Conceptual-Framework-and-Accounting-Standard.pptx

Conceptual Framework and
Accounting Standard
Chapter 1 – Overview of
Accounting

Definition of Accounting
Accounting is "the process of identifying, measuring, and
communicating economic information to permit informed
judgments and decisions by users of the information."
Three important activities included in the definition of
accounting
1. Identifying
2. Measuring
3. Communicating

Identifying
Identifying is the process of analyzing events and
transactions to determine whether or not they will be
recognized.
*Recognition refers to the process of including the effects of
an accountable event in the statement of financial position or
the statement of comprehensive income through a journal
entry.

Only accountable events are recognized (i.e., journalized).
An accountable event is one that affects the assets, liabilities,
equity, income or expenses of an entity. It is also known as
economic activity, which is the subject matter of accounting.
Only economic activities are emphasized and recognized in
accounting. Sociological and psychological matters are not
recognized.
Non-accountable events are not recognized but disclosed only in
the notes, if they have accounting relevance. Disclosure only in the
notes is not an application of the recognition process. A non-
accountable event that has an accounting relevance may be
recorded through a memorandum entry.

SUMMARY
Accountable Events Non-Accountable Events
Affects A,L & E does not Affects A,L & E
Recognized in FS Not Recognized
Journalized only Disclose in notes to FS (memorandum entry)
if they have accounting relevance

Types of events or transactions
1. External events - are events that involve an entity and
another external party.
Types of External events
i. Exchange (reciprocal transfer) — an event wherein there is
a reciprocal giving and receiving of economic resources or
discharging of economic obligations between an entity and an
external party.
Examples: sale, purchase, payment of liabilities, receipt of
notes receivable in exchange for accounts receivable, and the
like.

ii. Non-reciprocal transfer — is a "one way" transaction in
that the party giving something does not receive anything in
return while the party receiving does not give anything in
exchange.
Examples: donations, gifts or charitable contributions,
payment of taxes, imposition of fines, theft, provision of
capital by owners 1, distributions to owners and the like.

iii. External event other than transfer — an event that
involves changes in the economic resources or obligations of
an entity caused by an external party or external source but
does not involve transfers of resources or obligations.
Examples: changes in fair values and price levels,
obsolescence, technological changes, vandalism, and the
like.

2. Types of Internal events
i. Production - the process by which resources are
transformed into finished goods. Examples: conversion of raw
materials into finished products, production of farm products,
and the like.
ii. Casualty - an unanticipated loss from disasters or other
similar events. Examples: loss from fire, flood, and other
catastrophes.

Measuring
Measuring involves assigning numbers, normally in monetary
terms, to the economic transactions and events.
Several measurement bases are used in accounting which include,
but not limited to,
1. historical cost,
2. fair value,
3. present value,
4. realizable value,
5. current cost,
6. and sometimes inflation- adjusted costs.

The most commonly used is historical cost. This is usually
combined with the other measurement bases.
Accordingly, financial statements are said to be prepared
using a mixture of costs and values. Costs include historical
cost and current cost while values include the other
measurement bases.

Valuation by fact or opinion
The use of estimates is essential in providing relevant information.
Thus, financial statements are said to be a mixture of fact and
opinion.
When measurement is affected by estimates, the items measured
are said to be valued by opinion.
Examples:
a. Estimates of uncollectible amounts of receivables.
b. Depreciation and amortization expenses, which are affected
by estimates of useful life and residual value.
c. Estimated liabilities, such as provisions.
d. Retained earnings, which is affected by various estimates of
income and expenses

When measurement is unaffected by estimates, the items
measured are said to be valued by fact.
Examples:
a. Ordinary share capital valued at par value
b. Land stated at acquisition cost
c. Cash measured at face amount

Communicating
Communicating is the process of transforming economic data into
useful accounting information, such as financial statements and
other accounting reports, for dissemination to users. It also
involves interpreting the significance of the processed
information.
The communicating process of accounting involves three aspects:
1. Recording - refers to the process of systematically committing
into writing the identified and measured accountable events in
the journal through journal entries.
2. Classifying - involves the grouping of similar and interrelated
items into their respective classes through postings in the ledger
3. Summarizing - putting together or expressing in condensed form
the recorded and classified transactions and events. This includes
the preparation of financial statements and other accounting
reports.

Basic purpose of accounting
The basic purpose of accounting is to provide information that
is useful in making economic decisions.
Economic entities use accounting to record economic
activities, process data, and disseminate information intended
to be useful in making economic decisions.

An economic entity is a separately identifiable combination
of persons and property that uses or controls economic
resources to achieve certain goals or objectives. An economic
entity may either be a:
a. Not-for-profit entity — one that carries out some socially
desirable needs of the community or its members and whose
activities are not directed towards making profit; or
b. Business entity — one that operates primarily for profit.

Economic activities are activities that affect the economic
resources (assets) and obligations (liabilities), and
consequently, the equity of an economic entity. Economic
activities include:
1. Production
2. Exchange
3. Consumption
4. Income distribution
5. Savings
6. investment

Types of information provided by accounting
1. Quantitative information - information expressed in
numbers, quantities, or units.
2. Qualitative information - information expressed in words
or descriptive form, Qualitative information is found in the
notes to financial statements as well as on the face of the
other financial statements.
3. Financial information - information expressed in money,
Financial information is also quantitative information because
monetary amounts are normally expressed in numbers.

Types of accounting information classified as to users' needs
1. General purpose accounting information - designed to
meet the common needs of most statement users. This
information is provided under financial accounting.
General purpose information is governed by generally
accepted accounting principles (GAAP) represented by
the Philippine Financial Reporting Standards (PFRSs).
2. Special purpose accounting information - designed to
meet the specific needs of particular statement users. This
information is provided by other types of accounting other
than financial accounting, e.g., managerial accounting, tax
basis accounting.

Sources of information in financial statements
Information in the financial statements is not obtained
exclusively from the entity's accounting records. Some are
obtained from external sources. For example, fair value
measurements, resolutions of uncertainties, future lease
payments, and contractual commitments are only a few of
the information presented in the financial statements that are
derived from external sources.

Accounting Concepts
Accounting concepts refer to the principles upon which the process
of accounting is based. The term "accounting concepts" is used
interchangeably with the following terms:
1. Accounting assumptions (Accounting postulates) - are the
fundamental concepts or principles and basic notions that provide
the foundation of the accounting process.
2. Accounting theory - is logical reasoning in the form of a set of
broad principles that (i) provide a general frame of reference guide
by which accounting practice can be evaluated and (ii) the
development of new practices and procedures. It is the organized
set of concepts and related principles that explain and guide the
accountant's action in identifying, measuring, communicating
accounting information. Accounting theory comprises the
Conceptual Framework and the Philippine Financial Reporting
Standards (PFRSs).

Most accounting concepts are derived from the Conceptual
Framework and the Philippine Financial Reporting Standards
(PFRSs). However, some accounting concepts are implicit,
meaning they are not expressly stated in the Framework or
PFRSs but are generally accepted because of their long-time
use in the profession.
Examples of accounting concepts:
I. Double-entry system - each accountable event is recorded in
two parts - debit and credit.
2. Going concern assumption - the entity is assumed to carry
on its operations for an indefinite period of time. Meaning,
the entity does not expect to end its operations in the
foreseeable future.

The measurement basis involving mixture of costs and values
is appropriate only when the entity is a going concern.
If the entity is a liquidating concern, the appropriate
measurement basis is realizable value, i.e., estimated selling
price less estimated costs to sell for assets and expected
settlement amount for liabilities.

3. Separate entity (Accounting entity / Business entity concept/
Entity concept) — the entity is viewed separately from its owners.
Accordingly, the personal transactions of the owners among
themselves or with other entities are not recorded in the entity's
accounting records. This concept defines the area of interest of the
accountant.
4. Stable monetary unit (Monetary unit assumption)
a, Assets, liabilities, equity, income and expenses are stated in
terms of a common unit* of measure, which is the peso in the
Philippines; and
b. The purchasing power of the peso is regarded as stable or
constant and that its instability is insignificant and therefore
ignored.
*To be useful, accounting information should be stated in a
common denominator. For example, amounts in foreign currencies
should be translated into pesos,

5. Time Period (Periodicity/ Accounting period) — the life of
the entity is divided into series of reporting periods. An
accounting period is usually 12 months and may either be a
calendar year or a fiscal year period. A calendar year period
starts on January 1 and ends on December 31 of that same
year. A fiscal year period also covers 12 months but starts on a
date other than January 1.
6. Materiality concept — information is material if its
omission or misstatement could influence economic
decisions. Materiality is a matter of professional judgment
and is based on the size and nature of the item being judged.

