THE BALANCE SHEET AND NOTES

TO THE FINANCIAL STATEMENTS

“A company’s financial statements can be used as an analytical tool, as a management report card, as an early
warning signal, as a basis for prediction, and as a measure of accountability. Financial statements also provide
an economic history that is comprehensive and quantitative, and can be used to gauge company performance.
For these reasons, financial statements are indispensable for developing an accurate profile of ongoing
performance and prospects of a company.”

________________________________________________________________________

FINANCIAL STATEMENTS

Financial statements are a structured financial representation of the financial position of and
the transactions undertaken by an enterprise. The objective of general-purpose financial
statements is to provide information about the financial position, performance and cash flows of an
enterprise that is useful to a wide range of users in making economic decisions.

Financial statements are the responsibility of the company’s management. This means that the
format by which the financial statements are presented, the information presented therein and the fairness of
their presentation depend on the assessment by the enterprise management.

PAS 1, Presentation of Financial Statements, presents the basis for the presentation of financial
statements. The objective of PAS 1 is to present the basis for the presentation of the financial statements to
ensure comparability of an enterprise’s financial statements with financial statements of other enterprises
and with financial statements of the same enterprise (for different reporting periods). Thus, both
intercomparability and intracomparability are addressed by PAS 1.

Components of Financial Statements

A complete set of financial statements includes the following:
1. Balance sheet;
2. Income statement;
3. A statement showing either –
a. all changes in equity (also called Statement of changes in equity; or
b. changes in equity other than those arising from capital transactions with
owners and distributions to owners (also called Statement of recognized gains
and losses);
4. Cash flow statement; and
5. Accounting policies and explanatory notes.
Certain information may accompany financial statements in an enterprise’s financial reports.
These may include a financial review by management describing the main features of the entity’s
financial performance and financial position, environmental reports and value added statements.
These reports, although part of financial reports, are not part of financial statements and are not
within the scope of PAS 1.
 ACCOUNTING POLICIES
The financial statements are largely affected by the accounting policies adopted by the
company’s management. PAS 8, Accounting Policies, Changes in Accounting Policies and Errors,
defines accounting policies as the specific principles, bases, conventions, rules and practices
applied by an entity in preparing and presenting financial statements.
When a Standard or an Interpretation specifically applies to a transaction, other event or
condition, the accounting policy or policies applied to that item shall be determined by applying the
Standard or Interpretation and considering any relevant Implementation Guidance issued by the
IAS Board for the Standard or Interpretation (par. 7, PAS 8).
In the absence of a Standard or an Interpretation that specifically applies to a transaction,
other event or condition, management shall use its judgment in developing and applying an
accounting policy that results in information that is ( par. 10, PAS 8) -
(a) relevant to the economic decision-making needs of users; and
(b) reliable, in that the financial statements represent faithfully the financial position
financial performance and cash flows of the enterprise, reflect the economic substance
of transactions and not merely its legal form, are neutral and free from bias, are
prudent and are complete in all material respects.

In applying its judgment in selecting from different accounting methods to form part of its
accounting policies, the management of an enterprise shall consider the following sources in
descending order (paragraph 11, PAS 8):
(a) the requirements and guidance in Standards and Interpretations dealing with similar
and related issues; and
(b) the definitions, recognition criteria and measurement concepts for assets, liabilities,
income and expenses in the Framework.
(c)
The management may also consider the most recent pronouncements of other standard
setting bodies that use a similar conceptual framework to develop accounting standards, other
accounting literature and accepted industry practices to the extent that these do not conflict with
the sources enumerated above (based on paragraph 12, PAS 8).

OVERALL CONSIDERATIONS IN
FINANCIAL STATEMENT PRESENTATION

PAS 1 enumerates the following overall considerations in presenting the financial statements:
1. Fair Presentation and Compliance with PFRS
2. Going Concern
3. Accrual Basis of Accounting
4. Consistency of Presentation
5. Materiality and Aggregation
6. Offsetting
7. Comparative Information
Fair Presentation and Compliance with PFRS
Financial statements shall present fairly the financial position, financial performance and
cash flows of an enterprise. Fair presentation requires the faithful presentation of the effects of
transactions, other events and conditions in accordance with the definition and recognition criteria
for assets, liabilities, income and expenses set out in the Framework. The application of
PFRS/IFRS with additional disclosures, when necessary, is presumed to result in financial
statements that achieve fair presentation (par. 13, PAS1)
Based on the given paragraph, fair presentation is presumed to be achieved by:
(a) complying with all the applicable requirements of PFRS;
(b) presenting information that meet the qualitative characteristics as identified in the
Framework; and
(c) providing additional disclosures, in addition to the required disclosures, when
necessary for the user to understand the impact of particular transactions, other
events and conditions on the entity’s financial position and financial performance.

Philippine Financial Reporting Standards (PFRS), as used in PAS 1 and in this chapter, are
Standards and Interpretations adopted by the previously functioning Accounting Standards Council
or its successor, Financial Reporting Standards Council (based on and adopted by the IAS Board).
They comprise:
(a) Philippine Financial Reporting Standards (based on IFRS and originally promulgated by
the International Accounting Standards Board);
(b) Philippine Accounting Standards (based on International Accounting Standards and
originally promulgated by the International Accounting Standards Committee,
subsequently reviewed and improved by the IAS Board); and
(c) Interpretations originated by the International Financial Reporting Standards Committee
(IFRIC, which is the body that interprets the work of the IASB), Standing
Interpretations Committee (SIC, which was the body that interpreted the work of then
IASC), and the Philippine Interpretations Committee (PIC).

In rare instances when management believes that departure from PFRS is necessary to
achieve the objective of the financial statements, and the relevant regulatory framework applicable
to the enterprise requires or otherwise does not prohibit, such a departure, the financial statements
shall disclose (based on paragraph 18, PAS 1) -
(a) that management has concluded that the financial statements present fairly the entity’s
financial position, financial performance and cash flows;

(b) that it has complied with applicable Standards and Interpretations, except that it has
departed from a particular requirement to achieve a fair presentation;

(c) the title of the Standard or Interpretation from which the entity has departed, the nature
of the departure, including the treatment that the Standard or Interpretation would
require, the reason why the treatment would be misleading in the circumstances that
it would conflict with the objective of financial statements set out in the Framework,
and the treatment adopted; and

(d) for each period presented, the financial impact of the departure on each item in the
financial statements that would have been reported in complying with the
requirements.
 In rare instances when management believes that departure from PFRS is necessary to
achieve the objective of the financial statements, but the relevant regulatory framework prohibits
departure from the requirement, the enterprise shall reduce the perceived misleading aspects of
compliance by disclosing (par. 21, PAS 1):

(a) the title of the Standard or Interpretation in question, the nature of the requirement, and
the reason why management has concluded that complying with that requirement is
so misleading in the circumstances that it conflicts with the objective of the financial
statements; and

(b) for each period presented, the adjustments in each item in the financial statements that
management has concluded would be necessary to achieve fair presentation.

Going Concern

Financial statements should be prepared on a going concern basis unless management either
intends to liquidate the enterprise or to cease trading, or has no realistic alternative but to do so.
When the financial statements are not prepared on a going concern basis, the following shall
be disclosed in the notes to the financial statements:
(a) the fact that the financial statements are not prepared on a going concern
basis;
(b) the basis on which the financial statements are prepared; and
(c) the reason why the enterprise is not considered to be a going concern.

In assessing whether the enterprise is a going concern entity, the management should assess
the ability of the enterprise to continue operations for a period of at least, but not limited to, twelve
months. However, when the enterprise has a history of profitable operations and ready access to
financial resources, no detailed analysis is necessary to evaluate the capacity of the enterprise to
continue operations in the future.

Accrual Basis

An enterprise should prepare its financial statements under the accrual basis of accounting.

Under the accrual basis of accounting, transactions and events are recognized when they occur (not

necessarily when cash is received or paid). The transactions are recorded and reported in the

financial statements of the periods to which they relate. Expenses are recognized on the basis of a

direct association between the costs incurred and the earning of specific items of income (direct

matching) or by systematically allocating the cost of asset acquired to periods of benefit (systematic

and rational allocation). The accrual basis of accounting and expense recognition principle also do

not allow the recognition of assets for costs which are not expected to provide probable future

economic benefits to the enterprise.

 The accrual basis also applies the revenue recognition principles. Revenue is generally

recognized at the point of delivery of goods and services, provided that it is probable that it would

result to an inflow of economic benefits that could be reliably measured. PAS 18, Revenues,

prescribes the requirements, under specific circumstances, for the recognition of revenue in an

entity’s financial statements.

Consistency of Presentation

The presentation and classification of items in the financial statements should be the same

from period to period, unless (paragraph 27, PAS 1

(a) it is apparent, following a significant change in the nature of the entity’s operations or a
review of its financial statements, that another presentation or classification would be
more appropriate; or
(b) a Standard or an Interpretation requires a change in presentation.

This means that the manner of presentation of financial statements and the accounting

policies used as basis for the presentation shall be retained from period to period, unless the

enterprise can clearly demonstrate that another presentation is more appropriate or unless a

Standard or an Interpretation requires a change. If the manner of presentation is changed, with no

change in accounting policy being adopted by the enterprise, the manner of presentation of the

financial statements for the prior period presented shall be restated to achieve comparability of

information.

