OVERVIEW OF ACCOUTING
Accounting is the "process of identifying,
measuring, and communicating economic
information to permit informed judgments and
decisions by users of the information" (AAA).
Important Activities in Accounting
1. Identifying - analyzing events and
transactions to determine whether or
not they will be recognized
Recognition - including the effects of an
accountable event through journal
entry
Accountable Events
one that affects
economic activities
Non-accountable
Events
not recognized as
accounting; but it it
has accounting
relevance it is
recorded in
memorandum entry
Type of Events or Transactions
•
•
External Events - involve external
party
i.
Exchange (reciprocal transfer)
- give and receive
ii.
Non-reciprocal transfer - give
but not receive (e.g.,
donation, tax)
iii.
External event other than
transfer- changes in economic
resources or obligations but
no transfer happened (e.g..
price levels, technological
changes)
Internal Events - do not involve
external party
i.
Production - resources are
transformed into finished
goods
ii. Casualty unanticipated loss
Measuring- assigning numbers in monetary
terms
-FS are prepared using mixture of
costs and values.
FS are mixture of fact and opinion
•
Valued by Opinion - measurement
affected by estimates
• Valued by Fact measurement not
affected by estimates
2. Communicating - transferring economic
data into useful accounting information
for dissemination and interpretation
Three Aspects of Communicating
Process in Accounting:
1. Recording-writing the accountable
events through journal entry
2. Classifying grouping of similar items
into their respective classes through
posting
3. Summarizing-expressing in
condensed form which include
preparations of accounting reports
NOTE: Interpreting the processed
information is computing of financial
statement ratios.
BASIC PURPOSE OF ACCOUNTING
➢ To provide information useful in
making economic decisions
➢ Economic entity-combination
of people and property that
uses economic resources to
achieve certain goals.
Types of economic entity:
a. Not-for-profit entity
b. Business entity
Economic activities are activities that affect the
economic resources, obligations and the equity
of an economic entity. Economic activities
involve:
1. Production
2. Exchange 3. Consumption
4. Income Distribution 5. Savings 6. Investments
Types of Information Provided by Accounting
•
1. Quantitative Information - numbers,
quantities or units
2. Qualitative Information - words or
description form; usually found in notes
3. Financial Information-money
•
•
•
Types of Accounting Information Classified to
User's Need
1. General Purpose Accounting Information common need of most statement users
•
2. Special Purpose Accounting Informationspecific needs of particular users
•
The practice of accounting requires the
exercise of:
•
Creative
Thinking
using
imagination
and insight
logical
analysis
identifies
alternative
solutions
Critical
evaluates
Thinking
alternative
solutions
ACCOUNTING CONCEPTS principles upon which
the accounting process is based (accounting
assumptions or accounting theory)
•
•
•
•
Conceptual Framework and Accounting
Standards Notes
•
•
•
•
Double-entry system - debit and credit
Going Concern Assumption - assumes
continual operation and not expect to
end
Separate Entity-owners personal
transactions are separated from the
business
Stable Monetary Unit - accountable
events are expressed in terms of
common unit
•
•
•
- purchasing power is considered stable
regardless of instability
Time Period - life of reporting period of
entity, usually 12 months (Calendar Year
starts at January 1 ; Fiscal Year - starts
on a date other than January 1
Materiality Concept - a judgment that is
based on its size and nature
Cost-benefit-cost must equal benefit
Accrual Basis - the effects of
transactions are recognized when they
occur and not as cash is received or
paid
Historical Cost Concept (Cost Principle) the asset value is based on the
acquisition cost
Concept of Articulation all the
components of a complete set of
financial statements are interrelated
Full Disclosure Principle - including
enough details to make information
understandable
Consistency Concept - using the same
accounting principle of different periods
Matching - costs are recognized as
expenses when the related revenue is
recognized
Entity Theory - proper income
determination (A-L+C)-income
statement
Propriety Theory - proper valuation of
assets (A-L-C)
- balance sheet
Residual Equity Theory - applicable
when there are two classes of shares
issued (ordinary and preferred (A-LPreferred Shareholder's Equity-Ordinary
Shareholders Equity)
Fund Theory - custody and
administration of funds (cash inflows cash outflows-fund's)
Realization - converting non-cash assets
into cash or claims for cash
•
Prudence (Conservatism) use of caution
when making estimates; does not allow
deliberate assets' understatement or
liabilities' overstatement (e.g., cookie
jar reserve); choosing least effect on
equity E
EXPENSE RECOGNITION PRINCIPLES
•
•
•
Matching Concept (Direct Association of
Costs and Revenues) - cost that are
directly related to the revenue are
recognized as expenses in the same
period
Systematic and Rational Allocation cost
that are not directly related to the
revenue are recognized are assets first
and are recognized as expenses when
consumed using some method of
allocation (e.g., depreciation,
amortization)
Immediate Recognition cost that do not
meet or ceases to meet the definition of
assets are expensed immediately (e.g..
