ACCOUNTING - is the process of identifying, measuring, or external source but does not involve transfers of such as financial statements
financial statements and other accounting
and communicating economic information to permit
informed judgments and decisions by users of the
information
THREE (3) IMPORTANT ACTIVITIES
1. Identifying - the process of analyzing events and
transactions to determine whether or not they
will be recognized
1.1 Recognition refers to the process of including
the effects of an accountable event in the
statement of financial position or the
statement of comprehensive income through a
journal entry
1.2 Only accountable events (event that affects
the assets, liabilities, equity, income or
expenses of an entity; also known as economic
activity) are recognized/journalized
1.3 Non-accountable events are not recognized
but disclosed only in the notes, if they have
accounting relevance, although a non
accountable event that has an accounting
relevance may be recorded through a
memorandum entry
TYPES OF EVENTS OR TRANSACTIONS
1. External events - are events that involve an entity and
another external party
i. Exchange (reciprocal transfer) - an event
wherein there is a reciprocal giving and receiving of
economic resources or discharging of economic
obligations between an entity and an external
party; eg. sale, purchase, payment of liabilities,
receipt of notes receivable in exchange for accounts
receivable, etc.
ii. Non-reciprocal transfer - is a "one way"
transaction in that the party giving something does
not receive anything in return while the party
receiving does
not give anything in exchange; eg. donations, gifts
or charitable contributions, payment of taxes,
imposition of fines, theft, provision of capital by
owners, distribution to owners, etc.
iii. External event other than transfer - an event
that involves changes in the economic resources or
obligations of an entity caused by an external party
resources or obligations; eg. changes in fair values
and price levels, obsolescence, technological
changes, vandalism, etc
2. Internal events - are events that do not involve an
external party
i. Production - the process by which resources are
transformed into finished goods; eg. conversion of
raw materials into finished products, production of
farm products, etc.
ii. Casualty - an unanticipated loss from disasters or
other similar events; eg. loss from fire, flood, and
other catastrophes
2. Measuring - involves assigning numbers, normally
in monetary terms, to the economic transactions
and events; (more on cfas pg73-80)
SEVERAL MEASUREMENTS BASES
● Historical Cost
● Fair Value
● Present Value
● Realizable Value
● Current Cost
● Inflation-adjusted Cost
Financial statements are said to be prepared using a
mixture of costs (historical cost and current cost) and
values (other measurement bases).
VALUE BY FACT OR OPINION
When measurement is affected by estimates, the items are
said to be valued by opinion. Examples:
a. Estimates of uncollectible amounts of receivables
b. Depreciation and amortization expenses, which are
affected by estimates of useful life and residual value
c. Estimated liabilities, such as provisions
d. Retained earnings, which is affected by various
estimates of income and expenses
When measurement is unaffected by estimates, the items
are said to be valued by fact. Examples:
a. Ordinary share capital valued at par value
b. Land stated at acquisition cost
c. Cash measured at face amount
3. Communicating - is the process of transforming
economic data into useful accounting information,
reports, for dissemination to users; it also involves
interpreting the significance of the processed
information
3.1 Recording - refers to the process of systematically
committing into writing the identified and
measured accountable events in the journal
through journal entries
3.2 Classifying - involves the grouping of similar and
interrelated items into their respective classes
through postings in the ledger
3.3 Summarizing - putting together or expressing in
condensed form the recorded and classified
transactions and events; this includes the
preparation of financial statements and other
accounting reports
Interpreting the processed information involves the
computation of financial statement ratios. Some
regulatory bodies such as Banko Sentral ng Pilipinas (BSP),
require certain financial ratios to be disclosed in the notes
to financial statements.
BASIC PURPOSE OF ACCOUNTING
The basic purpose of accounting is to provide information
that is useful in making economic decisions. Various
sources of information are used when making economic
decisions and the financial statements are only one of
those sources. Other sources may include current events,
industry publications, internet resources, professional
advices, expert systems, etc.
Economic entities use accounting to record economic
activities, process data, and disseminate information
intended to be useful in making economic decisions.
Economic Entity - a separately identifiable combination of
persons and property that uses or control economic
resources to achieve certain goals or objectives
a. Not-for-profit entity - one that carries out some
socially desirable needs of the community or its
members and whose activities are not directed
towards making profit; or
b. Business entity - one that operates primarily for
profit
Economic Activities - activities that affect the economic
resources (assets) and obligations (liabilities), and
consequently the equity of an economic entity
 1. Production - the process of converting economic
resources into outputs of goods and services that are
intended to have greater utility than the required
inputs
2. Exchange - the process of trading resources or
obligations for other resources or obligations
3. Consumption - the process of using the final output
of the production process
4. Income Distribution - the process of allocating rights
to the use of output among individuals and groups in
society
5. Savings - the process of setting aside rights to present
consumption in exchange for rights to future
consumption
6. Investment - the process of using current inputs to
increase the stock of resources available for output as
opposed to immediately consumable output
NATURE OF ACCOUNTING
Accounting is a process with the basic purpose of
providing information about economic activities that is
intended to be useful in making economic decisions.
TYPES OF INFORMATION PROVIDED BY ACCOUNTING
1. Quantitative Information - information expressed in
numbers, quantities, or units
2. Qualitative Information - information expressed in
words or descriptive form; is found in the notes to
financial statements as well as on the face of other
financial statements
3. Financial Information - information expressed in
money; is also a quantitative information because
monetary amounts are normally express in numbers
TYPES OF ACCOUNTING INFORMATION CLASSIFIED AS TO
USERS’ NEEDS
1. General purpose accounting information - designed to
meet the common needs of most statement users;
provided under financial accounting; governed by
generally accepted accounting principles (GAAP)
represented by the Philippine Financial Reporting
Standards (PFRSs)
2. Special purpose - designed to meet the specific needs
of particular statement users; provided by other types
of accounting other than financial accounting, eg.
managerial accounting, tax basis accounting
ACCOUNTING AS SCIENCE AND ART
1. As a social science, accounting is a body of knowledge
which has been systematically gathered, classified, and
organized
2. As a practical art, accounting requires the use of
creative skills and judgment
ACCOUNTING AS AN INFORMATION SYSTEM
A system is one that consists of an input, process, and an
output. Similarly, in an accounting system, the inputs are
the identified accountable events; the processes are
recording, classifying, and summarizing; and the output is
the accounting report that is communicated to the users.
ACCOUNTING AS A LANGUAGE OF BUSINESS
Accounting is often referred to as a “language of business”
because it is fundamental to the communication of
financial information.
CREATIVE AND CRITICAL THINKING IN ACCOUNTING
The practice of accountancy requires the exercise of
creative and critical thinking.
a. Creative thinking involves the use of imagination and
insight to solve problems by finding new relationships
(ideas) among items of information. It is most
important in identifying alternative solutions.
b. Critical thinking involves the logical analysis of issues,
using inductive or deductive reasoning to test new
relationships to determine their effectiveness. It is
most important in evaluating alternative solutions.
Creative skills and judgment are excited in problem
solving. The following are the steps in problem solving:
1. Recognizing a problem
2. Identifying alternative solutions
3. Evaluating the alternatives
4. Selecting a solution from among the alternatives
5. Implanting the solution
BOOKKEEPING AND ACCOUNTING
Although bookkeeping function is part of accounting, they
are not the same.
a. Bookkeeping refers to the process of recording the
accounts or transactions of an entity; it normally ends
with the preparation of a trial balance; unlike
accounting, bookkeeping does not require the
interpretation of the significance of the information
processed
b. Accounting covers the whole process of identifying,
recording, and communicating information to
interested users
ACCOUNTANCY
Accountancy refers to the profession or practice of
accounting which can be classified into two: (1) Public
practice; and (2) Private practice. Public practice does not
involve an employer-employee relationship while private
practice involves an employer-employee relationship
meaning the accountant is an employee.
FOUR (4) SECTORS IN THE PRACTICE OF ACCOUNTANCY
Under the Republic Act of 9298 also known as the
“Philippine Accountancy Act of 2004,” the practice of
accounting is sub-classified into the following:
1. Practice of Public Accountancy - involves the rendering
of audit or accounting related services to more than
one client on a fee basis
2. Practice in Commerce and Industry - refers to
employment in the private sector in a position which
involves decision making requiring professional
knowledge in the science of accounting and such
position requires that the holder thereof must be a CPA
3. Practice in Education/Academe - employment in an
educational institution which involves teaching of
accounting, auditing, management advisory services,
finance, business law, taxation, and other technically
related subjects
4. Practice in the Government - employment or
appointment to a position in an accounting
professional group in the government or in a
government-owned and/or controlled corporation,
including those performing proprietary functions,
where decision making requires professional
knowledge in the science of accounting, or where civil
service eligibility as a CPA is prerequisite
THE NEED FOR REPORTING STANDARD
For financial statement to be useful, they should be
prepared using reporting standards that are generally
acceptable. Otherwise, each entity would have to develop
its own standards. If that is the case, every entity may just
present any asset or income it wants and omit any liability
or expense it does not want. Financial statements would
not be comparable, the risk of fraudulent reporting is
heightened, and economic decisions based on these
financial statements would be grossly incorrect. For this e. Customers
reason, entities should follow a uniform set of reporting f. Public
standards when preparing and presenting financial COMMON BRANCHES OF ACCOUNTING
EXAMPLES OF DECISIONS AND TYPES OF INFORMATION
statements. The term generally acceptable means that 1. Financial Accounting - the branch of accounting that
NEEDED TO MAKE THOSE DECISIONS
either: focuses on general purpose financial statements
1. the standard has been established by an authoritative Example of decision Example of ⮚ General purpose financial statements are those
User
accounting rule-making body, eg. the PFRSs adopted to make information needed statements that cater to the common needs of
by the FRSC; or external users, primarily the potential and existing
1. External ⮚ Existing investor: Audited financial
2. the principle has gained general acceptance due to (Investor) statements of the investors, lenders, and other creditors
practice over time and has been proven most useful, Whether to hold or business to aid in
sell investment in ⮚ Financial accounting is governed by the Philippine
eg. double-entry recording and other implicit analyzing the value of
stocks the company Financial Reporting Standards (PFRSs)
concepts.
⮚ Potential investor: FINANCIAL ACCOUNTING VS FINANCIAL REPORTING
The process of establishing financial accounting standards
is a democratic process in that a majority of practicing Whether or not to The terms are often used interchangeably, although both
buy shares of focus on general purpose financial statements, financial
accountants must agree with a standard before it becomes stocks
implemented. reporting endeavors to promote principles that are also
2. External ⮚ Lender: Whether Audited financial
statements of the useful to other financial reporting.
FUNCTIONS OF ACCOUNTING IN BUSINESS (Lender or or not to extend
supplier) loan to a business business to aid in o Other financial reporting comprises information
Accounting is often referred to as “language of business” analyzing the
⮚ Supplier: Whether provided outside the financial statements that assists
because it is fundamental to the communication of company’s ability to
or not to extend in the interpretation of a complete set of financial
financial information. It has the following two broad pay its debts
credit to a business statements or improves users’ ability to make
functions in a business:
efficient economic decisions
1. To provide external users with information that is 3. Internal ⮚ Whether or not to Analysis of the
(Manager) effects of sales FINANCIAL STATEMENTS VS FINANCIAL REPORT
useful in making, among others, investment and credit increase the sale volume and sales 1. Financial statements are the structured presentation
decisions; and price of a product prices to earnings
of an entity’s financial position and results of its
2. To provide internal users with information that is 4. Internal ⮚ How much capital Budget report
operations; they are the end product of the accounting
useful in managing the business (Manager)
is needed to process and the means by which information gathered
USERS OF ACCOUNTING INFORMATION manufacture a and processed are periodically communicated to users
new product?
1. Internal users - those who are directly involved in 2. Financial report includes the financial statements plus
managing the business EXAMPLES IN WHICH ACCOUNTING IS USED IN
other information provided outside the financial
INVESTMENT AND CREDIT DECISIONS
a. Business owners who are directly involved in statements that assists in the interpretation of a
managing the business External user of Accounting complete set of financial statements or improve users’
Decision
b. Board of directors information information ability to make efficient economic decisions
c. Managerial personnel 1. Investor ⮚ Shall I invest in The financial
performance of Financial Statements Financial Report
2. External users - those who are not directly involved in this business? the business 1. Statement of financial 1. Statement of financial
managing the business is this a position position
a. Existing and potential investors (eg. stockholders profitable
undertaking? 2. Statement of profit or 2. Statement of profit or
who are not directly involved in managing the loss and other loss and other
2. Creditor ⮚ Shall I lend The ability of the
business) business to comprehensive income comprehensive income
b. Lenders (eg. banks) and Creditors (eg. suppliers) money to this generate revenue 3. Statement of changes in 3. Statement of changes in
business? and cash flows equity equity
c. Government agencies (eg. Bureau of International Does this from its 4. Statement of cash flows 4. Statement of cash flows
Revenue ‘BIR’, Securities and Exchange Commission business have operations 5. Notes 5. Notes
‘SEC’) the ability to
pay back my 6. Additional Statement of 6. Additional Statement of
d. Non-managerial personnel loan? financial position financial position
 7. Other information 6. Cost Accounting - the systematic recording and Branch of Type of accounting
Users of service
Accounting service provided
analysis of the costs of materials, labor, and overhead
Financial reporting is the provision of financial information 1. Financial ⮚ General ⮚ All businesses
incident to the production of goods or rendering of
about an entity that is useful to external users, primarily Accounting record-keeping, use financial
services ie. maintenance accounting in
the investors, lenders, and other creditors, in making
7. Accounting Education - teaching accounting-related of journals and their
investment and credit decisions.