Changes in accounting policies would require additional disclosures. Under PAS 8, an entity

shall change its accounting policy only if the change (par. 14) -

(a) is required by a Standard or an Interpretation; or

(b) results in the financial statements providing reliable and more relevant information about
the effects of transactions, other events or conditions on the entity’s financial position,
financial performance or cash flows.

The following are not changes in accounting policies (par. 16, PAS 8 ):

(a) the application of an accounting policy for transactions, other events or conditions that differ in
substance from those previously occurring; and

(b) the application of a new accounting policy for transactions, other events or conditions that did not
occur previously or were immaterial.
 Thus, accounting for a lease transaction under finance lease, even if previous leases are accounted for
as operating leases is not considered as a change in accounting policy, because the new lease is considered a
new transaction and only now that the finance lease indicator/s have been met by the lease transaction.
Likewise, change from equity method to accounting for investment as available for sale securities, because
significant influence is lost over the investee, is not considered as a change in accounting policy.

Based on the discussion of PAS 8, accounting policies are classified either as an involuntary change in
accounting policy or a voluntary change in accounting policy. An involuntary change in accounting policy is
effected when it results from the application of a new accounting standard or an interpretation. An
involuntary change in accounting policy shall be accounted for by following the transitional provision, if any,
in the specific new accounting standard. If the new standard does not provide any transitional provision, the
change shall be treated retrospectively, unless it is impracticable to do so.

Retrospective application means restating the comparative figures for the prior periods
presented as if the new accounting policy has always been applied. The cumulative effect of such
change shall be considered as an adjustment to the beginning balance of retained earnings or
another component of equity of the earliest prior period presented.

Retrospective application of change in accounting policy is considered to be impracticable when the

enterprise cannot apply the new accounting policy retrospectively after making every reasonable effort to do
so. For a particular prior period, it is impracticable to apply a change in an accounting policy retrospectively
if (based on par. 5, PAS 8):

(a) the effects of the retrospective application are not determinable;

(b) the retrospective application requires assumptions about what management’s intent would have
been in that period; or

(c) the retrospective application or retrospective restatement requires significant estimates of amounts
and it is impossible to distinguish objectively information about other information from those
estimates that provide evidence of circumstances that existed on the date(s) at which those
amounts are to be recognized, and would have been available for that prior period were
authorized for issue.

When an involuntary change in accounting policy is adopted in the current period (with restated
information for prior periods, except that it is impracticable to do so), an entity shall disclose the following
(par. 28, PAS 8):

(a) the title of the Standard or Interpretation ;

(b) when applicable, that the change in accounting policy is made in accordance with transitional
provisions;

(c) the nature of the change in accounting policy;

(d) when applicable, a description of the transitional provisions;
 (e) when applicable, the transitional provisions that might have an effect on future periods;

(f) for the current period and each prior period presented, to the extent practicable, the amount of
the adjustment for each financial line item affected and for basic and diluted earnings per
share;

(g) the amount of the adjustment relating to periods before those presented, to the extent
practicable; and

(h) if retrospective application is impracticable, the circumstances that led to the existence of that
condition and a description of how and from when the change in accounting policy has been
applied.

A voluntary change in accounting policy results from other than application of a new accounting
standard that mandates its application. When an enterprise changes its accounting policy voluntarily, it shall
apply the change retrospectively, adjusting the opening balance of each affected component of the equity for
the earliest period presented and other comparative amounts disclosed for each prior period presented as if
the new accounting policy had always been applied, unless it is impracticable to do so. In addition, the entity
shall disclose (paragraph 29, PAS 8):

(a) the nature of the change in accounting policy;

(b) the reasons why applying the new accounting policy provides reliable and more relevant
information;

(c) for the current period and each prior period presented, to the extent practicable, the amount of the
adjustment for each financial statement line item affected and for basic and diluted earnings
per share;

(d) the amount of the adjustment relating to periods before those presented to the extent practicable;
and

(e) if retrospective application is impracticable, the circumstances that led to the existence of that
condition and a description of how and from when the change in accounting policy has been
applied.

Materiality and Aggregation

Each material item should be presented separately in the financial statements. Immaterial

amounts of similar nature or function should be aggregated and presented as one line item on the

face of the financial statements. The details comprising the amount, if relevant to the decision

needs of the users, will be presented in the notes to the financial statements.
 An information is material if its non-disclosure would influence the decision or evaluation of
the user. Materiality depends on the size and nature of the item judged in the particular
circumstances of its omission.

The process of aggregation and classification involves the presentation of condensed and
classified information, which are presented as separate line items on the face of the financial
statements. If an item taken individually will call the attention of the user, then the item is
presented as a single line item. However, if the item, taken individually is not considered
significant, it is aggregated with other items either on the face or in the notes.

Materiality is considered a threshold for recognition. A specific disclosure requirement in an

accounting standard need not apply if the item is not material.

The principle of materiality and aggregation, however, shall not apply to specific line items
required to be presented on the face of the balance sheet and the income statement. For example,
regardless of the amount of “Cash and cash equivalents” balance of an entity, it shall be presented
as a separate line item and shall not be aggregated with other financial assets on the face of the
balance sheet.

Offsetting

Offsetting means deducting one item from another item of different nature and presenting

only the net on the face of the financial statements. Presenting receivables net of the related

allowance for bad debts, and property, plant and equipment net of accumulated depreciation, on

the face of the balance sheet are not offsetting.

Generally, offsetting is not allowed, unless required or permitted by a Standard or an

interpretation. Thus, deferred tax assets are set off against the deferred tax liabilities, if they arise

from deferred taxes imposed by only one taxing authority and when there is a valid basis for

offsetting. This applies the requirements of PAS 12, Income Taxes.

Offsetting is also allowed and applied when presenting on the net basis reflects the substance

of the transaction or other event, say, netting any income with related expenses arising on the same

transaction. Thus, only the excess of proceeds from the sale of property, plant and equipment over

its carrying value is presented as a gain on the income statement. Other examples of offsetting

involve presenting only the net unrealized gain or loss on trading securities and the net foreign

exchange transaction gain or loss.

Comparative Information

Comparative information should be disclosed in respect of the preceding period for all

financial information in the financial statements. Thus, when presenting the financial statements

for the year 2007, the comparative information for 2006, as a minimum, should be presented.

Likewise, comparative information for narrative disclosures relating to the prior period should be

presented, unless otherwise required.

When the presentation or classification of items in the financial statements is amended,

comparative amounts should be reclassified, unless it is impracticable to do so. This is done to
ensure comparability of prior year information with the current period. Achieving comparability is
also the objective for the retrospective application of changes in accounting policies.

REPORTING PERIOD

Financial statements should be presented at least annually. When in exceptional cases, an

enterprise’s balance sheet date changes and annual financial statements are prepared for a period
longer or shorter than one year, that fact should be disclosed. The reason for using a period
shorter or longer than one year and the fact that comparative amounts are not entirely comparable
should likewise be disclosed.

Reporting annually does not prevent the enterprise from presenting interim financial
statements, which cover a period shorter than one year.

IDENTIFICATION OF THE FINANCIAL STATEMENTS

The financial statements shall be identified clearly and distinguished from other information
in the same published document (par. 44, PAS 1):

Each component of the financial statements shall be identified clearly. In addition, the following
information shall be displayed prominently and repeated, when necessary, for a proper understanding of the
information presented (par. 46, PAS 1):
 (a) the name of the reporting entity and other means of identification, and any change in that
information from the preceding balance sheet date;

(b) whether the financial statements cover the individual entity or a group of entities;

(c) the balance sheet date or the period covered by the financial statements, whichever is
appropriate to that component of the financial statements;

(d) the presentation currency: and

(e) the level of rounding used in presenting amounts in the financial statements.

BALANCE SHEET

A balance sheet reports the financial position of an entity at a particular date. A balance sheet is also
called a Statement of Financial Position which is a summary of an entity’s economic resources (assets),
economic obligations (liabilities), and equity and their relationships to each other at a moment in time. It is
for this reason that it is generally described as a detailed expression of the basic accounting equation: Assets
= Liabilities + Owners’ equity.

This statement, evaluated together with the other components of the financial statements, is useful to
various users of accounting information such as investors and creditors, in order to evaluate the economic
resources that an enterprise controls, its financial structure, its liquidity and solvency and its capacity to
adapt to changes in the environment in which it operates.

ELEMENTS OF THE BALANCE SHEET

The financial position of the enterprise consists of its assets, liabilities and equity.
Assets

The IASB’s and FRSC’s Framework for the Preparation and Presentation of Financial
Statements defines assets as resources controlled by the enterprise as a result of past events and
from which future economic benefits are expected to flow to the enterprise. Chapter 1 of this
textbook discusses the essential characteristics of assets, such as: control over the resource, arising
from past action, and providing the enterprise probable future economic benefits.

Liabilities

Liabilities are present obligations of an enterprise arising from past events, the settlement of
which is expected to result in an outflow from the enterprise of resources embodying economic
benefits.
 Based on the definition above and as discussed in Chapter 1, a liability possesses the
following essential characteristics: it is a present obligation of the enterprise, it arises from a past
event, and it is expected to result to a probable outflow of economic benefits.

Equity

Equity is the residual interest in the assets of the enterprise after deducting all its liabilities.
It refers to the interest of owners in an enterprise which is the excess of total assets over its
liabilities, also called as net assets.

INFORMATION TO BE PRESENTED
ON THE FACE OF THE BALANCE SHEET

As a minimum, the face of the balance sheet should include line items that present the following
amounts (par. 68, PAS 1)

 Property, plant and equipment;

 Investment property;
 Intangible assets;
 Financial assets, excluding investments accounted for under the equity method, trade and
other receivables and cash and cash equivalents;
 Investments accounted for using the equity method;
 Biological assets;
 Inventories;
 Trade and other receivables;
 Cash and cash equivalents;
 Trade and other payables;
 Provisions;
 Financial liabilities excluding trade and other payables and provisions;
 Liabilities and assets for current tax;
 Deferred tax liabilities;
 Minority interest, presented within equity (for consolidated balance sheet only); and
 Issued capital and reserves attributable to equity holders of the parent

Additional line items and headings may be presented on the face of the balance sheet when
an accounting standard requires it, or when such presentation is necessary to present fairly the
enterprise’s financial position.

REPORTING CLASSIFICATIONS ON THE BALANCE SHEET

An entity shall present current and non-current assets, and current and non-current
liabilities, as separate classifications on the face of its balance sheet, except when a presentation
based on liquidity provides information that is reliable and is more relevant. When that exception
applies, all assets and liabilities shall be presented broadly in the order of liquidity (par. 51, PAS 1)
 Thus, the general requirement of PAS 1 is to classify assets and liabilities into current and
non-current. Only when the enterprise assesses that the presentation based on liquidity is more
relevant to the users, that the current and non-current presentation will not be applied.

However, whether the enterprise presents assets and liabilities using the current and non-current
classification or based on liquidity, for each asset or liability line item that combines amounts expected to be
recovered or settled within twelve months and beyond twelve months from the balance sheet date, an entity
shall disclose the amount expected to be recovered or settled after more than twelve months.

Current Assets

An asset is classified as current when it satisfies any of the following criteria (par. 57, PAS 1):

(a) it is expected to be realized in, or is intended for sale or consumption in, the entity’s normal
operating cycle;

(b) it is held primarily for the purpose of being traded;

(c) it is expected to be realized within twelve months after the balance sheet date; or

(d) it is cash or a cash equivalent, unless it is restricted from being exchanged or used to settle a
liability for at least twelve months after the balance sheet date.

The first criterion uses the term normal operating cycle. The entity’s normal operating cycle is the
time between the acquisition of materials entering into a process and its realization in cash or an instrument
that is readily convertible into cash. Based on the illustration on the next page for a manufacturing entity, it
is the length of time to complete the following processes: purchase of materials, production of goods, sale of
goods and collection from customers. The operating cycle of a merchandising company is the time required to
complete purchase of goods, sale of goods and collection from customers. For a service entity, the normal
operation consists only of providing services and collection from customers.

The concept of the normal operating cycle classifies trade receivables and inventories as
current assets even if they are not expected to be realized in cash or sold within twelve months from
the balance sheet date. For example, distilleries must age some products for several years before
the products are ready for sale. Consequently, in such companies, inventories of raw materials,
manufacturing supplies and finished goods are still appropriately classified as current assets. On
the same line, installment trade receivables that are granted under normal long credit terms are
also classified as current assets, even if not collectible within one year. However, in these cases, the
amount not expected to be realized within twelve months from the balance sheet date need to be
disclosed.
 Cash

is invested in raw which are converted

materials into cash
(through purchase) (through collection)

which are which are sold in exchange

manufactured into for receivables
finished products (through sale)
(through production)

A Manufacturing Entity’s Normal Operating Cycle

For some entities where the normal operating cycle is not clearly identifiable, its duration is
presumed to be twelve months. (par. 59, PAS 1)

Financial assets at fair value through profit or loss (FVPL) as recognized under PAS 32, Financial
Instruments, are classified as current assets. Thus, trading securities are classified as current assets,
because they are intended to meet working capital requirements of the enterprise.
 Non-trade assets (assets other than trade receivables, inventories and prepaid expenses) are classified
as current assets if realizable only within twelve months and the length of the normal operating cycle is not
considered. Thus, non-trade receivables are classified as current assets only if expected to be collectible
within twelve months from the balance sheet date.

Non-current Assets

All other assets not classified as current should be classified as non-current assets. This
category includes tangible, intangible, operating, and financial assets of a long-term nature. The
non-current assets may be appropriately grouped and described as follows:

 Property, Plant and Equipment

 Investment Property
 Investments in Associates
 Deferred Tax Assets
 Other Financial Assets
 Intangible Assets

Property, Plant and Equipment include all tangible assets with an estimated useful life beyond one
year, used in the conduct of the business and are not intended for sale in the ordinary course of business.
Examples are land, buildings, machinery, equipment, furniture, tools, returnable containers, leasehold
improvements, and natural resources or wasting assets.

Investment Property is property (land or a building – or part of a building – or both) held (by the owner
or by the lessee under a finance lease) to earn rentals or for capital appreciation, or both rather than for use
in the production or supply of goods or services or for administrative purposes, or sale in the ordinary course
of business.

Investments in Associates refers to an investment in equity securities of another enterprise in which

the investor has significant influence and which is neither a subsidiary nor a joint venture of the investor.

Biological Assets are living animals and plants held by a company engaged in raising livestock,
forestry, cropping, cultivating orchards and plantation, floriculture, or aquaculture. They are distinguished
from agricultural produce, the latter being the harvested product of the entity’s biological assets. Thus, a
sheep is a biological asset, while wool is agricultural produce; vines are biological assets while grapes are
agricultural produce. Agriculture produce harvested are part of the entity’s inventories, and are therefore
classified as current assets.

Other Non-Current Financial Assets. A financial asset is any asset that is (a) cash; (b) a contractual
right to receive cash or other financial asset from another enterprise; (c) a contractual right to exchange
financial instruments with another enterprise under conditions that are potentially favorable; or (d) an equity
instrument of another enterprise. If not realizable within 12 months from the balance sheet date and are not
directly involved in the operating cycle, these assets are classified as non-current. Examples are bond
retirement fund, plant expansion fund, long-term receivables and advances to others, available for sale
securities and held to maturity securities.

Deferred Tax Asset results from interperiod tax allocation (discussed thoroughly in Volume 2).
Deferred tax asset is recognized because of temporary differences between book basis and tax basis of certain
assets and liabilities, which are deductible for tax purposes in future taxable periods. If there is a valid basis
of offsetting and deferred tax assets and deferred tax liabilities arise from taxes imposed by only one taxing
authority, the deferred tax asset is set off against the deferred tax liability and only the net is presented on the
face of the balance sheet.

Intangible Assets are identifiable non-monetary long-lived assets without physical substance.
Their value lies in rights, privileges, and competitive advantages which they give the owner. For a
resource to qualify under the classification of intangible assets, the item should be separately
identifiable from the entity and the entity has the power to control the economic benefits flowing
from the asset and restricts the access of others to those benefits. Furthermore, the item has a cost
or value that could be reliably measured. Typical examples are patents, copyrights, trademarks and
franchises. Goodwill, which is previously included in the classification of intangible assets, does
not meet the criterion of identifiability. Goodwill arises from business combination and is measured
as the excess of the purchase price paid by the acquiring company over the net identifiable assets of
the purchased entity. Goodwill shall be presented on the face of the balance sheet, separate from
the identifiable intangible assets.

Current Liabilities

PAS 1 defines current liabilities in a manner similar to the definition of current assets. A
liability is classified as current when it satisfies any of the following criteria:

(a) it is expected to be settled in the entity’s normal operating cycle;

(b) it is held primarily for the purpose of being traded:

(c) it is due to be settled within twelve months after the balance sheet date; or

(d) the entity does not have an unconditional right to defer settlement of the liability for at
least twelve months after the balance sheet date.

Thus, obligations related to the normal conduct of the entity’s central revenue producing
activities are classified as current liabilities. Examples are trade payables and some accruals for
operating costs which are part of the working capital of the company. Other obligations are not part
of the normal operating cycle but are still classified as current liabilities because they are due for
settlement within twelve months of the balance sheet date or because they are held primarily for the
purpose of being traded. Examples are bank overdrafts, dividends payable, current portion of long-
term non-trade payables.

Financial liabilities that are due within twelve months from the balance sheet date are
classified as current liabilities if the enterprise, as of the balance sheet date, does not have a
discretion to refinance or roll over the obligation for a period of at least twelve months after the
balance sheet date. The obligation is classified as a current liability even if the same has been
refinanced on a long-term basis and the agreement to refinance or to reschedule payments is
completed after the balance sheet date but before the issuance of the financial statements. The
obligation is classified as a current liability because as of the balance sheet date, the enterprise has
no discretion yet to refinance the obligation.
 The liability is classified as non-current if agreement for the refinancing or rescheduling of
payment has been completed before the balance sheet date.

Likewise, when an enterprise violates a debt covenant that results to the debt being due and
demandable, the liability is classified as current liability, even if the lender has agreed after the
balance sheet date but before the issuance of the financial statements, not to demand payment as a
consequence of the breach. The obligation is classified as a current liability because as of the
balance sheet date, there is no discretion to refinance yet. However, if the creditor agrees not to
demand payment and this agreement has been reached on or before the balance sheet date, the
liability is classified as non-current. (Examples of such obligation and the obligations described in
the previous paragraph and the circumstances that would result to their classification as current or
non-current are thoroughly discussed in Chapter 1, Volume 2 of this Intermediate Accounting
Series)

Liabilities that are classified as current but are refinanced after the balance sheet date but
before the issuance of the financial statements are considered to be non-adjusting events after the
balance sheet date. To inform the users that such current liabilities will not require outflow of
working capital within twelve months, it would require disclosure in the notes. Thus, the following
events after balance sheet date qualify for disclosure:

(a) refinancing of a maturing obligation on a long-term basis;

(b) rectification of a breach of a long-term loan agreement; and

(c) the receipt from the lender of a period of grace to rectify a breach of a long-term loan
agreement ending at least twelve months after the balance sheet date.

Any financial liability that is classified as non-current because of refinancing on or before balance
sheet date also requires disclosures of the refinancing arrangement in the notes to the financial statements.

Non-current Liabilities

All other liabilities not classified as current liabilities, as discussed above, are reported as
non-current liabilities. Examples are bonds payable, mortgage loans payable, long-term notes
payable, non-current portion of long-term financial liabilities, long-term loans from affiliated
companies, officers, and stockholders, non-current portion of obligations under finance leases and
deferred tax liability.

Equity

Equity is a term that broadly encompasses the capital of any form of business organization.
In a corporation, the net assets are referred to as stockholders’ equity or shareholders’ equity. The
component of shareholders’ equity is presented on the balance sheet according to source: Share
Capital, Reserves, and Retained Earnings.

An entity shall disclose the following, either on the face of the balance sheet or in the notes (par. 76,
PAS 1)

(a) for each class of share capital:

 the number of shares authorized;

 the number of shares issued and fully paid, and issued but not fully paid;

 par value per share, or that the shares have no par value;

 a reconciliation of the number of shares outstanding as of the beginning and at the end of
the period;

 the rights, preferences and restrictions attaching to that class including restrictions on the
distribution of dividends and the repayment of capital;

 shares in the entity held by the entity or by its subsidiaries or associates (treasury stock)
and

 shares reserved for issue under options and contracts for the sale of shares, including the
terms and amounts; and

(b) a description of the nature and purpose of each reserve within equity.

Non-current Assets Held for Sale and Liabilities Related to Assets Held for Sale

Non-current assets that qualify to be classified as “Held for Sale” and assets of a disposal group
classified as “Held for Sale” under PFRS 5, shall be presented separately from other assets in the balance
sheet. Likewise, the related liabilities shall be presented separately from other liabilities on the balance sheet.
(See chapter 8 of Volume 1 of Intermediate Accounting series for a detailed discussion of Assets Held for Sale).

Format of the Balance Sheet

PAS 1 does not prescribe a uniform format or order of the presentation of the elements on the
balance sheet. Each line item enumerated on pages 95 and 96 is sufficiently different in nature or
function to warrant separate presentation on the face of the balance sheet. Separate line items
may be included when the size, nature or function of an item or aggregation of similar items is such
that separate presentation is relevant to an understanding of the entity’s financial position.
Furthermore, the descriptions used and the ordering of items or aggregation of similar items may be
amended according to the nature of the entity’s operations and transactions to provide information
that is relevant to an understanding of the entity’s financial position.
 In addition, the use of different measurement bases for different classes of assets suggests
that their nature or function differs, and therefore, they should be presented as separate line items.
Thus, a class of property, plant and equipment measured using the cost model is presented
separately from the class of property, plant and equipment measured using the revaluation model.

The judgment on whether additional items are presented separately is based on the
assessment of (par. 72, PAS1):

(a) the nature and liquidity of assets

(b) the function of assets within the entity; and
(c) the amounts, nature and timing of liabilities.

There are three known formats of presenting the balance sheet, when the entity complies
with the general rule of presenting assets and liabilities following the classification of assets and
liabilities into current and non-current. The balance sheet may be prepared using either the
report form, the account form, or the financial position form.

1. Report Form – Assets, liabilities, and equity are shown in that order in vertical manner.
Thus, liabilities and equity follow immediately below the asset presentation.

ABC Company

Balance Sheet

December 31, 2007

Assets

Current Assets:

Cash and Cash Equivalents Pxx

Trade & Other Receivables xx

Inventories xx

Prepaid Expenses xx Pxx

Non-current Assets:

Property, Plant and Equipment Pxx

Investment Property xx

Other Non-current Assets xx xx

TOTAL ASSETS Pxx

Liabilities

Current Liabilities:
 Trade and Other Payables Pxx

Provisions xx

Income Tax Payable xx Pxx

Non-current Liabilities:

Mortgage Payable Pxx

Deferred Tax Liability xx xx

Total Liabilities Pxx

Shareholders’ Equity

Share Capital Pxx

Reserves xx

Retained Earnings xx

Total S hareholders’ Equity xx

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY Pxx

2. Account Form – This form follows the T-account format where assets are shown on the left side, while
liabilities and equity are shown on the right side of the balance sheet.

ABC Company

Balance Sheet

December 31, 2007

Assets Liabilities & Shareholders’ Equity

Current Assets: Current Liabilities:

Cash & Cash Equivalents Pxx Trade & Other Payables Pxx

Trade & Other Receivables xx Provisions xx

Inventories xx Income Tax Payable xx

 Prepaid Expenses xx Total Current Liabilities Pxx

Total Current Assets Pxx Non-Current Liabilities:

Mortgage Payable Pxx

Non-current Assets: Deferred Tax Liability xx

Property, Plant & EquipmentPxx Total Liabilities Pxx

Investment Property xx

Other Non-current Assets xx Shareholders’ Equity:

Total Non-current Assets Pxx Share Capital Pxx

Share Premium xx

Retained Earnings xx

Total Shareholders’ Equity Pxx

Total Liabilities and

Total Assets Pxx Shareholders’ Equity Pxx

3. Financial Position Form – This format emphasizes the working capital position of an enterprise.
Presented in vertical form, the current liabilities are deducted from current assets to derive working
capital. Non-current assets are then added and non-current liabilities are deducted, leaving a
residual amount as equity, or net assets.

A pro-forma balance sheet in financial position form is presented on the next page.

ABC Company

Balance Sheet

December 31, 2007

Assets

Current Assets:

Cash and Cash Equivalents Pxx

Trade and Other Receivables xx

Inventories xx

Prepaid Expenses xx Pxx

Less Current Liabilities:

Trade and Other Payables Pxx

Provisions xx

Income Tax Payable xx xx

 Working Capital Pxx

Add Non-current Assets:

Property, Plant and Equipment Pxx

Investment Property xx

Other Non-current Assets xx xx

Total Assets Net of Current Liabilities Pxx

Less Non-current Liabilities:

Mortgage Payable Pxx

Deferred Tax Liability xx xx

NET ASSETS Pxx

Shareholders’ Equity

Share Capital Pxx Share Premium

xx

Retained Earnings xx

TOTAL SHAREHOLDERS’ EQUITY Pxx

A pro-forma balance sheet, in conformity with PAS 1, is shown on the next page.

Note that most of the assets are grouped or aggregated as one-line items in the balance sheet. When
necessary and in order to present fairly an enterprise’s financial position, additional line items may be
presented on the face of the balance sheet. The order of presentation and the descriptions used for the line
items may be changed if it is to achieve a fair presentation in each enterprise’s particular circumstance.

ABC Corporation

Balance Sheet

December 31, 2007

Assets

Current Assets: Note

Cash and Cash Equivalents Pxx

Trade and Other Receivables (5) xx

Inventories xx
Prepaid Expenses (6) xx Pxx
Non-current Assets:
Property, Plant and Equipment (7) Pxx
Investment Property xx
Non-current Financial Assets (8) xx

Total Assets Pxx

Liabilities and Equity

Current Liabilities: Note
Trade and Other Payables (9) Pxx
Provisions (10) xx
Income Tax Payable xx Pxx

Noncurrent Liabilities:
Mortgage Payable Pxx

Deferred Tax Liability xx

Equity:

Share Capital (11) Pxx

Share Premium (12) xx
Retained Earnings xx xx

Total Liabilities and Equity Pxx

Note 5 – Trade and Other Receivables

Accounts Receivable Pxx
Allowance for Bad Debts (xx)
Notes Receivable xx
Accrued Interest on Notes Receivable xx
Total Pxx

Note 6 – Prepaid Expenses

Office Supplies Pxx
Prepaid Insurance xx
Total Pxx
 Note 7 – Property, Plant and Equipment
Land Pxx
Buildings xx
Accumulated Depreciation-Buildings (xx)
Equipment xx
Accumulated Depreciation-Equipment (xx)
Total Pxx

Note 8 – Non-current Financial Assets

Equipment Acquisition Fund Pxx
Long-term Advances to Officers xx
Total Pxx

Note 9 – Trade and Other Payables

Accounts Payable Pxx
Salaries Payable xx
Interest Payable xx
Total Pxx

Note 10 – Provisions
Provisions for Warranties Pxx
Provision for Equipment Dismantling xx
Total Pxx

Note 11 – Share Capital

Preference Share Pxx
Ordinary Share xx
Total Pxx

Note 12 – Share Premium

Share Premium – Preference Pxx
Share Premium – Ordinary xx
Total Pxx

The foregoing balance sheet is prepared in condensed form. The sub-classifications of the
line items are presented as supporting schedules and are included in the notes to the financial
statements. An enterprise may also choose to disclose such sub-classifications on the face of the
balance sheet, based on the requirements of the PFRSs and based on the assessment of the
enterprise’s management.

