CFAS 11 – Conceptual Framework and Accounting Standards

MIDTERM – WEEK 1 (PAS 1, PAS 7 & PAS 8)

PAS 1 – PRESENTATION OF FINANCIAL STATEMENTS

What it does:

• It defines complete set of general-purpose financial statements that contains 5 components:

✓ Statement of financial position;
✓ Statement of profit or loss and other comprehensive income;
✓ Statement of changes in equity;
✓ Statement of cash flows;
✓ Notes with summary of significant accounting policies and other explanatory information

• It describes the general features of financial statements:

✓ fair presentation and compliance with PFRS;
✓ going concern;
✓ accrual basis of accounting;
✓ materiality and aggregation;
✓ offsetting;
✓ frequency of reporting;
✓ comparative information; and
✓ consistency of presentation.

• It sets the minimum requirements for the content of financial statements; their identification and structure.

NOTE: PAS 1 applies to all general-purpose financial statements that are prepared and presented in accordance
with PFRSs.

General Purpose Financial Statements – those intended to meet the needs of users who are not in the position to require
an entity to prepare reports tailored to their particular information needs.

Purpose of the Financial Statements - to provide information about the financial position, financial performance and cash
flows of an entity that is useful to a wide range of users in making economic decisions. Financial statements also show the
results of management’s stewardship of the resources entrusted to it.

General features of financial statements

1. Fair Presentation and Compliance with PFRSs

Fair presentation requires the faithful representation of the effects of transactions, other events and conditions in
accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the Framework.

NOTE: The application of the PFRSs, with additional disclosure when necessary, is presumed to result in financial
statements that achieve a fair presentation.
 QUERY: Is it always required to comply with the requirements of PFRS in order to achieve fair presentation of the
financial statements? NO. Departure from a PFRS requirement is permitted if the relevant regulatory framework
requires or allows it, and so long as it will result to more relevant and more faithfully represented information. Of
course, this presupposes that the entity must disclose such departure in Notes.
Compliance with PFRSs. An entity whose financial statements comply with PFRSs shall make an explicit and unreserved
statement of such compliance in the notes.

2. Going concern
When preparing financial statements, management shall make an assessment of an entity’s ability to continue as a going
concern. When management is aware, in making its assessment, of material uncertainties related to events or conditions that
may cast significant doubt upon the entity’s ability to continue as a going concern, those uncertainties shall be disclosed.
When financial statements are not prepared on a going concern basis, that fact shall be disclosed, together with the basis on
which the financial statements are prepared and the reason why the entity is not regarded as a going concern.
General Rule: Financial statements shall be prepared on a going concern basis.
Exceptions:
i. management intends to liquidate the entity or to cease trading; or
ii. management has no realistic alternative but to do so

3. Accrual basis of accounting

An entity shall prepare its financial statements, except for cash flow information, using the accrual basis of accounting.

4. Materiality and aggregation

Each material class of similar items shall be presented separately in the financial statements. Items of a dissimilar nature or
function shall be presented separately unless they are immaterial. If a line item is not individually material, it is aggregated
with other items either on the face of those statements or in the notes.

5. Offsetting

General Rule: Assets and liabilities, and income and expenses, shall not be offset.
Exceptions:
i. when required or permitted by a Standard or an Interpretation; or
ii. if the amount is not material

NOTE: Measuring assets net of valuation allowances—for example, obsolescence allowances on inventories and
doubtful debts allowances on receivables—is not offsetting.

6. Frequency of Reporting (As a rule, at least annually)

NOTE: If an entity changes its reporting period to a period longer or shorter than one year, it shall disclose the
following:
i. the period covered by the financial statements;
ii. the reason for using a longer or shorter period; and
iii. the fact that amounts presented in the financial statements are not entirely comparable.
7. Comparative Information

General Rule: Comparative information shall be disclosed in respect of the previous period for all amounts reported
in the financial statements.
Exception: when a Standard or an Interpretation permits or requires otherwise

8. Consistency of Presentation
General Rule: The presentation and classification of items in the financial statements shall be retained from one
period to the next.
Exceptions:
(a) it is apparent, following a significant change in the nature of the entity’s operations or a review of its
financial statements, that another presentation or classification would be more appropriate – i.e., it will
result to a more reliable and more relevant information; or
(b) a Standard or an Interpretation requires a change in presentation.

