REVIEWER (CFAS)

CHAPTER 1 : The Accountancy Profession Overall Objective of Accounting:

● To provide quantitative financial information
ASC (Accounting Standards Council) - abt a business useful to users (owners and
Accounting a service activity. Quantitative creditors) in making economic decisions.
information, financial in nature, economic ● To supply financial information so statement
entities useful in making economic decisions. users can make judgments and better
COAT (Committee of Accounting decisions.
Terminology) - Art of recording, classifying, and
summarizing THE ACCOUNTANCY PROFESSION
AAA (American Accounting Association) - Present: Republic Act No. 9298 or Philippine
Process of identifying, measuring and Accountancy Act of 2004 - law regulating the
communicating economic information. practice of accountancy in PH.

3 important points: To qualify as an accountancy profession: (1)

1. Quantitative information finish a degree of BSA (2) pass a very difficult
2. Financial in nature government examination by BOA.
3. Useful in decision making
Board of Accountancy - body authorized by
3 number components law to promulgate rules and regulations about
1. Identifying (analytical) - process is the the accountancy profession. Responsible for
recognition or non recognition of business preparing and grading CPA examination
activities as “accountable events” (when it has (LECPA).
an effect on A, L, OE)
* Sociological and Psychological matters are CPA practice their profession in 3 areas:
beyond. 1. Public Accounting - individual practitioners,
small accounting firms, large multinational
External transactions - one entity and other organizations, independent financial service to
entity the public.
Internal transactions - entirely within the entity ● Auditing - primary service, expressing
only. Production and Casualty loss. opinion as to the fairness of financial
- Production - resources transformed into statements. Checks FS, na ginawa ni
products. accountant if tama ba.
- Casualty - sudden, unanticipated loss on the ● Taxation - preparation of annual income
act of God. tax returns, asses based on the tax law.

2. Measuring (technical) - assigning peso 2. Private Accounting - employee of a

amounts to accountable economic transactions. company, employed in business entities as
accounting staff, chief accountant, internal
Measurements bases: auditor and controller (highest accounting
(1) Historical Cost - original acquisition, most officer).
common measure
(2) Current Value - fair value, value in use, 3. Government Accounting - need to be
fulfillment value and current cost appointed, involves the receipt and disposition of
government funds.
3. Communicating (formal) - process of
preparing and distributing accounting reports. CONTINUING PROFESSIONAL
DEVELOPMENT (CPD)
Implicit in communication process: Republic Act No. 10912 - law mandating
A. Recording or journalizing - systematically
maintaining a record continuing professional development (advance
B. Classifying - sorting or grouping of similar knowledge, skill and proficiency) program for all
classes into their respective classes regulated professions including accountancy
C. Summarizing - preparation of financial profession.
statements (SFP, IS, SCI, SCE, SCF)
CPD credit units
● Required for the renewal of CPA license and FINANCIAL REPORTING STANDARDS
accreditation of CPA practice the COUNCIL (FRSC)
accountancy profession every 3 years. A - The accounting standard setting body.
mandatory. - Main function is to establish and improve
● Required 120 CPD credit units (under BOA accounting standards that will be generally
resolution) accepted in the Philippines.
● Exemptions: permanently exempted are the - It Constitutes the highest hierarchy of GAAP
age of 65 years. in the Philippines.
- Approved statements of the FRSC are
Accounting vs Auditing known as PAS and PFRS.
Broad sense: accounting embraces auditing - Composed of 15 members with a
(one of the areas of accounting specialization) Chairman. Shall have a term of 3 years
Limited sense: Accounting is constructive in renewable for another term.
nature. Auditing is analytical, the work of an
auditor begins once the work of an accountant Philippine Interpretations Committee
ends. - To prepare interpretations of PFRS for
approval by the FRSC and to provide timely
Accounting vs Bookkeeping guidance.
Bookkeeping - is a procedural element of - Intended to give authoritative guidance on
accounting and largely concerned with issues.
development and maintenance of accounting - The counterpart of PIC in the IASB is the
records. The “how” of accounting. IFRIC.
Accounting - is conceptual and is concerned
with the “why”, reason or justification. INTERNATIONAL ACCOUNTING
STANDARDS COMMITTEE
Financial Accounting vs Managerial - An independent private sector body,
Financial Accounting - concerned with the objective of achieving uniformity in the
recording of business transactions, preparation accounting principles around the world.
of financial statements intended for internal and OBJECTIVES:
external users. A. To formulate and publish in the public
Managerial Accounting - accumulation and interest accounting standards to be
preparation of financial reports for internal observed in the presentation of FS.
users only. Ex. analysis reports for B. To work generally for the improvement and
sale/product. harmonization of regulations, accounting
standards and procedures relating to FS.
GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP) INTERNATIONAL ACCOUNTING
- Represent the accounting rules, procedures, STANDARDS BOARD
and practices and standards followed in the - IASB now replaces the IASC.
preparation and presentation of financial - Pronouncement body (nagseset), IASB
statements. Widely accepted, widely used. publishes standards called IFRS.
(Pinakamataas) - IASB adopted the body of standards issued
- Like laws that must be followed in financial by IASC.
reporting. - Process: research, discussion paper,
exposure draft and accounting standard.
Purpose of Accounting Standards
- The overall purpose of accounting standards Philippine Financial Reporting Standards
is to identify proper accounting practices for - Correspond to IFRS, numbered the same.
the preparation and presentation of FS. - PAS corresponds to IAS, numbered the
- Create a common understanding between same.
preparers and users of FS. - PIC corresponds to IFRIC.
- To ensure comparability and uniformity in
FS. To compare with other entities.
CONCEPTUAL FRAMEWORK - If there is a conflict, the requirements of
IFRS shall prevail over the Conceptual
CHAPTER 2 : Objective of Financial Framework.
Reporting
Users of Financial Information
CONCEPTUAL FRAMEWORK 1. Primary Users - are the parties to whom
- For Financial Reporting is a complete, general purpose financial reports are
comprehensive, and single document primarily directed. Financial statement.
promulgated by the IASB. - Existing and Potential Investors
- Describes the concepts for general purpose - Lenders and other creditors
financial reporting. 2. Other Users - parties that may find the
- Attempt to provide an overall theoretical general purpose financial reports useful but
foundation for accounting. the reports are not directed to them
- Intended to guide standard setters, primarily.
preparers and users of financial information - Employees
for FS. - Customers
- Government and their agencies
Provides the foundation for Standards that: - Public
1. Contribute to transparency - enhancing
international comparability and quality of OBJECTIVE OF FINANCIAL REPORTING
financial information. - To provide financial information about the
2. Strengthen comparability - reducing reporting entity that is useful to existing and
information gap between providers of potential investors, lenders, and other
capital and who they entrusted their money creditors in making decisions about
with. providing resources to the entity.
3. Contribute to economic efficiency - - The “why” purpose or goal of accounting.
helping investors to identify opportunities - Principal way of providing information to
and risks to the world. external users is through the annual
financial statements.
Purposes of Revised Conceptual Framework - Encompasses: financial highlights,
a. To assist the IASB to develop IFRS summary of important financial figures,
Standards based on consistent concepts. analysis of financial statements, and
b. To assist preparers of financial statements significant ratios.
to develop consistent accounting policy - Also includes nonfinancial information:
when no Standard applies to a particular description of major products and listing of
transaction. corporate officers and directors.
c. To assist preparers of financial statements
to develop accounting policy when a Target Users
Standard allows a choice of an accounting - Directed primarily to the existing and potential
policy. investors, lenders, and other creditors which
d. To assist all parties to understand and compose the primary user group. They have
interpret the IFRS Standards. the most critical and immediate need for
information in financial reports. They are the
Authoritative status of Conceptual parties that provide resources to the entity.
Framework
- The standard or interpretation overrides the Specific objectives of financial reporting
Conceptual Framework (may mataas - Overall objective: to provide information
authoritative guidance kesa kay Conceptual useful for decision making.
Framework) A. To provide information useful in making
- In the absence of standard, management decisions about providing resources to the
shall consider the applicability of entity.
Conceptual Framework in developing and B. To provide information useful in assessing
applying an accounting policy that results in the cash flow prospects of the entity.
information that is relevant and reliable. (available cash, pambayad utang, pambili
- Conceptual Framework is not an IFRS. asset)
 C. To provide information about entity Usefulness of financial performance
resources, claims and changes in - Helps users to understand the return that
resources and claims. (tumaas ba the entity has produced on the economic
A,L,E, may additional creditors) resources.
- Information about past financial performance
Economic Decisions is usually helpful in predicting the future
- Existing and potential investors need returns on the entity’s economic resources.
general purpose financial reports to enable them - Useful in assessing the entity’s ability to
in making decisions whether to buy, sell, or hold generate future cash inflows from
equity investments. operations.
- Existing and potential creditors, to enable
them in making decisions whether to provide or Accrual Accounting
settle loans and other forms of credit. - financial performance must be measured
using the accrual basis of accounting.
Assessing Cash Flow Prospects - The effects of transactions and other
Existing and potential investors: depend on events are recognized when they occur and
the returns that they expect from an investment not as cash is received or paid.
like dividends. - Income is recognized when earned
Existing and potential creditors: depend on regardless of when received and expense
the principal and interest payments or other is recognized when incurred regardless of
returns that they expect. when paid.

