PRESENTATION OF FINANCIAL STATEMENTS

Related reference – PAS 1

Purpose of Financial Statements (par. 9)

Financial statements are a structured representation of the financial position and financial performance of an entity. The
objective of financial statements is to provide information about the financial position, financial performance and cash
flows of an entity that is useful to a wide range of users in making economic decisions. Financial statements also show
the results of the management’s stewardship of the resources entrusted to it. To meet this objective, financial
statements provide information about an entity’s:
(a) assets;
(b) liabilities;
(c) equity;
(d) income and expenses, including gains and losses;
(e) contributions by and distributions to owners in their capacity as owners; and
(f) cash flows.

Complete Set of Financial Statements (par. 10 – 14)

Since the purpose of the financial statements is to provide information regarding the entity’s assets, liabilities, equity,
income and expenses (including gains and losses), contributions by and distributions to owners in their capacity as
owners, and cash flows; a complete set of financial statements must include those statements that provide these
information.

A complete set of financial statements comprises:

1. A statement of financial position at the end of the period – provides information regarding the entity’s (a)
assets; (b) liabilities; and (c) equity
2. A statement of profit or loss and other comprehensive income for the period – provides information regarding
the entity’s (d) income and expenses, including gains and losses
3. A statement of changes in equity for the period – provides information regarding the closing of the income and
expenses to the equity account; and (e) contributions by and distributions to owners in their capacity as owners
4. A statement of cash flows for the period – provides information regarding the entity’s (f) cash flows
5. Notes, comprising significant accounting policies and other explanatory information – provides those other
information that are not presented in the face of the other statements but are useful to the users
6. Comparative information in respect of the preceding period
7. A statement of financial position as at the beginning of the preceding period when an entity applies an
accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or
when it reclassifies items in its financial statements

STATEMENT OF FINANCIAL POSITION

Related references: Conceptual Framework for Financial Reporting; PAS 1/IAS 1 – Presentation of Financial Statements

Information Presented in Statement of Financial Position

Under par. 54 of PAS 1, the statement of financial position shall include line items that present the following amounts:
(a) property, plant and equipment;
(b) investment property;
(c) intangible assets;
(d) financial assets (excluding amounts shown under (e), (h) and (i));
(da) groups of contracts within the scope of IFRS 17 that are assets, disaggregated as required by paragraph 78
of IFRS 17;
(e) investments accounted for using the equity method;
(f) biological assets within the scope of IAS 41 Agriculture;
(g) inventories;
(h) trade and other receivables;
 (i) cash and cash equivalents;
(j) the total of assets classified as held for sale and assets included in disposal groups classified as held for sale in
accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations;
(k) trade and other payables;
(l) provisions;
(m) financial liabilities (excluding amounts shown under (k) and (l));
(ma) groups of contracts within the scope of IFRS 17 that are liabilities, disaggregated as required by paragraph
78 of IFRS 17;
(n) liabilities and assets for current tax, as defined in IAS 12 Income Taxes;
(o) deferred tax liabilities and deferred tax assets, as defined in IAS 12;
(p) liabilities included in disposal groups classified as held for sale in accordance with IFRS 5;
(q) non-controlling interests, presented within equity; and
(r) issued capital and reserves attributable to owners of the parent.

Additional line items must be presented if such presentation is relevant to the understanding of the financial
statements.

PAS 1 does not prescribe the order of format in which an entity presents the items. An entity may make judgment about
whether to present additional line items separately on the basis of:
 The nature and liquidity of assets;
 The function of assets within the entity; and
 The amounts, nature and timing of liabilities

Definition of Asset
Previous Definition (under the old Conceptual Framework): A resource controlled by the entity as a result of past events
and from which future economic benefits are expected to flow to the entity.

Revised Definition: A present economic resource controlled by the entity as a result of past events. An economic
resource is a right that has the potential to produce economic benefits.

Main changes in the definition:

 separate definition of an economic resource—to clarify that an asset is the economic resource, not the ultimate
inflow of economic benefits
 deletion of ‘expected flow’—it does not need to be certain, or even likely, that economic benefits will arise
 a low probability of economic benefits might affect recognition decisions and the measurement of the asset

Current and Non-Current Assets

Under PAS 1 par.66, an entity shall classify an asset as current when:
 it expects to realize the asset, or intends to sell or consume it, in its normal operating cycle;
 it holds the asset primarily for the purpose of trading;
 it expects to realize the asset within twelve months after the reporting period; or
 the asset is cash or cash equivalent (as defined in PAS 7) unless the asset is restricted from being exchanged or
used to settle a liability for at least twelve months after the reporting period

All other assets not classified as current are classified as non-current.

Note: The operating cycle of an entity is the time between the acquisition of assets for processing and their realisation in
cash or cash equivalents. When the entity’s normal operating cycle is not clearly identifiable, it is assumed to be twelve
months.

Definition of Liability
Previous Definition: A present obligation of the entity arising from past events, the settlement of which is expected to
result in an outflow from the entity of resources embodying economic benefits.
Revised Definition: A present obligation of the entity to transfer an economic resource as a result of past events. An
obligation is a duty or responsibility that the entity has no practical ability to avoid.

Main changes in the definition:

 separate definition of an economic resource—to clarify that a liability is the obligation to transfer the economic
resource, not the ultimate outflow of economic benefits
 deletion of ‘expected flow’—with the same implications as set out above for an asset
 introduction of the ‘no practical ability to avoid’ criterion to the definition of obligation

Current and Non-Current Liabilities

Under PAS 1 par. 69, an entity shall classify a liability as current when:
 it expects to settle the liability in its normal operating cycle;
 it holds the liability primarily for the purpose of trading;
 the liability is due to be settled within twelve months after the reporting period; or
 it does not have an unconditional right to defer settlement of the liability for at least twelve months after the
reporting period. Terms of a liability that could, at the option of the counterparty, result in its settlement by the
issue of equity instruments do not affect its classification.

All other liabilities not classified as current are classified as non-current.

Definition of Equity
Equity is the residual interest in the assets of the entity after deducting all its liabilities.

Classifications of Equity
 Contributed Capital – this is the part of equity that is contributed by the shareholders. This includes:
o Share Capital – represents the amount of shares issued at par or stated value.
o Additional Paid-In Capital – this represents all other contributions, including those that are paid on top
of the par or stated value (e.g. share premium, share options outstanding, donated capital)
 Retained Earnings/Accumulated Profits – this represents the cumulative amount of profits or losses of the
entity.
o Unappropriated Retained Earnings – this is the portion that is not set aside for a specific purpose and is
available for distribution as dividends.
o Appropriated Retained Earnings – this is the portion that is set aside for a specific purpose and is not
available for distribution as dividends (e.g. appropriated for treasury shares, appropriated for plant
expansion)
 Accumulated Other Comprehensive Income or Loss – this represents the cumulative amount of other
comprehensive income or losses of the entity (e.g. unrealized holding gain – OCI).
Different Forms of Statement of Financial Position
Account Form
The statement of financial position is presented in horizontal format, wherein the accounts are presented in two
columns: the assets are listed on the left side, while the liabilities and equity are presented on the right side.

Example:
Report Form
The statement of financial position is presented in vertical format.

Example:
 STATEMENT OF COMPREHENSIVE INCOME
Related references: Conceptual Framework for Financial Reporting; PAS 1/IAS 1 – Presentation of Financial Statements

The statement of profit or loss and other comprehensive income (statement of comprehensive income) shall present, in
addition to the profit or loss and other comprehensive income sections:
(a) profit or loss;
(b) total other comprehensive income;
(c) comprehensive income for the period, being the total of profit or
loss and other comprehensive income.

If an entity presents a separate statement of profit or loss it does not present the profit or loss section in the statement
presenting comprehensive income.

Comprehensive Income
Comprehensive income is the change in equity during a period resulting from transactions and other events, other than
changes resulting from transactions with owners in their capacity as owners.

Accordingly, comprehensive income includes:

a. Components of Profit or loss
b. Components of Other Comprehensive Income

Profit or Loss
Revised Definition of Income
Increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions
from holders of equity claims.

Revised Definition of Expense

Decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions
to holders of equity claims.

Other Comprehensive Income

Other comprehensive income (OCI) comprises items of income and expenses including reclassification adjustments that
are not recognized in profit or loss as required or permitted by Philippine Financial Reporting Standards (PFRS).

The components of OCI include the following:

a. Unrealized gain or loss on equity investments measured at fair value through other comprehensive income
b. Unrealized gain or loss on debt investments measured at fair value through other comprehensive income
c. Gain or loss from translation of the financial statements of a foreign operation
d. Revaluation surplus during the year
e. Unrealized gain or loss from derivative contracts designated as cash flow hedge
f. “Remeasurements” of defined benefit plan, including actuarial gain or loss
g. Change in fair value attributable to credit risk of a financial liability designated at fair value through profit or loss

Forms of Income Statement

There are two forms of presentation of income statement:
1. Nature of Expense method
2. Function of Expense method

Nature of Expense
The first form of presentation is the “nature of expense” method. An entity aggregates expenses within profit or loss
according to their nature (for example, depreciation, purchases of materials, transport costs, employee benefits and
advertising costs), and does not reallocate them among functions within the entity. This method may be simple to apply
because no allocations of expenses to functional classifications are necessary. An example of a classification using the
nature of expense method is as follows:

