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.
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contributions by and distributions to owners in their
capacity as owners; and
cash flows.
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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:
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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:
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assets;
liabilities;
equity;
income and expenses, including gains and losses;
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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:
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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
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Cash and cash equivalents
Trade and other receivables
Financial asset at Fair Value through Profit of Loss
Inventories
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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:
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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:
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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
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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:
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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:
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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:
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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:
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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
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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:
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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:
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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:
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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:
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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:
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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;
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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:
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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:
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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;
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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:
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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:
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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:
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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:
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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:
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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.