Economic resources and claims Limitations of financial reporting

- Provide information about the financial a. It does not and cannot provide all of the
position of a reporting entity. (only give information that primary users need.
summary, common information only, only b. Is not designed to show the value of an
assumption) entity but the reports provide information to
- Financial position - information about the help the primary users estimate the value
entity’s economic resources (asset) and the of the entity.
claims (liabilities) against the reporting entity c. Intended to provide common information to
(equity). Comprises the A,L,E of an entity users and cannot accommodate every
at a particular moment in time. Also helps request for information
users to assess entity’s liquidity, solvency, d. Based on estimate and judgment rather
and the need for additional financing. than exact depiction.
- Liquidity - availability of cash in the near
future to cover currently maturing obligations. Management stewardship
- Solvency - availability of cash over a long term - Information about how efficiently and
to meet financial commitments when they fall effectively management has discharged its
due. responsibility.
- Helps users to assess management
Changes in economic resources and claims stewardship of those resources. For
- Provide information about the effects of predicting how management will use an
transactions and other events that change entity's economic resources in future
the economic resources and claims. periods.
- Result from financial performance and
from other events or transactions like issuing Chapter 3 : Qualitative Characteristics
debt or equity instruments.
- Financial performance - comprises QUALITATIVE CHARACTERISTICS
revenue, expenses, and net income or loss - the qualities or attributes that make financial
for a period of time. The level of income accounting information useful to the users. It has
earned by the entity through efficient and Fundamental and Enhancing Qualitative
effective use of its resources. Also known as Characteristics.
results of operations and is portrayed in the
income statement and statement of
comprehensive income.
1. Fundamental Qualitative Characteristics New definition of materiality
- relate to the content or substance of financial 3 important aspects:
information. It has relevance and faithful (1) Could reasonably expected to
representation. influence
- Material information should be limited to the
A. Relevance economic decision of primary users rather
- The capacity of the information to influence than to all users. Also, capable of influencing
a decision. The financial information must be economic decisions of the primary users.
capable of making a difference in the (2) Obscuring information
decisions made by users. (to alter decision) - Information is obscured if presenting or
communicating it would have a similar effect
Ingredients of relevance: as omitting or misstating the information.
(1) Predictive value - if it can be used as an - It means the presentation of financial
input to processes employed by users to information not readily understood or not
predict future outcome. When it can help clearly expressed.
users increase the likelihood of correctly or - May be characterized by: deliberate
accurately predicting or forecasting the vagueness, ambiguity, and abstruseness
outcome of events. (possible outcome
itself) (3) Primary Users
(2) Confirmatory value - if it provides - Only them are considered because these
feedback about previous evaluations. groups are the users whose general purpose
When it enables users to confirm or correct financial statements are primarily directed.
earlier expectations. (confirm the
assumption/past transaction) B. Faithful Representation
- Means that the financial reports represent
*interim - quarterly or monthly or semi-annually economic phenomena or transactions in
words and numbers.
Materiality - The actual effects of the transactions shall be
- Practical rule in accounting that strict properly accounted for and reported in FS.
adherence to GAAP is not required when the (record as it is, exact transaction must be
items are not significant enough to affect the recorded)
evaluation, decision, and fairness of the FS.
- Also known as the doctrine of convenience. Ingredients of faithful representation
- A quantitative threshold linked very closely to (1) Completeness
the qualitative characteristics of relevance. - Relevant information should be presented in
- Relevance information is affected by its a way that facilitates understanding and
nature and materiality. avoids erroneous implication.
- (specific and subjective to an entity, if - A complete depiction includes all information
mahalaga lang siya sa entity or malaking necessary for a user to understand the
bagay) transaction, including all necessary
description and explanation.
Materiality is a relativity - To be complete, financial statements should
- Item depend on relative size rather than be accompanied by notes to financial
absolute size. What is material for one entity statements. (complete description of a
may be immaterial for another. (good transaction)
judgment)
Standard of Adequate disclosure
When is an item material? - Completeness is the result of a standard of
- There is no strict or uniform rule for adequate disclosure.
determining whether an item is material or - All significant and relevant information
not. This is dependent on good judgment, leading to the preparation of financial
professional expertise and common sense. statements shall be clearly reported.
 (2) Neutrality Fundamental Qualitative Characteristics
- Without bias in the preparation or ● Relevance
presentation of financial information. (free 1. Predictive Value
from bias) (to be neutral is to be fair) 2. Confirmatory Value
- Neutral depiction is not slanted (don’t side (Materiality)
with other information), weighted, ● Faithful representation
emphasized, de-emphasized or otherwise 1. Completeness
manipulated. 2. Neutrality
- The financial information should not favor one (Prudence)
party to the detriment of another party. (Conservatism)
3. Free from error
Prudence (Measurement Uncertainty)
- The exercise of care and caution when (Substance over form)
dealing with the uncertainties in the
measurement process such that assets or 2. Enhancing Qualitative Characteristics
income are not overstated and liabilities or - Relate to the presentation or form of the
expenses are not understated. financial information.
- Neutrality is supported by the exercise of - Intended to increase the usefulness of the
prudence. (Diligence of a good father) financial information.

Conservatism (1) Comparability

- Synonymous with prudence, that when - The ability to bring together for the purpose of
alternatives exist, the alternative which has noting points of likeness and difference.
the least effect on equity should be chosen. - Enable users to identify and understand
- In simplest words “in case of doubt, record similarities and dissimilarities among items.
any loss and do not record any gain” (likeness and similarities) (comparable and
Contingent Loss - recognized as “provision”. If uniformed, compare across time or other
the loss is probable and the amount can be entity)
reliably measured. - Comparability within an entity or
Contingent Gain - not recognized but disclosed horizontal or intracomparability -
only. comparisons within a single entity through
time or from one accounting period to the
(3) Free from error next.
- There are no errors or omissions in the - Comparability between and across
description of the phenomenon or entities or dimensional or
transaction. intercomparability - comparisons between
Professional judgment - assumption and two or more entities engaged in the same
estimation, doesn't mean it's not accurate. industry. (last year to this year)

Measurement Uncertainty Consistency

- Arises when monetary amounts in financial - Not the same as comparability.
reports cannot be observed directly and must - Broad sense: refers to the use of the same
instead be estimated. method for the same item, either from period
- Can affect faithful representation if the level to period within an entity or in a single period
of uncertainty in estimating is high. across entities.
- Not 100% accurate, regardless of accuracy of - Limited sense: uniform of application of
estimation it's not accurate. accounting method from period to period
within an entity.
Substance over form - Consistency is desirable and essential to
- The transactions and events are accounted achieve comparability of FS.
for in accordance with their substance and
not merely their legal form. (2) Understandability
- Faithful representation inherently represents - Financial information must be
the substance of an economic phenomenon comprehensible or intelligible if it is to be
or transaction rather than merely most useful.
representing the legal form.
- Presented in a form and expressed in Chapter 4 : Financial Statements and
terminology that a user understands. (the reporting entity Underlying Assumptions
words that you will use is clear and concise)
GENERAL OBJECTIVE OF FINANCIAL
(3) Verifiability STATEMENTS
- Synonymous with objectivity. - Financial statements provide information about
- Different knowledgeable and independent economic resources of the reporting entity,
observers could reach consensus, although claims against the entity and changes in the
not necessarily complete agreement, that a economic resources and claims.
particular depiction is a faithful
representation. - Financial statement provide financial
- Verifiability implies consensus (the result has information about an entity’s assets, liabilities,
to be the same) equity, income, and expenses useful to users of
- Verifiable in the sense that it's supported by financial statements in:
evidence so that an accountant would look a. Assessing future cash flows to the
into the same evidence and would arrive at reporting entity
the same decision or conclusion. (can be b. Assessing management stewardship of
verified by other accountant) the entity’s economic resources.