7. Cost-benefit (cost constraint/ Reasonable assurance) — the cost of
processing and communicating information should not exceed the
benefits to be derived from it.
8. Accrual Basis of accounting - the effects of transactions and other
events are recognized when they occur (and not as cash is received or
paid) and they are recorded in the accounting records and reported in
the financial statements of the periods to which they relate.
Under accrual basis, income is recognized when earned rather than
when cash is collected and expenses are recognized when incurred
rather than when cash is paid.
9.Historical cost concept (Cost principle) - the value of an asset is
determined on the basis of acquisition cost. This concept is not always
maintained. Some PFRSs require the departure from this concept, such
as when inventories are measured at net realizable value (NRV) rather
than at cost when applying the "lower of cost and NRV"` measurement.

10. Concept of Articulation – all of the components of a complete
set of financial statement are interrelated. The preparation of a
worksheet ( and the eventual completion of FS) recognizes that the
FS are fundamentally interrelated and interact with each other.
Accordingly, when users use the FS in making decisions, they need
to use each FS in conjunction with the other FSs.
For Example: when evaluating an entity’s ability to generate future
cash flows, all FS should be used and not only the statement of
cash flows.
- Receivable & Payable in the Statement of Financial Position
provide information on expected cash receipt & disbursement in
the future periods.
- Income & Expenses in Statement of comprehensive Income
provided information on entity’s ability to generate cash flows
from its operation.

11. Full disclosure principle — this principle recognizes that the
nature and amount of information included in the financial
statements reflect a series of judgmental trade-offs. The trade- offs
strive for
a. sufficient detail to disclose matters that make a difference to
users, yet
b. sufficient condensation to make the information
understandable, keeping in mind the costs of preparing and using it.
12. Consistency concept — the financial statements are prepared
on the basis of accounting principles that are applied consistently
from one period to the next, Changes in accounting policies are
made only when required or permitted by the PFRSs or when the
change results to more relevant and reliable information. Changes
in accounting policies are disclosed in the notes.

13, Matching (Association of cause and effect) — costs are
recognized as expenses when the related revenue is
recognized.
14. Entity theory — the accounting objective is geared
towards proper income determination, Proper matching of
costs against revenues is the ultimate end. This theory
emphasizes the income statement and is exemplified by the
equation "Assets = Liabilities + Capital.“
The entity theory is a legal theory and accounting
concept that all of the business activity conducted by any
corporation or limited liability business is separate from that
of its owners

15. Proprietary theory— the accounting objective is geared
towards the proper valuation of assets. This theory
emphasizes the importance of the balance sheet and is
exemplified by the equation "Assets — Liabilities = Capital,“
The proprietary theory states that there is no fundamental
difference between owners of the business and the business
itself. Basically, the entity does not exist separately or
otherwise from its owners.

16. Residual equity theory — this theory is applicable when
there are two classes of shares issued, i.e., ordinary and
preferred. The equation is "Assets — Liabilities — Preferred
Shareholders‘ Equity = Ordinary Shareholders' Equity." This
theory is applied in the computation of book value per share
and return on equity.

17. Fund theory — the accounting objective is neither proper
income determination nor proper valuation of assets but the
custody and administration of funds. The objective is directed
towards cash flows, exemplified by the formula "cash inflows minus
cash outflows equals fund." This concept is used in government
accounting and fiduciary accounting.
18. Realization — the process of converting non-cash assets into
cash or claims for cash. It is also the concept that deals with
revenue recognition.
For example, realization occurs when goods are sold for cash or in
exchange for accounts receivable or notes receivable. The goods
are non-cash assets and they are converted into cash or, in the case
of the receivables, claims for cash.

19. Prudence (Conservatism) — is the use of caution when
making estimates under conditions of uncertainty, such that
asset or income are not overstated and liabilities or expenses
are not understated. In other words, when exercising
prudence, the one which has the least effect on equity is
chosen.
However, the exercise of prudence does not allow the
deliberate understatement of assets or overstatement Of
liabilities

Expense recognition Principle
1. Matching Concept ( Direct Association of Cost and
Revenue) – cost that are directly related to earning of
revenue are recognized as expenses in the same period
the related revenue is recognized
Example: Cost of Inventory is initially recognized as an asset
and recognized as expense when the inventory is sold ( that is
cost of goods sold). Other examples include freight out and
sales commissions; the are expensed in the period the related
sales are recognized.

2. Systematic and Rational Allocation – costs that are not
directly related to the earning of revenue are initially
recognized as assets and recognized as expenses over the
periods their economic benefits are consumed or used, using
some method of allocation.
Examples: Depreciation, Amortization, Expensing of
Prepayment and effective interest method of allocation.

3. Immediate recognition - costs that do not meet the
definition of an asset, or ceases to meet the definition of an
asset, are expensed immediately.
Examples include casualty losses and impairment losses.

Common branches of accounting
1. Financial accounting - is the branch of accounting that focuses on
general purpose financial statements.
General purpose financial statements are those statements that
cater to the common needs of external users.
Financial accounting is governed by the Philippine Financial
Reporting Standards (PFRSs).
2. Management accounting - refers to the accumulation and
communication of information for use by internal users or
management. An offshoot of management accounting is
management advisory services which includes services to clients
on matters of accounting, finance, business policies, organization
procedures, product costs, distribution, and many other phases of
business conduct and operations.

3. Cost accounting - is the systematic recording and analysis of
the costs of materials, labor, and overhead incident to
production.
4. Auditing - is the process of evaluating the correspondence
of certain assertions with established criteria and expressing
an opinion thereon.
5. Tax accounting - the preparation of tax returns and
rendering of tax advice, such as the determination of the
tax consequences of certain proposed business endeavors.

6. Government accounting - refers to the accounting for the
government and its instrumentalities, placing emphasis on the
custody of public funds, the purposes for which those funds
are committed, and the responsibility and accountability of
the individuals entrusted with those funds.
7. Fiduciary accounting - refers to the handling of accounts
managed by a person entrusted with the custody and
management of property for the benefit of another,
8. Estate accounting - refers to the handling of accounts for
fiduciaries who wind up the affairs of a deceased person.

9. Social accounting (social and environmental accounting or
social responsibility reporting)
- the process of communicating the social and environmental
effects of an entity's economic actions to the society.
10. Institutional accounting - the accounting for non-profit
entities other than the government.

11. Accounting systems - the installation of accounting
procedures for the accumulation of financial data and
designing of accounting forms to be used in data gathering,
12 Accounting research - pertains to the careful analysis of
economic events and other variables to understand their
impact on decisions. Accounting research includes a broad
range of topics, which may be related to one or more of the
other branches of accounting, the economy as a whole, or the
market environment,

Bookkeeping and Accounting
Bookkeeping refers to the process of recording the accounts
or transactions of an entity. Bookkeeping normally ends with
the preparation of the trial balance. Unlike accounting,
bookkeeping does not require the interpretation of the
significance of the processed information.

Accountancy
Accountancy refers to the profession or practice of
accounting.
The practice of accounting can be broadly classified into two -
(1) Public practice and (2) Private practice.
Public practice does not involve an employer-employee
relationship while private practice involves an employer-
employee relationship, meaning the accountant is an
employee.

Four sectors in the practice of accountancy Under RA. 9298
also known as the "Philippine Accountancy Act of 2004," the
practice of accounting is sub-classified into the following:
1. Practice of Public Accountancy - involves the rendering of
audit or accounting related services to more than one client
on a fee basis.
2. Practice in Commerce and Industry - refers to employment
in the private sector in a position which involves decision
making requiring professional knowledge in the science of
accounting and such position requires that the holder thereof
must be a certified public accountant.

3. Practice in Education/Academe - employment in an
educational institution which involves teaching of accounting
auditing, management advisory services, finance, business
law, taxation, and other technically related subjects.
4. Practice in the Government - employment or appointment
to a position in an accounting professional group in the
government or in a government-owned and/or controlled
corporation, including those performing proprietary
functions, where decision making requires professional
knowledge in the science of accounting, or where civil service
eligibility as a certified public accountant is a prerequisite.
Accountants practicing under numbers 2 to 4 above are
considered in private practice.

Accounting standards
The Philippine Financial Reporting Standards (PFRSs)
represent the generally accepted accounting principles
(GAAP) in the Philippines.
The PFRSs are Standards and interpretations adopted by the
Financial Reporting Standards Council (FRSC). They comprise:
a. Philippine Financial Reporting Standards (PFRSs);
b. Philippine Accounting Standards (PASs); and
c. Interpretations

The need for reporting standards
For financial statements to be useful, they should be prepared
using reporting standards that are generally acceptable.
Otherwise, each entity would have to develop its own
standards. If that is the case, every entity may just present any
asset or income it wants and omit any liability or expense it
does not want.
Financial statements would not be comparable, the risk of
fraudulent reporting is heightened, and economic decisions
based on these financial statements would be grossly
incorrect, For this reason, entities should follow a uniform set
of reporting standards when preparing and presenting
financial statements.