Management’s Responsibility over Financial Statements

The management is responsible for an entity’s financial statements.

Statement of Financial Position (previously known as Balance Sheet) – shows the entity’s financial condition (i.e., status
of assets, liabilities and equity) as at a certain date.

Current Assets and Current Liabilities

Current Assets (assets that are:) Current Liabilities (liabilities that are:)
a. expected to be realized in, or is intended for sale or a. expected to be settled in the entity’s normal
consumption in, the entity’s normal operating cycle; operating cycle;
b. held primarily for the purpose of being traded; b. held primarily for the purpose of being traded;
c. is expected to be realized within twelve months after c. due to be settled within twelve months after the
the balance sheet date; or reporting period; or
d. cash or a cash equivalent, unless it is restricted from d. the entity does not have an unconditional right
being exchanged or used to settle a liability for at to defer settlement of the liability for at least
least twelve months after the reporting period. twelve months after the balance sheet date

All other assets and liabilities are classified as noncurrent.

NOTE: 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.
NOTE: When the entity’s normal operating cycle is not clearly identifiable, its duration is assumed to be twelve
months.
NOTE: An entity classifies its financial liabilities as current when they are due to be settled within twelve months
after the reporting period, even if:
(a) the original term was for a period longer than twelve months; and
(b) an agreement to refinance, or to reschedule payments, on a long-term basis is completed after the reporting
period and before the financial statements are authorized for issue.
 NOTE: If an entity expects, and has the discretion, to refinance or roll over an obligation for at least twelve months
after the reporting period under an existing loan facility, it classifies the obligation as non-current, even if it would
otherwise be due within a shorter period.

NOTE: When an entity breaches an undertaking under a long-term loan agreement on or before the balance sheet
date with the effect that the liability becomes payable on demand, the liability is classified as current, even if the
lender has agreed, after the reporting period and before the authorization of the financial statements for issue, not to
demand payment as a consequence of the breach. However, the liability is classified as non-current if the lender
agreed by the end of the reporting period to provide a period of grace ending at least twelve months after the
reporting period, within which the entity can rectify the breach and during which the lender cannot demand immediate
repayment.

Statement of Profit or Loss and Other Comprehensive Income

General Rule: All items of income and expense recognized in a period shall be included in profit or loss.
Exceptions: Unless a Standard or an Interpretation requires otherwise.
Presentation of Income and Expenses (either):
a. A single statement of profit or loss and other comprehensive income; or
b. Two statements – (1) Statement of Profit or Loss; and (2) Statement of Comprehensive Income
Total Comprehensive Income – the change in equity during a period resulting from transactions and other events, other
than those changes resulting from transactions with owners in their capacity as owners.
Methods of Presenting Expenses
1. Nature of Expense Method
2. Function of Expense Method (Cost of Sales Method)
Statement of Changes in Equity (shows the following:)

• effects of changes in accounting policies and corrections of errors;

• total comprehensive income for the period; and
• for each component of equity, a reconciliation between the carrying amount at the beginning and the end of the
period, showing separately changes resulting from:
✓ profit or loss;
✓ other comprehensive income; and
✓ transactions with owners

PAS 7 – STATEMENT OF CASH FLOWS

Statement of Cash Flows – provides information about the sources and utilization of cash and cash equivalents during the
period. When used in conjunction with the rest of the financial statements, the statement of cash flows helps users assess:
a. the ability of the entity to generate cash and cash equivalents;
b. the timing and certainty of the generation of cash flows; and
c. the needs of the entity to utilize those cash flows.

NOTE: Only transactions that affected cash and cash equivalents are reported in the statement of cash flows.
Classification of cash flows
1. Operating activities
2. Investing activities
3. Financing activities
Operating Activities (principal revenue-producing activities) – include cash flows on items of income and expenses, or
those that enter into the determination of profit or loss.
NOTE: This part is probably the most important, because it shows the ability of the company to generate cash by
its own activities, rather than by external financing or making investments.
Examples of cash flows from operating activities:

• Cash receipts from the sale of goods, rendering of services, or other forms of income;
• Cash payments for purchases of goods and services;

• Cash payments for operating expenses; and

• Cash receipts and payments from contracts held for dealing or for trading purposes.