casualty and impairment losses)
•
•
•
•
•
•
•
•
•
COMMON BRANCHES OF ACCOUNTING
•
•
Financial Accounting - focuses on
general purpose financial statements
>Financial Statement (FS) entity's
financial position and results of its
operations and are communicated to
users.
> Financial Report - FS plus other
information to help in making efficient
economic decisions and is useful to
external users. Objectives of financial
reporting is to provide information:
1. Entity's economic resources, claims
and changes
2. Useful in assessing the entity's
management stewardship
Management Accounting communication of information for use
by internal users
•
•
•
Cost Accounting systematic recording
and analysis of cost of materials, labor
incident to production and overhead
Auditing-evaluating with established
criteria and express opinion to ensure
fairness and reliability
Tax Accounting - preparations of tax
returns and rendering of tax advice
Government Accounting custody of
public funds, its purpose, and the
responsibility and accountability of
entrusted individual
Fiduciary Accounting - handling
accounts managed by a person for the
benefit of other
Estate Accounting-handling accounts
for fiduciaries who wind up the affairs
of deceased person
Social Accounting communicating the
social and environmental effects of an
entity's economic actions to the society
Institutional Accounting - for nonprofit entities other than government
Accounting Systems - installation of
accounting procedures for the
accumulation of financial data and
designing of accounting forms for data
gathering
Accounting Research - careful analysis
of economic events and other variables
to understand their impact of decisions
Bookkeeping-recording the account or
transaction of an entity
- ends with the preparation of trial
balance
- does not require interpretation
Accountancy - profession or practice of
accounting either public or private
practice
PHILIPPINE ACCOUNTANCY ACT OF 2004
(R.A. 9298) Sectors in the Practice of
Accountancy
1. Practice in Public Accountancy-rendering
service to more than one client on fee basis
2. Practice in Commerce and Industryemployment in private sector
3. Practice in Education/Academe employment in educational institutions
4. Practice in Government - employment in
government or controlled corporations
NOTE: 2 and 4 are considered private
practice.
ACCOUNTING STANDARDS USED IN THE
PHILIPPINES
Philippine Financial Reporting Standards (PFRS)
- Philippines GAAP is based on IFRS PFRS is
comprised of:
a. Philippine Financial Reporting
Standards (PFRS)
b. Philippine Accounting Standard
(PAS)
c. Interpretations
Reporting standards is necessary to become
comparable, avoid fraudulent reporting, and
right economic decisions.
Selection of appropriate accounting policies is
the entity's management responsibility.
However, the proper application of accounting
principles is the accountant's responsibility.
ACCOUNTING STANDARD SETTING BODIES AND
OTHER RELEVANT ORGANIZATION
1. Financial Reporting Standard Council (FRSC) official accounting standard setting body of the
Philippine created under RA 9298
2. Philippine Interpretations Committee (PIC)
predecessor of FRSC which reviews the
interpretations of International Financial
Reporting Interpretations Committee (IFRIS) for
approval and adoption by the FRSC
3. Board of Accountancy (BOA) supervise the
registration, licensure and practice of
accountancy in the Philippines
4. Securities and Exchange Commission (SEC) regulates corporations and partnership, capital
and investment marks, and the investing public
Code
5. Bureau of Internal Revenue (BIR) administers the provisions of the National
Internal Revenue
6. Cooperative Development Authority (CDA)
influences the selection and application
accounting policies by cooperatives
NOTE: Accounting policies prescribes by a
regulatory body are sometimes referred to as
regulatory of accounting principles.
International Accounting Standards Board (IASB)
standard setting body of the IFRS Foundation
with the main objectives of developing and
promoting global accounting standards.