The term "generally acceptable" means that either:
1. the standard has been established by an authoritative
accounting rule-making body, e.g., the PFRSs adopted by the
FRSC.; or
2. the principle has gained general acceptance due to practice
over time and has been proven to be most useful, e.g.,
double- entry recording and other implicit concepts.

Hierarchy of Reporting Standards
When selecting its accounting policies, an entity considers the
following in descending order:
1. Philippine Financial Reporting Standards (PFRSs)
2. In the absence of a PFRS that specifically applies to a
transaction or event, management shall use its judgment in
developing and applying an accounting policy that results in
information that is relevant and reliable.

In making the Judgment,
Management shall refer to, and consider the applicability, of,
the following sources in descending order:
a. The requirements in PFRSs dealing with similar and related
issues;
b. The Conceptual Framework.
2. management may also consider the following:
a. Pronouncements of other standard-setting bodies
b. Accounting literature and accepted industry practices

Although the selection of appropriate accounting policies
is the responsibility of the entity's management, the proper
application of accounting principles is most dependent upon
the professional judgment of the accountant.

Accounting standard setting bodies and other relevant
organizations
1. Financial Reporting Standards Council (FRSC) - is the
official accounting standard setting body in the Philippines
created under the Philippine Accountancy Act of 2004 (RA.
No. 9298).
The FRSC is composed of fifteen (15) individuals – a
chairperson who had been or presently a senior accounting
practitioner in any of the scope of accounting practice and
fourteen (14) representative members:

Fourteen representative members from:
Board of Accountancy (BOA) 1
Commission on Audit (COA) 1
Securities and Exchange Commission (SEC) 1
Bangko Sentral ng Pilipinas (BSP) 1
Bureau of Internal Revenue (BIR) 1
A major organization composed of preparers
and users of financial statements 1

Fourteen representative members from:
Accredited National Professional Organization of CPAs (i.e.,
PICPA):
Public Practice 2
Commerce and Industry 2
Academe/Education 2
Government 2
Total 15

2. Philippine Interpretations Committee (PIC) — is a
committee formed by the Accounting Standards Council
(ASC), the predecessor of FRSC, with the role of reviewing
the interpretations of the International Financial Reporting
Interpretations Committee (IFRIC) for approval and adoption
by the FRSC.
3. Board of Accountancy (BOA) — is the professional
regulatory board created under R.A. No. 9298 to supervise
the registration, licensure and practice of accountancy in the
Philippines, The BOA consists of a chairperson and six (6)
members appointed by the President of the Philippines.

4. Securities and Exchange Commission (SEC) — is the
government agency tasked in regulating corporations and
partnerships, capital and investment markets, and the
investing public. Some SEC rulings affect the accounting
requirements of entities and the adoption and application of
accounting policies.
5. Bureau of Internal Revenue (BIR) — administers the
provisions of the National Internal Revenue Code. These
provisions do not always reflect the goals of financial
reporting. However, they do at times influence the choice of
accounting methods and procedures.

6. Bangko Sentra! ng Pilipinas (BSP) - influences the selection
and application of accounting policies by banks and other
entities performing banking functions.
7. Cooperative Development Authority (CDA) - influences the
selection and application of accounting policies by
cooperatives.
Accounting policies prescribed by a regulatory body (e.g.,
BSP, BIR, SEC, CDA) are sometimes referred to as regulatory
accounting principles.

CHAPTER 2
CONCEPTUAL FRAMEWORK FOR FINANCIAL
REPORTING

The Conceptual Framework prescribes the concepts for
general purpose financial reporting. Its purpose is to:
a. assist the International Accounting Standards Board (IASB)
in developing Standards* that are based on consistent
concepts;
b. assist preparers in developing consistent accounting
policies when no Standard applies to a particular transaction
or when a Standard allows a choice of accounting policy; and
c. assist all parties in understanding and interpreting the
Standards.
The conceptual Framework provides the foundation for the
development of Standards

The Conceptual Framework is not a Standard. If there is a
conflict between a Standard and the Conceptual Framework,
the requirement of the Standard will prevail.

Scope of the Conceptual Framework
The Conceptual Framework is concerned with general
purpose financial reporting. General purpose financial
reporting involves the preparation of general purpose
financial statements. The Conceptual Framework provides the
concepts that underlie general purpose financial reporting
with regard to the following:
1. The objective of financial reporting
2. Qualitative characteristics of useful financial information
3. Financial statements and the reporting entity
4. The elements of financial statements

Scope of the Conceptual Framework
5. Recognition and derecognition
6. Measurement
7. Presentation and disclosure
8. Concepts of capital and capital maintenance

1. The objective of financial reporting
"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 about providing resources to the entity.“
The objective of financial reporting refers to the following, so called
the primary users:
1. Existing and potential investors; and
2. Lenders and other creditors
These users cannot demand information directly from reporting
entities and must rely on general purpose financial reports for
much of their financial information needs.

General purpose financial reports provide information on a
reporting entity's:
a. Financial position - information on economic resources
(assets) and claims against the reporting entity (liabilities and
equity); and
b. Changes in economic resources and claims - information on
financial performance (income and expenses) and other
transactions and events that lead to changes in financial
position.

This can help users to identify the entity's financial strengths
and weaknesses. That information can help users in assessing
the entity's:
a. Liquidity and solvency;
b. Needs for additional financing and how successful it is
likely to be in obtaining that financing; and .
c. Management's stewardship on the use of economic
resources.
*Liquidity refers to an entity's ability to pay short-term
obligations, while solvency refers to an entity's ability to meet
its long -term obligations.

Formula:
1. Liquidity Ratio = Current Assets/ Current Liabilities
2. Solvency Ratio
a. Debt-to-Equity (D/E) Ratio = Total Liabilities/ Total Equity
b. Debt-to-Assets Ratio = Total Liabilities/ Total Assets
c. Interest Coverage Ratio =
Earnings before interest and taxes/ Interest Expense

2. Qualitative Characteristics
The Conceptual Framework classifies the qualitative
characteristics into the following:
1. Fundamental qualitative characteristics - these are the
characteristics that make information useful to users. They consist
of the following:
a. Relevance
b. Faithful representation
2. Enhancing qualitative characteristics - these are
characteristics that enhance the usefulness of information. They
consist of the following
a. Comparability
b. Verifiability
c. Timeliness
d. Understandability

Fundamental qualitative characteristics
Relevance
Information is relevant if it can make a difference in the
decisions of users. Relevant information has the following:
a. Predictive value - the information can help users in making
predictions about future outcomes.
b. Confirmatory value (feedback value) - the information can
help users in confirming their previous predictions.

Materiality
"Information is material if omitting, misstating or obscuring it
could reasonably be expected to influence decisions that the
primary users of a specific reporting entity's general purpose
financial statements make on the basis of those financial
statements."

Faithful representation
Faithful representation means the information provides a true,
correct and complete depiction of the economic phenomena
that it purports to represent.
When an economic phenomenon's substance differs from its
legal form, faithful representation requires the depiction of the
substance (i.e., substance over form), Depicting only the legal
form would not faithfully represent the economic
phenomenon.

For example, an entity may agree to sell inventory to someone
and buy back the same inventory after a specified time at an
inflated price that is planned to compensate the seller for the
time value of money. On paper, the sale and buy back may be
deemed as two different transactions which should be dealt
with as such for accounting purposes i.e. recording the sale
and (subsequently) purchase.

However, the economic reality of the transactions is that no
sale has in fact occurred. The sale and buy back, when
considered in the context of both transactions, is actually a
financing arrangement in which the seller has obtained a loan
which is to be repaid with interest (via inflated price).
Inventory acts as the security for the loan which will be
returned to the ‘seller’ upon repayment. So instead of
recognizing sale, the entity should recognize a liability for loan
obtained which shall be reversed when the loan is repaid. The
excess of loan received and the amount that is to be paid (i.e.
inflated price) is recognized as finance cost in the income
statement.

Faithfully represented information has the FF characteristics:
a. Completeness - all information (in words and numbers)
necessary for users to understand the phenomenon being
depicted is provided.
b. Neutrality - information is selected or presented without
bias.
c. Free from error - this does not mean that the information is
perfectly accurate in all respects. Free from error means there
are no errors in the description and in the process by which
the information is selected and applied.

Enhancing qualitative characteristics - Comparability
Information is comparable if it helps users identify similarities and
differences between different sets of information that are provided
by:
a. a single entity but in different periods (intra-comparability); or
b. different entities in a single period (inter-comparability).

Verifiability
Information is verifiable if different users could reach a general
agreement as to what the information purports to represent,
Verification can be direct or indirect.
Direct verification involves direct observation (e.g., counting of cash).
Indirect verification, the accounting measure is verified by checking
the inputs and recalculating the outputs, using the same accounting
methodology

Timeliness
Information is timely if it is available to users in time to be able to
influence their decisions.
Understandability
Information is understandable if it is presented in a clear and concise
manner.
Understandability does not mean that complex matters should be
excluded to make information understandable to users because this
would make information incomplete and Potentially misleading.
Accordingly, financial reports are intended for users:
a. who have reasonable knowledge of business activities; and
b. who are willing to analyze the information diligently.