Types of Verification The financial information provided the

A. Direct Verification - verifying an amount or following:
other representation through direct 1. Statement of financial position -
observation. Ex. Counting cash. (confirm by recognizing Assets, Liabilities, Equity.
looking and saying it, physically counting) 2. Statement of Comprehensive Income or
B. Indirect Verification - checking the inputs to Income statement - recognizing Income
a model, formula, or other technique and and Expenses.
recalculating the inputs using the same 3. Statement of cash flows - recognizing
methodology. (compute, recalculate) cash flows from operating, investing, and
financing activities.
(4) Timeliness 4. Statement of changes in equity -
- Financial information must be available or recognizing contributions from equity
communicated early enough when a decision holders and distributions to equity holders.
is to be made. 5. Notes to financial statements -
- Most important attribute of quarterly or interim recognizing disclosures required by
financial information is timeliness. accounting standards.
- Generally, the older the information, the less
useful it is. Types of Financial Statements
- What happened in the past would become 1. Consolidated Financial Statements -
the basis of what would happen in the future. Prepared when the reporting entity
comprises both parent and its subsidiary.
Cost constraint on useful information - Parent in the entity that exercises control
- Cost - a pervasive constraint on the over the subsidiaries.
information that can be provided by financial 2. Unconsolidated Financial Statements -
reporting. Prepared when the reporting entity is the
- Cost constraint is a consideration od the cost parent alone.
incurred in generating financial information 3. Combined Financial Statements - when
against the benefit to be obtained from the reporting entity comprises two or more
having the information. entities that are not linked by a parent and
subsidiary relationship.
Enhancing Qualitative Characteristics
● Verifiability Reporting entity
(Direct and Indirect Verification) - An entity that is required or chooses to
● Comparability prepare financial statements.
(Consistency) - Can be a single entity or a portion of an
● Understandability entity, or can comprise more than one entity.
● Timeliness
- Reporting entity is not necessarily a legal - The reason for the entity assumption is to
entity. have a fair presentation of financial
statements.
Reporting period - Each business is an independent accounting
- The period when financial statements are entity.
prepared for general purpose financial - The shareholder is not the corporation and
reporting. the corporation is not the shareholder.
- May be prepared on an interim basis: three
months, six months, or nine months. (not Time period
required but optional) - The time period assumption requires that the
- Financial statements must be prepared on an indefinite life of an entity is subdivided into
annual basis or a period of twelve months. accounting periods which are usually of equal
length for the purpose of preparing financial
UNDERLYING ASSUMPTIONS reports on financial position, performance,
- Accounting assumptions or accounting and cash flows. (cut off to have result of
postulates are the basic notions or operations)
fundamental premises on which the - By convention, the accounting period or fiscal
accounting process is based. period is one year or a period of twelve
- Accounting assumptions serve as the months.
foundation or bedrock of accounting in order - One-year period - traditionally the
to avoid misunderstanding but rather accounting period because usually it is after
enhance the understanding and usefulness of one year that government reports are
the FS. required.
- The conceptual framework for Financial - The accounting period may be: calendar year
Reporting mentions only one assumption, or natural business year.
going concern. - Calendar year - 12 month period that ends
- However, implicit in accounting are the basic on December 31. (January 1-December 31)
assumptions: accounting entity, time - Natural business year - 12 month period
period, and monetary unit. that ends on any month when the businesses
are at the lowest or experiencing slack
Going concern season.
- Also known as continuity assumption, means - Fiscal year - ends other than December 31.
that in the absence of evidence to the (<12 months, >12 months)
country, the accounting entity is viewed as
continuing in operation indefinitely. Monetary Unit
(continuing existence of entity, hindi - Has two aspects: quantifiability and stability
matatapos, entity will continue without
of the peso.
ending, infinite)
- FS are normally prepared on the assumption - Quantifiability aspect - the asset, liabilities,
that the entity will continue in operations for equity, income, expenses should be stated in
the foreseeable future. terms of a unit of measure which is the peso
- Very foundation of the cost principle. in the Philippines.
- If there is evidence that the entity would - Stability of peso - means that the
experience large and persistent losses or that
purchasing power of peso is stable or
the entity’s operations are to be terminated,
the going concern assumption is abandoned. constant and that its instability is insignificant
and therefore may be ignored.
Accounting entity (inflation-disclosed)
- Accounting entity is the specific business - The accounting function is to account for
organization, which may be a proprietorship, nominal pesos only and not for constant
partnership, or corporation. pesos or changes in purchasing power.
- The entity is separate from the owners,
managers, and employees who constitute the
entity.
- The transactions of the entity shall not be
merged with the transactions of the owners.
 Chapter 5 : Elements of Financial Statements Essential characteristics of asset
a. The asset is present economic resource
ELEMENTS OF FINANCIAL STATEMENTS b. The economic resource is a right that
- Financial statements portray the financial has the potential to produce economic
effects of transactions and other events by benefits.
grouping them into broad classes according c. The economic resource is controlled by
to their economic characteristics. the entity as a result of past events.
- Refer to the quantitative information
reported in the statement of financial RIGHT
position and income statement. Rights that have the potential to produce
- Are the building blocks from which financial economic benefits may take the following forms:
statements are constructed. 1. Rights that have the potential to produce
- The presentation of these elements in the economic benefits of another entity
statement of financial position and the a. Right to receive cash
income statement involves a process of b. Right to receive goods and services
classification and subclassification. c. Right to exchange economic resources
with another party on favorable terms
Elements directly related to the d. Right to benefit from an obligation of
measurement of financial position: another party if a specified uncertain
a. Asset future event occurs
b. Liability 2. Rights that do not correspond to an
c. Equity (residual information, deduct L to A) obligation of another entity
a. Right over physical objects, such as
Financial Performance: property, plant and equipment or
a. Income inventories.
b. Expense b. Right to intellectual property
3. Rights established by contract or
- The Conceptual Framework identifies no legislation such as owning a debt instrument
elements that are unique to the statement of or an equity instrument or owning a
changes in equity because such a statement registered patent.
comprises items that appear in the statement
of financial position and the income statement. Potential to produce economic benefits
- Equity - residual interest in the assets of the - Economic resource is a right that has the
entity after deducting all of the liabilities. potential to produce economic benefits.
- A right can meet the definition of an
ASSET economic resource even if the probability that
- Under the Revised Conceptual Framework, an it will produce economic benefit is low.
asset is defined as a present economic
resource controlled by the entity as a result of An economic resource could produce economic
past events. benefits if as entity is entitled:
- The new definition clarifies that an asset is an a. To receive contractual cash flows
economic resource and that the potential b. To exchange economic resources with
economic benefits no longer need to be another party on favorable terms
expected to flow to the entity. c. To produce cash inflows or avoid cash
- To inflow economic benefits. outflows
d. To receive cash by selling the economic
resource
e. To extinguish a liability by transferring
an economic resource
 Control of an economic resource - Constructive obligations - arise from normal
- An entity controls an asset if it has the present business practice, custom and a desire to
ability to direct the use of the asset and obtain maintain good business relations or act in an
the economic benefits that flows from it. equitable manner.
- Control also includes the ability to prevent
others from using such assets and therefore Transfer of an economic resource
preventing others from obtaining the economic Obligations to transfer an economic resource
benefits from the asset. include:
- Control may arise if an entity enforces legal a. Obligation to pay cash
rights. b. Obligation to deliver goods or noncash
- If there are no legal rights, control can still resources
exist if an entity has other means of ensuring c. Obligation to provide services at some
that no other party can benefit from an asset. future time
d. Obligation to exchange economic
LIABILITY resources with another party on
- Under the Revised Conceptual Framework, a unfavorable terms
liability is defined as the present obligation of e. Obligation to transfer an economic
an entity to transfer an economic resource as resource if specified uncertain future
a result of past events. event occurs
- New definition clarifies that a liability is the
obligation to transfer an economic resource Past event
and not the ultimate outflow of economic An obligation exists as a result of past event if
benefits. (cash, extinguishment of death, both of the following conditions are satisfied:
payment of cash) a. An entity has already obtained
- In case of conflict, the IASB stated that the economic benefits
requirements of a Standard shall always b. An entity must transfer an economic
prevail over the Conceptual Framework. resource.