Two Methods of reporting cash flows from operating activities

1. Direct Method – shows each major class of gross cash receipts and gross cash payments.
2. Indirect Method – profit or loss is adjusted for the effects of non-cash items and changes in operating assets and
liabilities

NOTE: Direct method provides more understandable information not disclosed under indirect method. However,
in reality, indirect method is far more preferred because it’s easier to get the information based on your accounting
records. (in most cases).

Investing Activities – the acquisition and disposal of long-term assets and other investments not included in cash
equivalents.
Examples of cash flows from investing activities:

• cash receipts and cash payments in the acquisition and disposal of property, plant and equipment, investment
property, intangible assets, and other noncurrent assets;
• cash receipts and cash payments in the acquisition and sale of equity or debt instruments of other entities (other
than those that are classified as cash equivalents or held for trading)
• cash receipts and cash payments on derivative assets and liabilities (other than those that are held for trading or
classified as financing activities);
• loans to other parties and collections thereof (other than those loans made by a financial institution)

Financing Activities – those that affect the entity’s equity capital and borrowing structure.
Examples of cash flows from financing activities:

• cash receipts from issuing shares or other equity instruments and cash payments to redeem them;
• cash receipts from issuing notes, loans, bonds, and mortgage payable and other short-term or long-term borrowings,
and their repayments;
• cash payments by a lessee for the reduction of the outstanding liability relating to a lease.
NOTE: Only cash flows on non-operating or non-trade liabilities are included as financing activities.
Interests and Dividends
Cash flows Option 1 Option 2
1. Interest income received Operating activity Investing activity
2. Interest expense paid Operating activity Financing activity
3. Dividend income received Operating activity Investing activity
4. Dividend paid to owners Financing activity Operating activity
PAS 8 – ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS

Accounting Policies – are anything from rules, guidelines, conventions, principles and similar norms used by entities for
the preparation of the financial statements.

How to select accounting policy? (depends on whether there is a particular PFRSs that deals with your specific transaction
or situation or not)
1. If there is some standard or interpretation, then you simply apply it.
2. When there is NO specific standard or interpretation dealing with your transaction or item, then management
needs to use judgement and develop its own policy, but careful, the policy needs to provide as reliable and relevant
information as possible.

How should you develop your accounting policy?

• First, you need to look at other PFRSs dealing with the similar or related issues.
• Second, you need to apply concepts from the Conceptual Framework.
• Also, in order to help, you can look to other standard setting bodies and their rules or standards for guidance.

NOTE: PAS 8 requires the consistent selection and application of accounting policies.

When can you change your accounting policy?

Only at 2 circumstances:
1. When it is required by another IFRS. This will be the case when new IFRS is issued and you HAVE TO apply it
mandatorily.
2. When new accounting policy provides better, more reliable and relevant information. In this case, you apply new
accounting policy voluntarily.

How can you change an accounting policy? (in the following order of priority)
1. Transitional provision in a PFRS, if any.
2. Retrospective application, in the absence of a transitional provision.
3. Prospective application, if retrospective application is impracticable.

Accounting Estimates (not directly defined by PAS 8, but indirectly via changes in accounting estimates)
A change in an accounting estimate is an adjustment of the carrying amount of an asset or liability, or related expense or
the amount of the periodic consumption of an asset, resulting from reassessing the present status of expected future benefits
and obligations associated with the asset or liability.

How can you account for change in accounting policy?

Unlike accounting for change in accounting policy, we need to change our accounting estimates prospectively, either:
• In the current reporting period, in form of so-called “catch-up adjustment“;
• In both the current and future reporting periods, if the change affects both.

NOTE: When it is difficult to distinguish a change in accounting policy from a change in accounting estimate, the
change is treated as a change in an accounting estimate.

Errors – include misapplication of accounting policies, mathematical mistakes, oversights or misinterpretations of facts,
and fraud.

Types of errors according to the period of occurrence:

1. Current period errors (corrected simply by correcting entries)
 2. Prior period errors (corrected by retrospective restatement)

NOTE: An entity shall correct material prior period errors respectively in the first set of financial statements
authorized for issue after their discovery by:
a. restating the comparative amounts for prior period(s) in which error occurred, or
b. If the error occurred before that date – restating the opening balance of assets, liabilities and equity for
earliest prior period presented.

In summary: