific disclosure even if required by PFRS. Offsetting An entity shall not offset assets and liabilities or income and expenses, unless required or permitted by an Irfan entity reports separately both assets and liabilities, and income and expenses. Measuring assets net of valuation allowances—for example, obsolescence allowances on inventories and doubtful debts allowances on receivables—is not offsetting. Frequency of Reporting An entity shall present a complete set of financial statements (including comparative information) 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. However, for practical reasons, some entities prefer to report, for example, for a 52‑week period. This Standard does not preclude this practice. Comparative Information Minimum Comparative Information 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 present, as a minimum, two statements of financial position, two statements of profit or loss and other comprehensive income, two separate statements of profit or loss (if presented), two statements of cash flows and two statements of changes in equity, and related notes. An entity shall include comparative information for narrative and descriptive information if it is relevant to understanding the current period’s financial statements. In some cases, narrative information provided in the financial statements for the preceding period(s) 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 taken during the period to resolve the uncertainty. Additional comparative information An entity may present comparative information may consist of one or more statements but need not comprise a complete set of financial statements. For example, an entity may present a third statement of profit or loss and other comprehensive income (thereby presenting the current period, the preceding period and one additional comparative period). However, the entity is not required to present a third statement of financial position, a third statement of cash flows or a third statement of changes in equity (i.e., an additional financial statement comparative). The entity is required to present, in the notes to the financial statements, the comparative information related to that additional statement of profit or loss and other comprehensive income. • • Under these circumstances, an entity shall present three statements of financial position as at: • • • it applies an accounting policy retrospectively, makes a retrospective restatement of items in its financial statements or reclassifies items in its financial statements; and the end of the current period; the end of the preceding period; and the beginning of the preceding period. Consistency of Presentation An entity shall retain the presentation and classification of items in the financial statements from one accounting period to the next. Change is allowed under the following circumstances: • • 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. LIMITATIONS OF THE FINANCIAL STATEMENTS Common limitations on the use financial statements are • • • When third statement of financial position is required An entity shall present a third statement of financial position as at the beginning of the preceding period in addition to the minimum comparative financial statements if: • the retrospective application, retrospective restatement or the reclassification has a material effect on the information in the statement of financial position at the beginning of the preceding period. • Use of different measurement bases. Elements recognized in financial statements are quantified in monetary terms. Consideration of the qualitative characteristics of useful financial information and of the cost constraint is likely to result in the selection of different measurement bases for different assets, liabilities, income and expenses. Inflationary effects. Assets measured at historical costs reflect the level of purchasing power when those assets are acquired at different dates. Such purchase costs albeit at different dates are the basis of the presentation of these assets in the statement of financial position and of the computation of depreciation expenses in the statement of comprehensive income. If the inflation rate is relatively high, the amounts reported in the financial statements will appear inordinately low since under the cost model, the assets are not adjusted for inflation. Hence, the amounts reflected in the financial statements are mixture of pesos with different levels of purchasing power. Measurement uncertainty. The use of reasonable estimates is an essential part of the preparation of financial information. In some cases, the level of uncertainty involved in estimating a measure of an asset or liability may be so high that it may be questionable whether the estimate would provide a sufficiently faithful representation of that asset or liability and of any resulting income, expenses or changes in equity. Now always comparable across companies. Different companies may apply different accounting policies and use different accounting periods. While accounting • • policies are disclosed in the financial statements, the users of financial statements can hardly adjust the reported figures in the financial statements for comparability. Any one period may vary from the normal operating results of a business due to seasonality effects. Non-financial information is not reported. The notes to financial statements provide textual description of what was reported in the face of the financial statements. However, the financial statements do not report the level of corporate governance of the company, the moral and efficiency of company personnel or business ethics, the effect of the business to the environment, or the company’s contribution to the local community. Financial statements may report high net