Notice that the Note Number for the schedules supporting the line items on the balance sheet does not
start with Number 1 since preceding these schedules are notes relating to the basis for the presentation of
financial statements, such as the statement of compliance with PFRS and summary of significant accounting
policies.

EVENTS AFTER THE BALANCE SHEET DATE

Events occurring after the balance sheet date may affect the information presented on the
face of the financial statements or in the notes. These are referred to as events after the balance
sheet date.

Events after the balance sheet date are those events, favorable and unfavorable, that occur
between the balance sheet date and the date when the financial statements are authorized for issue. The date
of the issuance of the financial statements is the date when the management of the enterprise approves and
authorizes the issue of the financial statements. Thus, in a corporate form of organization, this is the date
when the Board of Directors authorizes the financial statements for issue.

Two types of events can be identified (par. 3, PAS 10, Events After the Balance Sheet Date):

(a) Adjusting events after the balance sheet date – These events provide conditions that existed at the
balance sheet date.

(b) Non-adjusting events after the balance sheet date – They are indicative of conditions that arose
after the balance sheet date.

ADJUSTING EVENTS AFTER THE BALANCE SHEET DATE

An adjusting event after the balance sheet date confirms a condition that already exists at the balance
sheet date. An entity shall adjust the amounts recognized in its financial statements to reflect this type of
subsequent events. Such events may require an enterprise to adjust the amounts on the financial
statements, to reclassify an information, or to recognize a financial statement element that was not previously
recognized.

The following are examples of adjusting events after the balance sheet date (based on paragraph 9,
PAS 10).

(a) The settlement after the balance sheet date of a court case that confirms that the entity had a
present obligation at the balance sheet date. This may require an entity to adjust the amount of
the liability on the balance sheet or to recognize a liability that is not previously recognized.
 (b) The receipt of information after the balance sheet date indicating that an asset was impaired at the
balance sheet date. An example of this nature is the declaration of bankruptcy of one of the
enterprise’s customers. If the customer had been experiencing financial difficulty as of the
balance sheet date, its declaration of bankruptcy confirms the condition of the customer and
confirms the status of the enterprise’s accounts receivable as of the balance sheet date. This
would require the recognition of impairment loss on the income statement and the
derecognition of the related receivable on the balance sheet.

(c) The determination after the balance sheet date of the cost of assets purchased, or the proceeds from
assets sold, before the balance sheet date. This would require the adjustment of the gain or
loss on sale on the income statement, and the adjustment of the amount of the asset received,
on account of such sale, on the balance sheet.

(d) The determination after the balance sheet date of the amount of profit-sharing or bonus payments, if
the entity had a present legal obligation or constructive obligation at the balance sheet date to
make such payments as a result of events before that date. This would require the adjustment
of the amount of expense shown on the income statement and the amount of liability shown on
the balance sheet or the recognition of both expense and liability.

(e) The discovery of fraud or errors which show that the financial statements are incorrect. This would
require correction of such errors.

NON-ADJUSTING EVENTS AFTER THE BALANCE SHEET DATE

A non-adjusting event after the balance sheet date relates to a condition different from the condition
as of the balance sheet date. This may merely be ignored if not considered significant and will not affect the
evaluation of the user. If non-adjusting events are material and non-disclosure could influence the economic
decisions of users taken on the basis of the financial statements, then the non-adjusting event after the
balance sheet date should be disclosed in the notes to the financial statements. Such disclosures shall
include the nature of the event and an estimate of its financial effect, or a statement that such an estimate
cannot be made.

The following are examples of non-adjusting events after the balance sheet date that would generally
result in disclosure (par. 22, PAS 10):

(a) a major business combination after the balance sheet date or disposing of a major subsidiary;

(b) announcing a plan to discontinue an operation, disposing of assets or settling liabilities

attributable to a discontinuing operation or entering into a binding agreements to sell such
assets or settle such liabilities;

(c) major purchases and disposals of assets, or expropriation of major assets by government;

(d) the destruction of a major production plant by a fire after the balance sheet date;

(e) announcing or commencing the implementation of, a major restructuring;

(f) major ordinary share transactions and potential ordinary share transactions after the balance
sheet date;
 (g) abnormally large changes after the balance sheet date in asset prices or foreign exchange rates;

(h) changes in tax rates or tax laws enacted or announced after the balance sheet date that have a
significant effect on current and deferred tax assets and liabilities;

(i) entering into 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 balance sheet date.

NOTES TO FINANCIAL STATEMENTS

Since all of the relevant financial information pertaining to a company’s activities cannot be
disclosed directly on the face of the financial statements, additional disclosures are made in
accompanying notes.

The notes shall (par. 103, PAS 1) -

(a) present information about the basis of preparation of the financial statements and the
specific accounting policies used;

(b) disclose the information required by PFRS that is not presented on the face of the balance
sheet, income statement, statement of changes in equity or cash flow statement; and

(c) provide additional information that is not presented on the face of the balance sheet,
income statement, statement of changes in equity or cash flow statement, but is
relevant to an understanding of any of them.

The notes shall be arranged in logical sequence such that each item on the face of the
financial statements shall be cross-referenced to any related information in the notes. For example,
the accounting policy on the measurement of property, plant and equipment and the items
composing the property, plant and equipment, in the notes shall be cross referenced and properly
numbered in the notes and the note number shall be parenthetically shown on the face to refer the
user to read such notes related to property, plant and equipment.

Notes are normally presented in the following order, which assists users in understanding the
financial statements and comparing them with financial statements of other entities (par. 105, PAS 1):

(1) a statement of compliance with PFRS;

(2) a summary of significant accounting policies applied;

 (3) supporting information for items presented on the face of the balance sheet, income statement,
statement of changes in equity, and cash flow statement, in the order in which each statement
and each line item is presented;

(4) other disclosures, including

 contingent liabilities and unrecognized contractual commitments; and

 non-financial disclosures

STATEMENT OF COMPLIANCE WITH PFRS

An entity whose financial statements comply with PFRS shall make an explicit and unreserved
statement of such compliance in the notes. Financial statements shall not be described as complying with
PFRSs unless they comply with all the requirement of PFRSs (par. 14, PAS 1). An example of such note is
presented on the next page.

NOTE 2: Basis of Preparation

Our consolidated financial statements have been prepared in conformity

with Philippine Financial Reporting Standards. The ASC has renamed the
new standards Philippine Accounting Standards or “PAS” and Philippine
Financial Reporting Standards or “PFRS”. PASs and PFRSs are collectively
referred to as PFRSs. These PFRSs are effective beginning January 1,
2005.

Our accounting policies adopted are consistent with PFRSs. They are
briefly discussed as follows: (each accounting policy is briefly narrated in
accordance with the requirements of PFRSs).

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES APPLIED

and BASIS OF PRESENTATION

(a) An entity shall disclose the following in the summary of significant accounting policies (par. 108,
PAS
1):

(b) the measurement basis (or bases) used in preparing the financial statements; and
(c) the other accounting policies used that are relevant to an understanding of the financial
statements.

An example of a note relating to a description of an accounting policy is as follows:

NOTE 3: Investment Property

 PAS 40 prescribes the accounting treatment for investment
property which is defined as land and/or building held to
generate income or for capital appreciation or both. An
investment property is initially recognized at cost. Subsequent to
initial recognition, an investment property is either carried at (1)
cost less accumulated depreciation and any accumulated
impairment losses or (2) fair value, wherein fair value movements
are recognized as income or expense. Transfers to or from
investment property classification are made only when there is
evidence of a change in use.

An entity shall also disclose in the summary of significant accounting policies or other notes,
the judgments management has made in the process of applying the entity’s accounting policies
that have the most significant effect on the amounts recognized in the financial statements. For
example, management makes judgments in determining whether significant influence is acquired
through ownership of less than 20% voting shares of the investee.

If the financial statements are not prepared using the going concern basis, that fact should
be disclosed. The basis of the presentation of the financial statements shall likewise be described
accordingly.

SUPPORTING INFORMATION FOR ITEMS

PRESENTED ON THE FACE OF THE FINANCIAL STATEMENTS

The process of aggregation results to combining financial statement elements of the same
nature or function as one line item on the face of the financial statements. If the details of the
composition of these items are relevant to the users of the financial statements, then schedules
showing the composition of the items are disclosed in the notes to the financial statements.

The notes are also used to present information that are required by specific accounting
standards that are not presented on the face of the financial statements. For example, intangible
assets are presented as a single line item on the face of the balance sheet. PAS 38, however,
requires that both the gross cost and accumulated amortization for the intangible assets are
required to be disclosed. The disclosures, therefore, are made in the notes to make the financial
statements more condensed, thus facilitating the user’s comprehension. (See appendix at the end
of the chapter for an illustration)
OTHER DISCLOSURES

Disclosures of significant events after balance sheet date, key sources of estimation, the
basis of resolving uncertainties and information not required by any accounting standard, but are
necessary to make the financial statements not misleading are also disclosed in the notes.
In addition to the above, an entity shall also disclose in the notes (par. 125, PAS 1)

(a) the amount of dividends proposed or declared before the financial statements are
authorized for issue but not recognized as a distribution to equity holders, during the
period, and the related amount per share; and

(b) the amount of any cumulative preference dividends not recognized.

An entity shall disclose the following if not disclosed elsewhere in information published with
the financial statements (par. 126, PAS 1)

(a) the domicile and legal form of the entity, its country of incorporation and the address of
its registered office or principal place of business;

(b) a description of the nature of the entity’s operations and its principal activities; and

(c) the name of the parent and the ultimate parent of the group;

LIMITATIONS OF THE BALANCE SHEET

Despite the usefulness of the balance sheet, it also has several weaknesses and limitations.
The real worth of the business is not reflected in the statement, since the elements of the balance
sheet are measured using different measurement bases. In addition, with the assumption of a
stable monetary unit, notwithstanding that the purchasing power of the peso changes over time, the
balance sheet presents values that are a mixture of different levels of purchasing power.

Due to some measurement problems, some enterprise resources and obligations are not reported in
the balance sheet, providing in effect, an incomplete statement of a company’s financial condition. Only
events and transactions capable of financial measurement can be reflected on financial statements.
Information such as the moral and efficiency of company personnel, the strategic location of the company’s
production facilities and markets, its contribution to the development and deterioration of the environment
are reported nowhere on the balance sheet because these data are incapable of financial measurement.

KEY TERMS USED IN THIS CHAPTER

Accounting policies specific principles, bases, conventions, rules and practices applied by an entity in
preparing and presenting financial statements.
Accrual basis a basis of accounting where income is recognized when earned, not necessarily when cash is
received, and expenses are recognized when incurred, not necessarily when cash is paid.

Adjusting event after the balance sheet date event that confirms a condition that already exists at the
balance sheet date; requires an adjustment in the amounts recognized in the financial statements.

Asset a resource controlled by an enterprise as a result of past event and from which future economic
benefits are expected to flow to the enterprise.

Balance sheet statement of financial position of an enterprise as of a given date.

Biological assets living plants and animals held by a company engaged in raising livestock, forestry,
cropping, cultivating orchards and plantation, floriculture or aquaculture.

Cash an item that is acceptable for deposit at face value by a bank or other financial institution; includes
cash on hand and demand deposits with banks or other financial institutions.

Cash equivalents highly liquid financial instruments that are so near their maturity that there is
insignificant risk of change in value due to change interest rate.

Cash flow statement a statement showing the historical changes in cash and cash equivalents classified
into operating activities, investing activities and financing activities.

Current asset an asset that satisfies any one of the following criteria: (a) it is expected to be realized in, or
is intended for sale or consumption in, the entity’s normal operating cycle; (b) it is held primarily for the
purpose of being traded; (c) it is expected to be realized within twelve months after the balance sheet date;
or (d) it is cash or cash equivalent that is not restricted from being exchanged or used to settle a liability
for at least twelve months after the balance sheet date.

Current liabilities liability that is expected to be settled in the entity’s normal course of an enterprise’s
operating cycle or is to be settled within twelve months after the balance sheet date.

Equity the residual interest in the assets of the enterprise after deducting all its liabilities.

Financial asset any asset that is (a) cash; (b) contractual right to receive cash or other financial asset from
another enterprise; (c) a contractual right to exchange financial instruments with another enterprise
under conditions that are potentially favorable; or (d) an equity instrument of another enterprise.

Going concern assumes that in the absence of evidence to the contrary, an enterprise is to continue
operations in the future.

Intangible asset identifiable non-monetary asset without physical substance.

Inventories assets of an enterprise which are (a) held for sale in the ordinary course of business; (b) in the
process of production for such sales; or (c) in the form of materials or supplies to be consumed in the
production process or in the rendering of services.

Investment property land or building or both, held by the owner or by the lessee under a finance lease to
earn rentals or for capital appreciation, or both.

Liabilities present obligations of the enterprise arising from past events, the settlement of which is expected
to result in an outflow from the enterprise of resources embodying economic benefits.

Net assets excess of total assets over total liabilities; refers to equity.

Non-adjusting event after the balance sheet date relates to a condition different from the condition as of
the balance sheet date; this is indicative of condition that arose after the balance sheet date; may be
ignored or disclosed, if material.

Non-current assets assets that are not classified as current assets; includes tangible, intangible, operating
and financial assets of a long-term nature.

Non-current liabilities liabilities that are not classified as current liabilities such as bonds payable,
mortgage payable, long-term loans from affiliated companies, deferred tax liability and non-current
portion of finance lease obligations.
Notes to the financial statements non-quantitative and qualitative information about an enterprise which
are not appropriately presented on the face of the financial statements but are considered significant and
relevant to the needs of the users.

Operating cycle time between the acquisition of materials entering into a process and its realization in cash
or an instrument that is readily convertible into cash; time required to complete the purchase of goods,
sale of goods and collection from customers.

Philippine Financial Reporting Standards accounting standards currently adopted in the Philippines
which are based on the International Accounting Standards and International Financial Reporting
Standards. The PFRSs set out the recognition, measurement, presentation and disclosure requirements
dealing with transactions and events that are important in general purpose financial statements.

Property, plant and equipment tangible assets that are held by an enterprise for use in the production or
supply of goods or services, for rental to others, or for administrative purposes.

Refinancing an arrangement between a debtor and a creditor to defer the settlement of an obligation either
through an extension of maturity date or issuance of a debt instrument to settle the maturing debt
instrument.

Reporting period time intervals used for financial reporting; due to the timely information, the life of a
business is divided into specific accounting periods for external reporting purposes; one year is the
normal reporting period.

Statement of changes in equity a statement that shows the changes in each equity account during a
reporting period; a reconciliation of the beginning balances of equity accounts to the final balances shown
on the balance sheet.

Working capital excess of current assets over current liabilities.

SUMMARY

 Financial statements are a structured financial representation of the financial position of and the
transactions undertaken by an enterprise. The objective of general-purpose financial statements is to
 provide information about the financial position, performance and cash flows of an enterprise that is
useful to a wide range of users in making economic decisions.

 Financial statements are the responsibility of the company’s management.

 A complete set of financial statements is composed of a balance sheet, an income statement, a cash
flow statement, a statement of changes in equity and notes comprising a summary of significant
accounting policies and other explanatory notes.

 Several considerations guide the preparers of the financial statements. These are fair presentation and
compliance with PFRSs, going concern, accrual basis of accounting, consistency of presentation,
materiality and aggregation, offsetting and comparative information

 Financial statements shall be identified clearly and distinguished from other information in the
published document or financial report.

 Financial statements should be presented at least annually. In rare instances when the reporting
period is shorter than or longer than one year, the reason for using a different reporting period and the
lack of comparability with previous period presented must be disclosed.

 The balance sheet presents information about an entity’s financial position as of a certain date. It
presents assets, liabilities and equity.

 An entity shall present current and non-current assets and current and non-current liabilities, as
separate classifications on the face of the balance sheet, except when a presentation based on liquidity
provides information that is reliable and more relevant. When the exception applies, assets and
liabilities shall be presented broadly in the order of liquidity.

 PAS 1 enumerates the information that as a minimum shall be presented on the face of the balance
sheet. Additional line items may be included when such presentation is relevant to an understanding
of the entity’s financial position.

 The balance sheet may be prepared using any of the following formats: the report form, the account
form, or financial position form.

 The notes to the financial statements present information about the basis of presentation of the
financial statements, the specific accounting policies applied, information required by PFRSs and
additional information that are not presented on the face of the financial statements but are relevant
to an understanding of the financial statements.

Appendix
To provide students exposure on the format of actual financial statements, the balance sheet of Nestlé
Corporation at December 31, 2005 is hereby reproduced, along with some notes describing the company’s
accounting policies and some selected schedules. (Only selected notes are presented here for illustration).
NESTLÉ CORPORATION

Consolidated Balance Sheet as at 31December 2015

In Millions of CHF Notes 2005 2004

Assets

Current Assets

Liquid Assets 8

Cash and Cash Equivalents 4,658 4,902

Other Liquid Assets 12,735 10,380

17,393 15282

Trade and Other Receivables 9 14,291 11,809

Assets Held for Sale 30 6,333 -

Inventories 10 8,162 7,025

Derivative Assets 11 645 585

Prepayments and Accrued Income 641 584

Total Current Assets 41,765 35,285

Non-Current Assets

Property, Plant and Equipment 12

Gross value 44,976 41,045

Accumulated Depreciation and

Impairment
(26,142) (23,993)

18,834 17,052

Investments In Associates 13 7,073 4,091

Deferred Tax Assets 23 1,697 1,469

Financial Assets 14 2,513 2,410

Employee Benefits Assets 21 1,673 928

Goodwill 15 26,990 23,854

Intangible Assets 16 2,852 2,029

Total Noncurrent Assets 61,632 51,832

Total Assets 103,397 87,117

In Millions of CHF Notes 2015 2014

Liabilities and Equity

Current Liabilities

Trade and Other Payables 17 11,117 9,074

Liabilities Directly Associated with

Assets Held for Sales
30 38 -

Financial Liabilities 18 18,805 14,722

Tax Liabilities 705 584

Derivative Liabilities 19 922 856

Accruals and Deferred Income 4,231 3,839

Total Current Liabilities 35,818 29,075

Noncurrent liabilities

Financial Liabilities 20 8,153 10,731

Employee Benefits Liabilities 21 665 447

Other Payables 185 327

Provisions 24 3,347 3,004

Total Noncurrent Liabilities 16,144 17,743

Total Liabilities 51,962 46,818

Equity

Share Capital 25 404 404

Share Premium and Reserves

Share Premium 5,926 5,926

Reserve for Treasury Shares 2,616 2,619

Translation Reserve (3,984) (7,189)

Retained Earnings 47,655 39,911

Treasury Shares 26 (2,770) (2,435)

Total equity attributable to the 49,847 39,236

Group

Minority Interest 1,588 1,063

Total Equity 51,435 40,299

Total Liabilities and Equity 103,397 87,117

Accounting Policies

Accounting convention and accounting standards

The Consolidated Financial Statements comply with International Financial Reporting Standards (IFRS) issued by the International
Accounting Standards Board(IASB) and with the Interpretations issued by the International Financial Reporting Interpretations
Committee (IFRIC).

The accounts have been prepared on an accrual basis and under the historical cost convention, unless stated otherwise. All
significant consolidated companies and associates have a 31 December accounting year-end.

The preparation of the Consolidated Financial Statements requires Group Management to exercise judgment and to make estimates
and assumption that affect the application of policies, reported amounts of revenues, expenses, assets and liabilities and disclosures.
These estimates and associated assumptions are based on historical experience and various other factors that are believed to be
reasonable under the circumstances. Actual results may differ from these estimates.

The estimates and assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in
which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision
affects both current and future periods. Those areas affect mainly impairment of goodwill and employee benefits.

Current Financial Assets

Current financial assets include liquid assets, loans and receivables. Receivables are measured at cost, less appropriate bad debt
allowances.

Liquid assets encompass cash at bank and in hand, cash equivalents, current investments and marketable securities. Cash
equivalents consist of bank deposits and fixed term investments whose maturities are three months or less from the date of
acquisition. Current investments consist of bank deposits and fixed term investments whose maturities are more than three
months from the date of acquisition.

Liquid assets classified as available-for-sale comprise fixed rate deposits and marketable securities such as commercial paper. They
are stated at fair value with all unrealized gains and losses recognized against equity until the disposal of the investment when, at
such time, gains and losses previously carried to equity are recognized in the income statement.

Liquid assets not classified as available-for-sale are marketable securities and other portfolios that are managed with the aim of
delivering performance over agreed benchmarks and are therefore classified as trading. They are carried at fair value and all their
gains and losses, realized and unrealized are recognized in the income statement.

Financial assets that are acquired in market places that require the delivery within a time frame established by a convention are
accounted for in accordance with the settlement date.

Fair value is determined on the basis of market prices at the balance sheet date for listed instruments and on the basis of discounted
cash flow techniques based on market data for the other financial instruments.
Inventories

Raw materials and purchased finished goods are valued at purchase cost. Work in progress and manufactured finished
goods are valued at production cost. Production cost includes direct production cost and an appropriate proportion of
production overheads and factory depreciation.

Movements in raw material inventories and purchased finished goods are accounted for using the FIFO (first-in, first-out) method.
The weighted average cost method is used for other inventories.

An allowance is established when the net realizable value of any inventory is lower than the value calculated above.

Property, Plant and Equipment

Property, plant and equipment are shown in the balance sheet at its historical cost. Depreciation is provided on
components that have homogenous useful lives by using the straight-line method so as to depreciate the initial cost down
to the residual value over the estimated useful lives. The residual values are 30% on head offices, 20% on distribution
centers, for products stored at ambient temperature and nil for all other asset types.

The useful lives are as follows:

Buildings 20-35 years

Machinery and Equipment 10-20 years

Tools, Furniture, Information Technology and Sundry Equipment 3- 8 years

Vehicles 5 years

Land is not depreciated

Useful lives, components and residual amounts are reviewed annually. Such a review takes into consideration the nature
of the assets, their intended use and the evolution of the technology.

Depreciation of property, plant and equipment is allocated to the appropriate headings of expenses by function in the income
statement.

Financing costs incurred during the course of construction are expensed. Premiums capitalized for leasehold land or buildings are
amortized over the length of the lease.

An example of a schedule supporting a line item in the balance sheet is shown below:
16. Intangible assets

In Millions of CHF 2005 2004

Brands and Operating

intellectual rights
property and Managemen
rights others t
information
systems
Total Total

Gross value

At 1 January 480 592 2,146 3,218 2,640

of which indefinite
useful life
141 - - 141 -

Currency retranslations 20 67 170 257 (97)

Expenditures 21 67 670 758 736

Disposals 2 (12) (17) (27) (194)

Reclassified as held for

sale
- (4) (39) (43) -

Modification of the scope

of consolidation
318 (2) 2 318 133

At 31 December 841 708 2,932 4,481 3,218

of which indefinite
useful life
468 - - 468 141

Accumulated
depreciation and
impairments

At 1 January (147) (388) (655) (1,190) (1,065)

Currency retranslations (4) (39) (48) (91) 46

Depreciation (21) (65) (260) (346) (278)

Impairments (30) - - (30) -

Disposals - 8 13 21 94

Reclassified as held for

sale
- 4 3 7 -

Modification of the scope

of consolidation
- 2 (2) - 13

At 31 December (202) (478) (949) (1,629) (1,190)

Net at 31 December 639 230 1,983 2,852 2,028

PROBLEMS
 3-1. The December 31, 2017 balance sheet accounts of Gates Company are shown below in
alphabetical order:

Accounts Payable 236,000

Accounts Receivable 115,000
Accumulated Amortization – Patents 22,000
Accumulated Amortization – Trademarks 17,000
Accumulated Depreciation-Buildings 530,000
Accumulated Depreciation-Equipment 351,000
Allowance for Bad Debts 8,000
Appropriated Retained Earnings 45,000
Bonds Payable (due in 2009) 770,000
Buildings 1,440,000
Cash and Cash Equivalents 35,000
Discount on Bonds Payable 69,000
Equipment 624,000
Inventory 322,000
Investments in Associates 250,000
Land (including land with an undetermined

future use acquired in December 2017

for P1,000,000) 1,300,000

Ordinary Share, P10 par 1,300,000
Share Premium - Preference 81,000
Share Premium - Ordinary 240,000
Patents 120,000
Preference Share, P100 par 210,000
Retained Earnings 462,000
Salaries Payable 20,000
Share Dividends Distributable 24,000
Trademarks 60,000
Trading Securities 61,000
Withholding Taxes Payable 80,000

Required: Prepare a properly classified Balance Sheet for Gates Company as of December 31, 2017
with appropriate notes.
3-2. Listed below and on the next page, in random order, are the balance sheet accounts and related ending
balances of the Starbucks Corporation as of December 31, 2017:

Income Taxes Payable 247,000

Prepaid Expenses 31,000
Cash Surrender Value of Life Insurance 89,000
Preference Share 400,000
Premium on Bonds Payable 48,000
Cash and Cash Equivalents 116,000
Property, Plant, & Equipment 2,293,000
Accounts Payable 580,000
Ordinary Share 628,000
Retained Earnings 1,234,000
Land held for Future Use 195,000
Trading Securities 160,000
Bonds Payable 800,000
Share Premium - Ordinary 303,000
Inventories 985,000
Accounts Receivable 323,000
Patents 182,000
Held to Maturity Securities – XYZ Bonds 250,000
Share Premium – Preference 234,000
Unearned Revenues 62,000
Provision for Product Warranty 73,000
Allowance for Bad Debts 15,000

Additional information:

a. The company uses control accounts for inventories and property, plant, and equipment and
lists the latter at its book value.

b. The straight-line method is used to depreciate buildings, machinery, and equipment based
upon their cost and estimated residual values and lives. A breakdown of property, plant, and
equipment shows the following: Land at a cost of P320,000; Buildings at a cost of P1,824,000
and a book value of P1,202,000; Machinery at a cost of P639,000 and related Accumulated
Depreciation of P186,000, and Equipment (40% depreciated) at a cost of P530,000. Included in
Machinery is a unit costing P320,000 and with accumulated depreciation of P80,000 included
in the balance of Accumulated Depreciation, that qualifies as “Held for Sale”. This unit of asset
has an estimated sales price of P250,000; cost of P40,000 is expected to be incurred on its sale.
The sale is highly probable and is expected to be consummated in May 2018.
 c. Patents are amortized on a straight-line basis directly to the patents account. The cost of the
patent is P200,000 while its accumulated amortization is P18,000.

d. Inventories are listed at the lower of cost and net realizable value using an average cost. The
inventories include Raw Materials of P222,000, Goods in Process of P347,000, and Finished
Goods of P416,000.

e. The ordinary share has a P10 par value per share, 120,000 are authorized, 62,800 shares have
been issued.

f. Preference share has a P100 par value per share, 10,000 shares are authorized, 4,000 shares
have been issued.

g. Trading Securities are listed above at market values; their aggregate cost is P150,000.

h. The Bonds Payable mature on December 31, 2020.

i. The company attaches a one-year warranty on all products it sells.

Required: Prepare the December 31, 2017 balance sheet of the Starbucks Corporation (including
appropriate notes and parenthetical notations).

3-3. On December 31, 2017 the Bill Company bookkeeper prepared the erroneously classified balance
sheet presented below.