Applying the qualitative characteristics
The fundamental qualitative characteristics are essential to the
usefulness of information; meaning, information must be both
relevant and faithfully represented for it to be useful. For example,
neither a relevant information that is erroneous nor a correct
information that is irrelevant helps users make good decisions.
The enhancing qualitative characteristics only enhance the usefulness
of information that is both relevant and faithfully represented but
cannot make information that is irrelevant or erroneous to be useful.
Accordingly, the enhancing qualitative characteristics should be
maximized to the extent possible. There is no prescribed order in
applying the enhancing qualitative characteristics. Sometimes one
enhancing qualitative characteristic may have to be sacrificed to
maximize another,

The Cost Constraint
Cost is a pervasive constraint on the entity's ability to provide
useful financial information.
Providing information entails cost and this can only be justified by the
benefits expected to be derived from using the information.
Accordingly, an optimum balance between costs and benefits is
desirable such that costs do not outweigh the benefits.

Forward-looking information
Financial statements are designed to provide information about past
events (i.e., historical data). Information about possible future
transactions and other events is included in the financial statements
only if it relates to the past information presented in the financial
statements and is deemed useful to users of financial statements.
Financial statements, however, do not typically provide forward-
looking information about management's expectations and strategies
for the reporting entity.

The reporting entity
A reporting entity is one that is required, or chooses, to prepare
financial statements, and is not necessarily a legal entity. It can be a
single entity or a group or combination of two or more entities.
Sometimes an entity controls another entity. The controlling entity
is called the parent, while the controlled entity is called the
subsidiary.
"If a reporting entity comprises both the parent and its subsidiaries,
the reporting entity's financial statements are referred to as
'consolidated financial statements'.

If a reporting entity is the parent alone, the reporting entity's
financial statements are referred to as 'unconsolidated financial
statements'.
"If a reporting entity comprises two or more entities that
are not all linked by a parent-subsidiary relationship, the
reporting entity's financial statements are referred to as 'combined
financial statements',"

For example, Jollibee Foods Corporation controls Chowking,
Greenwich, Mang 'nasal, Dunkin' Donuts and many other companies.
Jollibee is the parent, while the controlled companies are the
subsidiaries. The financial statements of Jollibee, including its
subsidiaries, are called consolidated financial statements. The financial
statements of Jollibee alone, excluding its subsidiaries, are called
unconsolidated financial statements.
(The financial statements of each subsidiary alone are referred to as
'individual financial statements.)
If financial statements are prepared to include only Choking and
Greenwich (two subsidiaries only without the parent), the financial
statements would be referred to as combined

Consolidated and unconsolidated financial statements
Consolidated financial statements provide information on a parent and
its subsidiaries viewed as a single reporting entity. Consolidated
financial statements are not designed to provide information on any
particular subsidiary; that information is provided in the subsidiary's
own financial statements. Consolidated information enables users to
better assess the parent's prospects for future cash flows because the
parent's cash flows are affected by the cash flows of its subsidiaries.
Accordingly, when consolidation is required, unconsolidated financial
statements cannot be used as substitute for consolidated
financial statements. However, a parent may nonetheless be required
or choose to prepare unconsolidated financial statements

The Elements of Financial Statements
The elements of financial statements are:
1. Assets
2. Liabilities These relate to the entity's financial position.
3. Equity
4. Income
5. Expenses These relate to the entity's financial performance,

Asset
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." (Conceptual Framework 4.3
& 4.4)
The definition of asset has the following three aspects:
a. Right
b. Potential to produce economic benefits
c. Control

Right
1. right over physical objects (e.g., right to use a property including
intangible property or right to sell an inventory, ).
2. right to exchange economic resources with another party on
favorable terms (to receive cash, goods or services )

Potential to produce economic benefits
An economic resource can produce economic benefits for an entity in
many ways. For example, the asset may be;
a. Sold, leased, transferred or exchanged for other assets;
b. Used singly or in combination with other assets to produce goods or
provide services;
c. Used to enhance the value of other assets;
d. Used to promote efficiency and cost savings; or
e. Used to settle a liability.

Control
Control means the entity has the exclusive right over the benefits of an
asset and the ability to prevent others from accessing those benefits.
Control normally stems from legally enforceable rights (e.g.,
ownership or legal title). However, ownership is not always necessary
for control to exist because control can arise from other rights.
For example, Entity A acquires a car through bank financing. Although
the bank retains legal title over the car until full payment, the car is
nonetheless an asset of Entity A because Entity A has the exclusive
right to use the car and therefore controls the benefits from it.

Physical possession is also not always necessary for control to exist.
For example, goods transferred by a principal to an agent on
consignment remain as assets of the principal until the goods are sold.
to third parties.
This is because the principal retains control over the goods despite the
fact that physical possession is transferred to the agent, Similarly, the
agent does not recognize the goods as his assets because he does not
control the economic benefits from the goods.

Liability
Liability is "a present obligation of the entity to transfer an economic
resource as a result of past events."
The definition of liability has the following three aspects:
a. Obligation
b. Transfer of an economic resource
c, Present obligation as a result of past events

Obligation
An obligation is "a duty or responsibility that an entity has no practical
ability to avoid."
An obligation is either:
a. Legal obligation - an obligation that results from a contract,
legislation, or other operation of law; or
b. Constructive obligation - an obligation that results from an entity's
actions (e.g., past practice or published policies) that create a valid
expectation on others that the entity will accept and discharge certain
responsibilities.

Transfer of an economic resource
An obligation to transfer an economic resource may be an obligation
to:
a. pay cash, deliver goods, or render services;
b. exchange assets with another party on unfavorable terms;
c. transfer assets if a specified uncertain future event occurs; or
d. issue a financial instrument that obliges the entity to transfer
an economic resource.

A present obligation exists as a result of past events if:
1. the entity has already obtained economic benefits or taken an
action; and as a consequence, the entity will or may have to transfer an
economic resource that it would not otherwise have had to transfer.
Examples:1
Entity A intends to acquire goods in the future.
Analysis:
Entity A has no present obligation. A present obligation arises only
when Entity A:
a. has already purchased and received the goods; and
b. as a consequence, Entity A will have to pay the purchase price.

Examples:2
Entity B operates a nuclear power plant. In the current 'year, a new law
was enacted penalizing the improper disposal of toxic waste. No similar
law existed in prior years.
Analysis:
The enactment of legislation is not in itself sufficient to result in an
entity's present obligation, except when the entity:
a. has already taken an action contrary to the provisions of that law;
and
b. as a consequence, the entity will have to pay a penalty.

Accordingly, Entity B has no present obligation if its existing method of
waste disposal does not violate the new law. Similarly, Entity B has no
present obligation if it can avoid penalty by changing its future
method of waste disposal,
On the other hand, Entity B has a present obligation if its previous
waste disposal has already caused damages, and as a consequence,
Entity B has to pay for those damages.

Examples: 3
Entity C enters into an irrevocable commitment with another party to
acquire goods in the future, on credit.
Analysis:
A non-cancellable future commitment gives rise to a present
obligation only when it becomes onerous (i.e., burdensome), for
example, if the goods become obsolete before the delivery but Entity C
cannot cancel the contract without paying a substantial penalty.
Unless it becomes burdensome, no present obligation normally arises
from a future commitment.

Examples: 4
Although not stated in the sales contract, Entity D has a publicly-
known policy of providing free repair services for the goods it sells.
Entity D has consistently honored this implied policy.
Analysis:
Entity D has a present constructive obligation to provide free repair
services for the goods it has already sold because:
a. Entity D has already taken an action by creating valid
expectations on the customers that it will provide free repair services;
and
b. as a consequence, Entity D will have to provide those free services.

Executory contracts
An executory contract "is a contract that is equally unperformed by
neither party has fulfilled any of its obligations, or both parties
have partially fulfilled their obligations to an equal extent:
With an executory contract, the terms are set to be fulfilled at a future
date.
Example: Entity A enter into a executory contract with Entity B to buy
100 kg of lobster next year Jan 1, 2023 at a fixed price P50.

An executory contract establishes a combined right and obligation to
exchange economic resources, which are interdependent and
inseparable. Thus, the two constitute a single asset or liability. The
entity has an asset if the terms of the contract are favorable; a liability
if the terms are unfavourable. However, whether such an asset or
liability is included in the financial statements depends on the
recognition criteria and the selected measurement basis, including any
assessment of whether the contract is onerous.
The contract ceases to be executory when one party performs its
obligation. If the entity performs first, the entity's combined right and
obligation changes to an asset. If the other party performs first, the
entity's combined right and obligation changes to a liability.

