CHAPTER 3 changes in the environment in which it

operates.
BASIS FOR THE PRESENTATION OF THE
FINANCIAL STATEMENTS Statement of Comprehensive Income
● Presents the financial performance of an
Financial Statements entity during a reporting period.
● The means by which the information ● It is an expanded form of the income
accumulated and processed in financial statement because it encompasses both
accounting is periodically communicated profit or loss and other comprehensive
to the users income.
● The end-product or main output of the ● Information presented helps users to
financial accounting process. assess the entity’s ability to generate
● The structured financial representation cash and the potential changes in
of the financial position and financial economic resources that the enterprise
performance of an entity is likely to control in the future.

General Purpose of Financial Statements Statement of Changes in Equity

● An entity shall prepare and present ● Presents the summarized transactions
general purpose financial statements in affecting the balances of equity
accordance with the International accounts, such as profit or loss, other
Financial Reporting Standards (IFRS). comprehensive income, contributions
● General-purpose financial statements or from owners, and distributions to
simply financial statements are those owners.
intended to meet the needs of users
who are not in a position to require an Statement of Cash Flows
entity to prepare reports tailored to their ● Presents information on the inflows and
particular information needs. outflows of cash and cash equivalents
during the period.
Components of financial statements ● The information presented assists users
1. Statement of financial position as at the in assessing an entity’s ability to remain
end of the period solvent and provide returns to investors
2. Statement of comprehensive income for and creditors.
the period Notes to the Financial Statements
3. Statement of changes in equity for the ● Presents relevant financial information
period pertaining to the entity’s activities that
4. Statement of cash flows for the period cannot be presented on the face of the
5. Notes, comprising a summary of financial statements.
significant accounting policies and other ● Include a description of the basis of the
explanatory information presentation of financial statements and
summary of significant accounting
Statement of Financial Position policies, information required by the
● Presents information on the balances of PFRS or IFRS that is not presented on
assets, liabilities, and equity as at the the face of the financial statements, and
end of the reporting period. additional information that will help the
● Useful to various users of accounting users better understand the information
information in assessing the economic presented in any of the financial
resources that an enterprise controls, its statements.
financial structure, its liquidity and
solvency, and its capacity to adapt to Objective of Financial Statements

1
 ● The objective of general purpose by an entity in preparing and presenting
financial statements is to provide financial statements.
information about the financial position, ● Examples:
performance, and cash flows of an ○ Criteria to determine which
enterprise that is useful to a wide range financial instruments qualify as
of users in making economic decisions. cash equivalents.
● Financial statements also show the ○ Characteristics of elements
results of the management’s comprising Investments
stewardship of the resources entrusted Property.
to it. ○ Characteristics of elements
comprising PPE.
Financial Statements provide information about ○ Measurement model for a class
the following: of PPE.
a. Assets ○ Use of weighted average
b. Liabilities method to determine the cost of
c. Equity inventory.
d. Income and expenses, including gains ○ Measuring inventories at the
and losses Lower of Cost or Net Realizable
e. Contributions by and distributions to Value.
owners ● When an IFRS specifically applies to a
f. Cash flows transaction, other event or condition, the
accounting policy or policies applied to
Requirements for an additional statement of that item shall be determined by
financial position applying the IFRS.
● Inclusion of a statement of financial ● IFRSs set out accounting policies that
position as at the beginning of the the IASB has concluded result in
preceding period whenever an entity financial statements containing relevant
restates its comparative prior period and reliable information about the
financial statements. transactions, other events and
● Restatement of the comparative prior conditions to which they apply. Those
period is necessary when there is any of policies need not be applied when the
the following: effect of applying them is immaterial.
○ Retrospective application of a ● However, it is inappropriate to make or
change in accounting policy. leave uncorrected, immaterial
○ Retrospective application of a departures from IFRSs to achieve a
change in accounting policy. particular presentation of an entity’s
○ Reclassification of an element in financial position, financial performance
the financial statement. or cash flows.
● The requirement for a restatement of ● In the absence of an IFRS that
prior year’s financial statements and specifically applies to a transaction,
inclusion of a restated statement of other event or condition, management
financial position as at the beginning of shall use its judgement in developing
the preceding period presented and applying an accounting policy that
achieves the objective of comparability. results in information that is:
○ relevant to the economic
Accounting Policies decision-making needs of
● The specific principles, bases, users;
conventions, rules and practices applied ○ reliable, in that the financial
statements:

2
 ■ represent faithfully the 7. Comparative information
financial position, 8. Consistency of presentation
financial performance
and cash flows of the Fair presentation and compliance with
entity; IFRS
■ reflect the economic ● Financial statements shall present fairly
substance of the financial position, financial
transactions, other performance, and cash flows of an
events and conditions, entity.
and not merely the legal ● Fair presentation requires the faithful
form; representation of the effects of
■ are neutral, i.e. free transactions, other events and
from bias; conditions in accordance with the
■ are prudent; and definitions and recognition criteria for
■ are complete in all assets, liabilities, income and expenses
material respects. set out in the Conceptual Framework for
● In making the judgement, management Financial Reporting (Conceptual
shall refer to, and consider the Framework).
applicability of, the following sources in ● The application of IFRSs, with additional
descending order: disclosure when necessary, is
○ the requirements in IFRSs presumed to result in financial
dealing with similar and related statements that achieve a fair
issues; and presentation.
○ the definitions, recognition ● An entity whose financial statements
criteria and measurement comply with IFRSs shall make an
concepts for assets, liabilities, explicit and unreserved statement of
income and expenses in the such compliance in the notes.
Conceptual Framework for ● An entity shall not describe financial
Financial Reporting (Conceptual statements as complying with IFRSs
Framework). unless they comply with all the
● In making the judgement, management requirements of IFRSs.
may also consider the most recent ● In virtually all circumstances, an entity
pronouncements of other achieves a fair presentation by
standard-setting bodies that use a compliance with applicable IFRSs.
similar conceptual framework to develop ● A fair presentation also requires an
accounting standards, other accounting entity:
literature and accepted industry ○ to select and apply accounting
practices. policies in accordance with IAS
8.
General Features ○ to present information, including
The following are the general features for the accounting policies, in a manner
presentation of financial statements: that provides relevant, reliable,
1. Fair presentation and compliance with comparable and understandable
IFRS/PFRS information.
2. Going concern ○ to provide additional disclosures
3. Accrual basis of accounting when compliance with the
4. Materiality and aggregation specific requirements in IFRSs
5. Offsetting is insufficient to enable users to
6. Frequency of reporting understand the impact of

3
 particular transactions, other ● When an entity has departed from a
events and conditions on the requirement of an IFRS in a prior period,
entity’s financial position and and that departure affects the amounts
financial performance. recognised in the financial statements
● An entity cannot rectify inappropriate for the current period, it shall make the
accounting policies either by disclosure required disclosures.
of the accounting policies used or by ● Example: An entity departed in a prior
notes or explanatory material. In the period from a requirement in an IFRS for
extremely rare circumstances in which the measurement of assets or liabilities
management concludes that compliance and that departure affects the
with a requirement in an IFRS would be measurement of changes in assets and
so misleading that it would conflict with liabilities recognised in the current
the objective of financial statements set period’s financial statements.
out in the Conceptual Framework, the ● In the extremely rare circumstances in
entity shall depart from that requirement which management concludes that
if the relevant regulatory framework compliance with a requirement in an
requires, or otherwise does not prohibit, IFRS would be so misleading that it
such a departure. would conflict with the objective of
● When an entity departs from a financia lstatements set out in the
requirement of an IFRS, it shall disclose: Conceptual Framework, but the relevant
○ that management has regulatory framework prohibits
concluded that the financial departure from the requirement, the
statements present fairly the entity shall, to the maximum extent
entity’s financial position, possible, reduce the perceived
financial performance and cash misleading aspects of compliance by
flows; disclosing:
○ that it has complied with ○ the title of the IFRS in question,
applicable IFRSs, except that it the nature of the requirement,
has departed from a particular and the reason why
requirement to achieve a fair management has concluded
presentation; that complying with that
○ the title of the IFRS from which requirement is so misleading in
the entity has departed, the the circumstances that it
nature of the departure, conflicts with the objective of
including the treatment that the financial statements set out in
IFRS would require, the reason the Conceptual Framework; and
why that treatment would be so ○ for each period presented, the
misleading in the circumstances adjustments to each item in t
that it would conflict with the hefinancial statements that
objective of financial statements management has concluded
set out in the Conceptual would be necessary to achieve
Framework, and the treatment a fair presentation.
adopted; and ● An item of information would conflict
○ for each period presented, the with the objective of financial statements
financial effect of the departure when it does not represent faithfully the
on each item in the financial transactions, other events and
statements that would have conditions that it either purports to
been reported in complying with represent or couldreasonably be
the requirement. expecte represent and, consequently, it