Standards issued:
• International Financial Reporting Standards
(IFRS)
•International Accounting Standards (ASS)
•Interpretations
The move to IFRS was primarily brought by the
increasing acceptance of IFRSS world-wide and
increasing internalization of business thereby
increasing the need for a common financial
reporting standards that minimize, if not
eliminate, inconsistencies of financial reporting
among nations
Norwalk Agreement - a memorandum of FASB
(USA) and IASB to produce a single set of global
accounting standards, in which they agree to
make financial reporting standards that are:
a. Fully compatible; and
b. Coordinate future work programs
CONCEPTUAL FRAMEWORK AND REPORTING
STANDARD
Prescribes the concept for general purpose
financial reporting to assist IASB in developing
standards, assist prepares in developing
consistent accounting policies when no standard
applies to a transaction and assist all parties in
understanding and interpreting standards
CONCEPTUAL FRAMEWORK
• Provide foundation for the development of
standards that promote transparency,
strengthen accountability, and contribute to
economics efficiency
• Do not provide requirements for specific
transactions or events
• Conceptual framework is not a standard. Any
conflict between the two, standard will prevail.
• Use the hierarchy of standard for guidance in
authoritative status. (See PAS 2 for reference)
• This can be revised but not automatically
result to change of Standards not until the IASB
due process
• Scope of Conceptual Framework:
OBJECTIVE OF FINANCIAL REPORTING
• Foundation of the Conceptual Framework
Primary Users Existing and potential investors
• Provide financial information that is useful to
primary users in making decisions about
providing resources to the entity. Cannot
demand specific information
• Decisions of primary users are based on
assessment of an Entity only provides the
common entity's prospect for future net inflows
and management needed data of most primary
users stewardship. Hence, users need
information of entity's financial position,
financial performance, and other changes in
financial position, and assets' utilization.
Lenders and creditors
Objective of Financial Reporting = Conceptual
Framework = Standard
General Purpose Financial Reporting
Caters most of the common need of most
primary users Do not directly show the value of
entity but only information that help users
estimates entity value. Providing information
requires estimates and judgment
1. Financial Position - information on resources
(assets) and claims (liabilities and equity) This
can help users in assessing entity's:
• Liquidity and solvency - able to pay short and
long-term obligations, respectively
• Needs for additional financing Management's
stewardship
2. Changes in economic resources and claims information on financial performance and other
events or transaction that led to the said change
QUALITATIVE CHARACTERISTICS
Identifies the most useful information to
primary users in making decisions using entity's
financial report Applicable to information in FS
and to financial information provided in other
ways
1. Fundamental Qualitative Characteristics information useful to users
a. Relevance - can affect decision of users
• Predictive Value - making predictions using
past info
• Confirmatory Value - confirming previous
decisions
➢ Materiality
• Information is material if omitting or
misstating it could influence primary
users' decision
• Entity-specific
• IFRS Practice Statement 2 Making
Materiality Judgments provide nonmandatory guidance called materiality
process. Below are the four steps:
1. Cost-Benefit Principle. However, cost
is not a factor when making materiality
judgment.
2. Assess whether step 1 information
could influence the user's decisions by:
a. Items nature or size or both
b. Quantitative and qualitative factors
► Quantitative factors size of impact
and can be assessed in relation to
another amount percentage or a
threshold amount
- CF and the standard do not specify a
quantitative threshold since it is a
judgment
► Qualitative factors - characteristic of
item or context; (i) entity specific and
(ii) external qualitative factors
- No hierarchy among factors, but an
entity normally assesses an item first in
quantitative factors:
► If it is quantitatively material, no
need to reassess qualitative factors.
► If not quantitatively material, needs
to reassess qualitative factors
3. Maximizes understandability to users
by organizing FS draft
4. Reviewing the draft allows overview.
An item might be immaterial on its own,
but might be material in conjunction
with other FS information
b. Faithful Representation true, correct and
complete depiction (when an economic
phenomenon's substance differs from its legal
form (ie., substance over form), it requires
depiction)
•Completeness - must provide all information
needed in understanding
•Neutrality- not manipulated or without bias
•Free from Error - accurate but not precise;
supported by prudence (use of caution when
making judgment)
2. Enhancing Qualitative Characteristics enhance usefulness of information
a. Comparability to identify similarities and
differences of different information through
intra- comparability or inter-comparability
b. Verifiability-different users should reach a
general agreement i. Direct verification - can be
observe directly (e.g., counting of cash) ii.