Bill Company

Balance Sheet

For Year Ended December 31, 2017

Current Assets:
Inventory P 600,000
Accounts Receivable 590,000
Cash 230,000
Treasury Shares (at cost) 330,000
Long-term Investments:
Trading Securities 320,000
Available for Sale Securities 1,030,000
Property, Plant and Equipment:
Land 810,000
Office Supplies 80,000
Buildings and Equipment (net) 3,560,000
Intangible Assets:
Patents (net) 470,000
Prepaid Insurance 120,000
Discount on Bonds Payable 100,000
Total assets P8,240,000

Current Liabilities:
Accounts Payable P990,000
Allowance for Uncollectible Accounts 80,000
Salaries Payable 150,000
Taxes Payable 250,000
Long-term Liabilities:
Bonds Payable (due 2012) 1,100,000
Unearned Rent (for 3 months) 90,000
Owners’ Equity:
Retained Earnings 2,420,000
Accumulated Depreciation on
Buildings and Equipment 920,000
Share Premium 1,040,000
Ordinary Share Capital, P10 par 1,200,000
Total credits P8,240,000
 Required: Prepare a properly classified Balance Sheet as of December 31, 2017. Use line items as
prescribed by PFRS.

3-4. The Net Company presents the following December 31, 2017 balance sheet in condensed format.

Net Company

Balance Sheet

For Year Ended December 31, 2017

Current Assets P 4,430,000

Long-term Investments 1,360,000
Property and Equipment 12,350,000
Intangible Assets 770,000
Other Assets 1,360,000
Total Assets P20,270,000
Current Liabilities P 6,660,000
Long-term Liabilities 2,410,000
Contributed Capital 1,700,000
Unrealized Capital 2,250,000
Retained Earnings 7,250,000
Total Equities P20,270,000

The following information is also available:

a. Current assets include Cash P380,000, Accounts Receivable P1,850,000, Notes Receivable
(maturity date July 1, 2018) P1,000,000, and Land P1,200,000.

b. Long-term investments include a P460,000 trading securities and a P900,000 Investment in Day
Corporation Bonds that are expected to be held until their December 31, 2013 maturity date. Net
Company demonstrates an ability to hold the bonds until their maturity.

c. Property and Equipment include Buildings costing P6,340,000, Inventory costing P3,050,000, and
Equipment costing P2,960,000.

d. Intangible Assets include Patents that cost P820,000 and on which P230,000 amortization has
accumulated and Treasury Shares that cost P180,000.
e. Other Assets include Prepaid Insurance (which expires on November 30, 2018) P290,000, Sinking
Fund for Bond Retirement P700,000, and Trademarks that cost P520,000 on which P150,000
amortization has accumulated.
 f. Current Liabilities include Accounts Payable P1,940,000, Bonds Payable (maturity date December
31, 2024) P4,000,000 and Income Taxes Payable P720,000.

g. Long-term Liabilities include Accrued Wages P410,000 and Mortgage Payable (which is due in five
equal annual payments starting December 31, 2018 P2,000,000.

h. Contributed Capital includes Ordinary Shares (P50 par) P1,100,000 and Preference Shares
P600,000.

i. Unrealized Capital includes Premium on Bonds Payable P430,000 and Share Premium of
P1,820,000.
j. Retained Earnings includes Unrestricted Retained Earnings P3,780,000, Allowance for Bad Debts
P70,000, and Accumulated Depreciation on Buildings and Equipment of P2,100,000 and
P1,300,000, respectively.

Required: Based on the preceding information, prepare a correct December 31, 2017 Balance Sheet
for Net Company with accounts properly classified.

3-5. The accounts below were taken from the unadjusted trial balance of Makati Company as at December
31, 2017:

Cash and Cash Equivalents – P1,240,000; Trading Securities, at cost – P870,000; Available for Sale
Securities, P2,500,000; Notes Receivable – P920,000; Trade Accounts Receivable – P1,220,000;
Allowance for Bad Debts – P60,000; Merchandise Inventory – P1,360,000; Notes Payable –
P1,500,000; Trade Accounts Payable – P750,000; Employees Income Tax Withheld – P40,000; Bonds
Payable – P2,500,000; Share Dividends Distributable – P150,000; Income Tax Payable – P280,000.

An analysis of the above accounts disclosed the following:

a. Included in Cash is a 120-day, P500,000, Certificate of Time Deposit dated September 17,
2017 and maturing on January 15, 2018.

b. Trade Accounts Receivable was net of customers’ deposit of P70,000.

c. Merchandise worth P150,000 received December 30, 2017 was included in the inventory but
was not recorded as a purchase.

d. Accounts Payable was net of accounts with debit balance of P120,000.

e. A bank loan of P300,000 due December 31, 2009 was included in the Notes Payable balance.
f. Bonds Payable, which was issued in 2017, will mature in five annual installments beginning
June 1, 2018.

g. Trading Securities have a market value of P900,000 while Available for Sale Securities have
market value of P2,420,000.
 Required: Determine the total current assets and total current liabilities of Makati Company at December
31, 2017.

3-6. Following selected account balances and supplemental information were taken from the
accounting records of Internet Company as of December 31, 2017:

Sales P9,675,000
Mortgage Note Payable 1,300,000
Bank Notes Payable 300,000
Accounts Payable 270,000
Share Dividends Distributable 200,000
Withholding Tax Payable 120,000

Supplemental information:

a. Mortgage note was refinanced on its due date, February 15,

2018 with a new 5-year mortgage note after paying
P300,000 cash on the principal balance. The refinancing
scheme was planned long before its due date. There was
no unpaid interest as of December 31, 2017.

b. The bank notes are payable in semi-annual installments of

P50,000 on February 1 and August 1 of each year. Unpaid
interest for 2017 of P7,500 has not been taken up. This
was paid on January 5, 2018.

c. On August 1, 2017, a suit was filed by a dismissed

employee against the company asking for P1,000,000
damages. The company’s lawyer believes it is probable that
the suit will result in a loss to the company, but the amount
could not be reasonably estimated as of December 31,
2017.
d. The sales account included the 12% VAT corresponding to
the sales for the month of December of P2,688,000
(inclusive of VAT). This was remitted to the BIR on January
20, 2018.

e. Total income tax due for 2017 amounted to P86,500.

Quarterly remittances to BIR during the year for income tax
totaled to P55,000. The balance due as of December 31,
2017 has not been taken up in the books.

Required: Determine the total current liabilities at December 31, 2017.

3-7. Presented below are account balances and related information on December 31, 2017 for Jig
Company:

Cash on Hand and in Bank P2,480,000

Accounts Receivable 800,000
Allowance for Bad Debts ( 150,000)
Inventories 1,200,000
Prepaid Insurance 250,000
Total Current Assets P4,580,000

Related information is as follows:

The Cash balance consists of the following:

Cash in Bank, net of bank overdraft of P20,000

maintained in a separate bank account
P 400,000
Cash set aside by the Board of Directors for the
purchase of a plant site
1,500,000
Petty Cash (unreplenished expenses are P5,000)
40,000
General Cash 540,000

The Merchandise Inventory includes goods held on consignment amounting to P40,000 and goods of
P80,000 received on December 31, 2017. Neither of these items has been recorded as a purchase.
The Prepaid Insurance includes cash surrender value of life insurance in the amount of P50,000.

Required: Determine the total current assets at December 31, 2017.

3-8.The following totals are taken from the December 31, 2017 balance sheet of Streamer
Company:

Current assets - P3,500,000; Non-current assets - P8,000,000; Current liabilities - P2,400,000;

Non-current liabilities - P2,700,000.

Additional information:

(a) Cash of P380,000 has been placed in a fund for the retirement of long-term debt. The cash
and long-term debt have been offset and are not reflected in the financial statements.
 (b) Long-term assets include P500,000 in treasury shares.

(c) Cash of P140,000 has been set aside to pay taxes due. The cash and taxes payable have been
offset and do not appear in the financial statements.

(d) Advances on salespersons’ commissions in the amount of P210,000 have been made. Also,
sales commissions payable total P240,000. The net liability of P30,000 is included in current
liabilities.
Required: Make the necessary adjustments and determine the following:
1. Total current assets
2. Total non-current assets
3. Total current liabilities
4. Total non-current liabilities

3-9.The current asset section of the balance sheet prepared by the accountant of Ping Company
as of December 31, 2017 follows:

Cash – P536,000; Accounts Receivable – P3,285,000; Trading Securities – P500,000; Inventory –

P3,500,000; Other Assets – P140,000

The company determines its inventory at year end by physical count. An examination of the
accounts showed the following:

(a) On December 28, 2017, the company issued and recorded a check payable to a vendor dated
January 15, 2018 in the amount of P80,000.

(b) Accounts receivable includes selling price of goods invoiced to a customer on December 27,
2017. The goods cost P120,000 and were billed to the customer at 150% of cost. The goods
were shipped FOB destination on December 27, 2017 and were received by the customer on
January 5, 2018.

(c) There were goods out on consignment at sales price of P225,000. The company’s gross profit
on consigned goods is 40% of sales price.

(d) Other assets include the amortized cost of long-term advances to officers.

Required: Determine the correct balances of Cash, Accounts Receivable and Inventories at December 31,
2017.

3-10. Your review of the ledger of Lime Co. at December 31, 2017 reveals the following:

Amounts Due from Customers 148,000

350,000
Land for Future Plant Site
 Amounts Due to Suppliers 124,000

Income Taxes owed BIR 16,000

Citibank – current account 98,000

Advances From Suppliers 150,000

Accrued Interest on Bonds Payable 17,000

Sinking Fund for Bond Retirement 30,000

Allowance for Bad Debts 12,000

Provision for Warranties 60,000

Inventories including Office Supplies of P3,500 221,000

Required: Determine the company’s working capital at December 31, 2017.