4
 would be likely to influence economic ○ the basis on which it prepared
decisions made by users of financial the financial statements; and
statements. When assessing whether ○ the reason why the entity is not
complying with a specific requirement in regarded as a going concern.
an IFRS would be so misleading that it ● In assessing whether the going concern
would conflict with the objective of assumption is appropriate, management
financial statements set out in the takes into account all available
Conceptual Framework, management information about the future, which is at
considers: least, but is not limited to, twelve months
○ why the objective of financial from the end of the reporting period.
statements is not achieved in ● The degree of consideration depends on
the particular circumstances; the facts in each case. When an entity
and has a history of profitable operations
○ how the entity’s circumstances and ready access to financial resources,
differ from those of other entities the entity may reach a conclusion that
that comply with the the going concern basis of accounting is
requirement. appropriate without detailed analysis.
● If other entities in similar circumstances ● In other cases, management may need
comply with the requirement, thereis a to consider a wide range of factors
rebuttable presumption that the entity’s relating to current and expected
compliance with the requirement would profitability, debt repayment schedules
not be so misleading that it would and potential sources of replacement
conflict with the objective of financial financing before it can satisfy itself that
statements set out in the Conceptual the going concern basis is appropriate.
Framework.
Accrual Basis of Accounting
Going Concern ● An entity shall prepare its financial
● When preparing financial statements, statements, except for cash flow
management shall make an assessment information, using the accrual basis of
of an entity’s ability to continue as a accounting.
going concern. ● When the accrual basis of accounting is
● An entity shall prepare financial used, an entity recognises items as
statements on a going concern basis assets, liabilities, equity, income and
unless management either intends to expenses (the elements of financial
liquidate the entity or to cease trading, statements) when they satisfy the
or has no realistic alternative but to do definitions and recognition criteria for
so. those elements in the Conceptual
● When management is aware, in making Framework.
its assessment, of material uncertainties
related to events or conditions that may Materiality and Aggregation
cast significant doubt upon the entity’s ● An entity shall present separately each
ability to continue as a going concern, material class of similar items
the entity shall disclose those ● An entity shall present separately items
uncertainties. of a dissimilar nature or function unless
● When an entity does not prepare they are immaterial.
financial statements on a going concern ● Financial statements result from
basis, it shall: processing large numbers of
○ disclose that fact; transactions or other events that are

5
 aggregated into classes according to Offsetting
their nature or function. ● Offsetting means deducting one item
● The final stage in the process of from another item of different nature and
aggregation and classification is the presenting only the net on the face of
presentation of condensed and the financial statements.
classified data, which form line items in ● An entity shall not offset assets and
the financial statements. liabilities or income and expenses,
● If a line item is not individually material, unless required or permitted by an
it is aggregated with other items either in IFRS.
those statements or in the notes. ● An entity reports separately both assets
● An item that is not sufficiently material to and liabilities, and income and
warrant separate presentation in those expenses.
statements may warrant separate ● Offsetting in the statement(s) of profit or
presentation in the notes. loss and other comprehensive income
● When applying this and other IFRSs an or financial position, except when
entity shall decide, taking into offsetting reflects the substance of the
consideration all relevant facts and transaction or other event, detracts from
circumstances, how it aggregates the ability of users both to understand
information in the financial statements, the transactions, other events and
which include the notes. conditions that have occurred and to
● An entity shall not reduce the assess the entity’s future cash flows.
understandability of its financial ● Measuring assets net of valuation
statements by obscuring material allowances—for example, obsolescence
information with immaterial information allowances on inventories and doubtful
or by aggregating material items that debts allowances on receivables—is not
have different natures or functions. offsetting.
● Some IFRSs specify information that is ● Offsetting is allowed and applied when
required to be included in the financial presenting on the net basis reflects the
statements, which include the notes. substance of the transaction or other
● An entity need not provide a specific event.
disclosure required by an IFRS if the
information resulting from that Frequency of reporting
disclosure is not material. ● An entity shall present a complete set of
● This is the case even if the IFRS financial statements at least annually.
contains a list of specific requirements ● When an entity changes the end of its
or describes them as minimum reporting period and presents financial
requirements. statements for a period longer or shorter
● An entity shall also consider whether to than one year, an entity shall disclose,
provide additional disclosures when in addition to the period covered by the
compliance with the specific financial statements:
requirements in IFRS is insufficient to ○ the reason for using a longer or
enable users of financial statements to shorter period, and
understand the impact of particular ○ the fact that amounts presented
transactions, other events and in the financial statements are
conditions on the entity’s financial not entirely comparable.
position and financial performance. ● Normally, an entity consistently
prepares financial statements for a
one-year period.