Indirect verification - redo the methodology
used by the entity
c. Timeliness - available to users on time
excluding
d. Understandability - presented in clear and
concise manner but does not mean complex
matter
Applying Qualitative Characteristics
►Information must be both relevant and
faithfully represented
►Enhancing qualitative information cannot
make irrelevant information useful
►One enhancing qualitative characteristic may
be sacrificed to maximize another
►Cost constraint - pervasive constraint;
providing information has cost; cost must equal
benefits
FINANCIAL STATEMENTS AND THE REPORTING
ENTITY
• The objective of general purpose financial
statements is to provide financial information
about the reporting entity's financial position,
financial performance, and other statements
and notes
• Reporting Period
• Information must be comparative, forwardlooking, and entity's perspective
• Going concern assumption - an underlying
assumption that is based on management's
decision
• Reporting Entity - can be single or group or
combination of two or more entities
An entity controls another entity:
1. Parent-controlling entity
2. Subsidiary-controlled entity
▸ Consolidated Financial Statement-combined
report of parent and subsidiary
▸ Unconsolidated Financial Statement - report
from parent only
▸ Individual Financial Statement report from
subsidiary only
▸ Combined Financial Statement - report of two
or more entities not linked by parent subsidiary
ELEMENTS OF FINACIAL STATEMENTS
• Assets - 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.
- ability to prevent others from accessing the
benefits of controlled resources
- control normally stems from legally
enforceable rights (e.g., ownership or legal
title). However, ownership is not always
• Liability - present obligation of the entity to
transter an economic resource as a result of
past events
-transfer of economic benefits need not be
certain
a. Legal obligation-result from contact,
legislation, or other law of operation
b . Constructive obligation result from entity's
action (e.g.. warranty, environmental damages)
Executory Contract - a contract that is equally
unperformed by both parties or have partially
fulfilled with equal extent; combined right or
obligation
Executed Contract-fulfilled by other party
•Equity - residual interest after deducting assets
from liabilities Reserves
- amount set aside to protect the entity's
creditors or shareholders from losses
• Income - revenue; increase in assets or
decrease in liabilities that result in increase in
equity
• Expenses - costs; decrease in assets or
increase in liabilities that result in decrease in
equity
NOTE: The new conceptual framework removes
the notion of 'expected' and 'probability of
economic flow, and 'reliable measurement
Financial Position - balance sheet; assets,
liabilities and equity
Financial Performance income statement;
income and expenses
RECOGNITION
• Items are recognized if it meets the two
criteria:
➢ Meets the definition of financial
element;
➢ and Provides useful information
(relevance and faithfully represented
information)
• An asset (liability) can exist even if producing
(transferring) benefits has low probability, but
can affect the recognition, how it is measured,
what and how information is provided
•Unresolve dispute of asset or liability will
mostly affect the recognition
• Existence uncertainty and low probability of
an inflow or outflow of economic benefits may
result in but does not automatically lead to the
non-recognition of asset or liability. Other
factors should be considered.
• Measurement uncertainty
➢ Exist if the asset or liability needs to be
estimated
➢ High level of measurement uncertainty
does not necessarily lead to nonrecognition if it provides relevant
information and is clearly and
accurately described and explained
➢ However, it can lead to non-recognition
if making estimate is exceptionally
difficult or subjective (can affect faithful
representation) or especially if one or
more of the circumstances exist:
•Exceptionally wide range of possible
outcome and is difficult to estimate
•Highly sensitive to small changes
• Exceptionally subjective allocations of
cash flows that do not relate solely to
the asset or liability being measured
• Derecognition
• Removal of previously recognized asset or
liability when the item no longer meets its
definition
•Derecognizes asset or liability that have
expired, consumed, collected. fulfilled or
transferred and continues to recognize any
assets or liabilities that have retained after
derecognizing
Unit of Account is "the right or the group of
rights, the obligation or the group of obligations,
or the group of rights and obligations, to which
recognition criteria and measurement concept
are applied
MEASUREMENT
basis is needed since recognition requires
quantifying item in monetary terms.
Standards prescribe specific measurement
bases for different types of assets, liabilities,
income and expenses.