Equity
Equity is the residual interest in the assets of the entity after deducting
all its liabilities.“
The definition of equity applies to all entities regardless of form
(i.e., sole proprietorship, partnership, cooperative, corporation, non-
profit entity, or government entity).
Although, equity is defined as a residual, it may be sub- classified in the
statement of financial position.
For example, the equity of a corporation may be sub-classified into
share capital, retained earnings, reserves and other components of
equity.

Income
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
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."
The definitions of income and expenses are opposites.
Contributions from, and distributions to, the entity's Owners are not
income, and expenses, but rather direct adjustments to equity.

Recognition and Derecognition
Recognition is the process of including in the statement of financial
position or the statement(s) of financial performance an item that
meets the definition of one of the financial statement elements (i.e.,
asset, liability, equity, income or expense). This involves recording the
item in words and in monetary amount and
including that amount in the totals of either of those statements.
"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'."

Recognition criteria
An item is recognized if
a. it meets the definition of an asset, liability, equity, income or
expense; and
b. recognizing it would provide useful information, i.e., relevant and
faithfully represented information.
Both the criteria above must be met before an item is recognized.
Accordingly, items that meet the definition of a financial statement
element but do not provide useful information are not recognized, and
vice versa,

Derecognition
Derecognition is the opposite of recognition. It is the removal of a
previously recognized asset or liability from the entity's statement of
financial position.
Derecognition occurs when the item no longer meet the definition of
an asset or liability, such as when the entity loses control of all or part
of the asset, or no longer has a present obligation for all or part of the
liability.

On derecognition, the entity:
a. derecognizes the assets or liabilities that have expired or have been
consumed, collected, fulfilled or transferred (i.e., transferred
component'), and recognizes any resulting income and expenses.
b. continues to recognize any assets or liabilities retained after the
derecognition (i.e., 'retained component). No income or expense is
normally recognized on the retained component unless there is a
change in its measurement basis. After derecognition, the retained
component becomes a unit of account separate from the transferred
component.

Chapter 3 – PAS 1
PRESENTATION OF FINANCIAL
STATEMENT

Introduction
Philippine Accounting Standard (PAS) 1 Presentation of Financial
Statements prescribes the basis for the presentation of general
purpose financial statements, the guidelines for their structure,
and the minimum requirements for their content to ensure
comparability and uniformity.

Purpose of financial statements
1. Primary objective: To provide information about the financial
position, financial performance, and cash flows of an entity that is
useful to a wide range of users in making economic decisions.
2. Secondary objective: To show the results of management's
stewardship over the entity's resources.

To meet the objective, financial statements provide information
about an entity's:
a. Assets (economic resources);
b. Liabilities (economic obligations);
c. Equity;
d. Income;
e. Expenses;
f. Contributions by, and distributions to, owners; and
g. Cash flows.
This information, along with other information in the notes, helps users
assess the entity's prospects for future net cash inflows.

A complete set of financial statements consist of:
1. Statement of financial position;
2. Statement of profit or loss and other comprehensive income;
3. Statement of changes in equity;
4. Statement of cash flows;
5. Notes to FS
6. Additional statement of financial position (required only when
certain instances occur).

General Features of financial statements
1. Fair Presentation and Compliance with PFRSs
Compliance with the PFRSs is presumed to result in fairly presented
Fair presentation also requires the proper selection and application of
accounting policies, proper presentation of information, and provision
of additional disclosures whenever relevant to the understanding of
the financial statements.
Inappropriate accounting policies cannot be rectified by mere
disclosure.

PAS 1 requires an entity whose financial statements comply
with PFRSs to make an explicit and unreserved statement of
such compliance in the notes. However, an entity shall not
make such statement unless it complies with all the
requirements of PFRSs,
There may be Cases wherein an entity's management
concludes that compliance with a PFRS requirement will lead
the FS to be misleading.
In such cases, PAS 1 permits a departure from a PFRS
requirement". if the *relevant regulatory framework requires
or allows such departure.

(a)Relevant regulatory framework refers to the accounting principles
and other financial reporting requirements prescribed by a
government regulatory body.
(b)For example, banks in the Philippines are regulated by the Bangko
Sentral ng Pilipinas (BSP). Therefore, in addition to the PFRSs, banks
must also comply with the requirements of the BSP.
Accounting principles prescribed by a regulatory body are sometimes
referred to as "Regulatory Accounting Principles"

An entity departs from a PFRS requirement, it shall disclose the
management's conclusion as to the fair presentation of the financial
statements; that all other requirements of the PFRSs are complied
with; the title of the PFRS from which the entity has departed; and
the financial effect of the departure.

2. Going Concern
Financial statements are normally prepared on a going concern basis
unless the entity has an intention to liquidate or has no other
alternative but to do so.
When preparing financial statements, management shall assess the
entity's ability to continue as a going concern, taking into account all
available information about the future, which is at least, but not
limited to, 12 mouths from the reporting date.
If the entity has a history of profitable operations and ready access to
financial resources, management may conclude that the entity is a
going concern without detailed analysis.

If there are material uncertainties on the entity's ability to continue as
a going concern, those uncertainties shall be disclosed.
If the entity is not a. going concern, its financial statements shall be
prepared using another basis. This fact shall be disclosed, including the
basis used, and the reason why the entity is not regarded as a going
concern.

3.Accrual Basis of Accounting
All financial statements shall be prepared using the accrual basis of
accounting except for the statement of cash flows, which is prepared
using cash basis.
4.Materiality and Aggregation
Each material class of similar items is presented separately. A class of
similar items is called a "line item." Dissimilar items are presented
separately unless they are immaterial. Individually immaterial items
are aggregated with other items.

5. Offsetting
Assets and liabilities or income and expenses are presented separately
and are not offset, unless offsetting is required or permitted by a PFRS.
Offsetting is permitted when it reflects the substance of the
transaction. Examples of offsetting:
a. Presenting gains or losses from sales of assets net of the related
selling expenses.
b. Presenting at net amount the unrealized gains and losses arising
from trading securities and from translation of foreign currency
denominated assets and liabilities, except if they are material.
c. Presenting a loss from a provision net of a reimbursement from a
third party.

Measuring assets net of valuation allowances is not offsetting.
For example, deducting allowance for doubtful accounts from accounts
receivables or deducting accumulated depreciation from a building
account is not offsetting.

6. Frequency of reporting
Financial statements are prepared at least annually.
If an entity changes its reporting period to a period longer or shorter
than one year, it shall disclose the following:
a. The period covered by the financial statements:
b. The reason for using a longer or shorter period, and
c. The fact that amounts presented in the financial statements are not
entirely comparable,

7. Comparative Information
PAS 1 requires an entity to present comparative information in respect
of the preceding period for all amounts reported in the current
period's financial statements, unless another PFRS requires otherwise.
a minimum, an entity presents two of each of the statements and
related notes. For example, when an entity presents its 20x2 current
year financial statements, the 20x1 preceding year financial statements
shall also be presented as comparative information.

Additional Statement of financial position
As mentioned earlier, a complete set of financial statements includes
an additional statement of financial position when certain instances
occur. Those instances are as follows:
a. The entity applies an accounting policy retrospectively, makes a
retrospective restatement of items in its financial statements, or
reclassifies items in its financial statements; and
b. The instance in (a) has a material effect on the information in the
statement of financial position at the beginning of the preceding
period.

For example, if any of the instances above occur, the entity shall
present three statements of financial Position as follows:
Statement Date
1. Current year As at December 3, 2022
2. Preceding year As at December 31, 2021
(comparative formation)
3, Additional As at January 1, 2021
The opening (additional) statement of financial position is
dated as at the beginning of the preceding period even if the entity
presents comparative information for earlier periods.

8. Consistency of presentation
The presentation and classification of items in the financial statements
is retained from one period to the next, unless a change in
presentation:
a. is required by a PFRS; or
b. results in information that is reliable and more relevant.
A change in presentation requires the reclassification of items in the
comparative information. If the effect of a reclassification is material,
the entity shall provide the ,additional statement of financial
position" discussed earlier.

Structure and content of financial statements
The following information shall be displayed prominently and
repeatedly whenever relevant to the understanding of the information
presented:
a. The name of the reporting entity
b. Whether the statements are for the individual entity or for a group
of entities
c, The date of the end of the reporting period or the period covered by
the financial statements
d. The presentation currency
e. The level of rounding used (e.g., thousands, millions, etc.)
The statement of financial position is dated as at the end of the
reporting period while the other financial statements are dated for
the period that they cover.