6
Comparative information ○ The beginning of the preceding
● Except when IFRSs permit or require period.
otherwise, an entity shall present
comparative information in respect of Consistency of Presentation
the preceding period for all amounts ● An entity shall retain the presentation
reported in the current period’s financial and classification of items in the
statements. financial statements from one period to
● An entity shall include comparative the next unless:
information for narrative and descriptive ○ it is apparent, following a
information if it is relevant to significant change in the nature
understanding the current period’s of the entity’s operations or a
financial statements. review of its financial
● An entity shall present, as a minimum, statements, that another
two statements of financial position, two presentation or classification
statements of profit or loss and other would be more appropriate
comprehensive income, two separate having regard to the criteria for
statements of profit or loss (if the selection and application of
presented), two statements of cash accounting policies in IAS 8; or
flows and two statements of changes in ○ an IFRS requires a change in
equity, and related notes. presentation.
● In some cases, narrative information ● The manner of presentation of financial
provided in the financial statements for statements shall be retained from period
the preceding period(s) continues to be to period, unless the changed
relevant in the current period. presentation is more useful to the users
● For example, an entity discloses in the and enhances the relevance of
current period details of a legal dispute, information.
the outcome of which was uncertain at ● If the presentation is changed,
the end of the preceding period and is comparative financial statements for the
yet to be resolved. Users may benefit prior period shall be represented, unless
from the disclosure of information that impracticable to do so.
the uncertainty existed at the end of the ● When an entity reclassifies comparative
preceding period and from the amounts, it shall disclose
disclosure of information about the steps ○ The nature of the
that have been taken during the period reclassification;
to resolve the uncertainty. ○ The amount of each item or
● When an enterprise makes retrospective class of items that is
adjustment for any one or combination reclassified; and
of the following, ○ The reason for the
○ Change in accounting policy reclassification
○ Correction of prior period ● When it is impracticable to reclassify
error/s; and comparative amounts, an entity shall
○ Reclassification or amendment disclose the reason for not reclassifying
of items in the financial the amount and the nature of the
statements, adjustments that would have been made
● Three statements of financial position if the amount had been reclassified.
shall be presented, namely as at
○ The end of the current period;
○ The end of the immediate prior
period; and

7
Identification of the Financial Statements relate to the effects of the same sets of
● An entity shall clearly identify the transactions completed by the
financial statements and distinguish enterprise during the reporting period.
them from other information in the same ● Statement of Comprehensive income
published document. IFRSs apply only – The profit is the net effect of income
to financial statements, and not and expenses presented in the profit
necessarily to other information section which is transferred to the
presented in an annual report, a appropriate equity account in the
regulatory filing, or another document. Statement of Changes in Equity.
Therefore, it is important that users can ● Statement of Changes in Equity​ –
distinguish information that is prepared presents the changes in each major
using IFRSs from other information that equity component during the period and
may be useful to users but is not the reconcile the beginning equity
subject of those requirements component balances with the ending
● An entity shall clearly identify each equity component balances, the latter
financial statement and the notes. In being presented as the final figures and
addition, an entity shall display the are brought forward as equity account
following information prominently, and balances in the Statement of Financial
repeat it when necessary for the Position.
information presented to be ● Statement of cash flows presents
understandable: information on cash inflows and outflows
○ the name of the reporting entity of cash and cash equivalents.
or other means of identification, ○ Operating cash flow activities
and any change in that involved the determination of
information from the end of the profit
preceding reporting period; ○ Investing cash flow activities
○ whether the financial statements present inflows and outflows of
are of an individual entity or a cash affecting non-current
group of entities; assets.
○ the date of the end of the ○ Financing cash flow activities
reporting period or the period are those that arise from
covered by the set of financial transactions with non-trade
statements or notes; lenders as well as owners of the
○ the presentation currency; and entity.
○ the level of rounding used in
presenting amounts in the Limitations of the Financial Statements
financial statements. ● The real worth of the business is not
● An entity often makes financial reflected in the financial statements
statements more understandable by because of the use of different
presenting information in thousands or measurement bases.
millions of units of the presentation ● The financial statements present values
currency. that are a mixture of different levels of
● This is acceptable as long as the entity purchasing power.
discloses the level of rounding and does ● Due to some measurement
not omit material information. uncertainties, some financial statement
elements are not recognized because
Fundamentally Related Financial Statements only events and transactions capable of
● The financial statements are measurement and have met the
fundamentally related because they recognition criteria can be reflected.

8
 ● Information such as moral efficiency of ● In the process of filing their financial
company personnel, the strategic statements for the purpose of issuing
location of the company’s production any class of instruments in a public
facilities and markets, market;
● the enterprise’s contribution to the ● Holders of secondary licenses issued by
development and deterioration of regulatory agencies.
● the environment are reported nowhere
in the financial statements. Medium-sized entities
Those that meet all of the following criteria:
Securities and Exchange Commission (SEC) ● Total assets of more than P100M to
● The national government regulatory P350M or liabilities of more than P100M
agency charged with supervision of the to P250M (for a parent reporting entity,
corporate sector with the original the amounts are based on the
function of regulating the sale and consolidated figures);
registration of securities. ● Not required to file their financial
● Mandate: Development and regulation statements under Part II of Rule 68;
of the corporate and capital market ● Not in the process of filing their financial
toward: statements for the purpose of issuing
○ Good corporate governance; any class of the instruments in a public
○ Protection of investors; market; and
○ Widest participation of ● Not holders of secondary licenses
ownership; and issued by the regulatory agencies.
○ Democratization of wealth.
Small entities
Securities Regulation Code (RA 8799) Those that meet all of the following criteria:
● Requires the submission of an annual ● Total liabilities of between P3M and
report by companies together with P100M or liabilities of between P3M and
financial statements certified by an P100M (for a parent reporting entity, the
independent CPA. amounts are based on consolidated
● Requires for internal record keeping and figures);
internal controls to be complied with by ● Not required to file financial statements
entities. under Part II of Rule 68;
● Not in the process of filing their financial
Classification of Reporting Entities Based on the statements for the purpose of issuing
Applicable Philippine Financial Reporting any class of instruments in a public
Frameworks market; and
Classification of entities (Rule 68, SRC):
1. Large and/or publicly accountable Micro entities
entities; Those that meet all of the following criteria:
2. Medium-sized entities; ● Total assets and total liabilities of less
3. Small entities than P3M;
4. Micro entities ● Not required to file financial statements
under Part II of Rule 68;
Large and/or publicly accountable entities; ● Not in the process of filing their financial
Those that meet any of the following criteria: statements for the purpose of issuing
● Total assets of more than P350M or any class of instruments in a public
total liabilities of more than P250M; market; and
● Required to file financial statements ● Not holders of secondary licenses
under Part II of SRC, Rule 68; issued by regulatory agencies