Essential characteristics of liability Definitions of income

a. The entity has an obligation - Income is defined as increases in assets or
The entity liable must be identified. decreases in liabilities that result in increases
However, it is not necessary that the in equity, other than those relating to
payee or the entity to whom the contributions from equity holders.
obligation is owed be identified. - Income encompasses both revenue and
b. The obligation is to transfer an gains.
economic resource - Revenue - arises in the course of ordinary
c. The obligation is a present obligation regular activities and is referred to by a variety
that exists as a result of past events. of different names including sales, fees,
This means that a liability is not interest, dividends, royalties, and rent.
recognized until it is incurred. - The essence of revenue is regularity.
- Gains - represent other items that meet the
OBLIGATION definition of income and do not arise in the
- Duty or responsibility that an entity has no course of ordinary regular activities. It includes
practical ability to avoid. Obligations can either gain from disposal of noncurrent assets,
be legal or constructive. unrealized gain on trading investment and
- Obligations may be legally enforceable as a gain from expropriation.
consequence of a binding contract or statutory
requirement.
 Statement of financial performance - The statements are linked because the
- Refers to the income statement and a recognition of an item in one statement requires
statement presenting other comprehensive the recognition of the same item in another
income. statement.
- The income statement or statement of profit or - (there has to be a standard) (nirerecord mo if
loss is the primary source of information about passed siya sa criteria or standard)
an entity’s financial performance. As a general
rule, all income and expenses are included in Recognition criteria
profit or loss. - Only items that meet the definition of an A, L, or
- In developing accounting standards, there are E are recognized in the statement of F Position.
some items of income and expenses that are - Only items that meet the definition of I or E are
included in other comprehensive income and recognized in the statement of F Performance.
not in profit or loss if such presentation would - Items are recognized only when their
provide more relevant and faithfully recognition provides users of FS with
represented information about financial information that is both relevant and faithfully
performance. represented.
- There are instances that an amount in other - Recognition does not focus anymore on how
comprehensive income in one reporting period probable economic benefits will flow to or from
may be recycled to profit or loss in another the entity and that the cost can be measured
reporting period. reliably.

Definition of Expense Probability - high probable, 50%, mataas,

- Defined as decreases in assets or increases in disclose & record
liabilities that result in decreases in equity, Possible - chance of 20%, disclose
other than those relating to distributions to Remote - less than 20%, no record
equity holders.
- Expenses encompass losses as well. Point of sale income recognition
- Expenses - arise in the course of ordinary - Income should be recognized when earned.
regular activities. Includes cost of goods sold, - Under certain conditions, income may be
wages and depreciation. recognized at the point of production, during
- Losses - do not arise in the course of ordinary production, and at the point of collection.
regular activities and include losses resulting
from disasters. Ex. losses from fire, flood, storm Expense recognition
surge, tsunami, and hurricane, as well as those - The expenses are recognized when incurred.
arising from disposal of noncurrent assets. - Expense recognition principle is the application
of the matching principle.
Chapter 6 : Recognition and Measurement - The matching principle requires that those
costs and expenses incurred in earning a
RECOGNITION revenue shall be reported in the same period.
- The process of capturing for inclusion in the
financial statements an item that meets the The matching principle has 3 applications:
definition of an asset, liability, equity, income, or 1. Cause and effect association
expense. - The expense is recognized when the revenue
- Carrying amount - the amount at which an is already recognized.
asset, a liability, or equity is recognized in the - Actually the strict matching concept.
statement of financial position. - (narecognize na revenue, dun palang
- Recognition links the elements to the statement recognize si expense. Recognize revenue then
of F Position and statement of F Performance. to expense)
- Commonly referred to as the matching cost Derecognition
with revenue, simultaneous or combined - Defined as the removal of all part of a
recognition of revenue and expenses that result recognized asset or liability from the statement
directly and jointly from the same transactions of financial position.
or events. - Normally occurs when an item no longer meets
Ex. Cost of merchandise inventory, doubtful the definition of an asset or liability.
accounts, warranty expense, sales - Derecognition of an asset - occurs when the
commissions. entity loses control of all part of the asset.
- Derecognition of a liability - occurs when the
2. Systematic and rational allocation entity no longer has a present obligation for all
- Some costs are expensed by simply allocating or part of the liability.
them over the periods benefited.
(nagdedepreciate long-term then nababawas) MEASUREMENT
- Reason: cost incurred will benefit future periods - Defined as quantifying in monetary terms the
and that there is an absence of a direct or clear elements in the financial statements.
association of the expense with specific - The revised conceptual framework mentions
revenue. two categories:
- When economic benefits are expected to arise 1. Historical cost
over several accounting periods and the 2. Current value
association with income can only be broadly or
indirectly determined, expenses are recognized HISTORICAL COST
on the basis of systematic and rational - Also known as the original acquisition cost of
allocation. an asset - The cost incurred in acquiring or
Ex. depreciation of PPE, amortization of creating the asset comprising the consideration
intangibles, and allocation of prepaid rent, paid plus transaction cost.
insurance and other prepayments. - (actual cost, highly used)
- The historical cost of a liability - the
3. Immediate recognition consideration received to incur the liability
- The cost incurred is expensed outright because minus transaction cost.
of uncertainty of future economic benefits or - Historical cost - the entry price or entry value to
difficulty of reliably associating certain costs acquire an asset or to incur a liability.
with future revenue. (magagamit for the future, - An application of the historical cost
nadadagdagan) (expound, pinapalawak yung measurement is to measure financial asset and
isang bagay) financial liability at amortized cost.
An expense is recognize immediately: - Amortized cost - reflects the estimate of future
a. When an expenditure produces no cash flows discounted at a rate determined at
future economic benefit. initial recognition.
b. When cost incurred does not qualify or
ceases to qualify for recognition as an Historical cost updated
asset. 1. Historical cost of an asset is updated
Ex. officers’ salaries, most administrative because of:
expenses, advertising and most selling a. Depreciation and amortization
expenses, amount to settle lawsuits and b. Payment received as a result of disposing
worthless intangibles. part or all of the asset.
Many losses: loss from disposal of building, c. Impairment
loss from sale of investments, and casualty loss d. Accrual of interest to reflect any financing
(immediately recognized bcs not directly related component of the asset
to specific revenue) e. Amortized cost measurement of financial
asset
 2. Historical cost of a liability is updated Current cost
because of: - Current cost of an asset - the cost of an
a. Payment made or satisfying an obligation to equivalent asset at the measurement date
deliver goods comprising the consideration paid and
b. Increases in value of the obligation to transaction cost.
transfer economic resources such that the - Current cost of a liability - consideration that
liability becomes onerous would be received less any transaction cost at
c. Accrual of interest to reflect any financing measurement date.
component of the liability - Similar to historical cost, also based on the
d. Amortized cost measurement of financial entry price or entry value but reflects market
liability conditions on measurement date.