income but fail to indicate its degrading effect to the environment. No predictive value. The financial statements report past events, but they do not provide any value that predict what will happen in the future. A company may report billions of incomes in the preceding years, yet a newly elected president of the country cancels its contract on which it was relying. FUNCTION OF THE SECURITIES AND EXCHANGE COMMISSIONS (SEC) The Commission shall have the powers and functions provided by the Securities Regulation Code, Presidential Decree No. 902-A, as amended, the Corporation Code, the Investment Houses Law, the Financing Company Act, and other existing laws. Under Section 5 of the Securities Regulation Code, Rep. Act. 8799, the Commission shall have, among others, the following powers and functions: a) b) c) d) e) f) g) h) Have jurisdiction and supervision over all corporations, partnerships or associations who are the grantees of primary franchises and/or a license or permit issued by the Government; Formulate policies and recommendations on issues concerning the securities market, advise Congress and other government agencies on all aspects of the securities market and propose legislation and amendments thereto; Approve, reject, suspend, revoke or require amendments to registration statements, and registration and licensing applications; Regulate, investigate or supervise the activities of persons to ensure compliance; Supervise, monitor, suspend or take over the activities of exchanges, clearing agencies and other SROs; Impose sanctions for the violation of laws and the rules, regulations and orders issued pursuant thereto; Prepare, approve, amend or repeal rules, regulations and orders, and issue opinions and provide guidance on and supervise compliance with such rules, regulations and orders; Enlist the aid and support of and/or deputize any and all enforcement agencies of the Government, civil or military as well as any private institution, corporation, firm, association or person in the implementation of its powers and functions under this Code; i) Issue cease and desist orders to prevent fraud or injury to the investing public; j) Punish for contempt of the Commission, both direct and indirect, in accordance with the pertinent provisions of and penalties prescribed by the Rules of Court; k) Compel the officers of any registered corporation or association to call meetings of stockholders or members thereof under its supervision; l) Issue subpoena duces tecum and summon witnesses to appear in any proceedings of the Commission and in appropriate cases, order the examination, search and seizure of all documents, papers, files and records, tax returns, and books of accounts of any entity or person under investigation as may be necessary for the proper disposition of the cases before it, subject to the provisions of existing laws; m) Suspend, or revoke, after proper notice and hearing the franchise or certificate of registration of corporations, partnerships or associations, upon any of the grounds provided by law; and n) Exercise such other powers as may be provided by law as well as those which may be implied from, or which are necessary or incidental to the carrying out of, the express powers granted the Commission to achieve the objectives and purposes of these laws. Under Section 5.2 of the Securities Regulation Code, the Commission’s jurisdiction over all cases enumerated under Section 5 of PD 902-A has been transferred to the Courts of general jurisdiction or the appropriate Regional Trial Court. The Commission shall retain jurisdiction over pending cases involving intra-corporate disputes submitted for final resolution which should be resolved within one (1) year from the enactment of the Code. The Commission shall retain jurisdiction over pending suspension of payments/rehabilitation cases filed as of 30 June 2000 until finally disposed. Considering that only Sections 2, 4, and 8 of PD 902-A, as amended, have been expressly repealed by the Securities Regulation Code, the Commission retains the powers enumerated in Section 6 of said Decree, unless these are inconsistent with any provision of the Code. PHILIPPINE FINANCIAL REPORTING FRAMEWORKS AND THE REPORTING ENTITIES Financial reporting frameworks applicable to different reporting entities are as follows: Large and/or Publicly Accountable Entities Large entities are those with total assets of more than P350 million or total liabilities of more than P250 million. Public entities are those that meet any of the following criteria: • Holders of secondary licenses issues by regulatory agencies • • • 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 instrument in a public market Imbued with public interest as the SEC may consider in the future Large and/or public interest entities shall use the PFRS, as adopted by the Commission, as their financial reporting framework. However, a set of financial reporting framework other than the full PFRS may be allowed by the Commission for certain sub-class (e.g., banks, insurance companies) of these entities upon consideration of the pronouncements or interpretations. Medium-Sized Entities Medium-sized entities are those that meet all of the following criteria: • • • • Total assets of more than P100 million to P350 million or total liabilities of more than P100 million to P250 million. If the entity is a parent company, the said amounts shall be based on the consolidated figures. Not required to file financial statements under Part II of SRC Rule 68 Not in the process of filing their financial statements for the purpose of issuing any class of instrument in a public market Not holders of secondary licenses issues by regulatory agencies Medium-sized entities shall use as their financial reporting framework the PFRS for SMEs as adopted by