9
 criteria for a medium-sized
entity, provided that the event
that caused the change in
classification is considered
“significant and continuing;
○ An entity that has been
Applicability of Philippine Financial Reporting
preparing FS under Full
Frameworks
PFRS/IFRS and decide to
1. Full PFRS/IFRS;
liquidate; and
2. PFRS for Small and Medium-sized
○ Other entities that the SEC may
Entities (PFRS/IFRS for SMEs);
consider as valid exceptions
3. PFRS for Small Entities;
from mandatory adoption of
4. Income Tax Reporting
PFRS for SMEs.
● A medium-sized entity, belonging to any
Full PFRS/IFRS;
of the above, opting to adopt the Full
● For Large and/or publicly accountable
PFRS/ IFRS instead of the PFRS for
entities;
SMEs, shall include in its Notes to the
● Banks, insurance companies, and other
Financial Statements the facts
entities which are holders of secondary
supporting its adoption of the Full
licenses issued by regulatory agencies
PFRS/IFRS.
shall also apply the requirements of their
respective regulatory bodies.
PFRS for Small Entities
● Applicable for reporting entities
classified as Small Entities;
PFRS for Small and Medium-sized Entities
● Small entities that have operations or
(PFRS/IFRS for SMEs
investments in another country with
● For medium-sized entities.
different functional currency shall apply
● Medium-sized entities which may
instead the PFRS/IFRS for SMEs or the
choose to prepare the FS following
Full PFRS/IFRS.
either Full PFRS/IFRS or PFRS/IFRS for
● Small entities falling under any of the
SMEs:
following, may at their option apply the
○ A subsidiary of parent reporting
PFRS/IFRS for SMEs or Full
under Full PFRS/IFRS;
PFRS/IFRS instead of PFRS for Small
○ A subsidiary of a foreign parent
Entities:
that will move towards Full
○ A subsidiary of parent reporting
PFRS/IFRS;
under Full PFRS/IFRS or
○ A significant joint venture or
PFRS/IFRS for SMEs;
associate that is part of a group
○ A subsidiary of a foreign parent
that is reporting under Full
that will move towards Full IFRS
PFRS/IFRS;
or IFRS for SMES;
○ A branch office or regional
○ A significant joint venture or
operating headquarter of a
associate that is part of a group
foreign company reporting
that is reporting under Full
under Full PFRS/IFRS;
PFRS/IFRS or PFRS/IFRS for
○ A subsidiary that is mandated to
SMEs;
report under Full PFRS/IFRS;
○ A branch office or regional
○ An entity that has a short-term
operating headquarter of a
projection that it will breach the
foreign company reporting
quantitative threshold set in the