CURRENT VALUE Selecting a measurement basis

a. Fair value - In selecting a measurement basis for an asset
b. Value in use for asset or liability and for the related income or
c. Fulfillment value of liability expense, it is necessary to consider the nature
d. Current cost of the information that the measurement basis
will produce.
Fair value - The relative importance of each factor will
- Fair value of an asset - the price that would be depend on facts and circumstances.
received to sell an asset in an orderly - The information must be both relevant and
transaction between market participants at faithfully represented.
measurement date. - Historical cost - the measurement basis most
- Fair value of liability - the price that would be commonly used in preparing financial
paid to transfer a liability in an orderly statements. It is simpler and less costly to
transaction between market participants at measure than to current value. It's generally
measurement date. well understood and verifiable.
- Fair value is an exit price or exit value.
- Can be observed directly using the market Chapter 7 : Presentation and disclosure
price of the asset or liability in an active market. Concepts of capital
- Fair value is not adjusted for transaction cost.
Presentation and Disclosure
Value in use - Can be an effective communication tool about
the information in financial statements.
- The present value of the cash flows that an
- Reporting entity communicates information
entity expects to derive from the use of an about its assets, liabilities, equity, income and
asset and from the ultimate disposal. expenses by presenting and disclosing
- Value in use does not include transaction cost information in the financial statements.
on acquiring the asset but includes transaction - Effective communication of information in
cost on the disposal of the asset. financial statements makes the information
- Value in use is an exit price or exit value. more relevant and contributes to a faithful
representation of an entity’s assets, liabilities,
income and expenses.
Fulfillment value - It also enhances understandability and
- The present value of cash that an entity comparability of information in the financial
expects to transfer in paying or settling a statements.
liability.
- Fulfillment value does not include transaction Classification
- The sorting of assets, liabilities, equity,
cost on incurring a liability but includes
income, and expenses on the basis of shared
transaction costs on fulfillment of a liability. or similar characteristics.
- Fulfillment value is an exit price or exit value.
- Classifying dissimilar assets, liabilities, equity, - Shareholders invest in entities to earn a return
income and expenses can obscure relevant on capital or an amount in excess of their
information, reduce understandability and original investment.
comparability and may not provide a faithful - Return of capital - an erosion of the capital
representation of financial information. invested in the entity.
- It may be necessary to classify components of - 2 concepts of capital maintenance or
equity separately if such components are well-offness; Financial capital and Physical
subject to legal, regulatory, and other capital.
requirements.
- Ordinary share capital, preference share Financial capital
capital, share premium and retained earnings - Under a financial capital concept, such as
should be disclosed separately. invested money or invested purchasing power,
capital is synonymous with net assets or equity
Classification of Income and Expenses of the entity.
- Income and expenses are classified as - Financial capital is the monetary amount of
components of profit loss and components of the net assets contributed by shareholders and
other comprehensive income. the amount of the increase in net assets
- The income statement or statement of profit resulting from earnings retained by the entity.
or loss - the primary source of information - Traditional concept based on historical cost and
about an entity’s financial performance for the adopted by most entities.
reporting period.
- All income and expenses should be Net income under financial capital
appropriately classified and included in the - Under the financial capital concept, net income
income statement. occurs when the nominal amount of net assets
- The components of other comprehensive at the end of the year exceeds the nominal
income are subsequently recycled or amount of the net assets at the beginning of the
reclassified either to profit or loss or retained period, after excluding distributions to and
earnings. contributions by owners during the period. (net
asset, equity, magkakaroon lang profit if net
Aggregation asset increased at the end of the year)
- Aggregation is the adding together of assets,
liabilities, equity, income and expenses that *the amount of net assets is the excess of total
have similar or shared characteristics and are assets over the total liabilities. This is the reason
included in the same classification. this approach is also known as the net asset
- Aggregation makes information more useful by approach.
summarizing a large volume of detail. However,
aggregation may conceal some of the detail. Physical capital
- A balance should be made so that relevant - Physical capital is the quantitative measure of
information is not obscured either by a large the physical productive capacity to produce
amount of insignificant detail or by excessive goods and services. (gaano karami nagawa na
aggregation. output)
- Statement of financial position and financial - May be based on: units of output per day or
performance provide summarized or physical capacity of productive assets to
condensed information. produce goods and services.
- Productive assets are measured at current
CAPITAL MAINTENANCE cost, rather than historical cost.
- Financial performance of an entity is - Productive assets include inventories and
determined using two approaches: transaction property, plant and equipment.
and capital maintenance approach. - Physical capital is equal to the net assets of the
- The transaction approach - the traditional entity expressed in terms of current cost.
preparation of an income statement.
- The capital maintenance approach - net
income occurs only after the capital used from
the beginning of the period is maintained.
 Physical Capital Concept - Also show the results of the management’s
- Net income occurs when the physical stewardship of the resources entrusted to it.
productive capital of the entity at the end of the Financial statements provide information
year exceeds the physical productive capital at
about the following:
the beginning of the period, also after excluding
distributions to and contributions from owners a. Assets
during the period. (magkakaroon lang income if b. Liabilities
yung production increased at the end of the c. Equity
year) d. Income and expenses, including gains
and losses
Chapter 8 : Statement of Financial Position e. Contributions by and distributions to
owners in their capacity as owners.
FINANCIAL STATEMENTS f. Cash flows
- The means by which the information (offsetting - asset and liability can not offset
accumulated and processed in financial unless a standard says it)
accounting is periodically communicated to the
users. Frequency of reporting
- The end product or main output of the financial - Financial statements shall be presented
accounting process. annually. (once a year)
- A structured financial representation of the - When an entity’s end of reporting period
financial position and financial performance of changes and financial statements are presented
an entity. for a period longer or shorter than one year, an
entity shall disclose:
General purpose financial statements a. The period covered by the financial
- Simply referred to as financial statements are statements
those intended to meet the needs of the users b. The reason for using a longer or shorter
who are not in a position to require an entity to period
prepare reports tailored to their particular c. The fact that amounts presented in the
information needs. financial statements are not entirely
- Directed to all common users and not to comparable.
specific users.
Statement of financial position
Components of financial statements - A formal statement showing the three elements
A complete set: comprising financial position, namely assets,
1. Statement of financial position liabilities, and equity.
2. Income statement - Investors , creditors, and other statement users
3. Statement of comprehensive income analyze the statement of financial position to
4. Statement of changes in equity evaluate such factors as liquidity (asset),
5. Statement of cash flows solvency, maturity (liability), solvency and the
6. Notes,comprising a summary of significant need of the entity for additional financing.
accounting policies and other explanatory (5. Notes and Comparative Financial Transition)
notes
(accrual basis except to cash flow) Classification of assets
Classified into two: current asset and
Objective of financial statements noncurrent asset. (liquidity, resuidual)
- To provide information about the financial - When an entity supplies goods within a clearly
position, financial performance, and cash flows identifiable operating cycle, the separate
of an entity that is useful to a wide range of classification of current and noncurrent assets
users in making economic decisions. is useful information.
 Operating cycle - the time between the Long-term investments
acquisition of assets and their realization in - IASC defines investment: an asset held by an
cash. entity for accretion of wealth through capital
- When an entity’s normal operating cycle is not distribution, such as interest, royalties, dividends
clearly identifiable, the duration is assumed to and rentals, for capital appreciation or for other
be twelve (12) months. benefits to the investing entity such as those
obtained through trading relationships.
Current assets
PAS 1, paragraph 66: an entity shall classify an Intangible assets
asset as current when: - An identifiable nonmonetary asset without
a. The asset is cash or cash equivalent unless physical substance.
the asset is restricted to settle a liability for - Ex. (identifiable) patent, franchise, copyright,
more than twelve months after the reporting lease right, trademark, and computer software.
period. - Ex. (unidentifiable) Goodwill
b. The entity holds the asset primarily for the
purpose of trading. Other noncurrent assets
c. The entity expects to realize the asset within - Those assets that do not fit into the definition of
twelve months after the reporting period. the previously mentioned noncurrent assets.
d. The entity expects to realize the asset or - Ex. long-term advances to officers, directors,
intends to sell or consume it within the shareholders and employees, or abandoned
entity’s normal operating cycle. property and long-term refundable deposit.