the SEC. However, the following medium-sized entities shall be exempt from the mandatory adoption of the PFRS for SME’s and may instead apply, at their option, the full PFRS: • • • • • • • An SME which is a subsidiary of a foreign parent company reporting under the full PFRS An SME which is a subsidiary of a foreign parent company which will be moving towards International Financial Reporting Standards pursuant to the foreign country’s published convergence plan An SME either as a significant joint venture or associate, which is part of a group that is reporting under the full PFRS An SME which is a branch office or regional operating headquarter of a foreign company reporting under the full PFRS An SME which has a subsidiary that is mandated to report under the full PFRS An SME which has a short-term projection that shows that it will breach the quantitative thresholds set in the criteria for an SME. The breach is expected to be significant and continuing due to its long-term effect on the company’s asset or liability size An SME which has c concrete plan to conduct an initial public offering within the next two years • • An SME which has been preparing financial statements using full PFRS and has decided to liquidate Such other cases that the Commission may consider as valid exceptions from the mandatory adoption of PFRS for SMEs Small Entities Small entities are those that meet all of the following criteria: • • • • Total assets of between P3 million to P100 million or total liabilities between P3 million to P100 million. If the entity is a parent company, the said amounts shall be based on the consolidated figures. Are not required to file financial statements under Part II of SRC Rule 68 Are not in the process of filing their financial statements for the purpose of issuing any class of instruments in a public market Are not holders of secondary licenses issues by regulatory agencies Small entities shall use their financial reporting framework the PFRS for SEs as adopted by the Commission. However, entities who have operations or investments that are based or conducted in a different country with different functional currency shall not apply this framework and should instead apply the full PFRS or PFRS for SMEs. The following small entities shall also be exempt from the mandatory adoption of the PFRS for SEs and may instead apply, as appropriate, the full PFRS or PFRS for SMEs: • • • • • • • • A small entity which is a subsidiary of a foreign parent company reporting under the full PFRS or PFRS for SMEs A small entity which is a subsidiary of a foreign parent company which will be moving towards International Financial Reporting Standards or IFRS for SMEs pursuant to the foreign country’s published convergence plan A small entity either as a significant joint venture or associate, which is part of a group that is reporting under the full PFRS or PFRS for SMEs A small entity which is a branch office or regional operating headquarter of a foreign company reporting under the full PFRS or PFRS for SMEs A small entity which has a subsidiary that is mandated to report under the full PFRS or PFRS for SMEs A small entity which has a short-term projection that shows that it will breach the quantitative thresholds set in the criteria for a small entity. The breach is expected to be significant and continuing due to its long-term effect on the company’s asset size A small entity which has been preparing financial statements using full PFRS or PFRS for SMEs and has decided to liquidate Such other cases that the Commission may consider as valid exceptions from the mandatory adoption of PFRS for SMs Micro Entities Micro entities are those that meet all of the following criteria: • • • • Total assets and liabilities are below P3 million Are not required to file financial statements under Part II of SRC Rule 68 Are not in the process of filing their financial statements for the purpose of issuing any class of instruments in a public market Are not holders of secondary licenses issues by regulatory agencies Micro entities have the option to use as their financial reporting framework either the income tax basis or PFRS for SEs, provided however, that the financial statements shall at least consist of the Statement of Management’s Responsibility (SMR), Auditor’s Report, Statement of Financial Position, Statement of Income and Notes to Financial Statements, all of which cover the 2-year comparative periods, if applicable. In the event where an entity breaches the prescribed threshold in terms of total assets or total liabilities and thus it falls within a different classification, the Audited Financial Statements of said entity shall be prepared in accordance with the higher framework. EVENTS AFTER THE REPORTING PERIOD (IAS 10) In April 2001 the International Accounting Standards Board (Board) adopted IAS 10 Events After the Balance Sheet Date, which had originally been issued by the International Accounting Standards Committee in May 1999. IAS 10 Events After the Balance Sheet Date replaced parts of IAS 10 Contingencies and Events Occurring After the Balance Sheet Date (issued in June 1978) that were not replaced by IAS 37 Provisions and Contingent Assets and Contingent Liabilities (issued in 1998). In December 2003 the Board issued a revised IAS 10 with a modified title—Events after the Balance Sheet Date. This revised IAS 10 was part of the Board’s initial agenda of technical projects. As a result of the changes in terminology made by IAS 1 Presentation of Financial Statements in 2007, the title of IAS 10 was changed to Events after the Reporting Period. Other Standards have made minor consequential amendments to IAS 10. They includers 13 Fair Value Measurement (issued May 2011), IFRS 9 Financial Instruments (issued July2014) and Definition of