10
 under Full PFRS/IFRS or ● The SEC requires the reporting entity to
PFRS/IFRS for SMEs; adopt a higher framework should the
○ An entity that has a short-term prescribed thresholds for total assets or
projection that it will breach the total liabilities fall within different
quantitative threshold set in the classification of the reporting entity.
criteria for a Small entity,
provided that the event that
caused the change in CHAPTER 4
classification is considered
“significant and continuing; PREPARING THE FINANCIAL STATEMENTS
○ An entity that has a concrete
plan to conduct an initial public Components of Financial Statements
offering within the next two
years;
Components of FS Type of Information
○ An entity that has been Presented
preparing FS under Full
PFRS/IFRS for SMEs and Statement of The financial position of
decide to liquidate; and Financial Position the entity as of a given
○ Other entities that the SEC may reporting date
comprising of assets,
consider as valid exceptions
liabilities and equity.
from mandatory adoption of
PFRS for Small Entities. Statement of The performance of an
● Small entities which opted to apply the Comprehensive entity for a given
PFRS for SMEs or Full PFRS under any Income reporting period. Two
of the foregoing grounds shall include in components of
its FS the facts supporting their adoption comprehensive income
are presented: profit or
of the PFRS for SMEs for Full PFRS.
loss and other
comprehensive income
Income Tax Reporting
● Micro entities have the option of
adopting either the PFRS for Small Statement of Cash The historical changes
Entities or the income tax basis. Flows in cash and cash
● The following at a minimum, shall equivalents during a
reporting period
consist the micro entities’ FS:
○ The Statement of Statement of Events that cause
Management’s Responsibility; Changes in Equity changes in equity and
○ Auditor’s Report; include profit or loss,
○ Statement of Financial Position; other comprehensive
○ Statement of Income; and income and transactions
with owners of the
○ Notes to Financial Statements.
enterprise.
● Notes to Financial Statements.
● The management of micro entities using
a reporting framework other than PFRS Notes to the The accounting policies
for Small Entities shall assess the Financial adopted by the
applicability of the basis of accounting Statements management, schedules
considering the nature of the entity, the to support the balances
presented on the face of
objective of the financial statements and
the financial statements
the requirements of the law or and other information
regulators.

11
 Examples of Current Assets
that may be relevant to
the users but is not
appropriately presented Asset Reason for
on the face of the Classification
financial statements.
Cash Unless otherwise
described, presumed
to be unrestricted
Responsibility for the Presentation of Financial
Statements Trade Receivables Expected to be
● FS are basically the representation of (Accounts and realized in the entity’s
the company’s management. Notes Receivable normal operating
arising from sale of cycle.
Statement of Financial Position goods or rendering
of services)
● Conventionally called the balance sheet
● Presents the financial position of an Inventories Expected to be sold
enterprise as of a given date in the entity’s normal
● Presents three elements: operating cycle
○ Assets
○ Liabilities Prepaid Expenses Expected to be
○ Equity consumed in the
entity’s normal
● A formal presentation of the basic operating cycle.
accounting equation:
Assets = Liabilities +Equity Financial Assets at Held primarily for the
Fair Value through purpose of
Current Assets and Non-current Assets Profit or Loss being traded.
● PAS 1 requires the presentation of (investment in shares
of stock or investment
assets and liabilities following the
in debt instruments of
current and non-current classification, other entities that are
unless presentation based on liquidity currently being traded
provides information that is more in capital markets and
relevant to the users. are intended
to be sold currently)
Current Assets
Non-trade Expected to be
An asset is current if it satisfies any one of the
receivables realized within 12
following criteria: collectible within 12 months after the
1. It I expected to be realized in, or is months (dividends reporting period.
intended for sale or consumption in the receivable, interest
entity’s normal operating cycle; receivable, and
2. It is held primarily for the purpose of advances to officers
due currently)
being traded;
3. It is expected to be realized within
twelve months after the reporting period;
or Non-Current Assets
4. It is cash or cash equivalent, unless it is ● All other assets that do not meet any of
restricted from being exchanged or used the criteria for current assets are
to settle a liability for at least 12 months classified as non-current assets.
from the end of the reporting period.

12
Examples of Non-Current Assets
course of business
1. Property, plant and equipment i.e., land,
building, equipment, furniture and Accrued expenses Expected to be
fixtures, tools, if used in the normal settled within the
operations of the entity or if intended to entity’s normal
be used in the operations of the entity in operating cycle.
the future.
Dividends payable Expected to be
2. Intangible assets, i.e., patents, settled within 12
franchise, trademarks, customer list, months after the
which provide economic benefit and reporting period
rights to the entity for a period of more
than 12 months. Unearned revenues Expected to be
3. Investment property, i.e., land or settled within the
entity’s normal
building that are held for appreciation in
operating cycle.
value, for rental to others, or for an
undetermined future use.
4. Financial assets that are not expected to Long-term notes The entity does not
be realized in cash in the entity’s normal payable due within 12 have an unconditional
operating cycle or within 12 months after months, maturity date right to postpone
is extended for a settlement of the
the reporting period. Examples:
period of 5 years from obligations for at least
long-term advances officers and key original maturity 12 months after the
employees, other non-trade receivables date. Arrangement for reporting period.
which are collectible after at least twelve the extension of
months after the reporting period. maturity date is
completed after the
Current Liabilities & Non-Current Liabilities reporting period.
Current liabilities include obligations which meet
any of the following criteria: Examples of Non-Current Liabilities
● It is expected to be settled in the entity’s 1. Long-term notes payable that are due
normal operating cycle; beyond 12 months from the end of the
● It is held primarily for the purpose of reporting period.
being traded; 2. Bonds payable that are due beyond 12
● It is held primarily for the purpose of months after the reporting period.
being traded; 3. Long-term notes payable that are due
● The entity does not have an within 12 months after the reporting
unconditional right to defer settlement of period, but which term is extended on a
the liability for at least 12 months after long-term basis and negotiation has
the reporting period. been completed before the end of the
reporting period.
Examples of current Liabilities
Equity
Liability Reason for
Classification ● The equity of a corporate form is
presented according to source.
Trade Payables Expected to be ● Components of Shareholders’ Equity:
(Account Payable settled in the entity’s 1. Contributed capital
and Notes Payable normal operating 2. Retained Earnings
which arise from cycle.
3. Cumulative other
purchase of goods or
services in the normal comprehensive income