Noncurrent assets (material congregation - as one line)

The caption “noncurrent assets” is a residual
definition. Classification of liabilities
PAS 1, paragraph 66: an entity shall classify all Liabilities classified into two: current liabilities
other assets not classified as current as and noncurrent liabilities.
noncurrent.
What is not included in the definition of current Current Liabilities
asset is deemed excluded. All others are PAS 1, paragraph 69: an entity shall classify a
noncurrent assets. liability as current when:
Including the following: a. The entity expects to settle within the
a. property , plant, and equipment entity’s normal operating cycle.
b. Long-term investments b. The entity holds the liability primarily for
c. Intangible assets the purpose of trading.
d. Deferred tax assets c. The liability is due to be settled within
e. Other noncurrent assets twelve months after the reporting period.
d. The entity does not have a right to defer
Property, plant, and equipment settlement of the liability for at least
- PAS 16, paragraph 6: tangible assets which are twelve months after the reporting period.
held by an entity for use in production or supply
of goods and services, for rental to others, or Noncurrent liabilities
for administrative purposes, and are expected The term “noncurrent liabilities” is also a residual
to be used during more than one period. definition.
Ex. land, building, machinery equipment, PAS 1, paragraph 69: all liabilities not classified
furniture, fixtures, patterns, molds, dies and as current are classified as noncurrent.
tools. a. Noncurrent portion of long-term debt
*Most PPE, except land, are presented at cost b. Finance lease liability
less accumulated depreciation. c. Deferred tax liability
 d. Long-term obligations to company - If certain conditions relating to the borrower’s
officers financial situation are breached, the liability
e. Long-term deferred revenue becomes payable on demand.
- PAS 1, paragraph 74: the liability is classified
Definition of equity as current even if the lender has agreed, after
- Equity is the residual interest in the assets of the reporting period and before the statements
the entity after deduction of all of its liabilities. are authorized for issue, not to demand
Simply stated: equity means “net assets” or payment as a consequence of breach.
total assets minus liabilities. - However, paragraph 75: the liability is
The terms used in reporting the equity of an classified as noncurrent if the lender has
entity depending on the form of the business agreed on or before the end of the reporting
organization are: period to provide a grace period ending at least
Owner’s equity - proprietorship twelve months after the end of reporting period.
Partner’s equity - partnership
Stockholders’ equity or shareholders’ equity Shareholders’ equity
- corporation - The residual interest of owners in the net
assets of a corporation measured by the excess
However, the term equity may simply be used of assets over liabilities.
for all business entities, under PAS 1, paragraph
7, the holders of instruments classified as equity Notes to financial statements
are simply known as owners. - Provide narrative description or disaggregation
of items presented in the FS and information
Currently maturing long-term debt about items that do not qualify for recognition.
- A liability which is due to be settled within - Used to report information that does not fit into
twelve months after the reporting period is the body of the FS in order to enhance the
classified as current, even if; understandability of the FS. (eto yung
a. The original term was for a period longer nagpapahaba sa FS, mga meaning,
than twelve months. descriptions, more on words)
b. An agreement to refinance or to reschedule - Purpose: to provide the necessary disclosures
payment on a long-term basis is completed required by the PFRS.
after the reporting period and before the
financial statements are authorized for Forms of statement of financial position
issue. 1. Report form
- The report form sets forth the three major
However, if the refinancing on a long-term basis sections in a downward sequence of A, L, and
is completed on or before the end of the E.
reporting period, the refinancing is an adjusting 2. Account form
event and the obligation is classified as - The presentation follows that of an account,
noncurrent liability. meaning, the assets are shown on the left side
and the liabilities and equity on the right side of
Covenants the statement of financial position.
- Often attached to borrowing agreements which
represent undertakings by the borrower.
- Actually restrictions on the borrower as to
undertaking further borrowings, paying
dividends, maintaining specified level of
working capital and so forth.
 Chapter 9 : Income Statement
Classification of expenses
INCOME STATEMENT 1. Distribution Costs
- A formal statement showing the financial - Constitute costs which are directly related to
performance of an entity for a given period of selling, advertising, and delivery of goods to
time. customers.
- The financial performance of an entity is a. Salesmen’s salaries
primarily measured in terms of the level of b. Salesmen’s commissions
income earned by the entity through the c. Traveling and marketing expenses
effective and efficient utilization of its d. Advertising and publicity
resources. e. Freight out
- The financial performance is also known as f. Depreciation of delivery equipment and
the results of operations of the equity. store equipment
- Transaction approach - traditional
preparation of the income statement 2. Administrative Expenses
- The income statement for a period presents - Constitute cost of administering the business
the income, expenses, gains, losses, and net (mga gastos more on nasa loob ng office)
income or loss recognized during the period. a. Doubtful accounts
- Useful: predicting future performance and b. Office salaries
ability to generate future cash flows. c. Expenses of general executives
d. Expenses of general accounting and credit
Sources of income department
a. Sales of merchandise to customers - sales e. Office supplies used
returns, allowances and discounts shall be f. Certain taxes
deducted from gross sales to arrive at net g. Contribution
sales. h. Professional fees
b. Rendering of services - income from i. Depreciation of office building and office
rendering services, among others, includes equipment
professional fees, media advertising j. Amortization of intangible assets
commissions, admission fees for artistic
performance and tuition fees. (service oriented 3. Other Expenses
business, cost of service) - Those expenses which are not directly
c. Use of entity resources - this income related to the selling and administrative
category includes interest, rent, royalty, and function. (mga losses)
dividend income. (non-operating income) a. Loss on sale of trading investments
d. Disposal of resources other than products b. Loss on disposal of PPE
- examples include gain on sale of c. Loss on sale of noncurrent investment
investments and gain on sale of PPE. (higher d. Casualty loss - flood, earthquake, fire
than book value is disposal)
No more extraordinary items
Components of expense PAS 1, paragraph 87: specifically mandates that
a. Cost of goods sold an entity shall not present any items of income
(merchandising/manufacturing) or cost of and expenses as extraordinary either on the
sales (service) face of the income statement or statement of
b. Distribution costs or selling expenses comprehensive income or in the notes.
c. Administrative expenses (not directly related
to b)
d. Other expenses (not part of b and c)
e. Income tax expense
 Line items - Ex. depreciation, purchases of raw materials,
The following items shall be disclosed on the transport costs, employee benefit costs, and
face of the income statement and statement of advertising costs.
comprehensive income: - (group of expenses)
a. Profit or loss for the period attributable to
noncontrolling interest and owners of the Which form of income statement?
parent PAS 1 does not prescribe any format.
b. Total comprehensive income for the period Paragraph 105: each method of presentation
attributable to noncontrolling interest and has merit for different types of entities,
owners of the parent management is required to select the
presentation that is reliable and more relevant.
Forms of income statement
PAS 1, paragraph 99: provides that an entity Comprehensive Income
shall present an analysis of expenses using a The Standard introduces a new term
classification based on either the function of comprehensive income.
expenses or their nature within the entity, - The change in equity during a period resulting
whichever provides information that is reliable from transactions and other events, other than
and more relevant. changes resulting from transactions with
owners in their capacity as owners.
Income statement may be presented into two Accordingly: comprehensive income includes:
ways: functional and natural. a. Components of profit or loss or income
and expenses affecting net income
Functional Presentation b. Components of other comprehensive
- Classifies expenses according to their function income
as part of cost of goods sold, distribution Profit or loss
costs, administrative expenses, and other - The total of income less expenses, excluding
expenses. the components of other comprehensive
- Also known as the cost of goods sold. income.
- An entity classifying expenses by function - This is the bottom line in the traditional income
shall disclose additional information on the statement.
nature of expenses, including depreciation, - An entity may use net income or net loss to
amortization, and employee benefit costs. describe profit or loss.
- (based on the division, type of
income/expense) Other comprehensive income
- Comprises items of income and expense that
Natural Presentation are not recognized in profit or loss or not
- Referred to as the nature of the expense shown in the traditional income statement.
method. The components:
- Expenses are aggregated according to their 1. Unrealized gain or loss on equity
nature and not allocated among the various investment measured at fair value through
functions within the entity. other comprehensive income.
- The expenses are no longer classified as cost 2. Unrealized gain or loss on debt investment
of goods sold, distribution costs, administrative measured at fair value through other
expenses, and other expenses. comprehensive income.
- The expenses which are of the same nature 3. Gain or loss from translation of the FS of a
are grouped or aggregated and presented as foreign operation. (common currency
one item. gamitin)
4. Revaluation surplus during the year.
 5. Unrealized gain or loss from derivative investment must be acquired three months or
contracts designated as cash flow hedge. less before the date of maturity.
6. Remeasurements of defined benefit plan, - Bank overdrafts - repayable on demand
including actuarial gain or loss. (looking for form an integral part of cash management.
fair value if gain or losses) Included as a component of cash and cash
7. Change in fair value attributable to credit equivalents.
risk of a financial liability designated at fair
value through profit or loss. Examples of cash equivalents:
a. Three-month BSP treasury bill
Statement of comprehensive income b. Three-year BSP treasury bill purchased
- Prepared in order to show the total three months before date of maturity
comprehensive income. c. Three-month time deposit
- Starts with the net income or loss as shown in d. Three-month money market instrument or
the income statement plus or minus the commercial paper
components of other comprehensive.
- Purpose: To provide a more comprehensive Classification of cash flows
information on financial performance - Cash flows - are inflows and outflows of cash
measured more broadly than the income as and cash equivalents.
traditionally computed. - The statement of cash flows shall report cash
- (to give more measured of whole flows during the period, classified as:
performance) operating, investing, financing activities.