subjects in an organized learning environment; a ledgers record-keepin
PRIMARY OBJECTIVE OF FINANCIAL REPORTING process of facilitating the acquisition of knowledge and g; these
To provide information about an entity’s economic skills regarding one or more of the other branches of record provide
resources (assets), claims to those resources (liabilities and accounting information
equity), and changes in those resources (income, that is also
8. Fiduciary Accounting - refers to the handling of
expenses, and other changes). used in the
accounts managed by a person entrusted with the
other
SECONDARY OBJECTIVE OF FINANCIAL REPORTING custody and management of property for the benefit branches of
To provide information useful in assessing the entity’s of another accounting
management stewardship (ie. how efficiently and 9. Estate Accounting - refers to the handling of accounts ⮚ Preparation of
effectively the entity’s management has discharged its for fiduciaries who wind up the affairs of a deceased general purpose ⮚ Businesses
responsibilities to use the entity’s economic resources). person financial prepare
statements general
o The term entity refers to the reporting entity, one 10. Social Accounting - process of communicating the
purpose FS at
that is required, or chooses, to prepare financial social and environmental effects of an entity’s least annually
statements, for example a ‘business’ economic actions to the society for the use of
2. Management Accounting - involves the accumulation 11. Accounting Systems - the installation of accounting lenders,
and communication of information for use by the procedures for the accumulation of financial data and investors, or
internal users; an offshoot of management accounting designing of accounting forms to be used in data government
is management advisory services which includes gathering regulatory
services to clients on matters of accounting, finance, bodies
12. Accounting Research - pertains to the careful analysis
business policies, organization procedures, product of economic events and other variables to understand 2. Managemen ⮚ Preparation of ⮚ Required by
costs, distribution, and many other phases of business their impact on decisions; includes a broad range of t Accounting specifically management to
conduct and operations topics, which may be related to one or more of the tailored aid them in
Financial Accounting Management Accounting other branches of accounting, the economy as a whole, management preforming
⮚ Focuses on the ⮚ Focuses on the or the market environment reports their
information needs of information needs of management
Related Branch of function
external users internal users Accounting Research Topic
Accounting
3. Government ⮚ General ⮚ Required by the
3. Government Accounting - refers to the accounting for ● Impact of fair value ● Financial Accounting
Accounting record-keeping government
the government and its instrumentalities, focusing measurement on the
and preparation and its agencies
attention on the custody of public funds, the purpose financial statements
of financial
or purposes on which those funds are committed, and ● Inventory management ● Management reports for the
the responsibility and accountability of the individuals and its effects on Accounting government and
entrusted with those funds earnings its agencies; also
4. Auditing - involves the inspection of an entity’s includes the
● Internal controls and ● Auditing preparation of
financial statements or business processes to ascertain
modern technology budgets and
their correspondence with an established criteria
accountability
5. Tax Accounting - is the preparation of tax returns and ● Becoming a certified ● Accounting Education
reports
rendering of tax advice, such as the determination of public accountant
tax consequences of certain proposed business 4. Auditing ⮚ Expression of an ⮚ Business with
endeavors opinion on the gross annual
 correspondence sales or business corporation can transact on its own, have its own
between receipts owners, properties, incur its own obligations, and sue or be
management exceeding accounting sued. (more on far pg15)
assertions and P3,000,000 are professionals in 4. Cooperative - is also owned by more than one
established required to their individual; however, a cooperative is formed in
criteria; the have their Continuing accordance with the provisions of The Philippine
most common financial Professional
Cooperative Code of 2008; the owners of a cooperative
form of an audit statements Development
are called members; registered with the Cooperative
opinion is the audited by and (CPD), and
Development Authority (CDA)
Independent independent other interest
Auditors’ Report CPA parties From the root word “cooperative,” a cooperative is an
which is association of individuals who joined together to
attached to 8.Accounting ⮚ Accounting ⮚ Required by contribute capital and cooperate in order to achieve
Research research papers, business
audited financial certain. (more on far pg16)
reports articles and owners,
similar professional Form of
Business Ownership Formation/Registration
5.Tax ⮚ Preparation of ⮚ All businesses publications organizations, Organization
Accounting tax returns; are required to and other 1. Sole ⮚ One ⮚ Registered with the
failure to file tax file tax returns interested Proprietor individual DTI
returns results parties
to penalty and 2. Partnership ⮚ More than ⮚ Formed by
imprisonment of one contractual
not less than 6 FORMS OF BUSINESS ORGANIZATIONS agreement
years but not ⮚ Registered with
A business is an activity where goods or services are
more than 10 SEC
exchanged for money. A person who is engaged in
years
business is called an entrepreneur or businessmen. 3. Corporation ⮚ More than ⮚ Formed by
⮚ Some taxpayers
⮚ Providing tax may require the 1. Sole/Single Proprietorship - is a business that is owned one operation of law
advice professional by only one individual; it is the most common and ⮚ Registered with
advice of a tax simplest form of a business organization; the business SEC
practitioner owner is called a sole proprietor; a sole proprietorship 4. Cooperative ⮚ More than ⮚ Formed in the
regarding the is registered with the Department of Trade and one accordance with
management of Industry (DTI) the Cooperative
taxes Code
2. Partnership - is a business that is owned by two or
6.Cost ⮚ Analysis of costs ⮚ Businesses use more individuals who entered into a contract to carry ⮚ Registered with the
Accounting of products or cost accounting on the business and divide among themselves the CDA
services to analyze the earnings therefrom; the business owners are called
cost of their partners; a partnership is registered with the Securities ADVANTAGES AND DISADVANTAGES OF THE DIFFERENCES
products or and Exchange Commission (SEC) FORMS OF BUSINESS ORGANIZATION
services and SOLE PROPRIETORSHIP
3. Corporation - is also owned by more than one
the effects of
individual, however, unlike a partnership, a corporation
👍 You are the boss and you 👎 You assume all the risk of
those costs in, Advantage Disadvantage
is created by operation of law rather than a contract;
among others,
ownership in a corporation is represented by shares of
earnings and keep all the profits. loss.

👍 Decision making is simple 👎 You take all responsibility

pricing policies stocks; the owners are called stockholders or
shareholders; registered with SEC
7.Accounting ⮚ Teaching of ⮚ Required by A corporation is an artificial being or a juridical person, because you have and rely mostly on
Education accounting business complete control over yourself in making
meaning in the eyes of the law, a corporation is like a
related subjects students, the business. decisions.
person, separate from its owners. Therefore, a
👍 Relatively easier and less 👎 It is more difficult to
costly to form because
there are fewer formal
business requirements.
👍 Lower extent of
government regulations
and relatively lower
taxes.
PARTNERSHIP
👍 Better business decisions 👎 Making business
Advantage
can be made because
“two heads are better
than one.”
👍 You share the business
risk and the responsibility
of running the business
with your partner(s).
👍 Compared to
corporations and
cooperatives, a
partnership is easier to
form because only a
contractual agreement
between the partners is
needed.
👍 Greater capital compared 👎 Lesser capital compared
to a sole proprietorship. to a corporation.
👍 Relatively lower extent of 👎 A partnership (other
government regulation
compared to
corporations.
CORPORATION
Advantage
👍 A stockholder who is not 👎 Your “say” on corporate
raise capital because you
rely mostly on your
personal assets and
loans to initially finance
the business.
👎 You are personally liable
for the debts and
obligations of the
business.
Disadvantage
decisions may give rise
to conflict among
partners.
👎 You don’t keep all the 👍 Limited liability of the
profits because you
need to share them with
your partner(s).
👎 Limited life, in the sense
that a partnership can
be easily dissolved by
👍 Greater capital and ease 👎 Greater extent of
the withdrawal,
retirement, death or
insanity of one of the
partners.
👍 If the corporation is
than a general
professional
partnership) is taxed like
a corporation.
👎 Unlimited liability. The
partners can be held
liable for partnership
👍 Unlimited life, in the
debts up to their
personal assets.
Disadvantage
a member of the
corporation’s board of
directors is relieved from
management
responsibilities. Only the
stockholders that are
elected as members of
the board of directors
and those they hire or
appoint are tasked with
managerial
responsibilities. This can
be an advantage because
a regular investor does
not need to work for the
corporation to earn
income.
👎 A corporation is more
owners because
stockholders are liable
for corporate debts only
up to the amount they
have invested.
in raising additional
funds because a
corporation can issue
shares to a wider extent
of investors.
👎 Unlike for a sole
listed, you can easily
transfer your shares to
other investors by selling
them in the stock market.
Many investors earn
profit this way- by buying
shares at a cheap price,
wait for prices to go up,
and then sell them. This
activity is referred to as
stock trading.
sense that the
withdrawal retirement,
death or insanity of one
of the stockholders does
affairs depends on the
number of shares you
own. Those who own
more shares are the
bosses and enjoy a larger
share of the
corporation’s profit.
COOPERATIVE
👍 Unlike a corporation,
difficult and more costly
to form because there
are more formal
business requirements.
government regulation
and higher taxes.
👍 A cooperative is generally 👎 A cooperative is
proprietorship or a
partnership where
business profits are
easily distributed to the
owner(s), in a
corporation, you have to
wait for the board of
directors to declare
dividends before you can
get your share in the
profits.
👍 Compared to a
not dissolve the
corporation. Although a
corporation has a legal
life of 50 years, this can
be renewed for an
indefinite number of
renewals.
Advantage
👎 A cooperative is prone to
your “say” on
cooperative affairs is not
affected by the number
of shares you own. This is
because, in a
cooperative, each
member is entitled to
only one vote regardless
of his or her
shareholdings. However,
members with larger
shareholdings are
entitled to larger share in
profit (net surplus).
exempt from paying
taxes. This is the main
advantage of a
cooperative and the most
common reason why
cooperatives are
organized. Moreover, a
cooperative may receive
assistance from the
government.
👎 The Cooperative Code
corporation, a
cooperative is easier and
less costly to form
because there are fewer
Disadvantage
poor management.
Cooperatives are, more
often than not, managed
by members who were
elected as board of
directors rather than by
employed professional
managers. Since there is
a ‘one-member,
one-vote’ policy in a
cooperative, influential
members tend to
dominate the election
process. The result is
that those who get
elected may not be the
ones who are most
qualified for the task.
susceptible to
corruption. Due to its
management structure
and lack of profit motive,
the elected officers may
be inclined to act on
their personal interest.
places some restrictions
on the distribution of a
cooperative’s profit to its
members. More
specifically, the Code
requires a cooperative to
 formal business appropriate a portion of
requirements. its annual profit to some
funds. Only the
remaining portion can be
distributed to the
members. Furthermore,
when the cooperative is
dissolved, the amount
accumulated in a fund
called the “reserve fund”
will not be returned to
the members, but rather
donated to another
cooperative or to the
community.
👍 Limited liability- the 👎 Compared to a
members are liable for corporation, it is more
cooperative debts only difficult for a cooperative
up to the amount they to sustain growth. This is
have invested. in part because of the
lack of profit motive and
the lack of management
expertise. Moreover, a
cooperative’s success
strongly depends on the
members’ cooperation
and members are not
always willing to
cooperate. The success
of a business depends on
continuing effort. Sadly,
many cooperatives are
zealous at the start but
fail to sustain continuing
effort resulting to the
waning down of their
activities. This does not
mean though that all
cooperatives are small
businesses. There are
many multi-billionaire
cooperatives in our
country. Some might be
located in your
community.
👍 Unlimited life, in the 👎 Unlike in a corporation
sense that the
withdrawal, retirement,
where the stockholder
can freely transfer his
death or insanity of one shares, in a cooperative, 3.4 Factories (clothing factories, animal feeds
of the members does not there are restrictions on factories, plastic wares factories, etc.)
dissolve the cooperative. the transfer of a
Although a cooperative member’s shares. For Some businesses, called hybrid businesses, engage in
has a legal life of 50 example, the approval of more than one type of activity. It is classified into one of
years, this can be the board of directors the major types based on the activity that is most in line
renewed for an indefinite must first be obtained with the business’ purpose.
number of renewals. before a member can
ADVANTAGES AND DISADVANTAGES OF THE DIFFERENT
transfer his or her
TYPES OF BUSINESS
shares.
SERVICE BUSINESS
TYPES OF BUSINESS ACCORDING TO ACTIVITIES Advantage Disadvantage
1. Service Business - one that offers services as its main
product rather than physical goods; it may offer
👍 You don’t need to worry 👎 You may not have a
about inventory, flexible personal time
professional skills, expertise, advice, lending service,
warehousing and because you need to be
and similar services distribution costs directly involved in
1.1 Schools because you don’t have providing a service to a
any inventory. You only customer. You can stock
1.2 Professionals (accounting firm, law firm,
have some minimal inventory but not
electrician, etc.)
supplies necessary in service. Until your
1.3 Hospitals providing your services. business is big enough to
1.4 Banks and other financial institutions be able to hire other
professionals to do the
1.5 Hotels and restaurants
work for you, you will
1.6 Transportation and travel (taxi operator, travel need to render the
agency, etc.) services yourself.
1.7 Entertainment and event planners (wedding
planners, concert promoters, etc.)
👍 You may only need a 👎 Service businesses
small capital because normally suffer first from
2. Merchandising (Trading) Business - one that buys and what you are selling is decline in demand
sells goods without changing their physical form your skill set and you during times of
2.1 General Merchandise Resellers (grocery stores, only need yourself to economic difficulty. This
department stores, hardware stores, pharmacies, render a service. If you is because most services
online stores, sari-sari stores, etc.) are a manufacturer, you are perceived as luxuries
need to buy raw rather than necessities
2.2 Distributors and Dealers (rice wholesalers, materials and machinery for survival.
vegetable dealers, 2nd hand cars dealers, etc.) to produce your product.
3. Manufacturing Business - one that buys raw materials
and processes them into final products; unlike a 👍 You are perceived as an 👎 Your business’ success
expert in your chosen depends on your
merchandising business, a manufacturing business
field. People respect you. credibility. Personally,
changes the physical form of the goods it has
You can also have fans. you must have a good
purchased in a production process
reputation. You need to
3.1 Car Manufacturers (Toyota, Isuzu, Volkswagen, be always discreet in the
etc.) things you say and the
way you act in the
3.2 Technology Companies (Apple, Samsung, Sony,
etc.) society.
3.3 Food Processing Companies (San Miguel Pure 👎 Since service business is
Foods, Silver Swan, etc.) founded on good

MERCHANDISING BUSINESS
Advantage
👍 Compared to a
manufacturing firm, you
may need a much lower
start-up capital because
you don’t need to
acquire machineries to
produce your goods.
reputation, it is more
costly to commit an
error in a service
business compared to a
merchandising business.
Disadvantage
👎 You need to have a retail
store to display your
goods and the store
must be in a strategic
location for it to attract
more customers. MANUFACTURING BUSINESS
👍 It is much easier to start 👎 Self-satisfaction is low
a merchandising business
because you don’t need
to have an expertise or
special skill (service
business) and you don’t
need to have invented a
new product or have
conceptualized an
innovative idea for an
existing product
(manufacturing
business).
👍 You can have a better
because you did not
produce the products
you sold.
👎 You rely on raw
pricing policy because
mass production can
decrease your unit cost
(often called “economies
of scale”).
materials. You need to
manage them properly
to ensure that they are
available when they are
needed. This is because
a shortage in a raw
material can disrupt your
operation, and that can
be very costly. In a
merchandising business,
if you run out of a
specific good, you don’t
necessarily need to close
your store because you
can still sell other goods.

👍 You can take advantage 👎 Less flexibility in

of price fluctuations.
👍 Lower cost of quality.
This is because “what
you buy is what you sell.”
In a service or
manufacturing business,
you need to continually
improve your products to
maintain their stability. In
a merchandising
business, if a certain
product is not selling
well, you can just stop
buying it and find an
alternative product,
another brand maybe.
👍 You have a high growth 👎 You need a high start-up
managing costs. This is
because the cost of your
goods is based primarily
on their purchase price,
which you do not
👍 You have the opportunity 👎 Conceptualizing a viable
control. “In a
manufacturing business,
you can cut down cost by
redesigning your
product, improving your
processes, acquiring
more efficient machines,
employing more skillful
personnel, and so much 👍 Self-satisfaction is high. 👎 You need to be
more.”
👎 Keeping track of
inventory is tedious,
most especially when
you are selling numerous
and varied items with
fast turnover rate. Also,
you can incur additional
costs due to spoilages, 👍 You may not need to
theft, breakages,
damages, and
obsolescence.
Advantage
potential because you
can tap into a wider
market and can produce
in large quantities.
to establish a brand that
could last longer than
your lifetime. This is the
ultimate dream of most
entrepreneurs.