The responsibilities are expressly stated in a document called
"Statement of Management's Responsibility for Financial Statements,"
which is attached to the financial statements as a cover letter. This
document is signed by the entity's
a. Chairman of the Board (or equivalent),
b. Chief Executive Officer (or equivalent), and
c. Chief Financial Officer (or equivalent)

Statement of Financial Position
The statement of financial position shows the entity's financial condition
(i.e., status of assets, liabilities and equity) as at a certain date.
A statement of financial position may be presented in a 'classified“ or an
"unclassified" manner.
a. A classified presentation shows distinctions between current and
noncurrent assets and current and noncurrent liabilities.
b. An unclassified presentation (also called 'based on liquidity') shows no
distinction between current and noncurrent items.
A classified presentation shall be used except when an unclassified
presentation provides information that is reliable and more relevant. When
that exception applies, assets and liabilities are presented in order of
liquidity (this is normally the case for banks and other financial institutions)

PAS 1 also permits a mixed presentation, i.e., presenting some assets
and liabilities using a current/non-current classification and others
in order of liquidity. This may be appropriate when the entity has
diverse operations.
Whichever method is used, PAS 1 requires the disclosure of items that
are expected to be recovered or settled (a) within 12 months and (b)
beyond 12 months after the reporting period.
A classified presentation highlights an entity's working capital and
facilitates the computation of liquidity and solvency ratios.
Formula: Working capital = Current Assets - Current Liabilities

Current and Non-Current
1.Expected to be realized or settled in the entity’s normal operating
cycle
2.Held primarily for trading
3. Expected to be realized or settled within 12 months after the
reporting period
The term “noncurrent” is a residual definition. All not classified as
current are classified non-current.

"The operating cycle of an entity is the time between the acquisition
of assets for processing and their realization in cash or cash
equivalents. When the entity's normal operating cycle is not clearly
identifiable, it is assumed to be 12 months."

Assets and liabilities that are realized or settled as part of the entity's
normal operating cycle (e.g., trade receivables, inventory, trade
payables, and some accruals for employee and other operating costs)
are presented as current, even if they are expected to be realized or
settled beyond 12 months after the reporting period.
Assets and liabilities that do not form part of the entity's normal
operating cycle (e.g., non-operating assets and liabilities) are presented
as current only when they are expected to be realized or settled within
12 months after the reporting period.
Deferred tax assets and liabilities are always presented as noncurrent
items in a classified statement of financial position regardless of their
expected dates of reversal.

Prescribe line item under PAS 1
Under Current Assets Under Current Liabilities
1. Cash and Cash equivalent 1. Trade and other Payable
2. FA at FV 2. Current provisions
3. Trade and other receivable 3. Short term borrowing
4. Inventory 4. Current portion of long term debt
5. Prepaid Expenses 5. Current tax liability
Under Non-Current Assets Under Non-Current Liabilities
1. PPE 1. Non-Current portion of long term debt
2. Long Term Investment 2. Finance lease liability
3. Intangible assets 3. Deferred tax liability
4. Other NCA 4. Long term obligation to officer
5. Long term deferred revenue

Equity
1. Share Capital
2. APIC
3. Retained Earnings

Refinancing agreement
A long-term obligation that is maturing within 12 months after the
reporting period is classified as current, even if a refinancing
agreement to reschedule payments on a long-term basis is completed
after the reporting period but before the financial statements are
authorized for issue.
However, the obligation is classified as noncurrent if the entity expects,
and has the discretion, to refinance it on a long- term basis under an
existing loan facility.

If the refinancing is not at the discretion of the entity for example,
there is no arrangement for refinancing, the financial liability is
current,
Refinancing refers to the replacement of an existing debt with a new
one but with different terms, e.g., an extended maturity date or a
revised payment schedule.

Example 1:
Entity A's current reporting date is December 31, 2021. A bank loan
taken 10 years ago is maturing on October 31, 2022.
Analysis: A currently maturing obligation (i.e., due within 12 months
after the reporting date) is classified as current even if that obligation
used to be noncurrent, Therefore, the loan is presented as a current
liability in Entity A's December 31, 2021 statement of financial
position.

Example 2:
On January 15, 2022, Entity A enters into a refinancing agreement to
extend the maturity date of the loan to October 31, 2027. Entity A's
financial statements are authorized for issue on March 31, 2022.
Analysis: Continuing with the general rule, a currently maturing
obligation is classified as current even if a refinancing agreement, on a
long-term basis, is completed after the reporting period and before
the financial statements are authorized for issue. Accordingly, the
loan is nevertheless presented as a current liability.

Example 3:
Under the original terms of the loan agreement, Entity A has the unilateral
right to defer (postpone) the payment of the loan up to a maximum
period of 5 years from the original maturity date,
Entity A expects to exercise this right after the reporting date but before the
financial statements are authorized for issue.
Entity A has the discretion (i,e., unilateral right) to refinance the obligation
On a long-term basis under an existing loan facility (i.e., the unilateral right
is included in the original terms of the loan agreement). Accordingly, the
loan is classified as noncurrent
In this scenario, Entity A has an unconditional right to defer the settlement
of the loan for at least twelve months after the reporting period.

Liabilities payable on demand
Liabilities that are payable upon the demand of the lender are classified as
current.
A long-term obligation may become payable on demand as a result of a
breach of a loan provision. Such an obligation is classified as current even if
the lender agreed, after the reporting period and before the authorization
of the financial statements for issue, not to demand payment, This is
because the entity does not have an unconditional right to defer
settlement of the liability for at least twelve months after the reporting
period.
However the liability is noncurrent if the lender provides the entity by the
end of the reporting period (e.g., on or before December 31) a grace period
ending at least twelve months after the reporting period, within which the
entity can rectify the breach and during which the lender cannot demand
immediate repayment.

Illustration:
In 2021, Entity A took a long-term loan from a bank. The loan
agreement requires Entity A to maintain a current ratio of 2:1. If the
current ratio falls below 2:1, the loan becomes payable on demand on
December 31, 2021 (reporting date), Entity A's current ratio was 1.8:1,
below the agreed level. Entity A's financial statements were
authorized for issue on March 31, 2022.
Case 1: On January 5, 2022, the bank gives Entity A, a chance to rectify
the breach of loan agreement within the next 12 months and promises
not to demand immediate repayment within this period.
Analysis: The loan is classified as current liability because the grace
period is received after the reporting date.

Case 2:
On December 31, 2021, the bank gives Entity A, a chance to rectify the
breach of loan agreement within the next 12 months and promises not
to demand immediate repayment within this period.
Analysis: The loan is classified as noncurrent liability because the
grace period is received by the reporting date.

Statement of Profit or Loss and Other Comprehensive Income
Income and expenses for the period may be presented in either:
a. A single statement of profit or loss and other comprehensive
income (statement of comprehensive income); or
b. Two statements
1) a statement of profit or loss (income statement) and
(2) a statement presenting comprehensive income.

These presentations have the following basic formats:
1. Single Statement Presentation - Statement of Profit or Loss and
Other Comprehensive Income or Statement of Comprehensive
Income
Revenue xxxx
Expenses (xxxx)
Profit or loss xxxx
Other comprehensive Income(OCI) xxxx
Comprehensive Income xxxx

These presentations have the following basic formats:
Two - Statement Presentation
1. – Income Statement/Statement of Profit or loss
Revenue xxxx
Expenses (xxxx)
Profit or loss xxxx
2. – Statement of Other comprehensive Income
Profit or loss xxxx
Other comprehensive Income(OCI) xxxx
Comprehensive Income xxxx

PAS 1 requires an entity to present information on the following:
a. Profit or loss;
b. Other comprehensive income; and
c. Comprehensive income
Presenting a separate income statement is allowed as long as a
separate statement showing comprehensive income is also
presented (i.e., 'Two-statement presentation').
Presenting only an income statement is prohibited.

Profit or loss
Profit or loss is = income less expenses, excluding the components of
other comprehensive income. The excess of income over expenses is
profit; while the deficiency is loss. This method of computing for profit
or loss is called the "transaction approach."
Income and expenses are usually recognized in profit or loss unless:
a. They are items of other comprehensive income; or
b. They are required by other PFRSs to be recognized outside of profit
or loss.

The following are not included in determining the Profit or loss for the
period:
1, Correction of prior period Error
Accounting Treatment: Direct adjustment to the beginning balance of
retained earnings. The adjustment is presented in the statement of
changes in equity.
2. Change in accounting policy – Same Treatment for prior period Error
3. Other comprehensive income (OCI) - changes during the period are
presented in the “ OCI section of the statement of comprehensive
Income. Cumulative balances are presented in the equity section of
the statement of financial position

The following are not included in determining the Profit or loss for the
period:
4. Transactions with owners
Example: issuance of share capital, declaration of dividends, and the
like
Accounting Treatment: Recognized directly in equity. Transactions
during the period are presented in the statement of changes in equity.

The profit or loss section shows line items that present the following
amounts for the period:
a. revenue, presenting separately interest revenue;
b. finance costs;
c. Gains and losses arising from the de-recognition of financial
assets measured at amortized cost;
d. impairment losses and impairment gains on financial assets;
e. gains and losses on reclassifications of financial assets from
amortized cost or fair value through other comprehensive income to
fair value through profit or loss;
f. share in the profit or loss of associates and joint ventures;
g. tax expense; and
h. result of discontinued operations.