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Contributed capital ○ Expenses
● Share capital ● The statement presenting the financial
○ Preference share capital performance of an entity is an expanded
○ Ordinary share capital statement in 2 sections:
● Share premium/ additional contributed ○ Profit or Loss section
capital ○ Other comprehensive income
section
Retained Earnings
● Represents cumulative profits earned by Forms of SCI
the corporation reduced by the 1. One-statement form – includes both the
dividends declared. profit or loss and the other
comprehensive income.
Cumulative other comprehensive income 2. Two-statement form – one statement for
● Presents change in equity arising from the profit or loss and another statement
non-owner transactions that do not pass for the comprehensive income.
through the profit or loss but are taken
to other comprehensive income of the Methods of presenting expenses in the P/L
corporation. section
● Examples: 1. Function of expense method
○ Revaluation surplus from 2. Nature of expense method
revaluation increment based on
independent appraisal of PPE Function of expense
and intangible assets ● Used by an entity engaged either in
○ Unrealized gain or losses on merchandising or manufacturing activity.
investments at FVOCI, ● Expenses are classified under the cost
○ Foreign currency translation of goods sold, selling or marketing
gains and losses of assets and expenses, general and administrative
liabilities of a foreign operation, expenses and other operating
○ Actuarial gains and losses on expenses.
defined benefit employee
retirement plans. Nature of expense
● Used by entities engaged in any type of
business activity.
Forms of the Statement of Financial Position ● There is no need to classify the
● Account form - resembles the expenses by function.
T–account ● Expenses are presented based on their
● Report form – a continuous format of account names in the general ledger.
presenting all three elements. Liabilities ● Presented as salaries expense, supplies
are presented immediately after total expense, insurance expense,
assets and equity accounts are listed depreciation expense, amortization
after liabilities expense and other operating expenses.
● Financial position form – emphasizes
the working capital of the firm. Finance Cost/ Interest Expense
● Required to be presented as a line item
Statement of Comprehensive Income in profit or loss.
● Presents the performance of the entity ● Income tax expense is also presented
for a given period of time. separately.
● Two elements:
○ Income, and

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Earnings Per Share (EPS)
● Entities classified as large and/or Investing activities
publicly accountable entities are ● Include cash transactions affecting
required to present on the face of the assets not normally identified with
SCI figures for EPS. normal operating cycle.
● EPS indicates the profit earned by a ● Examples:
holder of one ordinary share capital. ○ Granting of non-trade loans and
● Basic EPS is computed by dividing the collecting them
profit attributable to ordinary ○ Acquiring and disposing
shareholders by the weighted average investments in non-current
number of shares outstanding for the financial assets, and
period. ○ Acquiring and disposing PPE
● If an entity’s capital structure is and intangible assets.
composed of more than one class of
share capital, the profit which serves as Financing Activities
the numerator for the computation shall ● Include cash transactions affecting
be reduced by the preference dividends non-trade liabilities and stockholders’
as follows; equity.
○ If the Preference Share (PS) is ● Examples:
cumulative, the annual dividend ○ Payment of dividends
requirement, whether declared ○ Issuance of debt
or not, shall be deducted from ○ Issuance of share capital
the profit to arrive at profit ○ Repayment or settlement of
attributable to Ordinary debt obligations
Shareholders (OS). ○ Purchase of treasury shares
○ If the PS is non-cumulative, only
the dividend on preference Non-cash activities
share that has been declared ● Non-cash activities that significantly
during the period shall be affect assets and liabilities are not
deducted from profit to arrive at presented in the face of the statement of
profit attributable to OS. cash flows but may be presented in the
accompanying notes to the financial
Statement of Cash Flows statements.
● Presents information on the inflows and
outflows of cash equivalents, classified Methods of presenting cash flows from
into operating activities, investing operating activities
activities and financing activities. 1. Direct method
2. Indirect method
Operating activities
● Include all transactions and other events Direct method
that enter into determination of income ● Enumerates the major classes of gross
in profit or loss. Examples: operating receipts and payments
○ Collections from customers ● Reconstructions are made based on
○ Payment to suppliers income statement accounts and
○ Payment to employees for changes in account balances in the
wages and salaries statement of financial position to arrive
○ Payment to government for at the amounts shown as receipts and
taxes payments for operations.
○ Payment to lenders for interest

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Indirect method Increase/Decrease in prepaid expenses
● Present cash flows from operations by ● Increase is deducted from profit
reconciling profit or loss before income because it results from payment of cash
tax to operating cash flows. this year, but the expense is to be
● Adjustments are made for income and incurred in subsequent period and is not
expenses not involving cash receipts or yet deducted from current year’s
cash payments income.
● Examples: depreciation, amortization of ● Decrease in prepaid expense is added
intangible assets, gains and losses on because it results from incurrence of
sale of non-cash assets and gains and expense this year, with payment already
losses on debt extinguishment. made in a prior year.