Knowing that consumers
are happy and satisfied
with a tangible product
you have produced
brings you pride and joy.
👎 Warehousing and
have a strategically
located retail store to
display your products
because you can sell
directly to wholesalers
rather than to end
consumers.
Disadvantage
👍 Greater flexibility in 👎 Managing a
managing costs. manufacturing business
capital to acquire can be difficult because
machineries, to employ
production processes are
people, and to acquire a often complicated and
big space for your
there is always some
production. room for improvement
(although many skilled
manufacturing business managers may take this
is difficult. This is why positively as a
more entrepreneurs challenge).
would rather engage in
merchandising.
👎 Also, more accounting
work is needed. This is
why there is a separate
branch of accounting
continuously innovative
formed primarily for
and abreast of changes
in technology. If another manufacturing
company comes up with businesses, ie. cost
a better and cheaper accounting.
product, your product
will automatically lose ACCOUNTING CONCEPTS AND PRINCIPLES
demand. Accounting concepts and principles (assumptions or
postulates) are a set of logical ideas and procedures that
guide the accountant in recording and communicating
logistics costs can be
economic information. They provide reasonable assurance
high.
that information communicated to users is prepared in a
proper way. (more on far pg43)
o Accounting Assumptions - are the fundamental
concepts or principles and basic notions that provide
the foundation of the accounting process.
o Accounting Theory - is logical reasoning in the form of
a set of broad principles that:
i. provide a general frame of reference by which
accounting practice can be evaluated; and
ii. guide the development of new practices and
procedures
It is the organized set of concepts and related
principles that explain and guide the accountant’s
action in identifying, measuring, communicating
accounting information.
BASIC ACCOUNTING CONCEPTS
1. Separate Entity Concept - the business is viewed as a
separate person, distinct from its owner(s). Only the
transactions of the business are recorded in the books
of accounts. (more on far pg44)
2. Historical Cost Concept (Cost Principle) - assets are
initially recorded at their acquisition cost.
3. Going Concern Assumption - the business is assumed
to continue to exist for an indefinite period of time.
The opposite of going concern is liquidating concern in
which a business intends to end its operations or if it
has no other choice but to do so. The assets of a
liquidating concern are measured at net selling price
rather than historical cost.
4. Matching (Association of Cost and Effect) - some costs
are initially recognized as assets and charged as
expenses only when the related revenue is recognized.
5. Accrual Basis of Accounting - economic events are
recorded in the period in which they occur rather than
at the point in time when they affect cash. Thus,
income is recognized in the period when it is earned
rather than when it is collected, while expense is
recognized in the period when it is incurred rather than
when it is paid.
6. Prudence (or Conservatism) - the accountant observes
some degree of caution when exercising judgments
needed in making accounting estimates under
conditions of uncertainty. This is necessary so that
assets or income are not overstated and liabilities or
expenses are not understated.
7. Time Period (Periodicity or Accounting Period) - the life
of the entity is divided into series of reporting periods.
An accounting period is usually 12 months and may
either be a:
7.1 Calendar Year - starts on January 1 and ends on
December 31 of that same year
7.2 Fiscal Year - covers 12 months but starts on a date
other than January 1 (more on far pg46)
8. Double-Entry System - each accountable event is
recorded in two parts - debit and credit.
9. Stable Monetary Unit (Monetary Unit Assumption) -
assets, liabilities, equity, income and expenses are
stated in terms of a common unit of measure, which is
the peso in the Philippines and the purchasing power
of the peso is regarded as stable or constant and that
its instability is insignificant and therefore ignored. To
be useful, accounting information should be stated in a
common denominator.
10. Materiality Concept - information is material if its
omission or misstatement could influence economic
decisions. Materiality is a matter of professional
judgment and is based on the size and nature of the
item being judged.
11. Cost-Benefit (Cost Constraint or Reasonable Assurance)
- the cost of processing and communicating
information should not exceed the benefits to be
derived from it.
12. Concept of Articulation - all of the components of a
complete set of financial statements are interrelated.
The preparation of a worksheet (and the eventual
completion of the financial statements) recognizes that
the financial statements are fundamentally interrelated
and interact with each other. (more on cfas pg10)
13. Full Disclosure Principle - recognizes that the nature
and amount of information included in the financial
statements reflect a series of judgmental trade-offs:
a. sufficient detail to disclose matters that make a
difference to users, yet
b. sufficient condensation to make the information
understandable, keeping in mind the costs of
preparing and using it.
14. Consistency Concept - the financial statements are
prepared on the basis of accounting principles that are
applied consistently from one period to the next.
Changes in accounting policies are made only when
required or permitted by the PFRSs or when the
change results to more relevant and reliable
information. Changes in accounting policies are
disclosed in the notes.
15. Entity Theory - the accounting objective is geared
towards proper income determination. Proper
matching of costs against revenues is the ultimate end.
This theory emphasizes the income statement and is
exemplified by the equation “Assets = Liabilities +
Capital.” (cfas)
16. Proprietary Theory - the accounting objective is geared
towards proper valuation of assets. This theory
emphasizes the importance of the balance sheet and is
exemplified by the equation “Assets - Liabilities =
Capital.” (cfas)
17. Residual Equity Theory - this theory is applicable when
there are two classes of shares issues, ie. ordinary and
preferred. The equation is “Assets - Liabilities -
Preferred Shareholders’ Equity = Ordinary
Shareholders’ Equity.” (cfas)
18. Fund Theory - the accounting objective is neither
proper income determination nor proper valuation of
assets but the custody and administration of funds. The
objective is directed towards cash flows, exemplified by
the formula “Cash Inflows - Cash Outflows = Fund.”
This concept is used in government accounting and
fiduciary accounting. (cfas)
19. Realization - the process of converting non-cash assets
into cash or claims of cash. It is also the concept that
deals with revenue recognition. (cfas)
20. Matching Concept - costs that are directly related to
the earning of revenue are recognized as expenses in
the same period the related revenue is recognized.
(cfas)
21. Systematic and Rational Allocation - costs that are not
directly related to the earning of revenue are initially
recognized as assets and recognized as expenses over
the periods their economic benefits are consumed,
using some method of allocation. (cfas)
22. Immediate Recognition - costs that do not meet the
definition of an asset, or ceases to meet the definition
of an asset, are expensed immediately. (cfas)
ACCOUNTING STANDARDS
Accounting concepts and principles are either explicit or
implicit. Explicit concepts and principles are those that are
specifically mentioned in the Conceptual Framework for
Financial Reporting and on the Philippine Financial
Reporting Standards (PFRSs). Implicit concepts and
principles are those that are not specifically mentioned in
the foregoing but are customarily used because of their
general and longtime acceptance within the accountancy
profession.
PHILIPPINE FINANCIAL REPORTING STANDARDS (PFRSs)
The PFRSs are Standards and Interpretations adopted by
the Financial Reporting Standards Council (FRSC) and
consists of the following:
a. Philippine Financial Reporting Standards (PFRSs);
b. Philippine Accounting Standards (PASs); and
c. Interpretation
The PFRSs are issued by the FRSC, which is the official
accounting standard-setting body in the Philippines. They
are patterned from the International Financial Reporting
Standards (IFRSs) which are issued by the International
Accounting Standards Board (IASB). This means that the
accounting standards used here in the Philippines are
similar to those used in other countries worldwide. The
terms “generally acceptable” means that either:
1. The standard has been established by an authoritative
accounting standard-setting body; or
2. The principle has gained general acceptance due to
practice over time and has been proven to be most
useful
The process of establishing accounting standards is a
democratic process in that a majority of practicing
accountants worldwide must agree with a standard before
it becomes implemented.
HIERARCHY OF REPORTING STANDARDS
When selecting its accounting policies, an entity considers
the following in descending order:
1. Philippine Financial Reporting Standards (PFRSs)
2. In the absence of a PFRS that specifically applies to a
transaction or event, management shall use its
judgment in developing and applying an accounting
policy that results in information that is relevant and
reliable. In making the judgment,
i. management shall refer to, and consider the
applicability of, the following sources in descending
order:
a. the requirements in PFRS dealing with similar
and related issues;
b. the conceptual framework
ii. management may also consider the following
a. pronouncements of other standard-setting
bodies
b. accounting literature and accepted industry
practices
Although the selection of appropriate accounting policies
is the responsibility of the entity’s management, the
proper application of accounting principles is most
dependent upon the professional judgment of the
accountant.
ACCOUNTING STANDARD SETTING BODIES AND OTHER
RELEVANT ORGANIZATIONS
1. Financial Reporting Standards Council (FRSC) - is the
official accounting standard setting body in the
Philippines created under the Philippine Accountancy
Act of 2004 (R.A. 9298). The FRSC is composes of
fifteen (15) individuals- a chairperson who had been or
presently a senior accounting practitioner in any of the
scope of accounting practice and fourteen (14)
representative members:
Chairperson
Fourteen representative members from:
Board of Accountancy (BOA)
Commission on Audit (COA)
Securities and Exchange Commission (SEC)
Bangko Sentral ng Pilipinas (BSP)
Bureau of International Revenue (BIR)
A major organization composed of preparers
and users of financial statements
Accredited National Professional Organization of CPAS:
Public Practice
Commerce and Industry
Academe/Education
Government
2. Philippine Interpretations Committee (PIC) - formed
by the Accounting Standards Council (ASC), the
predecessor of FRSC, with the role of reviewing the
interpretations of the International Financial Reporting
Interpretations Committee (IFRIC) for approval and
adoption by the FRSC
3. Board of Accountancy (BOA) - the professional
regulatory board created under R.A. 9298 to supervise
the registration, licensure and practice of accountancy
in the Philippines. The BOA consists of a chairperson
and six (6) members approved by the President of the
Philippines. The Board shall elect a vice-chairperson
from among its members for a term of one (1) year.
4. Securities and Exchange Commission (SEC) - is the
government agency tasked in regulating corporations
and partnerships, capital and investments markets, and
the investing public.
5. Bureau of Internal Revenue (BIR) - administers the
provisions of the National Internal Revenue Code.
These provisions do not always reflect the goals of
financial reporting. However, they do at times
influence the choice of accounting methods and
procedures.
6. Bangko Sentral ng Pilipinas (BSP) - influences the
selection and application of accounting policies by
banks and other entities performing banking functions.
7. Cooperative Development Authority (CDA) -
influences the selection and application of accounting
policies by cooperatives.
Accounting policies prescribed by a regulatory body are
1 sometimes referred to as regulatory accounting
principles.
1
INTERNATIONAL ACCOUNTING STANDARDS
1
1 The International Accounting Standards Board (IASB) is
1 the standard-setting body of the IFRS Foundation with the
1 main objectives of developing and promoting global
accounting standards. The IASB was established in April 1,
2001 as part of the International Accounting Standards
1
Committee (IASC) Foundation. The IASC Foundation is a
2 non-profit organization based in Delaware, USA and is the
2 parent of IASB, which is based in London. On July 1, 2010,
2 the IASC Foundation was renamed to International
2 Financial Reporting Standards Foundation or IFRS
Foundation. (more on cfas pg22-23)
DUE PROCESS
The IFRS are developed through an international due
process that involves accountants and other various
interested individuals and organizations from around the
world. Due process normally involves the following steps:
1. The staff identifies and reviews issues associated with a
topic and considers the application of the Conceptual
Framework to the issues;
2. Study of national accounting requirements and
practice, including consultation with national
standard-setters;
3. Consulting the Trustees and the Advisory Council about
the advisability of adding the topic to the IASB’s
agenda;
4. Formation of an advisory group to give advice to the
IASB on the project;
5. Publishing a discussion document for public comment;
6. Publishing an exposure draft for public comment;
7. Publishing with an exposure draft a basis for
conclusions and the alternative views of any IASB
member who opposes publication;
8. Consideration of all comments received;
9. Holding a public hearing and conducting field tests, if
necessary; and
10. Publishing a standard, including:
i. a basis for conclusions, explaining, among other
things, the steps in the IASB’s due process and how
the IASB dealt with public comments on the
exposure draft; and
ii. the dissenting opinion of any IASB member.
OTHER RELEVANT INTERNATIONAL ORGANIZATIONS
1. International Financial Reporting Interpretations
Committee (IFRIC) - is a committee that prepares
interpretations of how specific issues should be
accounted for under the application of IFRS where:
a. The standards do not include specific authoritative
guidance; and
b. There is a risk of divergent and unacceptable
accounting practices.
2. IFRS Advisory Council (Standards Advisory Council) - a
group of organizations and individuals with an interest
in international financial reporting. The Advisory
Council’s role includes advising on priorities within the
IASB’s work program. The IASB is required to consult
with the Advisory Council in advance of any board
decisions on major projects that it wishes to add its
agenda.
3. International Federation of Accountants (IFAC) - a
non-profit, non-governmental, and non-political
organization of accountancy bodies that represents the
worldwide accountancy profession. Its mission is to
develop and enhance the profession to provide service
services of consistently high quality in the public
interest.
4. International Organization of Securities Commissions
(IOSCO) - an international body of security
commissions. The Philippine SEC is a member of IOSCO.
MOVE TO IFRSs
Prior to the full adoption of the IFRSs in 2005, the
accounting standards used in the Philippines were
previously based on US GAAP, ie., the Statements of
Financial Accounting Standards issued by the Federal
Accounting Standards Board (FASB), the US national
standard setting body. (more on cfas pg25)
THE FUTURE OF IFRSs
A significant milestone towards achieving the goal of
having one set of global standards was reached in October
2002 when the FASB and the IASB entered into a
memorandum of understanding called the Norwalk
Agreement. In this agreement, the FASB and the IASB
formalized their commitment to the convergence of US
GAAP and IFRS by agreeing to use their best efforts to:
a. make their existing financial reporting standards fully
compatible as soon as practicable, ie., minimize
difference; and
b. coordinate their future work programs to ensure that
once achieved, compatibility is maintained.
CHANGES IN REPORTING STANDARDS
Once established, financial reporting standards are
continually reviewed, revised or superseded. Changes to
reporting standards are primarily made in response to
users’ needs. Users’ needs for financial information
change, and so must financial reporting standards in order
to continually provide useful information. Legal, political,
business and social environments also influence changes in
reporting standards. Regulatory bodies, lobbyists, laws and
regulations, and changes in economic environments affect
the choice of accounting treatment provided under the
reporting standards.
RELEVANT REGULATORY BODIES
Other than the FRSC, the following also affect the
accounting policies used by businesses and their financial
reporting:
1. Securities and Exchange Commission (SEC) - is tasked
with regulating corporations, including partnerships;
requires corporations and partnerships to file audited
financial statements
2. Bureau of International Revenue (BIR) - is tasked in
collecting national taxes and administering the
provisions of the Tax Code
3. Bangko Sentral ng Pilipinas (BSP) - is tasked in
regulating banks and other entities performing
banking functions; influences the selection and
application of accounting policies by these businesses
4. Cooperative Department Authority (CDA) - is tasked in
regulating cooperatives; influences the selection and
application of accounting policies by cooperatives
CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING
Just like the Standards, the Conceptual Framework for
Financial Reporting also prescribes accounting concepts
that are relevant to the presentation of financial
statements. However, the Conceptual Framework is not a
standard. Rather, the Conceptual Framework serves as a
general frame of reference in developing or applying the
standards.