Measurement bases describe by Conceptual
Framework
1. Historical Cost - acquired (incurred) cost of
assets (liability) plus (minus) transaction costs
do not reflect changes in value but may need to
be updated (e.g.. depreciation, amortization
cost) so, the value can be changed
2. Current Value-reflect changes in value at the
measurement date
•Fair Value - price that would be received to sell
(paid) an asset (liability) that reflects the
perspective of market participants at the
measurement date
• Value in use of assets and fulfillment value of
liability - reflect entity's assumption
- Value in Use present value of economic
benefits from the use or ultimate disposal of
asset
- Fulfillment Value - present value of
economic resources to transfer or fulfilling
liability
Both do not include transaction cost from
acquiring or incurring, but include transaction
cost of disposal or fulfillment
• Current Cost - cost at the measurement date
plus (minus) transaction cost at that date
Entry Values
Historical cost and
current cost
Reflect prices in
acquiring assets or
incurring liability
Exit Values
Fair value, value in
use and fulfillment
value
Reflect prices in
selling or using an
asset or transferring
or fulfilling a liability
Considerations when selecting a measurement
basis:
a. The nature of information provided by a
particular measurement basis
b. Considerations of other factors rather than
only a single isolated factor. Example:
• Faithful representation. If measurement of
uncertainty is high to a particular measurement
basis, consider other measurement basis .
•Comparability. Using the same measurement
basis consistently is important for comparability,
but a change is appropriate if it result to a more
relevant information
•Understandability. The more different
measurement bases are used, the more
complex.
PRESENTATION AND DISCLOSURE
Objectives are specified in standards that strive
for a balance between:
a. Giving entities the flexibility to provide
relevant and faithfully represented information;
and
b. Requiring information that has both intracomparability and inter-comparability
Principles for effective communication
considers:
a. Entity-specific information is more useful than
standardized description, also known as
'boilerplate; and
b. Duplication of information is usually
unnecessary at it can make financial statement
less understandable
Classification
Offsetting
Definition
Sorting
elements of FS
with similar
nature,
function and
measurement
basis
- When asset
and liability
with separate
units of
accounts are
combined and
only Accounts
receivable and
accounts the
net amount is
presented
- Combines
dissimilar
items, hence
appropriate
practice
Example
Accounts
receivable
Accounts
receivable and
payable are
netted and
presented in
not in the net
amount
same
classification
- Summarizes
large volume of
detail
CAPITAL AND CAPITAL MAINTENANCE
Capital
Concept
Concept used
for users
concerned
Capital
Maintenance
Measuremen
t
Current Cost
Basis
Aggregation
- Adding
together of FS
elements that
share
characteristics
and are
included the
All receivables
(e.g., accounts
in receivable,
interest
receivables)
are aggregated
and presented
under "Trade
and other
receivables"
FINANCIAL
Invested
money or
investment
purchasing
price
with the
maintenanc
e of nominal
invested
capital of
purchasing
power of the
invested
capital
Profit is
earned it net
assets at the
end period
exceeds the
beginning
period
Current Cost
PHYSICAL
Entity's
productive
capacity
To the
entity's
operating
capability
Profit is
earned only if
entity's
productive
capacity at
the end
period
exceeds the
beginning
period
Does not
require
particular
measuremen
t basis
➢ Both capital maintenances exclude the
distributions to, contributions from
owners during the period.
➢ Capital Maintenance is essential in
distinguishing between return on capital
and return of capital.
Capital Maintenance Adjustments - the
revaluation or restatement of assets and
liabilities results in increase or decrease in
equity. Although these increases or
decreases meet the definition of income or
expense, they are not recognized in profit or
loss under certain concepts of capital
maintenance. Accordingly, these items are
included in equity as capital maintenance
adjustments or revaluation reserves.
PAS 1 PRESENTATION OF FINANCIAL
STATEMENT
It prescribes the basis for the presentation of
general purpose financial statements, its
structure guidelines and content's minimum
requirements to ensure comparability (intercomparability and intra- comparability). The
terminology of PAS 1 is suitable for profitoriented entities.