Material (Amendments to IAS 1 and IAS 8) (issued October 2018) Scope This Standard shall be applied in the accounting for, and disclosure of events after the reporting period. Definitions The following terms are used in this Standard with the meanings specified: Events after the reporting period are those events, favorable, that occur between the end of the reporting period and the date when the financial statements are authorized for issue. Two types of events can be identified: a) those that provide evidence of conditions that existed at the end of the reporting period (adjusting events after the reporting period); and b) those that are indicative of conditions that arose after the reporting period (non-adjusting events after the reporting period). The process involved in authorizing the financial statements for issue will vary depending upon the management structure, statutory requirements and procedures followed in preparing and finalizing the financial statements. In some cases, an entity is required to submit its financial statements to its shareholders for approval after the financial statements have been issued. In such cases, the financial statements are authorized for issue on the date of issue, not the date when shareholders approve the financial statements. In some cases, the management of an entity is required to issue its financial statements to a supervisory board (made up solely of non-executives) for approval. In such cases, the financial statements are authorized for issue when the management authorizes them for issue to the supervisory board. Objective The objective of this Standard is to prescribe: a) when an entity should adjust its financial statements for events after the reporting period; and b) the disclosures that an entity should give about the date when the financial statements were authorized for issue and about events after the reporting period. The Standard also requires that an entity should not prepare its financial statements on a going concern basis if events after the reporting period indicate that the going concern assumption is not appropriate. Events after the reporting period include all events up to the date when the financial statements are authorized for issue, even if those events occur after the public announcement of profit or of other selected financial information. Recognition and Measurement Adjusting events after the reporting period although it may need to give additional disclosure under paragraph 21. An entity shall adjust the amounts recognized in its financial statements to reflect adjusting events after the reporting period. The following are examples of adjusting events after the reporting period that require an entity to adjust the amounts recognized in its financial statements, or to recognize items that were not previously recognized: Dividends a) the settlement after the reporting period of a court case that confirms that the entity had a present obligation at the end of the reporting period. The entity adjusts any previously recognized provision related to this court case in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets or recognizes a new provision. The entity does not merely disclose a contingent liability because the settlement provides additional evidence that would be considered in accordance with paragraph 16 of IAS 37. b) the receipt of information after the reporting period indicating that an asset was impaired at the end of the reporting period, or that the amount of a previously recognized impairment loss for that asset needs to be adjusted. For example: i. the bankruptcy of a customer that occurs after the reporting period usually confirms that the customer was credit-impaired at the end of the reporting period; and ii. the sale of inventories after the reporting period may give evidence about their net realizable value at the end of the reporting period. c) the determination after the reporting period of the cost of assets purchased, or the proceeds from assets sold, before the end of the reporting period. d) the determination after the reporting period of the amount of profit-sharing or bonus payments, if the entity had a present legal or constructive obligation at the end of the reporting period to make such payments as a result of events before that date (see IAS 19 Employee Benefits). e) the discovery of fraud or errors that show that the financial statements are incorrect. Non-adjusting events after the reporting period An entity shall not adjust the amounts recognized in its financial statements to reflect non-adjusting events after the reporting period. An example of a non-adjusting event after the reporting period is a decline in fair value of investments between the end of the reporting period and the date when the financial statements are authorized for issue. The decline in fair value does not normally relate to the condition of the investments at the end of the reporting period, but reflects circumstances that have arisen subsequently. Therefore, an entity does not adjust the amounts recognized in its financial statements for the investments. Similarly, the entity does not update the amounts disclosed for the investments as at the end of the reporting period, If an entity declares dividends to holders of equity instruments (as defined in IAS 32 Financial Instruments: Presentation) after the reporting period, the entity shall not recognize those dividends as a liability at the end of the reporting period. If dividends are declared after the reporting period but before the financial statements are authorized for issue, the dividends are not recognized as a liability at the end of the reporting period because no obligation exists at that time. Such dividends are disclosed in the notes in accordance with IAS 1Presentation of Financial Statements. Going