PURPOSE OF THE CONCEPTUAL FRAMEWORK
The Conceptual Framework prescribes the concepts for
general purpose financial reporting. Its purpose is to:
a. assist the International Accounting Standards Board
(IASB) in developing Standards that are based on
consistent concepts;
b. assist preparers in developing consistent accounting
policies when no Standard applies to a particular
transaction or when a Standard allows a choice of
accounting policy; and
c. assist all parties in understanding and interpreting the
Standards
The Conceptual Framework provides foundation for the
development of Standards that:
a. promote transparency by enhancing the international
comparability and quality of financial information
b. strengthen accountability by reducing the information
gap between providers of capital and the entity’s
management
c. contribute to economic efficiency by helping investors
to identify opportunities and risks around the world,
thus improving capital allocation. The use of a single,
trusted accounting language lowers the cost of capital
and reduces international reporting costs
SCOPE OF THE CONCEPTUAL FRAMEWORK
The Conceptual Framework is concerned with general
purpose financial reporting which involves the
preparation of general purpose financial statements. The
Conceptual Framework provides concepts that underlie
general purpose financial reporting with regard to the
following:
1. The objective of financial reporting
2. Qualitative characteristics of useful financial
information
3. Financial statements and the reporting entity
4. The elements of financial statements
5. Recognition and derecognition
6. Measurement
7. Presentation and disclosure
8. Concepts of capital and capital maintenance
THE OBJECTIVE OF FINANCIAL REPORTING
The objective of general purpose financial reporting is to
provide financial information about the reporting entity
that is useful to existing and potential investors, lenders
and other creditors in making decisions about providing
resources to the entity. This objective is the foundation of
the Conceptual Framework. All the other aspects of the
Conceptual Framework revolve around this objective.
General purpose financial reporting (or simply financial
reporting) deals with providing information that caters to
the common needs of the primary users. Therefore,
general purpose financial reports do not and cannot
provide all the information needs of primary users. (more
on cfas pg40)
DECISIONS ABOUT PROVIDING RESOURCES TO THE ENTITY
The primary users’ decisions about providing resources to
the entity involve decisions on:
a. buying, selling or holding investments;
b. providing or settling loans and other forms of credit; or
c. exercising voting or similar rights that could influence
management’s actions relating to the use of the
entity’s economic resources.
These decisions depend on the primary users’ expected
returns (eg. investment income or repayment of loan).
Expectations about returns, in turn, depend on the
assessments of the entity’s (i) prospects for future net
cash inflows; and (ii) management stewardship. To make
these assessments, investors, lenders and other creditors
need information on:
a. the economic resources of the entity, claims against
the entity and changes in those resources and claims;
and
b. how efficiently and effectively the entity’s
management has utilized the entity’s economic
resources.
INFORMATION ON ECONOMIC RESOURCES, CLAIMS, AND
CHANGES
General purpose financial reports provide information on a
reporting entity’s:
a. Financial Position - information on economic
resources (assets) and claims against the reporting
entity (liabilities and equity); and
b. Changes in Economic Resources and Claims -
information on financial performance (income and
expenses) and other transactions and events that lead
to changes in financial position.
Collectively, these are referred to under the Conceptual
Framework as the economic phenomena.
ECONOMIC RESOURCES AND CLAIMS
Information about the nature and amounts of an entity’s
economic resources (assets) and claims (liabilities and
equity) can help users to identify the entity’s financial
strengths and weaknesses. That information can help users
in assessing the entity’s:
a. Liquidity and solvency;
b. Needs for additional financing and how successful it is
likely to be in obtaining that financing; and
c. Management’s stewardship on the use of economic
resources. (more on cfas pg42)
CHANGES IN ECONOMIC RESOURCES AND CLAIMS
Changes in economic resources and claims result from:
a. financial performance (income and expenses); and
b. other events and transactions.
Information on financial performance helps users access
the entity’s ability to provide return from its economic
resources. Return provides an indication on how well
management has efficiently and effectively used the
entity’s resources. Information on the variability of the
return helps users in assessing the uncertainty of future
cash flows. Information based on accrual accounting
provides a better basis for assessing an entity’s financial
performance than information based solely on cash
receipts and payments during the period. Information on
past cash flows help users assess the entity’s ability to
generate future cash flows by providing users a basis in
understanding the entity’s operating, investing and
financing activities, assessing its liquidity or solvency, and
interpreting other information about its financial
performance. Economic resources and claims may also
change for reasons aside from financial performance, such
as issuing debt or equity instruments.
INFORMATION ABOUT USE OF THE ENTITY’S ECONOMIC
RESOURCES
Information on how efficiently and effectively an entity’s
management has discharged its responsibilities to use the
entity’s economic resources helps users assess the entity’s
management’s stewardship. This information also helps in
predicting how efficiently the entity’s resources will be
used in future periods; thus, helping in the assessment of
the entity’s prospects for future net cash inflows.
QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL
INFORMATION
Qualitative Characteristics are the traits that determine
whether an item of information is useful to users. Without
these characteristics, information may be deemed useless.
The qualitative characteristics are broadly classified into
two, namely:
1. Fundamental Qualitative Characteristics - these are
the characteristics that make information useful to
users. They consist of the following:
1.1 Relevance - information is relevant if it can affect
the decisions of users
a. Predictive Value - can help users to make
predictions about future outcomes
b. Confirmatory Value (Feedback) - can help
users confirm their past predictions
c. Materiality - is an ‘entity-specific’ aspect of
relevance, meaning it depends on the facts
and circumstances surrounding a specific
entity. Accordingly, the Conceptual Framework
 and the Standards do not specify a uniform
quantitative threshold for materiality for it is a
matter of judgment. Making materiality
judgments provides a non-mandatory
guidance or materiality process:
i. Identify the information that has the
potential to be material
ii. Assess whether the information identified
in step 1 is, in fact, material
a. Whether the information could
influence the users’ decisions on the
basis of the financial statements as a
Whole
b. Quantitative (size of the impact of the
item) and Qualitative factors
(characteristics of the item;
entity-specific qualitative factors and
external qualitative factors)
iii. Organize the information within the draft
financial statements in a way that
communicates the information clearly and
concisely to primary users
iv. Review the draft financial statements to
determine whether all material
information has been identified and
materiality considered from a wide
perspective and in aggregate, on the basis
of the complete set of financial statement
(more on cfas pg47)
1.2 Faithful Representation - information is faithfully
represented if it is factual, meaning it represents
the actual effects of events that have taken place
a. Completeness - complete understanding of
the financial statements is provided
b. Neutrality - information is selected or
presented without bias and is not manipulated
to increase its favorability or decrease its
unfavorability
c. Free from error - information is not materially
misstated
2. Enhancing Qualitative Characteristics - these
characteristics support the fundamental
characteristics. The enhance the usefulness of
information. As such, they must be maximized. They
consist of the following:
a. Comparability - information is comparable if it
can help users identify similarities and differences
between different sets of information
b. Verifiability - information is verifiable if different
users could reach a general agreement as to what
the information intends to represent
c. Timeliness - information is timely if it is available
to users in time to be able to influence their
decisions
d. Understandability - information is
understandable if it is presented in a clear and
concise manner
APPLYING THE QUALITATIVE CHARACTERISTICS
The fundamental qualitative characteristics are essential
to the usefulness of information; meaning, information
must be both relevant and faithfully represented for it to
be useful. The enhancing qualitative characteristics only
enhance the usefulness of information that is both
relevant and faithfully represented but cannot make
information that is irrelevant or erroneous to be useful.
Accordingly, the eqc should be maximized to the extent
possible.
THE COST CONSTRAINT
Cost is a pervasive constrain on the entity’s ability to
provide useful financial information. Providing information
entails cost and this can only be justified by the benefits
expected to be derived from using the information.
Accordingly, an optimum balance between costs and
benefits is desirable such that costs do not outweigh the
benefits.
FINANCIAL STATEMENTS AND THE REPORTING ENTITY
The objective of general purpose financial statements is to
provide financial information about the reporting entity’s
assets, liabilities, equity, income and expenses that is
useful in assessing the entity’s prospects for future net
cash inflows and management’s stewardship over
economic resources. That information is provided in the:
a. statement of financial position (for recognized assets,
liabilities, and equity);
b. statement(s) of financial performance (for income and
expenses); and
c. other statements and notes (for additional
information)
REPORTING PERIOD
Financial statements are prepared for a specific period of
time and provide information on assets, liabilities and
equity that existed at the end of the reporting period, or
during the reporting period, and income and expenses for
the reporting period. To help users of financial statements
in evaluating changes and trends, financial statements also
provide comparative information for at least one
preceding reporting period.
Forward-looking information. Financial statements are
designed to provide information about past events.
Information about possible future transactions and other
events is included in the financial statement only if it
relates to the past information presented in the financial
statements and is deemed useful to users of financial
statements.
Perspective adopted in financial statements. Information
in financial statements is prepared from the perspective of
the reporting entity, not from the perspective of any
particular group of financial statement user.
REPORTING ENTITY
Sometimes an entity controls another entity. The
controlling entity is called the parent, while the controlled
entity is called the subsidiary. If a reporting entity
comprises both the parent and its subsidiaries, the
reporting entity’s financial statements are referred to as
consolidated financial statements. If a reporting entity is a
parent alone, the financial statements are referred to as
unconsolidated financial statements. If a reporting entity
comprises two or more entities that are not all linked by a
parent-subsidiary relationship, the reporting entity’s
financial statements are referred to as combined financial
statements.
ELEMENTS OF FINANCIAL STATEMENTS
1. Assets - rights, potential to produce economic benefits,
control (more on cfas pg54-57)
2. Liabilities - obligation, transfer of an economic
resource, present obligation as a result of past events
(more on pg58-62)
3. Equity
4. Income
5. Expenses
RECOGNITION AND DERECOGNITION
Recognition is a process of including in the statement of
financial position or the statement(s) of financial
performance an item that meets the definition of one of
the financial statement elements. This involves recording
the item in words and in monetary amount and including
that amount in the totals of either of those statements.
Recognition criteria. An item is recognized if (a) it meets
the definition of an asset, liability, equity, income and
expense; and (b) recognizing it would provide useful
information, ie. relevant and faithfully represented
information. (more on cfas pg64-67)
Derecognition is the removal of a previously recognized
asset or liability from the entity’s statement of financial
position. It occurs when the item no longer meet the
definition of an asset or liability, such as when the entity
losses control of all or part of the asset, or no longer has a
present obligation for all part of the liability. (more on cfas
pg68)
UNIT OF ACCOUNT
Unit of account is the right or the group of rights, the
obligation or the group of obligations, or the group of
rights and obligations, to which recognition criteria and
measurement concepts are applied. A unit of account can
be an account title, a group of similar assets, or a group of
assets and liabilities. It is selected for an asset or liability
when determining how that asset or liability, and the
related income or expense, will be recognized and
measured. If an entity transfers part of an asset or part of
a liability, the unit of account may change at that time, so
that the transferred component and the retained
component become separate units of account.
Transfers. Derecognition is not appropriate if the entity
retains substantial control of a transferred asset. In such
case, the entity continues to recognize the transferred
asset and recognizes any proceeds received from the
transfer of a liability. If there is only a partial transfer, the
entity derecognizes only that transferred component and
continues to recognize the retained component. (more on
cfas pg69-72)
FACTORS SPECIFIC TO INITIAL MEASUREMENT
In transaction on market terms, an asset’s (liability’s) cost
is normally similar to its fair value on initial recognition.
Even so, it is still necessary to describe the measurement
basis used at initial recognition because this determines
whether any income or expense arises on that date.
Moreover, the initial and subsequent measurement bases
usually parallel each other. In transactions not on market
terms, measurement at historical cost may not provide
faithfully represented information. Examples of
transactions not on market terms include:
a. transactions in which the transaction price is affected
by related party relationships or by financial distress of
one of the parties
b. receipt of donation from another party or a grant from
the government
c. incurrence of a liability that is imposed by law or a
penalty for an act of wrongdoing
In such cases, it may be appropriate to measure the
resulting asset or liability at a deemed cost.
MORE THAN ONE MEASUREMENT BASIS
Sometimes it may be necessary to use more than one
measurement basis in order to provide useful information.
In most cases, the use of different measurement basis is
applied in such a way that:
a. a single measurement basis is used in the statement of
financial position and statement(s) of financial
performance; and
b. additional information is disclosed in the notes for a
different measurement basis.
In some cases, however, it may be more appropriate to:
a. use a current value measurement basis for the asset or
liability in the statement of financial position; and
b. a different measurement basis for the related income
and expenses in the statement of profit or loss.
MEASUREMENT OF EQUITY
Total equity is not measured directly. It is simply equal to
the difference between the carrying amounts of
recognized assets and recognized liabilities. Financial
statements are not designed to show an entity’s value.
Thus, total equity cannot be expected to be equal to the
entity’s market value nor the amount that can be raised
from either selling or liquidating the entity. (more on cfas
pg82-83)
CASH-FLOW-BASED MEASUREMENT TECHNIQUES
A measure that cannot be observed directly needs to be
estimated. One way to make the estimate is by using
cash-flow-based measurement techniques. Such
techniques are not measurement bases, but rather used in
applying a measurement basis. Accordingly, when using
such a technique, it is necessary to identify which
measurement basis is used and the extent to which the
technique reflects the factors applicable to that
measurement basis. When making an estimate from a
range of possible outcomes, the single amount that
provides the most relevant information is usually one from
within the central part of the range (a central estimate).
However, different central estimates provide different
information. For example:
a. Statistical Mean (Expected value or Probability
weighed average) - reflects the average amount within
the entire range and expected value is not intended to
predict the ultimate cash inflow from asset
b. Statistical Median (Maximum amount is more likely
than not to occur) - is the middle amount within the
range and reflects the probability of an inflow or
outflow to be no more than that amount
c. Statistical Mode (Most likely outcome) - reflects the
single most likely ultimate inflow from the asset, which
is the amount that occurs the highest number of times
within the range (more on cfas pg84)
PRESENTATION AND DISCLOSURE
Information about assets, liabilities, equity, income and
expenses is communicated through presentation and
disclosure in the financial statements. Effective
communication makes information more useful. Effective
communication requires:
1. focusing on presentation and disclosure objectives
and principles rather than on rules
2. classifying information by grouping similar items and
separating dissimilar items
3. separating information in a manner that it is not
obscured either by excessive detail or by excessive
summarization
The cost constraint is a pervasive constraint meaning it
affects all aspects of financial reporting. Hence, it affects
decisions about presentation and disclosure.
PRESENTATION AND DISCLOSURE OBJECTIVES AND
PRINCIPLES
Those requirements strive a balance between:
a. giving entities the flexibility to provide relevant and
faithfully represented information; and
b. requiring information that has both
intra-comparability (comparability from period to
period within a single entity) and inter-comparability
(comparability within a single period across different
entities).