Financial Statements
• Structured presentation of an entity's
financial position and result of its operation
• Pertain only to the entity not the industry
• General purpose financial statements - cater
most of the common needs of a wide range of
external users (cannot demand specific reports
for their own needs)
Purpose of Financial Statements
• To provide useful information useful to a wide
range of users in making economic decision
• To show result of management stewardship
over the entity's resources
Complete Set of General Purpose Financial
Reporting Statement
1. Statement of Financial Position (or Balance
Sheet)
2. Statement of Profit or loss and other
comprehensive income (not the same as income
statement)
3. Statement of Changes in Equity
4. Statement of Cash Flows
5. Notes-qualitative info to explain the
quantitative info 1-4
- comparative information in respect of the
preceding period
6. Additional statement of financial position
- required under certain instances
GENERAL FEATURES OF FINANCIAL
STATEMENTS
Management is responsible for preparation and
the fair presentation of entity's FS in accordance
to PFRS
1. Fair presentation and compliance with the
PFRS
• Make an explicit and unreserved statement
• Application of PFRS with additional disclosure
when necessary
• If management concludes that PFRS
requirement compliance is misleading, PAS 1
permits requires or allows such departure from
it relevant regulatory framework (prescribed by
a government regulatory body) requires or
allows such departure
• If it departs, the entity shall disclose which
PFRS it departs, why, and the effect of departure
Compliance or departure is written in the note
section
2. Going Concern
• If there are uncertainties of going concern, it
shall be disclosed
• If entity is not a going concern, it shall be
disclosed and the reason why, and FS shall be
prepared using another basis
•
Not a going concern if as of the
reporting period date or the
authorization of FS issuance,
management either:
a. Intends to liquidate the entity to
cease trading
b. Has no realistic alterative but to do so
(e.g., bankruptcy)
3. Accrual Basis of Account All FS shall use this
except cash flow statement, which uses cash
basis to know the amount of cash the company
has because it is easier to liquidate (ability to
pay short-term obligation)
1. Application of accounting policy
retrospectively
2. Makes a retrospective restatement on items
in its financial position, or
3. Reclassifies items in its FS
These instances have a material effect on the
information of statement of financial position
beginning of the preceding period.
4. Materiality and Aggregation
• Each material class of similar item (line item)
is presented separately.
• Immaterial items can be aggregated
8. Consistency of Presentation
•Retainment of one method from one to next
period unless change is needed for a more
relevant information
5.Offsetting
• Not offsetting if it measure asset net valuation
allowance, for example, allowances for obsolete
inventories and of doubtful accounts on
receivables, and accumulated PPE depreciation
• Shall not use it unless permitted by PFRS
• Only permitted when it reflects substance of
the transaction
• Example of offsetting: Using two bank
accounts in the same bank (not the same is
prohibited). If the other has negative balance
and the other is positive, therefore offsetting is
okay.
6. Frequency of reporting
• Prepared at least annually Changes in
reporting period shall disclose the period
covered, the reason for changing, and the fact
that amount presented are not entirely
comparable
7. Comparative Information
• Minimum requirement for comparison is two
different statements and related notes
• PAS 1 permits addition to the minimum
requirement
• Additional Statement of Financial Position instances to add are:
STRUCTURE AND CONTENT OF FINANCIAL
STATEMENT
1. Name of the reporting entity
2. For whom the statements (individual or group
entity)
3. Date (end or covered period)
4. Presentation currency
5. Rounding level used (e.g., thousands, millions
Example:
ABC Group Statement of Financial Position As of
December 31, 20x2 (in thousand of Philippine
Peso)
STATEMENT OF FINANCIAL POSITION
Presentation of Statement of Financial
Position
CLASSIFIED
PRESENTATION
UNCLASSIFIED
PRESENTATION
- shows no distinction
between current and
noncurrent assets or
liabilities
= most commonly
used
- highlights working
capital and facilitates
- shows distinction
between current and
non-current
- based on liquidity
➢ Refinancing agreement is fully
completed on or before balance-sheet
date; or
➢ Refinancing agreement after balance
sheet date but before FS are authorized
for issue
the computation of
liquidity and solvency
ratios
- Working capital =
Current Assets Current Liabilities
PAS 1 does not prescribe the order or format in
which an entity presents items,
PAS 1 permits mixed presentation especially if
the entity's operation is diverse.
CURRENT NON-CURRENT ASSETS AND
LIABILITIES
CURRENT
- Used for trading
during the entity's
normal operating
cycle (12 months)
- Cash or cash
equivalents restricted
from being
- Includes accruals Ex.