Concern An entity shall not prepare its financial statements on a going concern basis if management determines after the reporting period either that it intends to liquidate the entity or to cease trading, or that it has no realistic alternative but to do so. Deterioration in operating results and financial position after the reporting period may indicate a need to consider whether the going concern assumption is still appropriate. If the going concern assumption is no longer appropriate, the effect is so pervasive that this Standard requires a fundamental change in the basis of accounting, rather than an adjustment to the amounts in the the original basis of accounting. IAS 1 specifies required disclosures if: a) the financial statements are not prepared on a going concern basis; or b) management is aware 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 events or conditions requiring disclosure may arise after the reporting period. Disclosure Date of authorization for issue An entity shall disclose the date when the financial statements reauthorized for issue and who gave that authorization. If the entity’s owners or others have the power to amend the financial statements after issue, the entity shall disclose that fact. It is important for users to know when the financial statements reauthorized for issue, because the financial statements do not reflect events after this date. Updating disclosure about conditions at the end of the reporting period If an entity receives information after the reporting period about conditions that existed at the end of the reporting period, it shall update disclosures that relate to those conditions, in the light of the new information. In some cases, an entity needs to update the disclosures in its financial statements to reflect information received after the reporting period, even when the information does not affect the amounts that it recognizes in its financial statements. One example of the need to update disclosures is when evidence becomes available after the reporting period about a contingent liability that existed at the end of the reporting period. In addition to considering whether it should recognize or change a provision under IAS 37, an entity updates its disclosures about the contingent liability in the light of that evidence. Non-adjusting events after the reporting period If non-adjusting events after the reporting period are material, on-disclosure could reasonably be expected to influence decisions that the primary users of generalpurpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity. Accordingly, an entity shall disclose the following for each material category of non-adjusting event after the reporting period: a) the nature of the event; and b) an estimate of its financial effect, or a statement that such an estimate cannot be made. The following are examples of non-adjusting events after the reporting period that would generally result in disclosure: a) b) c) d) e) f) g) h) i) j) a major business combination after the reporting period (IFRS 3Business Combinations requires specific disclosures in such cases) or disposing of a major subsidiary; announcing a plan to discontinue an operation; major purchases of assets, classification of assets as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, other disposals of assets, or expropriation of major assets by government; the destruction of a major production plant by a fire after the reporting period; announcing, or commencing the implementation of, a major restructuring (see IAS 37); major ordinary share transactions and potential ordinary share transactions after the reporting period (IAS 33 Earnings per Share requires an entity to disclose a description of such transactions, other than when such transactions involve capitalization or bonus issues, share splits or reverse share splits all of which are required to be adjusted under IAS 33); abnormally large changes after the reporting period in asset prices or foreign exchange rates; changes in tax rates or tax laws enacted or announced after the reporting period that have a significant effect on current and deferred tax assets and liabilities (see IAS 12 Income Taxes); entering into significant commitments or contingent liabilities, for example, by issuing significant guarantees; and commencing major litigation arising solely out of events that occurred after the reporting period. Effective Date An entity shall apply this Standard for annual periods beginning on or after1 January 2005. Earlier application is encouraged. If an entity applies this Standard for a period beginning before 1 January 2005, it shall disclose that fact. IFRS 13 Fair Value Measurement, issued in May 2011, amended paragraph 11. An entity shall apply that amendment when it applies IFRS 13. IFRS 9 Financial Instruments, as issued in July 2014, amended paragraph 9. An entity shall apply that amendment when it applies IFRS 9. Definition of Material (Amendments to IAS 1 and IAS 8), issued in October 2018, amended paragraph 21. An entity shall apply those amendments prospectively for annual periods beginning on or after 1 January 2020. Earlier application is permitted. If an entity applies those amendments for an earlier period, it shall disclose that fact. An entity shall apply those amendments when it applies the amendments to the definition of material in paragraph 7 of IAS 1 and paragraphs 5 and 6 of IAS 8. Withdrawal of IAS 10 (revised 1999) This Standard supersedes IAS 10 Events After the Balance Sheet Date (revised in1999). Appendix Amendments to other pronouncements the amendments in this appendix shall be applied for annual periods beginning on or after 1 January2005. If an entity applies this Standard for an earlier period, these amendments shall be applied for that earlier period.