Effective communication also requires the consideration of
the following principles:
a. entity-specific information is more useful than
standardized descriptions, also known as boilerplate;
and
b. duplication of information is usually unnecessary as it
can make financial statements less understandable
CLASSIFICATION OF ASSETS AND LIABILITIES
Classification is applied to an asset or liability’s selected
unit of account. However, it is sometimes necessary to
apply classification to a higher level of aggregation and
then sub-classify the components separately.
Offsetting. Offsetting occurs when an asset and a liability
with separate units of account are combined and only the
net amount is presented in the statement of financial
position. It is generally not appropriate because it
combines dissimilar items.
Classification of Equity. Equity claims with different
characteristics may be classified separately. Similarly,
equity components that are subject to legal or similar
requirements may be classified separately.
Classification of Income and Expenses. Income and
expenses are classified as recognized either in profit or
loss, or other comprehensive income. Profit or loss is
customarily used as the main indicator of an entity’s
return or earnings, and hence the entity’s financial
performance. The Standards specify whether an income or
expense is to be recognized in profit or loss or in other
comprehensive income. It also specifies whether an
income or expense that was previously recognized in other
comprehensive income is subsequently reclassified to
profit or loss or transferred directly within equity.
Aggregation. It is the adding together of assets, liabilities,
equity, income or expenses that have shared
characteristics and are included in the same classification.
Aggregation summarizes a large volume of detail, thus
making information more useful. However, balance should
be strived for because excessive aggregation can conceal
important detail.
CONCEPTS OF CAPITAL AND CAPITAL MAINTENANCE
The Conceptual Framework mentions two concepts of
capital, namely:
1. Financial concept of capital - capital is regarded as the
invested money or invested purchasing power. It is
synonymous with equity, net assets, or net worth.
2. Physical concept of capital - capital is regarded as the
entity’s productive capacity, eg. units of outputs per
day.
The choice of an appropriate concept is based on users’
needs. Thus, if users are primarily concerned with the
maintenance of nominal invested capital or purchasing
power of invested capital, the financial concept shall be
used; whereas if their primary concern is the entity’s
operating capability, the physical concept should be used.
Most entities adopt the financial concept of capital in
preparing their financial statements. (more on pg88-90)
PHILIPPINE ACCOUNTING STANDARD (PAS) 1
Philippine Accounting Standard (PAS) 1 Presentation of
Financial Statements prescribes the basis for the
presentation of general purpose financial statements, the
guidelines for their structure and the minimum
requirements for their content to ensure comparability.
TYPES OF COMPARABILITY
Comparability requires consistency in the adoption and
application of accounting policies and in the presentation
of financial statements, e.g., the use of line-item
descriptions account titles, either within a single entity
from one period to another or across different entities.
a. Intra-comparability (horizontal or inter-period) - refers
to the comparability of financial statements of the
same entity but from one period to another.
b. Inter-comparability (dimensional) - refers to the
comparability of financial statements between
different entities.
PAS I applies to the preparation and presentation of
general purpose financial statements. The recognition,
measurement and disclosure requirements for specific
transactions and other events are set out in other PFRSs.
The terminology used in PAS 1 is suitable for
profit-oriented entities. If non-profit organizations apply
PAS 1, they may need to amend the line-item and financial
statement descriptions.
FINANCIAL STATEMENTS
Financial statements are the "structured representation of
an entity's financial position and results of its operations."
Financial statements are the end product of the financial
reporting process and the means by which the information
gathered and processed is periodically communicated to
users. The financial statements of an entity pertain only to
that entity and not to the industry where the entity
belongs or the economy as a whole. General purpose
financial statements ('financial statements") are "those
intended to meet the needs of users who are not in a
position to require an entity to prepare reports tailored to
their particular information needs." General purpose
financial statements cater to most of the common needs
of a wide range of external users. General purpose
financial statements are the subject matter of the
Conceptual Framework and the PFRSs.
PURPOSE OF FINANCIAL STATEMENTS
1. Primary objective: 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.
2. Secondary objective: To show the results of
management's stewardship over the entity's resources.
To meet the objective, financial statements provide
information about an entity's:
a. Assets (economic resources);
b. Liabilities (economic obligations);
c. Equity;
d. Income;
e. Expenses;
f. Contributions by, and distributions to, owners; and
g. Cash flows.
This information, along with other information in the
notes, helps users assess the entity's prospects for future
net cash inflows.
COMPLETE SET OF FINANCIAL STATEMENTS
A complete set of financial statements consist of:
1. Statement of financial position;
2. Statement of profit or loss and other comprehensive
income:
3. Statement of changes in equity;
4. Statement of cash flows;
5. Notes (Comparative information); and
6. Additional statement of financial position (required
only when certain instances occur).
An entity may use other titles for the statements. For
example, an entity may use the title "balance sheet" in lieu
of "statement of financial position" or "statement of
comprehensive income" instead of "statement of profit or
loss and other comprehensive income." However, an
"income statement" is different from a statement of profit
or loss and other comprehensive income" or a "statement
of comprehensive income." We will elaborate on this later.
Reports that are presented outside of the financial
statements, such as financial reviews by management,
environmental reports and value added statements, are
outside the scope of PFRSs.
GENERAL FEATURES OF FINANCIAL STATEMENTS
1. Fair Presentation and Compliance with PFRSs. Fair
presentation is faithfully representing, in the financial
statements, the effects of transactions and other
events in accordance with the definitions and
recognition criteria for assets, liabilities, income and
expenses set out in the Conceptual Framework.
Compliance with the PFRSs is presumed to result in
fairly presented financial statements. Fair presentation
also requires the proper selection and application of
accounting policies, proper presentation of
information, and provision of additional disclosures
whenever relevant to the understanding of the
financial statements. Inappropriate accounting policies
cannot be rectified by mere disclosure. PAS 1 requires
an entity whose financial statements comply with
PFRSS to make an explicit and unreserved statement
of such compliance in the notes. However, an entity
shall not make such statement unless it complies with
all the requirements of PFRSs. (more on pg113)
There may be cases wherein an entity’s management
concludes that compliance with a PFRS requirement is
leading. In such cases, PAS 1 permits a departure from
a PFRS requirement if the relevant regulatory
framework requires or allows such a departure.
Relevant regulatory framework refers to the accounting
principles and other financial reporting requirements
prescribed by a government regulatory body. For
example, banks in the Philippines are regulated by the
Bangko Sentral ng Pilipinas (BSP). Therefore, in addition
to the PFRSs, banks must also comply with the
requirements of the BSP. Accounting principles
prescribed by a regulatory body are sometimes
referred to as Regulatory Accounting Principles (RAP).
In practice, banks commonly refer to the financial
reporting required by the BSP as "FRP or Financial
Reporting Package." When an entity departs from a
PFRS requirement, it shall disclose the management's
conclusion as to the fair presentation of the financial
statements; that all other requirements of the PERS are
complied with; the title of the PFRS from which the
entity has departed; and the financial effect of the
departure. (more on pg114)
2. Going Concern. Financial statements are normally
prepared on a going concern basis unless the entity has
an intention to liquidate or has no other alternative but
to do so. When preparing financial statements,
management shall assess the entity's ability to
continue as a going concern, taking into account all
available information about the future, which is at
least, but not limited to, 12 months from the reporting
date. If the entity has a history of profitable operations
and ready access to financial resources, management
may conclude that the entity is a going concern
without detailed analysis. If there are material
uncertainties on the entity's ability to continue as a
going concern, those uncertainties shall be disclosed. If
the entity is not a going concern, its financial
statements shall be prepared using another basis. This
fact shall be disclosed, including the basis used, and
the reason why the entity is not regarded as a going
concern.
3. Accrual Basis of Accounting. All financial statements
shall be prepared using the accrual basis of accounting
except for the statement of cash flows which is
prepared using cash basis.
4. Materiality and Aggregation. Each material class of
similar items is presented separately. A class of similar
items is called a "line item." Dissimilar items are
presented separately unless they are immaterial
Individually immaterial items are aggregated with
other items.
5. Offsetting. Assets and liabilities or income and
expenses are presented separately and are not offset,
unless offsetting is required or permitted by a PFRS.
Offsetting is permitted when it reflects the substance
of the transaction. Examples of offsetting:
a. Presenting gains or losses from sales of assets net
of the related selling expenses.
b. Presenting at net amount the unrealized gains and
losses arising from trading securities and from
translation of foreign currency denominated assets
and liabilities, except if they are material.
c. Presenting a loss from a provision net of a
reimbursement from a third party.
6. Frequency of Reporting. Financial statements are
prepared at least annually. If an entity changes its
reporting period to a period longer or shorter than one
year, it shall disclose the following:
a. The period covered by the financial statements;
b. The reason for using a longer or shorter; and
c. The fact that amounts presented in the financial
statements are not entirely comparable.
7. Comparative Information. PAS 1 requires an entity to
present comparative information in respect of the
preceding period for all amounts reported in the
current period's financial statements, unless another
PFRS requires otherwise. As a minimum, an entity
presents two of each of the statements and related
notes. For example, when an entity presents its 20x2
current year financial statements, the 20x1 preceding
year financial statements shall also be presented as
comparative information. PAS 1 permits entities to
provide comparative information in addition to the
minimum requirement. For example, an entity may
provide a third statement of comprehensive income. In
this case, however, the entity need not provide a third
statement for the other financial statements, but must
to provide the related notes for that additional
statement of comprehensive income.
ADDITIONAL STATEMENT OF FINANCIAL POSITION
As mentioned earlier, a complete set of financial
statements includes an additional statement of financial
position when certain instances occur. Those instances are
as follows:
a. The entity applies an accounting policy retrospectively,
makes a retrospective restatement of items in its
financial statements, or reclassifies items in its financial
statements; and
b. The instance in (a) has a material effect on the
information in the statement of financial position at
the beginning of the preceding period.
For example, if any of the instances above occur, the entity
shall present three statements of financial position as
follows:
Statement of Financial
Date
Position
1. Current Year ⮚ As at December 31, 20x2
2. Preceding Year ⮚ As at December 31, 20x1
(Comparative
Information)
3. Additional ⮚ As at January 1, 20x1
The opening (additional) statement of financial position is
dated as at the beginning of the preceding period even if
the entity presents comparative information for earlier
periods. The entity need not present the related notes to
the opening statement of financial position.
8. Consistency of Presentation. The presentation and
classification of items in the financial statements is
retained from one period to the next unless change in
presentation:
a. is required by a PERS; or
b. results in information that is reliable and more
relevant.
A change in presentation requires the reclassification
of items in the comparative information. If the effect of
t reclassification is material, the entity shall provide the
"additional statement of financial position" discussed
earlier.
STRUCTURE AND CONTENT OF FINANCIAL STATEMENTS
Each of the financial statements shall be presented with
equal prominence and shall be clearly identified and
distinguished from other information in the same
published document. For example, financial statements
are usually included in an annual report which also
contains other information. The PFRSs apply only to the
financial statements and not necessarily to the other
information. The following information shall be displayed
prominently and repeatedly whenever relevant to the
understanding of the information presented:
a. The name of the reporting entity
b. Whether the statements are for the individual entity or
for a group of entities
c. The date of the end of the reporting period or the
period covered by the financial statements
d. The presentation currency
e. The level of rounding used (e.g., thousands, millions,
etc.) (more on cfas pg119)
The statement of financial position is dated as at the end
of the reporting period while the other financial
statements are dated for the period that they cover. PAS 1
requires particular disclosures to be presented either in
the notes or on the face of the other financial statements
(eg, footnote disclosures). Other disclosures are addressed
by other PFRSs.
MANAGEMENT’S RESPONSIBILITY OVER FINANCIAL
STATEMENTS
The management is responsible for an entity's financial
statements. The responsibility encompasses:
a. the preparation and fair presentation of financial
statements in accordance with PFRSs;
b. internal control over financial reporting;
c. going concern assessment;
d. oversight over the financial reporting process; and
e. review and approval of financial statements.
The responsibilities are expressly stated in a document
called "Statement of Management's Responsibility for
Financial Statements," which is attached to the financial
statements a cover letter. This document is signed by the
entity's
a. Chairman of the Board (or equivalent),
b. Chief Executive Officer for equivalent), and
c. Chief Financial Officer (or equivalent)
STATEMENT OF FINANCIAL POSITION
The statement of financial position shows the entity's
found condition (i.e., status of assets, liabilities and equity)
as at a certain date. It includes line items that present the
following amounts:
a. Property, plant and equipment;
b. Investment property;
c. Intangible assets;
d. Financial assets (excluding (e), (h) and (i));
e. Investments accounted for using the equity method;
f. Biological assets;
g. Inventories;
h. Trade and other receivables;
i. Cash and cash equivalents;
j. Assets held for sale, including disposal groups;
k. Trade and other payables;
l. Provisions;
m. Financial liabilities (excluding (k) and (l));
n. Current tax liabilities and current tax assets;
o. Deferred tax liabilities and deferred tax assets;
p. Liabilities included in disposal groups;
q. Non-controlling interests; and
r. Issued capital and reserves attributable to owners of
parent
PAS 1 does not prescribe the order or format of presenting
items in the statement of financial position. The foregoing
is simply a list of items that are sufficiently different in
nature or function to warrant separate presentation.
Accordingly, an entity may modify the descriptions used
and the sequence of their presentation to suit the nature
of the entity and its transactions. Moreover, additional line
items may be presented whenever relevant to the
understanding of the entity's financial position.
PRESENTATION OF STATEMENT OF FINANCIAL POSITION
A statement of financial position may be presented in a
"classified" or an "unclassified manner.
a. A classified presentation shows distinctions between
current and noncurrent assets and current and
noncurrent liabilities.
b. An unclassified presentation (also called "Based on
liquidity'), shows no distinction between current and
noncurrent items.
A classified presentation shall be used except when an
unclassified presentation provides information that is
reliable and more relevant. When that exception applies,
assets and liabilities are presented in order of liquidity
(this is normally the case for banks and other financial
institutions). PAS 1 also permits a mixed presentation, i.e., the reporting period. Deferred tax assets and liabilities are restructuring. Loan facility refers to a credit line. (more on
presenting assets and liabilities using a always presented as noncurrent items in a classified pg124-125)
current/non-current some classification and others in statement of financial position, regardless of their LIABILITIES PAYABLE ON DEMAND
order of liquidity. This may be appropriate when the entity expected dates of reversal.