Additional line items shall be presented whenever relevant to the
understanding of the entity's financial performance. The nature and
amount of material items of income or expense shall be disclosed
separately.
Circumstances that would give rise to the separate disclosure of
items of income and expense include:
a. write-downs of inventories to net realizable value or of property,
plant and equipment to recoverable amount, as well as reversals of
such write-downs;
b. restructurings of the activities of an entity and reversals of any
provisions for restructuring costs;
c. disposals of items o property, plant and equipment;
d. disposals of investments;
e. discontinued operations;

PAS 1 prohibits the presentation of extraordinary items in the
statement of profit or loss and other comprehensive income or in the
notes.

Presentation of Income Statement
1. Natural Approach
2. Functional Approach
The main difference between the 2 approach is how expenses
in an income statement are presented in either by their
nature or by their function

Income Statement by Nature of Expense - Natural Approach
An income statement by nature is the one in which expenses
are disclosed according to nature/categories they are spent
on, such as raw materials, transport costs, staffing costs,
depreciation, employee benefit, advertising cost etc.

Example presentation - Natural Approach
BC PTE. LTD.
Statement of Comprehensive Income
For the Financial Year Ended 31 December 2022
Sales 573,610
Expenses:
Purchases, delivery charges
and other direct costs
(158,401)
Depreciation Expense (3,250)
Rent Expense (24,000)
Employee benefit expenses (124,630)
Utilities Expense (6,900)
Interest Expense (375)
Total Expenses (248,130)

Income Statement by Function of Expense – Functional Approach (
Cost of Sales Method)
An income statement by function is the one in which expenses are
disclosed according to different functions they are spent on (cost
of goods sold, selling expenses, administrative expenses, etc.).
If the function of expense method is used, additional disclosures
on the nature of expenses shall be provided, including depreciation
and amortization expense and employee benefits expense.
This is the typical Income Statement format used by most
Companies

Example presentation – Functional Approach
ABC PTE. LTD.
Statement of Comprehensive Income
For the Financial Year Ended 31 December 20XX
Revenue 102,716
Cost of sales (55,708)
Gross profit 47,008
Other income 1,021
Selling and distribution
expenses
(17,984)
Administrative expenses (17142)
Other expenses (1,109)
Profit before tax 10,929
Tax expense (3,371)

Other Comprehensive Income
Other comprehensive income consists of all unrealized gains and
losses on assets that are not reflected in the income statement.
Some examples of these unrealized gains or losses are:
1. Gains or losses from pension and other retirement programs
2. Adjustments made to foreign currency transactions
3. Gains or losses from derivative instruments
4. Unrealized gains or losses from debt securities
5. Unrealized gains or losses from available-for-sale securities

Amounts recognized in OCI are usually accumulated as separate
components of equity.
For example, cumulative changes in revaluation surplus are
accumulated in a "Revaluation surplus‘ account, which is
presented as a separate component of equity; cumulative gains
and losses from investments in FVOCI and from translation of
foreign operation are also accumulated in separate equity
accounts.

Reclassification adjustments –
are amounts reclassified to profit or loss in the current period
the were recognized in OCI in the current or previous periods
Reclassification adjustments arise, for example, on disposal of
a foreign operation, de-recognition of debt instruments
measured at FVOCI.
On de-recognition, the cumulative gains and losses that were
accumulated in equity on these items are reclassified from OCI to
profit or loss.

A reclassification adjustment for a gain is a deduction in OCI and
an addition to profit or loss. This is to avoid double inclusion in
total comprehensive income. On the other hand, a reclassification
adjustment for a loss is an addition to OCI and a deduction from
profit or loss.

Statement of changes in equity
The statement of changes in equity is a reconciliation of the beginning and
ending balances in a company’s equity during a reporting period.
Contents of the Statement of Changes in Equity
1. Net profit or loss during the accounting period attributable to shareholders
2. Increase or decrease in share capital reserves
3. Dividend payments to shareholders
4. Gains and losses recognized directly in equity
5. Effect of changes in accounting policies
6. Effect of correction of prior period error

Statement of changes in equity
Beginning Balance - Equity xxxx
1.Effect of correction of prior period error xxxx
2. Effect of changes in accounting policies xxxx
Adjusted Beginning Balance xxxx
Add: Net profit xxxx
Less: Net Loss (xxxx)
Add: Increase in share capital (Stock Issuance) xxxx
Less: Decrease in share capital (acquisition of treasury share) (xxxx)
Less: Dividend payments to shareholders (xxxx)
Add: Gains recognized directly in equity xxxx
less: Losses recognized directly in equity (xxxx)
Ending Balance xxxx

Retrospective adjustments and retrospective restatements
are presented in the statement of changes in equity as
adjustments to the opening balance of retained earnings
rather than as changes in equity during the period.
PAS 1 allows the disclosure of dividends, and the related
amount per share, either in the statement of changes in
equity or in the notes to FS.

Statement of cash flows
A cash flow statement tells you how much cash is entering and leaving your
business.
Cash Inflow – Pertains to receipt of cash
Cash outflow – Pertains to the disbursement of cash
3 Major Activity within the organization/ Component of Cash flow statement
1. Operating Activities
2. Investing Activities
3. Financing Activities

Notes to Financial Statement
The notes provides information in addition to those
presented in the other financial statements. It is an integral
part of a complete set of financial statements. All the other
financial statements are intended to be read in conjunction
with the notes. Accordingly, information in the other financial
statements shall be cross- referenced to the notes.

PAS 1 requires an entity to present the notes in a systematic
manner. Notes are normally structured as follows:
1. General Information of the company
2. Statement of compliance with the PFRSs and Basis of
preparation of financial statements.
3. breakdowns of the line items in the other financial
statements and other supporting information.
4. Other disclosures required by PFRSs
5. Other disclosures not required by PFRSs but the
management deems relevant to the understanding of the

Introduction
PAS 2 prescribes the accounting treatment for inventories.
PAS 2 recognizes that a primary issue in the accounting for
inventories is the determination of cost to be recognized as
asset and carried forward until it is expensed. Accordingly,
PAS 2 provides guidance in the determination of cost of
inventories, including the use of cost formulas, and their
subsequent measurement and recognition as expense.

PAS 2 applies to all inventories except for the following:
1. Assets accounted for under other standards
a. Financial instruments (PAS 32 and PFRS 9); and
b. Biological assets and agricultural produce at the point of
harvest (PAS 41).
2. Assets Not measured under Lower of Cost or Net Realizable
value (LCNRV)
a. Inventories to producers of agricultural, forest and mineral
products measured at NRV in accordance with well stablished
practices in those in industries
b. Inventories of commodity broker-traders measured at FV
less cost to sell.

Definitions
Inventories
a)Held for sale in the ordinary course of business;
b)In the process of production for such sale;
c) In the form of materials or supplies to be consumed in the production process or
in the rendering of services.
Example:
1. Merchandise Inventory
2. Raw Materials
3. Finish Goods
4. Goods in Process
5. Supplies

Cost of purchase of inventories comprise the:
1. Purchase price,
2. Import duties and other taxes,
3. Transport and handling Cost
4. Other costs directly attributable to the acquisition of finished goods,
materials and services.
Trade discounts, rebates and other similar items are deducted in
determining the cost of purchase.

Accounting for Inventories
1. Periodic Inventory System – Actual or Physical of Inventory,
usually used in inventory with small peso value such as groceries
and hardware and auto parts
2. Perpetual Inventory System – Book or Stock Card showing the
inflow and outflow of inventory, usually used in inventory with large
peso value such as Jewelry and Cars
Methods of Recording Inventory Purchases
1. Gross Method
2. Net Method

Cost of inventory shall determined by using either:
• The First-in, First out (FIFO)
• Weighted average cost formula
• Goods or services produced and segregated for specific projects
shall be assigned by using Specific Identification of their individual
costs

First-in, First out (FIFO)
Milagro Corporation decides to use the FIFO method for the month of
January. During that month, it records the following transactions:
• Month Number Unit Price Paid
• September 200 sunglasses $200.00 per
October 275 sunglasses $210.00 per
November 300 sunglasses $225.00 per
December 500 sunglasses $275.00 per
The company sold 600 sunglasses during this time, out of his stock of 1275.
Usually Question:
Ending Inventory = Ending Inventory x Latest Price
500 glasses x 275 + 175 glasses x 225 = 176,875

First-in, First out (FIFO)
Milagro Corporation decides to use the FIFO method for the month of
January. During that month, it records the following transactions:
• Month Amount Price Paid
• September 200 sunglasses $200.00 per
October 275 sunglasses $210.00 per
November 300 sunglasses $225.00 per
December 500 sunglasses $275.00 per
Sal sold 600 sunglasses during this time, out of his stock of 1275.
Usually Question: CGS = Sold Units x Price
200 x $200.00 = $40,000.
275 x $210.00 = $57,750.
125 x $225.00 = $28,125.
COGS Total: $125,875.