Chapter 10 : Statement of Cash Flows Operating activities

- Are the cash flows derived primarily
STATEMENT OF CASH FLOWS from the principal revenue producing
- A component of financial statements activities of the entity.
summarizing the operating, investing, and - Simply worded: generally result from
financing activities of an entity. transactions and other events that enter
- In simple language: it provides information into the determination of net income or
about the cash receipts and cash payments loss. (Interest Expense)
of an entity during a period. Ex.
- (strictly a cash concept, not an accrual a. Cash receipt from sale of goods
basis.) (Saan pumasok pera natin) b. Cash receipt from royalties, rental, fees,
commissions, and other revenue.
Cash and Cash Equivalents c. Cash payments to suppliers for goods
- Statement of cash flows is designed to purchased
provide information about the change in an d. Cash payments for selling,
entity’s cash and cash equivalents. administrative and other expenses
- Cash - comprises cash on hand and demand e. Cash receipts and payments for
deposits. securities held for trading
- Cash equivalents - are the short-term highly f. Cash payment or refund of income
liquid investments that are readily convertible taxes unless can be identified
to known amounts of cash and which are specifically with financing and investing
subject to an insignificant risk of change in activities.
value.
- PAS 7, paragraph 7: an investment normally
qualifies as a cash equivalent only when it
has a short maturity of three months or less
from date of acquisition. In other words, the
 Investing Activities Noncash Transactions
- Are the cash flows derived from the - Noncash investing and financing transactions
acquisition and disposal of long-term assets shall be disclosed only either in the notes to
and other investments not included in cash financial statements or in a separate
equivalent. schedule or in a way that provides all relevant
- Simple guide: include cash flows from information about these transactions.
transactions involving nonoperating assets.
(inflow and outflow of long-term assets like Accordingly, the following noncash transactions
PPE) are disclosed separately:
Ex. a. Acquisition of asset by issuing share
a. Cash payments to acquire PPE, intangible capital
asset and other long-term asset b. Acquisition of asset by issuing bonds
b. Cash receipts to sale of PPE, intangible payable
asset and other long-term asset c. Conversion of bonds payable into share
c. Cash payments to acquire equity or debt capital
instruments of other entities (current and d. Conversion of preference shares into
long-term investments) ordinary shares
d. Cash receipts from sale of equity or debt
instruments of other entities Interest paid and interest received
e. Cash advances and loans to other parties - PAS 7, paragraph 33: interest paid and interest
other than advances and loans made by received shall be classified as operating cash
financial institutions. flows because such items enter into
f. Cash receipts from repayment of advances determination of net income or loss.
and loans made to other parties.
Alternatively, interest paid may be classified as
Financing Activities financing cash flow because it is a cost of
- The cash flows derived from the equity capital obtaining financial resources.
and borrowings of the entity. Alternatively, interest received may be
Cash flows that result from transactions: classified as investing cash flow because it is a
a. Between the entity and the owners - return on investment.
equity financing
b. Between the entity and the creditors - For a financial institution, interest paid and
debt financing interest received are usually classified as
- Simple guide: include the cash flows from operating cash flows.
transactions involving nontrade liabilities and
equity of an entity. (loan for borrowings) Dividends received
(whether cash inflow/outflow from equity) PAS 7, paragraph 33: dividend received shall be
Ex. classified as operating cash flow because it
a. Cash receipts from issuance of ordinary enters into the determination of net income.
and preference shares
b. Cash payments to acquire treasury Alternatively, dividend received may be
shares classified as investing cash flow because it is a
c. Cash receipts from issuing bonds, return on investment.
loans, notes, mortgages, and other short
or long term borrowings. Dividends paid
d. Cash payments for amounts borrowed PAS 7, paragraph 34: dividend paid shall be
e. Cash payments by lessee for the classified as financing cash flow because it is
reduction of the outstanding principal a cost of obtaining financial resources.
lease liability.
 Alternatively, dividend paid may be classified b. Change from cost model to revaluation model
as operating cash flow in order to assist users to in measuring PPE.
determine the ability of the entity to pay c. Change from cost model to fair value model
dividends out of operating cash flows. in measuring investment property.
d. Change to new policy resulting from the
Chapter 11 : Accounting Policies, Estimate, requirement of a new PFRS.
and Errors
How to report a change in accounting policy
ACCOUNTING POLICIES - A change in accounting policy required by a
- These are the specific principles, bases, standard or an interpretation shall be applied
conventions, rules, and practices applied by in accordance with the transitional provisions
an entity in preparing and presenting financial therein.
statements. - If the standard or interpretation contains no
- An entity is required to outline all significant transitional provisions or if an accounting
accounting policies applied in preparing policy is changed voluntarily, the change shall
financial statements. be applied retrospectively or retroactively.
- The entity shall select and apply the same
accounting policies each period in order to Retrospective application
achieve comparability of financial statements - Any resulting adjustment from the change in
or to identify trends in the financial position, accounting policy shall be reported as an
performance and cash flows of the entity. adjustment to the opening balance of retained
- (entity has no option what to apply in earnings.
accounting policies so it's a matter of - The amount of the adjustment is determined
judgment, so choose a right standard with as of the beginning of the year change.
diligence) - If comparative information is presented, the
financial statements prior period presented
Change in accounting policy shall be restated to conform with the new
- Once selected, accounting policies must be accounting policy.
applied consistently for similar transactions and - (from beginning to pabalik) (past to past) (pag
events. may retained earnings, may other past years
A change in accounting policy shall be made na nakainput)
only when:
a. Required by an accounting standard. ACCOUNTING ESTIMATE
b. The change result will result in more relevant - A change in accounting estimate is a normal
and faithfully represented information about recurring correction or adjustment of an asset
the financial position, financial performance, or liability which is the natural result of the use
and cash flows of the entity. of an estimate.
- By very nature, the revision of the estimate
Examples of change in accounting policy does not relate to prior periods and is not a
A change in accounting policy arises when an correction of an error.
entity adopts a generally accepted accounting - Sometimes it is difficult to distinguish a change
principle which is different from the one in accounting estimate and a change in
previously used by the entity. accounting policy.
- In such a case, the change is treated as a
Examples of change in accounting policy change in accounting estimate with
are: appropriate disclosure.
a. Change in the method of inventory pricing
from the FIFO method to weighted average
method.
- As a result of uncertainties in business - If comparative statements are presented, the
activities, many items in financial statements financial statements of the prior period shall be
cannot be measured with precision but can restated so as to reflect the retroactive
only be estimated. application of the prior period errors as a
- Estimates may be required for doubtful retrospective restatement.
accounts, inventory obsolescence, useful life
and residual value of asset, and warranty cost. Chapter 12 : Events after the reporting period
- (allocation to estimate transaction for relevant
information) EVENTS AFTER THE REPORTING PERIOD
- *(1) required by standard (2) if option of the - PAS 10, paragraph 3: events after the
entity choose an accounting estimate to make reporting period as those events, whether
presentation relevant. favorable or unfavorable, that occur between
the end of reporting period and the date on
How to report change in accounting estimate which the financial statements are authorized
- The effect of a change in accounting estimate for issue.
shall be recognized currently and - (after Dec 31 but will happen after issuance,
prospectively by including it in income or loss by verifying to the Board of Directors)
of: - (events after the period, if silent we assume it
a. The period of change if the change 12 months) (crineate pero not still the end)
affects that period only.
b. The period of change and future periods Such events may require either adjustment or
if the change affects both. disclosure.
- Changes in accounting estimates are to be Types of events after the reporting period:
handled currently and prospectively, if 1. Adjusting events - after the reporting period
necessary. are those that provide evidence of
conditions that exist at the end of reporting
Prospective application period. (need adjust the account/entry
- Prospective recognition of the effect of a before FS is issued)
change in accounting estimate means that the 2. Nonadjusting events - after reporting period
change is applied to transactions and other are those that are indicative of conditions
events from the date of change in estimate. that arise after the end of reporting period.
(for conservatism, onti effect, eto yung mga (not entry but disclosed, disclose to notes to
nagdedepriciate kaya ineestimate) (from FS the reason)
present to future)
Examples of adjusting events
Prior period errors 1. Settlement after the reporting period of a
- Omissions and misstatements in the financial court case because it confirms that the entity
statements for one or more periods arising already had a present obligation at the end of
from a failure to use or misuse of reliable the reporting period.
information. 2. Bankruptcy of a customer which occurs after
- Errors may occur: mathematical mistakes, the reporting period. (right to collect customer
mistakes in applying accounting policies, but no collect so adjust)
misinterpretation of facts, fraud, or oversight. 3. The determination after the reporting period
of the cost of asset purchased before the end
How to treat prior period errors of reporting period.
- Shall be corrected retrospectively by adjusting 4. The determination after the reporting period
the opening balances of retained earnings of the profit sharing or bonus payment if the
(accumulated surplus or kita) and affected entity has the present obligation at the end of
assets and liabilities. the reporting period to make such payment.
 5. The discovery of fraud or errors that show the Chapter 13 : Related Party Disclosures
financial statements were incorrect. (no
matter how small or big, it needs adjustment RELATED PARTY
because it already happened) (connection with entity that need to be
disclosed) (where we have transactions related
Examples of nonadjusting events to entity)
1. Business combination after the reporting Parties are considered to be related if one
period party has:
2. Plan to discontinue operation (no available a. the ability to control the other party (50%)
materials) b. The ability to exercise significant influence
3. Major purchase and disposal of asset or over the other party (can be expertise) (20%
expropriation of major asset by government or more) (big number of share but no control,
(huge effect to Asset and Liability) less than 50%)
4. Destruction of a major production plant by a c. Joint control over the reporting entity (entity A
fire after the reporting period (need to and entity B = joined)
disclose because nasira)
5. Major ordinary share transactions and Control - ownership directly or indirectly through
potential ordinary share transactions after the subsidiaries of more than half of the voting
reporting period power of an entity. Significant influence may be
6. Announcing or commencing the gained by share ownership of 20% or more.
implementation of a major restructuring
(organizational chart, number of depts) Joint control - the contractually agreed sharing
7. Entering into significant commitments or of control over an economic activity. (combined
contingent liabilities, for example by issuing resources to have a new product, suppliers)
guarantees (promise or a future date,
babayaran mo macocollect, omg diko gets Examples of related parties
sulat ko TT) 1. Affiliates
8. Commencing major litigation (for - Meaning the parent, the subsidiary and fellow
investigation) arising solely from events that subsidiaries. (parent, entity, child have a
occurred after the reporting period (after relationship)
reporting period until marecognize of - Investor owns more than 50% of an investee,
issuance of FS if BOD reviewed it) the investor is known as parent and the
investee is known as the subsidiary.
Financial Statements authorized for issue - The subsidiary is related to the parent and the
- FS are authorized for issue when the Board fellow subsidiaries of one parent are also
of Directors (BOD) reviews the FS and related to each other.
authorizes them issue.
- In some cases, an entity is required to submit 2. Associates
the financial statements to the shareholders - The entities over which one party exercises
for approval after the FS have been issued. significant influence.
- In such cases, the FS are authorized for issue - If an investor owns at least 20% of the
on the date of issue by the BOD and not on investee. The associate is related to the
the date when shareholders approve the FS. investor. The term “associate” includes the
subsidiary or subsidiaries of the associate.