Liabilities that are payable upon the demand of the lender
has diverse operations. Whichever method is used, PAS I
Current Assets Current Liabilities are classified as current. A long-term obligation may
requires the disclosure of items that are expected to be
become payable on demand as a result of a breach of a
recovered or settled (a) within 12 months and (b) beyond o cash and cash o accounts payable
loan provision. Such an obligation is classified as current
12 months, after the reporting period. A classified equivalents o salaries payable
o accounts receivable o dividends payable even if the lender agreed, after the reporting period and
presentation highlights an entity's working capital and
o non-trade receivables o income (current) tax before the authorization of the financial statements for
facilitates the computation of liquidity and solvency ratios.
collectible within 12 payable issue, not to demand payment. This is because the entity
𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 − 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
months o unearned revenue does not have an unconditional right to defer settlement
o held for trading securities o portion of of the liability for at least twelve months after the
CURRENT ASSETS AND LIABILITIES o inventory notes/loans/bonds reporting period. However, the liability is noncurrent if the
o prepaid assets payable due within 12 lender provides the entity by the end of the reporting
Current Assets Current Liabilities months period a grace period ending at least 12 months after the
are assets that are: are liabilities that are: reporting period, within which the entity can rectify the
a. Expected to be realized, I. Expected to be settled in Noncurrent Assets Noncurrent Liabilities breach and during which the lender cannot demand
sold, or consumed in the the entity’s normal immediate repayment. (more on pg125-126)
entity’s normal operating operating cycle; o property, plant & o portion of
cycle; I. Held primarily for equipment notes/loans/bonds STATEMENT OF PROFIT OR LOSS AND OTHER
b. Help primarily for trading; o non-trade receivables payable due beyond 12 COMPREHENSIVE INCOME
trading; I. Due to be settled within collectible beyond 12 months Income and expenses for the period may be presented in
c. Expected to be realized 12 months after the months o deferred tax liability either:
within 12 months after reporting period; or o investment in associate
o investment property a. A single statement of profit or loss and other
the reporting period; or V. The entity does not have
o intangible assets comprehensive income (statement of comprehensive
d. Cash or cash equivalent, the right at the end of
o deferred tax asset income); or
unless restricted from the reporting period to
b. Two statements - (1) a statement for profit or loss
being exchanged or used defer settlement of the
to settle a liability for at liability for at least 12 REFINANCING AGREEMENT (income statement) and (2) a statement presenting
least 12 months after the months after the A long-term obligation that is maturing within 12 months comprehensive income (more on pg128)
reporting period reporting period. after the reporting period is classified as current, even if a PAS 1 requires an entity to present information on the
refinancing agreement to reschedule payments on a following:
All other assets and liabilities are classified as noncurrent. long-term basis is completed after the reporting period a. Profit or loss;
The operating cycle of an entity is the time between the and before the financial statements are authorized for b. Other comprehensive income; and
acquisition of assets for processing and their realization in issue. However, the obligation is classified as noncurrent if
cash or cash equivalents. When the entity’s normal c. Comprehensive income
the entity has the right, at the end of the reporting period,
operating cycle is not clearly identifiable, it is assumed to to roll over the obligation for at least 12 months after the Presenting a separate income statement is allowed as long
be 12 months. Assets and liabilities that are realized or reporting period under an existing loan facility. Without as a separate statement showing comprehensive income is
settled as part of the entity’s normal operating cycle (eg. such right, the entity does not consider the potential to also present. Presenting only an income statement is
trade receivables, inventory, trade payables, and some refinance the obligation and classifies the obligation as prohibited.
accruals for employee and other operating costs) are current. PROFIT OR LOSS
presented as current, even if they are expected to be \

Refinancing refers to the replacement of an existing debt Profit or loss is income less expenses, including the
realized or settled beyond 12 months after the reporting
with a new one but with different terms, eg. an extended components of other comprehensive income. The excess
period. Assets and liabilities that do not form part of the
maturity date or a revised payment schedule. Refinancing of income over expenses is profit; while the deficiency is
entity’s normal operating cycle (eg. non-operating assets
normally entails a fee or penalty. A refinancing where the loss. This method of computing for profit or loss is called
and liabilities) are presented as current only when they are
debtor is under financial distress is called troubled debt the transaction approach. Income and expenses are
expected to be realized or settled within 12 months after
usually recognized in profit or loss unless:
a. They are items of other comprehensive income; or
b. They are required by other PFRSs to be recognized
outside of profit or loss.
The following are not included in determining the profit or
loss for the period:
Transaction Accounting
1. Correction of prior ⮚ Direct adjustment to the
period error beginning balance of
retained earnings. The
adjustment is presented
in the statement of
changes in equity
2. Change in accounting ⮚ Similar treatment to
policy correction of prior
period error
3. Other comprehensive ⮚ Changes during the
income period are presented in
the other
comprehensive income
section of the statement
of comprehensive
income. Cumulative
balances are presented
in the equity section of
the statement of
financial position
4. Transactions with owners ⮚ Recognized directly in
(eg. issuance of share equity. Transactions
capital, declaration of during the period are
dividends, etc) presented in the
statement of changes in
equity.
The profit or loss section shows line items that present the
following amounts for the period:
a. revenue, presenting separately interest revenue;
b. finance costs;
c. gains and losses arising from the derecognition of
financial assets measured at amortized cost;
d. impairment losses and impairment gains on financial
assets;
e. gains and losses on reclassifications of financial assets
from amortized cost or fair value through other
comprehensive income to fair value through profit or
loss;
f. share in the profit or loss of associates and joint
ventures;
g. tax expense; and
h. result of discontinued operations.
Additional line items shall be presented whenever relevant
to the understanding of the entity’s financial performance.
The nature and amount of material items of income or
expense shall be disclosed separately. Circumstances that
would give rise to the separate disclosures of items of
income and expense include:
a. write-downs of inventories to net realizable value or of
PPE to recoverable amount, as well as reversals of such
write-downs;
b. restructurings of activities of an entity and reversals of
any provisions for restructuring costs;
c. disposal of items of PPE;
d. disposals of investments;
e. discontinued operations;
f. litigation settlements; and
g. other reversals of provisions.
PAS 1 prohibits the presentation of extraordinary items in
the statement of profit or loss and other comprehensive
income or in the notes.
PRESENTATION OF EXPENSES
Expenses may be presented using either of the following
methods:
a. Nature of expense method - Under this method,
expenses are aggregated according to their nature
(e.g., depreciation, purchases of materials, transport
costs, employee benefits and advertising costs) and are
not reallocated according to their functions within the
entity.
b. Function of expense method (Cost of sales method) -
Under this method, an entity classifies expenses
according to their function (e.g., cost of sales,
distribution costs, administrative expenses, and other
functional classifications). At a minimum, cost of sales
shall be presented separately from other expenses.
The nature of expense method is simpler to apply because
it eliminates considerable judgment needed in reallocating
expenses according to their function. However, an entity
shall choose whichever method it deems will provide
information that is reliable and more relevant, taking into
account historical and industry factors and the entity's
nature. If the function of expense method is used,
additional disclosures on the nature of expenses shall be
provided, including depreciation and amortization expense
and employee benefits expense. This information is useful
in predicting future cash flows. (more on pg131)
OTHER COMPREHENSIVE INCOME (OCI)
Other comprehensive income "comprises items of income
and expense (including reclassification adjustments) that
are not recognized in profit or loss as required or
permitted .by other PFRSs." The components of other
comprehensive income include the following:
a. Changes in revaluation surplus;
b. Remeasurements of the net defined benefit liability
(asset);
c. Gains and losses on investments designated or
measured at fair value through other comprehensive
income (FVOCI); or measured
d. Gains and losses arising from translating the financial
statements of a foreign operation;
e. Effective portion of gains and losses on hedging
instruments in a cash flow hedge;
f. Changes in fair value of a financial liability designated
at fair value through profit or loss (FVPL) that are
attributable to changes in credit risk;
g. Changes in the time value of option when the option's
intrinsic value and time value are separated and only
the changes in the intrinsic value is designated as the
hedging instrument; and
h. Changes in the value of the forward elements of
forward contracts when separating the forward
element and spot element of a forward contract and
designating as the hedging instrument only the
changes in the spot element, and changes in the value
of the foreign currency basis spread of a financial
instrument when excluding it from the designation of
the financial instrument as the hedging instrument.
Amounts recognized in OCI are usually accumulated in
separate components of equity. For example, cumulative
changes in revaluation surplus are accumulated in a
"Revaluation surplus account, which is presented as a
separate component of equity cumulative gains and losses
from investments in FVOCI and from translation of foreign a. Changes in revaluation iii. transactions with owners, e.g., contributions by
operation are also accumulated in separate equity surplus No and distributions to owners.
accounts. Retrospective adjustments and retrospective restatements
b. Remeasurements of the
RECLASSIFICATION ADJUSTMENTS net defined benefit are presented in the statement of changes in equity as
No
Items of OCI include reclassification adjustments. liability (asset) adjustments to the opening balance of retained earnings
Reclassification adjustments are amounts reclassified to rather than as changes in equity during the period.
c. Fair value changes in Components of equity include, for example, each class of
profit or loss in the current period that were recognized in
FVOCI contributed equity, the accumulated balance of each class
other comprehensive income in the current or previous
i. equity instrument
periods." Reclassification adjustments arise, for example, No of other comprehensive income and retained earnings.
(election)
on disposal of a foreign operation, derecognition of debt PAS 1 allows the disclosure of dividends, and the related
ii. debt instrument Yes
instruments measured at FVOCI, or when a cash flow amount per share, either in the statement of changes in
(mandatory)
hedge becomes ineffective or affects profit or loss. On equity or in the notes.
derecognition (or when the cash flow hedge becomes d. Translation differences Non-owner changes in equity are presented in the
on foreign operations Yes
ineffective), the cumulative gains and losses that were statement of comprehensive income while owner
accumulated in equity on these items are reclassified from e. Effective portion of cash changes (e.g., contributions by and distributions to
OCI to profit or loss. The amount reclassified is called the flow hedges Yes owners) are presented in the statement of changes in
reclassification adjustment. equity. This is to provide better information by aggregating
A reclassification adjustment for a gain is a deduction in Items of OCI, including reclassification adjustments, may items with shared characteristics and separating items
OCI and an addition to profit or loss. This is to avoid be presented at either net of tax or gross of tax. with different characteristics. (more on pg137) \

double inclusion in total comprehensive income. On the
other hand, a reclassification adjustment for a loss is an
addition to OCI and a deduction from profit or loss.
Reclassification adjustments do not arise on changes in
revaluation surplus, derecognition of equity instruments
designated at FVOCI, and remeasurements of the net
defined benefit liability (asset). On derecognition, the
cumulative gains and losses that were accumulated in
equity on these items are transferred directly to retained
earnings, rather than to profit or loss as a reclassification
adjustment.
PRESENTATION OF OCI
The other comprehensive income section shall group items
of OCI into the following:
a. Those for which reclassification adjustment is allowed;
and
b. Those for which reclassification adjustment is not
allowed.
The entity's share in the OCI of an associate or joint
venture accounted for under the equity method shall also
be presented separately and also grouped according to the
classifications above.
Type of OCI Reclassification Adjustment
TOTAL COMPREHENSIVE INCOME
Total comprehensive income is the change in equity
during a period resulting from transactions and other
events, other than those changes resulting from
transactions with owners in their capacity as owners. Total
comprehensive income is the sum of profit or loss and
other comprehensive income. It comprises all non-owner
changes in equity. Presenting information on
comprehensive income, and not just profit or loss, helps
users better assess the overall financial performance of
the entity. (more on pg135)
STATEMENT OF CHANGES IN EQUITY
The statement of changes in equity shows the following
information:
a. Effects of change in accounting policy (retrospective
application) or correction of prior period error
(retrospective restatement);
b. Total comprehensive income for the period; and
c. For each component of equity, a reconciliation
between the carrying amount at the beginning and the
end of the period showing separately changes
resulting from:
i. profit or loss;
ii. other comprehensive income; and
STATEMENT OF CASH FLOWS
PAS 1 refers the discussion and presentation of statement
of cash flows to PAS 7 Statement of Cash Flows.
NOTES
The notes provide information in addition to those
presented in the other financial statements. It is an
integral part of a complete set of financial statements. All
the other financial statements are intended to be read in
conjunction with the notes. Accordingly, information in the
other financial statements shall be cross referenced to the
notes. PAS 1 requires an entity to present the notes in a
systematic manner. Notes are normally structured as
follows:
1. General information on the reporting entity. This
includes the domicile and legal form of the entry, its
country of incorporation and the address of its
registered office (or principal place of business, if
different from the registered office) and a description
of the nature of the entity's operations and its principal
activities.
2. Statement of compliance with the PFRS and Basis of
preparation of financial statements.
3. Summary of significant accounting policies. This
includes narrative descriptions of the line items in the
other financial statements, their recognition criteria,
 measurement bases, derecognition, transitional
provisions and other relevant information.
4. Disaggregation (breakdowns) of the line items in the
financial statements and other supporting
information.
5. Other disclosures required by PFRSs, such as (the list
is exhaustive):
a. Contingent liabilities and unrecognized contractual
commitments.
b. Non-financial disclosures, e.g., the entity's financial
risk management objectives and policies.
c. Events after the reporting date, if material.
d. Changes in accounting policies and accounting
estimates and corrections of prior period errors.
e. Related party disclosure.
f. Judgments and estimations.
g. Capital management.
h. Dividends declared after the reporting period but
before the financial statements were authorized for
issue, and related amount per share.
i. The amount of any cumulative preference
dividends not recognized.
6. Other disclosures not required by PFRSs but the
management deems relevant to the understanding of
the financial statements.
Notes are prepared in a necessarily detailed manner. More
often than not, they are voluminous and occupy a bulk
portion of the financial statements. For that reason, only
excerpts of notes to the financial statements are provided
below, sufficient to give you an idea on how the concepts
discussed above are presented in the notes. (more on
pg139-141)
PHILIPPINE ACCOUNTING STANDARD 2
PAS 2 prescribes the accounting treatment for inventories.
PAS 2 recognizes that a primary issue in the accounting for
inventories is the determination of cost to be recognized
as asset and carried forward until it is expensed.
Accordingly, PAS 2 provides guidance in the determination
of cost of inventories, including the use of cost formulas,
and their subsequent measurement and recognition as
expense. PAS 2 applies to all inventories except for the
following:
1. Assets accounted for under other standards
a. Financial instruments (PAS 32 and PFRS 9); and
b. Biological assets and agricultural produce at the
point of harvest (PAS 41).
2. Assets not measured under the lower of cost or net
realizable value (NRV) under PAS 2
a. Inventories of producers of agricultural, forest, and
mineral products measured at net realizable value
in accordance with well-established practices in
those industries.
b. Inventories of commodity broker-traders measured
at fair value less costs to sell.
INVENTORIES
Inventories are as assets:
a. Held for sale in the ordinary course of business
(finished goods);
b. In the process of production for such sale (work in
process); or
c. In the form of materials or supplies to be consumed in
the production process or in the rendering of services
(materials and manufacturing supplies).
Examples of inventories:
a. Merchandise purchased by a trading entity and held for
resale.
b. Land and other property held for sale in the ordinary
course of business.
c. Finished goods, goods undergoing production, and ta
materials and supplies awaiting use in the production
process by a manufacturing entity.
Ordinary course of business refers to the necessary,
normal or usual business activities of an entity.
MEASUREMENT
Inventories are measured at the lower of cost and net
realizable value.
COST
The cost of inventories comprises the following:
1. Purchase cost - this includes the purchase price (net of
trade discounts and other rebates), import duties,
non-refundable or non-recoverable purchase taxes,
and transport, handling and other costs directly
attributable to the acquisition of the inventory.
2. Conversion costs - these refer to the costs necessary in
converting raw materials into finished goods.
Conversion costs include the costs of direct labor and
production overhead.
3. Other costs necessary in bringing the inventories to
their present location and condition.