1. Weighted Average Cost (WAC) Method Formula
Weighted Average per unit =
Cost of Goods available for sale/ units available for sale
Costs of goods available for sale = beginning inventory value + purchases.
Units available for sale = beginning inventory in units + purchases in units.
Usually Question:
Ending Inventory = Ending Inventory unit x Weighted Average per unit
CGS = unit sold x Weighted Average per unit

Weighted Average
At the beginning of its January 1 fiscal year, a company reported a beginning
inventory of 300 units at a cost of $100 per unit. Over the first quarter, the
company made the following purchases:
January 15 purchase of 100 units at a cost of $130 = $13,000
February 9 purchase of 200 units at a cost of $150 = $30,000
March 3 purchase of 150 units at a cost of $200 = $30,000
Total 450 units and $73,000
In addition, the company made the following sales:
End of February sales of 100 units
End of March sales of 70 units

Solution:
Weighted Average per unit = 30,000 + 13,000 + 30,000 + 30,000
300 + 100 + 200 + 150
= 137. 33
580 x 137.33 = 79,651.40
170 x 137.33 = 23,346.10

Moving Average
Under the Moving Average, new weighted average unit cost must be computed
after every purchase and purchase return. OR
We would determine the new average unit cost before the sale of units.
Weighted Average per unit =
Cost of Goods available for sale/ units available for sale
Costs of goods available for sale = beginning inventory value + purchases.
Units available for sale = beginning inventory in units + purchases in units.
Usually Question:

Moving Weighted Average
At the beginning of its January 1 fiscal year, a company reported a beginning
inventory of 300 units at a cost of $100 per unit. Over the first quarter, the
company made the following purchases:
January 15 purchase of 100 units at a cost of $130 = $13,000
February 9 purchase of 200 units at a cost of $150 = $30,000
March 3 purchase of 150 units at a cost of $200 = $30,000
Total 450 units and $73,000
In addition, the company made the following sales:
End of February sales of 100 units
End of March sales of 70 units

Under the Moving Average, We would determine the new average unit cost
before the sale of units.
Therefore, before the sale of 100 units in February, our average would be:
Solution:
Weighted Average per unit = 30,000 + 13,000 + 30,000
300 + 100 + 200
= 121.67
100 x 121.67 = 12,167
Ending Inventory = Total Cost – CGS
73,000 – 12,167 = 60,833

Under the Moving Average, new weighted average unit cost must be computed
after every purchase and purchase return.
Before the sale of 70 units in March, our average would be:
Solution:
Weighted Average per unit = 60,833 + 30,000
500 + 150
= 139.74
70 x 139.74 = 9,781.80
Ending Inventory = Total Cost – CGS
90,833 – 9,781.80 = 81,051.20

Measurement of Inventory
PAS 2 provides that inventory shall be measured at the lower of cost and net
realizable value (LCNRV)
Cost of inventories shall comprise all costs of purchase, cost of conversion
and other costs incurred in bringing the inventories to their present location
and condition.
Net Realizable Value: is the estimated selling price in the ordinary course of
business less the estimated cost of completion and the estimated costs
necessary to make the sale.
Inventories usually written down to NRV on an Item by Item or Individual
Basis

ILLUSTRATION:
At December 31, 2009, Zebra's Raw Materials Inventory account and
relevant inventory cost and market data at December 31, 2009 are
summarized in the schedule below.
Description Total Cost Net Realizable Value LCNRV
Aluminum Slide 10,000 11,000 10,000
Glass doors 30,000 24,000 24,000
Glass windows 20,000 15,000 15,000
Total 60,000 50,000 49,000
Inventory Valuation 49,000

Net Realizable Value
Estimated Selling Price X
Discounts (X)
Estimated cost of completion (X)
Selling Costs (X)
Net Realisable Value XXX
Items should not be capitalized as cost of inventories
a) Abnormal amounts of wasted materials, labor or other production costs
b) Storage costs, unless those costs are necessary in the production
process before a further production stage
c) Administrative overheads
d) Selling costs

Accounting for Inventory write-down ( NRV is lower than the Cost )
1. Direct method – any loss on inventory is not accounted separately and
charge to “CGS”
2. Allowance method - any loss on inventory is accounted separately and
charge to loss in inventory write-down account.

ILLUSTRATION:
ABC Corp data as follows:
December 31, 2017
Inventory at Cost 360,000
Inventory at NRV 348,000
Difference 12,000
Journal Entry
Loss on Inventory write-down 12,000
Allowance for Inventory write-down 12,000

Allowance method
Finished Goods Inventory at Cost , Jan 1 xxxx
CGM at Cost xxxx
TGAS xxxx
Less: Finished Goods Inventory at Cost , Dec 31 (xxxx)
CGS before Inventory write-down xxxx
Add: Loss on Inventory write-down xxxx
Adjusted CGS xxxx

Direct method
Finished Goods Inventory at LCNRV , Jan 1 xxxx
CGM at Cost xxxx
TGAS xxxx
Less: Finished Goods Inventory at LCNRV, Dec 31 (xxxx)
CGS xxxx
Note that whether direct method or allowance method, the CGS must be
the same.

Inventories that are used in the construction of another asset
is not expensed but rather capitalized as cost of the
constructed asset. For example, some inventories may be used
in constructing a building. The cost of those inventories is
capitalized as cost of the building and will be included in the
depreciation of that building.

DM+DL+FOH = PC/FC/MC
BWIP+MC-EWIP = CGM
BI +CGM –EI = CGS

Disclosures
a. Accounting policies adopted in measuring inventories, including the
cost formula used;
b. Total carrying amount of inventories and the carrying amount in
classifications appropriate to the entity;
c. Carrying amount of inventories carried at fair value less costs to sell;
d. Amount of inventories recognized as an expense during the period;
e. Amount of any write-down of inventories recognized as an expense in
the period;
f. Amount of any reversal of write-down that is recognized as a reduction
in the amount of inventories recognized as expense in the period;
g. Circumstances or events that led to the reversal of a write- down of
inventories; and
h. Carrying amount of inventories pledged as security for liabilities.

Accounting for freight charge
For ownership rule:
1. FOB destination: Seller is still the owner until it reach the destination
2. FOB shipping point : Buyer will be the owner upon reaching the shipping
vessel.
Who should be responsible for freight charge
1. Freight Prepaid - Seller is responsible for freight charge
2. Freight Collect – buyer is responsible for freight charge

In connection with your audit of the Alcala Manufacturing Company, you reviewed its inventory as of
December 31, 2006 and found the following items:
A) A packing case containing a product costing P100,000 was standing in the shipping room when the
physical inventory was taken. It was not included in the inventory because it was marked “Hold for shipping
instructions.” The customer’s order was dated December 18, but the case was shipped and the costumer
billed on January 10, 2007.
B) Merchandise costing P600,000 was received on December 28, 2006, and the invoice was recorded. The
invoice was in the hands of the purchasing agent; it was marked “On consignment”.
C) Merchandise received on January 6, 2007, costing P700,000 was entered in purchase register on January
7. The invoice showed shipment was made FOB shipping point on December 31, 2006. Because it was not
on hand during the inventory count, it was not included.
D) A special machine costing P200,000, fabricated to order for a particular customer, was finished in the
shipping room on December 30. The customer was billed for P300,000 on that date and the machine was
excluded from inventory although it was shipped January 4, 2007.
E) Merchandise costing P200,000 was received on January 6, 2007, and the related purchase invoice was
recorded January 5. The invoice showed the shipment was made on December 29, 2006, FOB destination.
F) Merchandise costing P150,000 was sold on an installment basis on December 15. The customer took
possession of the goods on that date. The merchandise was included in inventory because Alcala still holds
legal title. Historical experience suggests that full payment on installment sale is received approximately
99% of the time.
G) Goods costing P500,000 were sold and delivered on December 20. The goods were included in the
inventory because the sale was accompanied by a purchase agreement requiring Alcala to buy back the
inventory in February 2007. Total Inventory as of December 31, 2006

Reasons for including and excluding the items:
A) Included - Merchandise should be included in the inventory until shipped.
An exception would be special orders.
B)Excluded - Alcala Manufacturing has the merchandise on a consignment
basis and therefore does not possess legal title.
C)Included - The merchandise was shipped FOB shipping point and therefore
would be included in the inventory on the shipping date.
D)Excluded - Title may pass on special orders when segregated for shipment.
E)Excluded - The merchandise was shipped FOB destination and was not
received until January 3, 2006.
F)Excluded - Historical experience suggests that Alcala will collect the full
purchase price, so the sale is recognized even though legal title has not
passed.
G)Included - This is not a sale of inventory but instead is a loan with the
inventory as collateral.

Unshipped goods P 100,000
Purchased merchandise shipped FOB shipping point 700,000
Goods used as collateral for a loan 500,000
Total P1,300,000

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