Trade Receivables
- Ex. trade
Receivables
NON-CURRENT
- Used more than 1
year
- Cash and cash
equivalents restricted
for exchange (e.g.,
maintaining balance
of bank account)
- Includes deferrals
-Ex. Non-trade
Receivables
Currently Maturing Long-Term Liabilities
• Must be presented as current liabilities
Breach of Loan Contract
• A liability that is payable on demand is a
current liability
• Exception is if a lender provides on or before
balance sheet date a grace period ending at
least 12 months after the balance sheet date to
rectify the breach
Presentation of Deferred Taxes
• Presented as non-current in a classified
presentation, irrespective of their expected date
of reversal
STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME
Income and expenses may be presented either:
a. Single statement of profit or loss and other
comprehensive income, called statement of
comprehensive income
PAS 1 requires entity to present information
on the following:
a. Profit or loss
b. Other comprehensive income; and
c. Comprehensive income
Presenting only an income statement is
prohibited.
• Example: A 10-year loan payable acquired 10
years ago must be fulfilled within this year.
Hence, it must be presented current liabilities
• Exception is refinancing agreement (defer
settlement of currently maturing long-term
liability) when:
b. Two statements:
1. statement of profit or loss (income
statement)
2. statement presenting comprehensive income
Profit or Loss
• Income minus expenses, excluding the
components of comprehensive income
• Not included in determining profit or loss
1. Correction of prior period error
2. Change in accounting policy
3. Other comprehensive income
4. Transactions with owner's
Presentation of Expense
NATURE OF EXPENSE
METHOD
FUNCTION OF
EXPENSE METHOD
-According to their
nature
- Ex. Transportation
cost, advertising cost,
purchase of materials
-According to their
function
-Ex. Cost of sales,
distribution costs,
administrative
expense
-More difficult to
apply but has
potential of providing
more relevant
information NOTE: If
an entity classifies
expenses by function,
it shall disclose
additional
information
OTHER COMPREHENSIVE INCOME (OCI)
•May presented in net tax or gross of tax
• Comprises items of income and expense
(including reclassification adjustments) that are
not recognized in profit or loss as required or
permitted by other PFRS
• Comprises items of income and expense
(including reclassification adjustments) that are
not
• Amounts in OCI are usually accumulated as
separate components of equity
Reclassification of adjustments - amounts from
OCI reclassified to profit or loss
a. Gain is deduction to OCI and addition to profit
or loss
b. Loss is addition to OCI and deduction to profit
or loss
Presentation of OCI-shall group items into
reclassification adjustment is allowed and not
allowed
Types of OCI
Reclassification
adjustment
a. Changes in
revaluation surplus
liability (asset) (e.g.,
employee benefit)
Not allowed
b. Remeasurement of
the net defined
benefit
Not allowed
c. Fair Value changes
in FVOCI
- Equity instrument
(election)
- Debt instrument
(mandatory)
▸ on the nature of expenses
Not allowed
Allowed
d. Translation
difference in foreign
operations
Allowed
e. Effective portion of
cash flows
Allowed
Total Comprehensive Income
• The sum of profit or loss and OCI
•Presented here is also the change in nonowner's equity during a periods; owner's is
excluded
STATEMENT OF CHANGES IN EQUITY
• Owner/s only
•Shows the following:
a. Effect of change in accounting policy and
correction
b . Total comprehensive income for the period
of error retrospectively
c. For each component of equity, a
reconciliation between the carrying amount at
the beginning and end of period, showing
separately changes resulting from profit or loss,
other comprehensive income, and transaction
with owners
STATEMENT OF CASH FLOWS
Refer to PAS 7
• Provides qualitative information to the other
FS, therefore other FS should be cross-refenced
to the notes
• Integral part of a complete FS
PAS 1 requires entity to present the notes in
system manner. It is structured as follows:
1. General information on the reporting entity
2. Statement of compliance with the PFRS and
Basis of preparation of FS
3. Summary of significant accounting policies
4. Disaggregation (breakdowns) of line items in
the other FS and other supporting information
5. Other disclosure required by PFRS
6. Other disclosure not required y PFRS but is
relevant in understanding
PAS 2 INVENTORIES
Determination of costs to recognize as asset to
expense is the primary issue in accounting
inventories Hence, PAS 2 provides guidance in
the determination of costs of inventories,
including use of cost formulas, and their
subsequent measurement and recognition as
asset then expense.