The following are excluded from the cost of inventories
and are expensed in the period in which they are incurred:
a. Abnormal amounts of wasted materials, labor or other
production costs;
b. Storage costs, unless those are necessary in the
production process before a further production stage
(e.g., the storage costs of partly finished goods may be
capitalized as cost of inventory, but the storage costs of
completed goods are expensed);
c. Administrative overheads that do not contribute to
bringing inventories to their present location and
condition; and
d. Selling costs.
When a purchase transaction effectively contains a
financing element, such as when payment of the purchase
price is deferred, the difference between the purchase
price for normal credit terms and the amount paid is
recognized as interest expense over the period of the
financing. The advertisement costs are selling costs. These
are expensed in the period in which they are incurred.
(more on pg155-156)
COST FORMULAS
The cost formulas deal with the computation of cost of
inventories that are charged as expense when the related
revenue recognized (i.e., 'cost of sales' or 'cost of goods
sold') as well as the I cost of unsold inventories at the end
of the period that are recognized as asset (ie, 'ending
inventory). PAS 2 provides the following cost formulas:
1. Specific Identification - this shall be used for
inventories that are not ordinarily interchangeable (i.e.,
those that are individually unique) and those that are
segregated for specific projects. Under this formula,
specific costs are attributed to identified items of
inventory. Accordingly, cost of sales represents the
actual costs of the specific items sold while ending
inventory represents the actual costs of the specific
items on hand. For example, if an inventory with a
serial number of "ABC-123" costing P10,948.67 is sold,
 the amount charged b cost of sales is also P10,948.67.
If that inventory remains unsold the amount included
in ending inventory is also P10,948.67. In this regard,
records should be maintained the enables the entity to
identify the cost and movement of each specific
inventory. Specific identification, however, is not
appropriate when inventories consist of large number
of items that are ordinarily interchangeable. In such
cases, the entity shall choose between formulas 2 and
3 below.
2. First-In, First-Out (FIFO) - Under this formula, it is
assumed that inventories that were purchased or
produced first are sold first, and therefore unsold
inventories at the end of the period are those most
recently purchased or produced. Accordingly, cost of
sales represents costs from earlier purchases while the
cost of ending inventory represents costs from the
most recent purchases.
3. Weighted Average - Under this formula, cost of sales
and ending inventory are determined based on the
weighted average cost of beginning inventory and all
inventories purchased or produced during the period.
The average may be calculated on a periodic basis, or
as each additional purchase is made, depending upon
the circumstances of the entity.
The cost formulas refer to "cost flow assumptions,"
meaning they pertain to the flow of costs (ie., from
inventory to cost of sales) and not necessarily to the actual
physical flow of inventories. Thus, the FIFO or Weighted
Average can be used regardless of which item of inventory
is physically sold first. Same cost formula shall be used for
all inventories with similar nature and use. Different cost
formulas may be used for inventories with different nature
or use. However, a difference in geographical location of
inventories, by itself, is not sufficient to justify the use of
different cost formulas.
PAS 2 does not permit the use of a last-in, first out (LIFO)
cost formula. (more on pg157-160)
NET REALIZABLE VALUE (NRV)
Net realizable value is the estimated selling price in the
ordinary course of business less the estimated costs of
completion and the estimated costs necessary to make the
sale. NRV is different from fair value. Net realizable value
refers to the net amount that an entity expects to realize
from the sale of inventory in the ordinary course of
business. Fair value reflects the price at which an orderly
transaction to sell the same inventory in the principal (or
most advantageous) market for that inventory would take
place between market participants at the measurement
date. The former is an entity-specific value; the latter is
not. Net realizable value for inventories may not equal fat
value less costs to sell. Measuring inventories at the lower
of cost and NRV is in line with the basic accounting
concept that an asset shall not be carried at an amount
that exceeds its recoverable amount. The cost of an
inventory may exceed its recoverable amount if, for
example, the inventory is damaged, becomes obsolete,
pieces have declined, or the estimated costs to complete
or to sell the inventory have increased. In these
circumstances, the cost of the inventory is written-down to
NRV. The amount of write-down is recognized as expense.
If the NRV subsequently increases, the previous write
down is reversed. However, the amount of reversal shall
not exceed the original write-down. This is so that so that
the new carrying amount is the lower of the cost and the
revised NRV. Write-downs of inventories are usually
carried out on an item by item basis, although in some
circumstances, it may be appropriate to group similar
items. It is not appropriate to write down inventories on
the basis of their classification (e.g., finished goods or all
inventories of an operating segment). Raw materials
inventory is not written down below cost if the finished
goods in which they will be incorporated are expected to
be sold at or above cost. If, however, this is not the case,
the raw materials are written down to their NRV. The best
evidence of NRV for raw materials is replacement cost.
(more on pg161-162)
RECOGNITION AS EXPENSE
The carrying amount of an inventory that is sold is charged
as expense (i.e., cost of sales) in the period in which the
related revenue is recognized. Likewise, the write-down of
inventories to NRV and all losses of inventories are
recognized as expense in the period the write-down or loss
occurs. The amount of any reversal of any write-down of
inventories, arising from an increase in net realizable
value, shall be recognized as a reduction in the amount of
inventories recognized as an expense in the period in
which the reversal occurs." Inventories that are used in the
construction of another asset is not expensed but rather
capitalized as cost of the constructed asset. For example,
some inventories may be used in constructing a building.
The cost of those inventories is capitalized as cost of the
building and will be included in the depreciation of that
building.
DISCLOSURES
a. Accounting policies adopted in measuring inventories,
including the cost formula used;
b. Total carrying amount of inventories and the carrying
amount in classifications appropriate to the entity;
c. Carrying amount of inventories carried at fair value
less costs to sell;
d. Amount of inventories recognized as an expense
during the period;
e. Amount of any write-down of inventories recognized
as an expense in the period;
f. Amount of any reversal of write-down that is
recognized as a reduction in the amount of inventories
recognized as expense in the period;
g. Circumstances or events that led to the reversal of a
write down of inventories; and
h. Carrying amount of inventories pledged as security for
liabilities.
STATEMENT OF CASH FLOWS
PAS 7 prescribes the requirements in the presentation of
statements of cash flows. The statement of cash flows
provides information about the sources and utilization of
cash and cash equivalents during the period. Cash
comprises cash on hand and cash in bank while cash
equivalents are short-term, highly liquid investments that
are readily convertible to known amounts of cash and
which are subject to an insignificant risk of changes in
value. Only debt instruments acquired within 3 months or
less before their maturity date can qualify as cash
equivalents. Examples:
a. 1-year treasury bill acquired 3 months before maturity
date
b. 90-day money market instrument or commercial paper
c. 3-month time deposit
Cash flows include inflows and outflows of cash and cash
equivalents. Inflows refers to the sources of cash/cash
equivalents while outflows refer to the usage of cash/cash
equivalents. When used in conjunction with the rest of the
financial statements, the statement of cash flows helps
users assess:
a. the ability of the entity to generate cash and cash o loan transactions of financial institutions are and cash equivalents held or due in a foreign currency
equivalents, operating activities because they relate to the main is reported in the statement of cash flows in order to
b. the timing and certainty of the generation of cash revenue-producing activity of a financial institution reconcile cash and cash equivalents at the beginning
flows, and 2. Investing Activities. Involve the acquisition and and the end of the period; the amount of reconciliation
disposal of noncurrent assets and other investments. is reported separately from the operating, investing,
c. the needs of the entity to utilize those cash flows
Examples include: and financing activities
The statement of cash flows may also provide information
o cash receipts and payments in the acquisition and GENRAL CONCEPT IN THE PREPARATION OF STATEMENT
on the quality of earnings of an entity. An entity may
disposal of PPE, investment property, intangible OF CASH FLOWS
report profit under the accrual basis but suffers negative
cash flows from its operating activities. This may provide assets and other noncurrent assets The statement of cash flows is prepared using cash basis.
indicators of, among other things, difficulty in collecting o cash receipts and payments in the acquisition and Under the cash basis of accounting, income is recognized
accounts receivable. As the statement of cash flows can sale of equity or debts instruments of other entities only when collected and expenses are recognized only
only be prepared on a cash basis, it enhances when paid, rather than when these items are earned or
o cash receipts and payments on derivative assets
inter-comparability among different accounting treatments incurred. Accordingly, only transactions that affected cash
and liabilities
for the same transactions and events. and cash equivalents are reported in the statement of cash
o loans to other parties and collections thereof flows. Non-cash transactions are excluded and disclosed
CLASSIFICATION OF CASH FLOWS
3. Financing Activities. Activities that affect the entity’s only.
The statement of cash flows presents cash flows according equity capital and borrowing structure. Examples INTERESTS AND DIVIDENDS
to the following classifications: include:
Entities except financial institutions may classify cash flows
1. Operating Activities. Cash flows are primarily derived o cash receipts from issuing shares or other equity on interests and dividends as follows:
from the principal revenue-producing activities of the instruments and cash payments to redeem them
entity. It usually includes cash inflows and outflows on Cash Flows Option 1 Option 2
o cash receipts from issuing notes, loans, bonds and
items of income and expenses, or those that enter into 1. Interest income
mortgage payable and other short-term or
the determination of profit or loss. Examples of cash received Operating Investing
long-term borrowings, and their repayments
flows from operating activities:
o cash payments by a lessee for the reduction of the 2. Interest expense paid
o cash receipts from the sale of goods, rendering of Operating Financing
outstanding liability relating to a lease
services, or other forms of income 3. Dividend income
Cash flows on trade payables, accrued expenses and Operating Investing
o cash payments for purchases of goods and services received
other operating liabilities are classified as operating
o cash payments for operating expenses, such as activities and not financing activities. Only cash flows 4. Dividend paid to
employee benefits, insurance, and the like, on non-operating or non-trade liabilities are included owners Financing Operating
payment of refunds of income taxes as financing activities.
o cash receipts and payments from contracts held for CASH FLOWS EXCLUDED FROM THE ACTIVITIES SECTION Option 1 Option 2
dealing or trading purposes ⮚ Interest income, interest ⮚ Interest income and
o cash flows on movements between cash and cash expense and dividend dividend income are
o cash flows from buying and selling held for trading equivalents are not presented separately because income are classified as classified as investing
securities- similar to inventories in the sense that these are part of the entity’s cash management rather operating activities activities because they
they are acquired specifically for resale than its operating, investing and financing activities because they enter into are result from
o some entities, in the ordinary course of their the determination of investments
o bank overdrafts that cannot be offset to cash are
activities, routinely manufacture or acquire items of profit or loss ⮚ Interest expense is
presented as financing activities- those that can be
PPE to be held for rental to others and ⮚ Dividend paid is classified as financing
offset to cash forms part of the balance of cash and
subsequently transfer these assets to inventories classified as financing activity because it
cash equivalents and therefore not presented
when they cease to be rented and become held for activity because it is a results from borrowing
separately in the activities sections
sale- from the acquisition, rentals and subsequent transaction with the ⮚ Dividend paid is
sale of such assets are considered operating o cash flows denominated in a foreign currency are owners and alters the classified as operating
activities translated using the spot exchange rate at the date of equity structure activity in order to assist
the cash flow- exchange differences are not cash flows users in assessing the
however, the effect of exchange rate changes on cash entity’s ability to pay
 dividends out of
operating cash flows
Only interests and dividends received or paid in cash are
included in the statement of cash flows. For example,
dividends declared in year 1 but paid in year 2 are
excluded from the statement of cash flows in year 1 and
reported only in year 2. Only option 1 is available to
financial institutions. When answering CPA board question
wherein the problem is silent, it is presumed that the
entity uses option 1.
PRESENTATION
PAS 7 does not require any particular method however,
PAS 7 encourages the direct method because it provides
information that may be useful in estimating future cash
flows whish is not available under the indirect method. In
practice, however, the indirect method is more commonly
used because it is easier to apply. Moreover, the choice
between direct and indirect method of presentation is only
applicable for operating activities. For investing and
financing, gross cash receipts and payments for the related
transactions are presented separately, unless they qualify
for net presentation. Cash flows from operating activities
may be presented using either:
a. Direct method - shows each major class of gross cash
receipts and gross cash payments; or
b. Indirect method - profit or loss is adjusted for the
effects of non-cash items and changes in operating
assets and liabilities (more on pg175-178)
CHANGES IN OWNERSHIP INTERESTS IN SUBSIDIARIES
Cash flows arising from acquisitions and disposals of
subsidiaries or other business units resulting to loss or
obtaining of control are classified as investing activities.
Those that do not result to loss or obtaining of control are
classified as financing activities.
DISCLOSURE
PAS 7 requires the following disclosures:
a. Components of cash and cash equivalents and a
reconciliation of amounts in the statement of cash
flows with the equivalent items in the statement of
financial position.
b. Significant cash and cash equivalents held by the entity
that are not available for use by the group, together
with a management commentary.
ACCOUNTING POLICIES, CHANGES IN ACCOUNTING
ESTIMATES AND ERRORS
PAS 8 prescribes the criteria for selecting, applying, and
changing accounting policies and the accounting and
disclosure of changes in accounting policies, changes in
accounting estimates and correction of prior period errors.
ACCOUNTING POLICIES
Accounting policies are the specific principles, bases,
conventions, rules and practices applied by an entity in
preparing and presenting financial statements. The
foregoing means that, to account for a transaction, an
entity refers to the PFRSs first (which consist of the PFRSs,
PASs and Interpretations); in the absence of a PFRS that
specifically deals with that transaction, management uses
its judgment in developing and applying an accounting
policy that results in information that is relevant and
reliable. In making the judgment, management considers
the applicability of the references listed above. PFRSs are
accompanied by guidance to assist entities in applying
their requirements. A guidance states whether it is an
integral part of the PFRSs. A guidance that is an integral
part of the PFRSS is mandatory.
HIERARCHY OF REPORTING STANDARDS
1. PFRSs
2. Judgment
When making the judgment:
⮚ management shall consider the following:
a. Requirements in other PFRSs dealing with
similar transactions
b. Conceptual Framework
⮚ management may consider the following:
a. Pronouncements issued by other
standard-setting bodies
b. Other accounting literature and industry
practices
CHANGES IN ACCOUNTING POLICIES
PAS 8 requires the consistent selection and application of
accounting policies. PAS 8 permits a change in accounting
policy only if the change is: (a) required by a PFRS; or (b)
results in reliable and more relevant information. A change
in accounting policy usually results from a change in
measurement basis. Examples of changes in accounting
policies
a. Change from FIFO to the Weighted Average cost
formula for inventories.
b. Change from the cost model to the fair value model of
measuring investment property.
c. Change from the cost model to the revaluation model
of measuring property, plant, and equipment and
intangible assets.
d. Change in business model for classifying financial
assets.
e. Change in the method of recognizing revenue from
long-term construction contracts.
f. Change to a new policy resulting from the requirement
of a new PFRS.
g. Change in financial reporting framework, such as from
PFS for SMEs to full PFRSs.