Function of Expense
The second form of presentation is the “function of expense” or “cost of sales” method and classifies expenses
according to their function as part of cost of sales or, for example, the costs of distribution or administrative activities. At
a minimum, an entity discloses its cost of sales under this method separately from other expenses. This method can
provide more relevant information to users than the classification of expenses by nature, but allocating costs to
functions may require arbitrary allocations and involve considerable judgement. An example of a classification using the
function of expense method is as follows:

For instance, an entity incurred depreciation expenses of P200,000 in its administrative department, and P1,500,000 in
its sales department; and salaries of P500,000 in its administrative department, and P600,000 in its sales department.
The summary is as follows:
Administrativ Sales
e Department Department
Depreciation
Expense 200,000 1,500,000
Salaries 500,000 600,000
Under the “nature of expense method” the expenses are presented based on their “nature”, meaning, the depreciation
expense and salaries are presented separately, as follows:
Depreciation expense 1,700,000
Salaries 1,100,000

Under the “function of expense” method, the expenses are presented based on their “function”. In other words, the
expenses are totaled based on the department from which they were incurred. The presentation is as follows:
Administrative expenses 700,000
Selling expenses 2,100,000
ILLUSTRATION:
Prepare an Income Statement for Singular Corporation for the year ended December 31, 2019 using the:
a. Functional method
b. Natural method

Purchases 5,250,000
Purchase returns and allowances 150,000
Rental income 250,000
Selling expenses:
Freight out 175,000
Salesmen's commission 650,000
Depreciation - store equipment 125,000
Merchandise inventory, January 1 1,000,000
Merchandise inventory, December 31 1,500,000
Sales 7,850,000
Sales returns and allowances 140,000
Sales discounts 10,000
Administrative expenses:
Officers' salaries 500,000
Depreciation - office equipment 300,000
Freight in 500,000
Income tax 250,000
Loss on sale of equipment 50,000
Purchase discounts 100,000
Dividend revenue 150,000
Loss on sale of investment 50,000

FUNCTIONAL METHOD
Note
Net sales 1 7,700,000
Less: Cost of goods sold 2 5,000,000
Gross profit 2,700,000
Other income
Rental income 250,000
Dividend revenue 150,000 400,000
Total income   3,100,000
Less: Expenses
Selling expenses 3 950,000
Administrative expenses 4 800,000
Other expense and losses 5 100,000 1,850,000
Net income before tax   1,250,000
Income Tax (250,000)
Net income before tax 1,000,000

Note 1
Sales 7,850,000
Sales returns and allowances (140,000)
Sales discounts (10,000)
Net sales 7,700,000
Note 2
Merchandise inventory, January 1 1,000,000
Net purchases
Purchases 5,250,000
Purchase returns and allowances (150,000)
Purchase discounts (100,000) 5,000,000
Freight in 500,000
Total goods available for sale 6,500,000
Merchandise inventory, December 31 (1,500,000)
Cost of goods sold 5,000,000

Note 3
Freight out 175,000
Salesmen's commission 650,000
Depreciation - store equipment 125,000
Selling expenses 950,000

Note 4
Officers' salaries 500,000
Depreciation - office equipment 300,000
Administrative expenses 800,000

Note 5
Loss on sale of equipment 50,000
Loss on sale of investment 50,000
Other expense and losses 100,000

NATURAL METHOD
Note
Net sales 1 7,700,000
Other income
Rental income 250,000
Dividend revenue 150,000 400,000
Total income   8,100,000
Less: Expenses
Change in merchandise inventory 2 (500,000)
Net purchases 3 5,000,000
Freight in 500,000
Depreciation expense 4 425,000
Salaries and commissions 5 1,150,000
Freight out 175,000
Loss on sale of equipment 50,000
Loss on sale of investment 50,000 6,850,000
Net income before tax   1,250,000
Income Tax (250,000)
Net income before tax 1,000,000
Note 1
Sales 7,850,000
Sales returns and allowances (140,000)
Sales discounts (10,000)
Net sales 7,700,000

Note 2
Merchandise inventory, December 31 1,500,000
Merchandise inventory, January 1 (1,000,000)
Change in merchandise inventory 500,000

Note 3
Purchases 5,250,000
Purchase returns and allowances (150,000)
Purchase discounts (100,000)
Net purchases 5,000,000

Note 4
Depreciation - store equipment 125,000
Depreciation - office equipment 300,000
Depreciation expense 425,000

Note 5
Salesmen's commission 650,000
Officers' salaries 500,000
Salaries and commissions 1,150,000