Depreciation and amortization Increase/Decrease in AP

● Added back to profit ● Increase in AP and accrued expenses is
● Reduces profit without any cash outflow. added to net income because it is
presumed to have resulted from current
Gains year purchases or expenses that were
● Deducted from profit because they are deducted to arrive at profit but cash
already included in the proceeds or payment is to be made in subsequent
payments classified under either period.
investing or financing activities ● Decrease in these accounts is deducted
because the related expense had been
Losses reported in a prior year but it required
● Added back to profit because losses cash outflow during this year.
have been netted to arrive at the
proceeds or payments that are included Indirect method
in either investing or financing activities.

Increase/Decrease in AR
● Increases in AR is deducted from profit
because it arises from revenue without
cash collections.
● Decrease in AR is added to profit
because the revenue has been
recognized in a prior year but the cash
collection is made only during the year.

Increase/Decrease in inventories
● Increase is deducted from profit Statement of Changes in Equity
because increase in inventories results ● Shows the movement of each equity
from purchase of goods, which in effect component during a reporting period.
causes a decrease in the cash balance. ● Final figures of these equity components
● Decrease in inventories is added to are presented in the statement of
profit because it represents an expense financial position under the equity
in the current year from a purchase portion
made last year. ● The statements provides one column for
each equity component.

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Notes to the Financial Statement a financial statement element that was
● To achieve completeness, information not previously recognized.
that cannot be appropriately presented
on the face of the financial statements is Examples of adjusting events
presented in the Notes to the FS. a. The settlement after the reporting period
● Includes: of a court case that confirms that the
a. The basis for the presentation of entity had a present obligation at the
FS including a summary of reporting date.
significant accounting policies. b. The receipt of information after the
b. Supporting schedules for line reporting period indicating that an asset
items presented on the financial was impaired at the reporting date.
statements. c. The determination after the reporting
c. Other disclosures, including period of the cost of assets purchased,
contingent liabilities, contractual or the proceeds from assets sold during
commitments, and events after the reporting period.
the reporting period which may d. The determination after the reporting
be relevant to the decisions to date of the amount of profit- sharing or
be made by and evaluation of bonus payments, if the entity had a
the users. present legal obligation or constructive
obligation to make such payments as a
Effects of Events After the Reporting Period result of events before the end of the
● Events after the reporting period are reporting period.
those events, favorable and unfavorable e. The discovery of fraud or errors which
that occur between the end of the show that the FS are incorrect.
reporting period and the date when
financial statements are authorized for Non-adjusting events after the reporting
issue. period
● The date of issuance of the FS is the ● Relates to condition different from the
date when the management of the condition as of the reporting date.
enterprise approves and authorizes the ● May be merely ignored if not considered
issue of the FS. significant and will not affect the
● Two types of events that can be evaluation of the user.
identified: ● Should be disclosed if material and non-
○ Adjusting events – events that disclosure could influence the economic
provide conditions that existed decisions of users taken on the basis of
at the end of the reporting the FS.
period.
○ Non-adjusting events – events Examples of non-adjusting events
that are indicative of conditions a. A major business combination or
that arose after the reporting disposing of a major subsidiary;
period. b. Announcing a plan to discontinue an
operation, disposing of assets or settling
Adjusting events after the reporting period liabilities attributable to a discontinuing
● Confirms a condition that already exists operation or entering into a binding
at the reporting date. agreements to sell such assets or settle
● The entity shall adjust the amounts such liabilities;
recognized in its FS to reflect this type c. Major purchases and disposals of
of subsequent events in order to assets, or expropriation of major assets
reclassify an information, or to recognize by government;

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d. The destruction of a major production
plant by a fire;
e. Announcing or commencing the
implementation of, a major restructuring;
f. Major ordinary share transactions and
potential ordinary share transactions;
g. Abnormally large changes, after the
reporting date, in asset prices or foreign
exchange rates;
h. Changes in tax rates or tax laws
enacted or announced after the
reporting period that have a significant
effect on current and deferred tax assets
and liabilities;
i. Entering into a significant commitments
or contingent liabilities, for example by
issuing significant guarantees; and
j. Commencing major litigation arising
solely out of events that occurred after
the reporting period.

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