3. Venturers
- Related to the joint venture because they have
joint control of the activities of the joint
venture.
- The fellow venturers are not related to each 3. Rendering or receiving services
other, unlike fellow subsidiaries. 4. Leases
5. Transfer of research and development
Other related parties 6. License agreement
(need to be disclosed, identify them) 7. Finance agreements, including loans and
1. Key management personnel equity contributions in cash or in kind
- The persons with managerial positions, like 8. Guarantee and collateral
the president, vice-president, chief executive 9. Settlement of liabilities on behalf of the entity
officer, and other officers with responsibility of or by the entity on behalf of another party.
controlling the activities of the entity. (mataas
mga position, insured, mga officers, Related party disclosures
presidents) - PAS 24, paragraph 12: requires disclosure of
related party relationships where control exists
2. Close family members of key irrespective of whether there have been
management personnel transactions between the related parties.
a. The individual’s spouse and children - Relationships between parent and subsidiaries
b. Children of the individual’s spouse or investor and associates shall be disclosed
c. Dependents of the individual or the individual’s regardless of whether there have been
spouse transactions between those related parties.
- (up - parents, down - children, side - asawa) - An entity shall disclose the name of the entity's
parent and if different, the ultimate controlling
3. Individuals or shareholders owning at party.
least 20% of the reporting entity.
- The close family members of such individuals Disclosures of related party transaction
or shareholders are also related to the PAS 24, paragraph 17: if there have been
reporting entity. transactions between related parties, an entity
shall disclose the nature of the related party
4. Postemployment benefit plan for the relationship as well as information about the
benefit of employees. transactions and outstanding balances
- The retirement plan of an entity is funded by necessary for an understanding of the financial
contributions from the entity. (after the statements.
employment, employment benefits) As a minimum, the disclosures of related party
- Such contributions constitute the trust fund transactions shall include:
handled by a trustee. Such a trust fund a. The amount of transaction
(increase or decrease) is related to the b. The amount of outstanding balance, terms
reporting entity. and conditions, whether secured or
unsecured, and nature of consideration to be
Related party transaction provided in settlement.
- A transfer of resources or obligations between c. The allowance for doubtful accounts related
related parties, regardless of whether a price to the outstanding balance.
is charged. d. The doubtful accounts expense recognized
during the period in respect of amount due
PAS 24, paragraph 20: provides the following from related parties.
examples of related party transaction:
1. Purchase and sale of goods (other entity Key management personnel compensation
dapat) PAS 24, paragraph 16: an entity shall disclose
2. Purchase and sale of property and other key management personnel compensation in
asset (if it is from a customer, it is not total and for each of the following categories:
related)
a. Short-term employee benefits, for example,
salaries, bonuses and nonmonetary benefits,
such as medical care, housing, car, and free
or subsidized goods.
b. Postemployment benefits, for example,
retirement pensions.
c. Other long-term benefits, such as long-term
paid absences and long-term disability
benefit (if incase magvacation)
d. Termination benefits, such as separation or
severance pay.
e. Share based payment transactions, for
example, share options.

Related party disclosures not required

PAS 24, paragraph 3: requires disclosure of
related party transactions and outstanding
balances in the separate financial statements of
a parent, subsidiary, associate or venturer.

However, paragraph 4 provides that intergroup

related party transactions and outstanding
balances are eliminated in the preparation of
consolidated financial statements of the group.
(mageliminate if child and parent, it will offset)

UNRELATED PARTIES
1. Two entities simply because they have a
same director key management personnel in
common
2. Providers of finance, banks, trade unions,
public utilities, and government agencies in
the course of their normal dealings with the
reporting entity. (if regular basis)
3. Customers and suppliers by virtue of their
normal dealings with the reporting entity.
4. Fellow venturers are unrelated to each other
but the venturers are related to joint venture.

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