The following are not changes in accounting policies:
a. the application of an accounting policy for
transactions, other events or conditions that differ in
substance from those previously occurring
b. the application of a new accounting policy for
transaction other events or conditions that did not
occur previously or we immaterial
ACCOUNTING FOR CHANGES IN ACCOUNTING POLICIES
Changes in accounting policies are accounted for using the
following order of priority:
1. Transitional provision in a PFRS, if any.
2. Retrospective application, in the absence of a
transitional provision.
3. Prospective application, if retrospective application
impracticable.
For example, if an entity changes an accounting policy, it
shall refer first to any specific transitional provision of the
PFRS that specifically deals with that accounting policy. If
there is no transitional provision, the entity shall account
for the change using retrospective application. If,
however, retrospective application is impracticable, the
entity is allowed to account for the using prospective
application.
RETROSPECTIVE APPLICATION
Retrospective application means adjusting the opening
balance of each affected component of equity (eg.,
retained earnings) for the earliest prior period presented
and the other comparative amounts disclosed for each
prior period presented as if the new accounting policy had
always been applied. For example, if an entity changes its
accounting policy from the Weighted Average to the FIFO
cost formula, all previous financial statements presented in
comparative with the current-year financial statements are
restated to apply FIFO. It is as if FIFO had always been
applied.
If retrospective application is impracticable for all periods
presented, the entity shall apply the new accounting policy
as at the beginning of the earliest period for which
retrospective application is practicable, which may be the
current period. If retrospective application is still
impracticable as at the beginning of the current period,
the entity is allowed to apply the new accounting policy
prospectively from the earliest date practicable.
Impracticable means it cannot be done after making every
reasonable effort to do so.
A retrospective treatment is impracticable if the prior
period effects cannot be determined or if it requires
significant estimates and assumptions to have been made
when the prior period financial statements were prepared
and these are impossible to determine in the current
period. A voluntary change in accounting policy is
accounted for by retrospective application. An early
application of a PFRS is not a voluntary change in
accounting policy.
CHANGES IN ACCOUNTING ESTIMATES
Many items in the financial statements cannot be
measured with precision but only through estimation
because of uncertainties inherent in business activities.
The use of reasonable estimates therefore is necessary in
order to provide relevant information. Estimates are an
essential part of financial reporting and do not undermine
the reliability of financial reports. For example, the
following necessarily requires estimation:
a. net realizable value of inventories;
b. depreciation;
c. bad debts;
d. fair value of financial assets or financial liabilities; and
e. provisions.
Estimates involve judgments based on latest available
information. Consequently, estimates need to be revised
when there is a change in circumstances such that new
more experience is obtained. A change in accounting
estimate is an adjustment of the carrying amount of an
asset or a liability, or the amount of the periodic
consumption of an asset, that results from the assessment
of the present status of, and expected future benefits and
obligations associated with, assets and liabilities. Changes
accounting estimates result from new information or new
developments and, accordingly, are not corrections of
errors.
Change in Accounting Policy vs. Change in Accounting Estimates
Normally results from a change Normally results from changes
in measurement basis (eg. FIFO on how the expected inflows or
to Weighted Average, Cost to Fair outflows of economic benefits
Value, etc.) are realized from assets or
incurred on liabilities
If a change is difficult to distinguish between these two the
change is treated as a change in an accounting estimate.
Examples of changes in accounting estimates:
a. Change in depreciation or amortization methods
b. Change in estimated useful life or residual value of
depreciable asset
c. Change in the required balance of allowance for
uncollectible accounts or impairment losses
d. Change in fair value less cost to sell of non-current
assets held for sale and biological assets
e. Change in estimated warranty obligations and other
provisions
ACCOUNTING FOR CHANGES IN ACCOUNTING ESTIMATES
Changes in accounting estimates are accounted for by
prospective application. Prospective application means
recognizing the effects of the change in profit or loss,
either in:
a. the period of change; or
b. the period of change and future periods, if both are
affected.
Under prospective application, the beginning balance of
retained earnings and the previous financial statements
are not restated.
ERRORS
Errors include misapplication of accounting policies,
mathematical mistakes, oversights or misinterpretations
of facts, and fraud. Financial statements do not comply
with PFRSs if they contain either material errors or
immaterial errors made intentionally to achieve a
particular presentation of an entity's financial position,
financial performance or cash flows. Material errors are
those that cause the financial statements to be misstated.
Intentional errors are fraud. In the case of fraud, it does
not matter whether the error is material or immaterial.
Fraudulent financial reporting does not comply with PFRSs.
Errors can be errors of commission or errors of omission.
An error of commission is doing something wrong while an
error of omission is not doing something that should have
been done. The types of errors according to the period of
occurrence are as follows:
a. Current period errors - are errors in the current period
that were discovered either during the current period
or after the current period but before the financial
statements were authorized for issue. These are
corrected simply by correcting entries.
b. Prior period errors - are errors in one or more prior
periods that were only discovered either during the
current period or after the current period but before
the financial statements were authorized for issue.
These are corrected by retrospective restatement.
RETROSPECTIVE RESTATEMENT
Retrospective restatement means:
a. restating the comparative amounts for the prior
period(s) presented in which the error occurred; or
b. if the error occurred before the earliest prior period
presented, restating the opening balances of assets,
liabilities and equity for the earliest prior period
presented.
Retrospective Restatement Retrospective Application
Correcting a prior period Applying a new accounting
error as if the error had never policy as if the policy had
occurred. always been applied
Just like retrospective application, retrospective
restatement shall be made as far back as practicable. If it is
impracticable to determine the cumulative effect of a prior
period error at the beginning of the current period, the
entity is allowed to correct the error prospectively from
the earliest date practicable.
EVENTS AFTER REPORTING PERIOD
PAS 10 prescribes the accounting for, and disclosures of,
events after the reporting period, including disclosures
regarding the date when the financial statements were
authorized for issue. Events after the reporting period are
"those events, favorable and unfavorable, that occur
between the end of the reporting period and the date
when the financial statements are authorized for issue."
For example, Entity A's reporting period ends on
December 31, 20x1 and its financial statements are
authorized for issue on March 31, 20x2. Events after the
reporting period are those events that occur within
January 1, 20x2 to March 31, 20x2. The date of
authorization of the financial statements is the date when
management authorizes the financial statements for issue
regardless of whether such authorization is final or subject
to further approval.
TWO TYPES OF EVENTS AFTER THE REPORTING PERIOD
1. Adjusting events after the reporting period - are
events that provide evidence of conditions that existed
at the end of the reporting period. Examples:
a. The settlement after the reporting period of a court
case that confirms that the entity has a present
obligation at the end of reporting period.
b. The receipt of information after the reporting
period indicating that an asset was impaired at the
end of reporting period. For example:
i. The bankruptcy of a customer that occurs after
the reporting period may indicate that the
carrying amount of a trade receivable at the end
of reporting period is impaired.
ii. The sale of inventories after the reporting
period may give evidence to their net realizable
value at the end of reporting period.
c. The determination after the reporting period of the
cost of asset purchased, or the proceeds from asset
sold, before the end of reporting period.
d. The determination after the reporting period of the
amount of profit-sharing or bonus payments, if the
entity had a present legal or constructive obligation
at the end of reporting period to make such
payments.
e. The discovery of fraud or errors that indicate that
the financial statements are incorrect.
2. Non-adjusting events after the reporting period - are
events that are indicative of conditions that arose after
the reporting period. Examples:
a. Changes in fair values, foreign exchange rates,
interest rates of market prices after the reporting
period.
b. Casualty losses (e.g., fire, storm, or earthquake)
occurring after the reporting period but before the
financial statements were authorized for issue.
c. Litigation arising solely from events occurring after
the reporting period.
d. Significant commitments or contingent liabilities
entered after the reporting period, e.g., significant
guarantees.
e. Major ordinary share transactions and potential
ordinary share transactions after the reporting
period.
f. Major business combination after the reporting
period.
g. Announcing, or commencing the implementation
of, a major restructuring after the reporting period.
h. Announcing a plan to discontinue an operation
after the reporting period.
i. Change in tax rate enacted after the reporting
period.
j. Declaration of dividends after the reporting period.
DISCLOSURES
⮚ date of authorization for issue
⮚ adjusting events
⮚ material, non-adjusting events
DIVIDENDS
Dividends declared after the reporting period are not
recognized as liability at the end of reporting period
because no present obligation exists at the end of
reporting period.
GOING CONCERN
PAS 10 prohibits the preparation of financial statements on
a going concern basis if management determines after the
reporting period either that it intends to liquidate the
entity or to cease trading, or that it has no realistic
alternative but to do so.
INCOME TAXES
PAS 12 prescribes the accounting for income taxes. For
purposes of PAS 12, income taxes refer to taxes that are
based on taxable profits. The income tax expense reported
in the statement of comprehensive income may be
different from the amount of income tax required to be
paid to the Bureau of Internal Revenue. (BIR). This is
because the income tax expense in the statement of
comprehensive income is computed using PFRSS while the
current tax expense in the income tax return (ITR) is
computed using Philippine tax laws, and the PFRSs and tax
laws have different accounting treatments for some
economic activities.
Some items are appropriately recognized as income
(expense) under financial reporting but are either (a)
non-taxable (non-deductible) or (b) taxable (deductible)
only at some other periods under Philippine tax laws.
These varying treatments result to permanent and
temporary differences. PAS 12 addresses the accounting,
presentation and reconciliation of these differences. For
example, assume Entity A accrues bad debts expense of
$100 under financial reporting. However, under taxation,
this amount is tax deductible only when it is deemed
worthless. (more on pg202)
ACCOUNTING PROFIT AND TAXABLE PROFIT
Accounting profit is profit or loss for a period before
deducting tax expense. Taxable profit (tax loss) is profit
(loss) for a period, determine in accordance with the rules
established by the taxation authorities, upon which
income taxes are payable (recoverable).
Accounting Profit or Loss Taxable Profit (Tax Loss)
⮚ Computed using PFRSs ⮚ Computed using tax laws
⮚ Total income less total ⮚ Taxable income less
expenses, excluding tax tax-deductible expenses
expense
⮚ Other terms: pretax ⮚ Other term: taxable
income, financial income, income
and accounting income
INCOME TAX EXPENSE AND CURRENT TAX EXPENSE
● Tax expense or income tax expense (tax income) - is
the total amount included in the determination of
profit or loss for the period. It comprises current tax
expense (current tax income and deferred tax expense
(deferred tax income).
● Current tax or current tax expense - is the amount of
income taxes payable (recoverable) in respect of the
taxable profit (tax loss) for a period.
● Deferred tax expense (income or benefit) - is the sum
 of the net changes in deferred tax assets and deferred
tax liabilities during the period. If the increase in
deferred tax liability exceeds the increase in deferred
tax asset, the difference is deferred tax expense. If the
increase in deferred tax asset exceeds the increase in
deferred tax liability, the difference is deferred tax
income or benefit. (more on pg203)
The varying treatments of economic activities between the
PFRS, and the tax laws result to following differences:
a. Permanent differences - arise when income and
expenses enter in the computation of either
accounting profit or taxable profit but not both. If an
item is included in the computation of one, it will never
enter in the computation of the other. Permanent
differences usually arise from non-taxable and
non-deductible expenses and those that have already
been subjected to final taxes. In other words, these are
items excluded from the income tax return. Since
permanent differences are non-taxable, nontax
deductible or have already been taxed under final
taxation, the do not have future tax consequences, and
hence do not give rise to deferred tax assets and
liabilities. Examples of permanent differences:
i. Interest income on government bonds and treasury
bills
ii. Interest income on bank deposits
iii. Dividend income
iv. Fines, surcharges, and penalties arising from
violation of law e. Life insurance premium on
employees where the entity is the irrevocable
beneficiary
b. Temporary differences - are differences between the
carrying amount of an asset or liability in the statement
of financial position and its tax base. Temporary
differences may be either:
i. Taxable temporary differences - those that result
to future taxable amounts when the carrying
amount of the asset or liability is recovered or
settled; or
ii. Deductible temporary differences - those that
result to future deductible amounts when the
carrying amount of the asset or liability is recovered
or settled.
Temporary difference have future tax consequences;
hence they give rise to either deferred tax assets or
deferred tax liabilities. Taxable temporary differences
give rise to deferred tax liabilities while Deductible
temporary differences give rise deferred tax assets.
Temporary differences include timing differences. Timing
differences arise when income and expenses are
recognized for financial reporting purposes in one period
but are recognized for taxation purposes in another period
(or vice versa). They are called "timing differences"
because only the timing or period of their recognition
differs between financial reporting and taxation. They are
temporary differences because their effect reverses in one
or more subsequent periods.
TAXABLE TEMPORARY DIFFERENCES
Taxable temporary differences arise when:
a. Financial income (accounting profit) is greater than
Taxable income (taxable profit);
b. The carrying amount of an asset is greater than its tax
base, or
c. The carrying amount of a liability is less than its tax
base.
Examples of Taxable temporary differences:
a. Revenue is recognized in full under financial reporting
but taxable only when collected.
b. A prepayment is capitalized and amortized to expense
under financial reporting but is tax deductible in full
upon payment.
c. An asset is revalued upward and no equivalent
adjustment is made for tax purposes.
d. Depreciation recognized under financial reporting is
lower than the depreciation recognized for taxation
purposes.
Taxable temporary difference multiplied by the tax rate
results to deferred tax liability. Deferred tax liabilities are
"the amounts of income la payable in future periods in
respect of taxable temporary differences."
DEDUCTIBLE TEMPORARY DIFFERENCE
Deductible temporary differences arise when:
a. Financial income (accounting profit) is less than the
Taxable income (taxable profit);
b. The carrying amount of an asset is less than its tax
base; or
c. The carrying amount of a liability is greater than its tax
base
Examples of Deductible temporary differences:
a. Rent received in advance is treated as unearned
income (liability) under financial reporting but is
taxable in full upon receipt of cash.
b. Bad debts expense is recognized for financial reporting
when the collectability of accounts receivable becomes
doubtful while it is tax deductible only when the
accounts receivable is deemed worthless.
c. Warranty obligation is recognized as expense when a
product is sold under financial reporting but is tax
deductible only when actually paid.
d. Depreciation recognized under financial reporting than
the depreciation recognized for taxation purposes.
e. Losses and tax credits that can be carried forward and
deducted from future taxable profits.
Deductible temporary difference multiplied by the tax rate
results to deferred tax asset. Deferred tax assets are the
amounts of income taxes recoverable in future periods in
respect of: (a) deductible temporary differences; (b) the
carryforward of unused tax losses; and (c) the
carryforward of unused tax credits.
The recognition of deferred tax assets and liabilities does
not alter the amount of tax to be paid to the BIR in the
current period. However, when they reverse in a future
period:
a. Deferred tax liability results to a higher amount of tax
to be paid to the BIR.
b. Deferred tax asset results to a lower amount of tax to
be paid to the BIR.
ACCOUNTING FOR DEFERRED TAXES
PAS 12 requires the use of the asset-liability method (also
called balance sheet liability method) in accounting for
deferred taxes. This method is a comprehensive approach
in accounting for deferred taxes in that it accounts both (a)
timing differences and (b) differences between the
carrying amounts and tax bases of assets and liabilities.
Timing differences are differences between accounting
profit and taxable profit that originate in one period and
reverse in one or more subsequent periods. Temporary
differences are differences between the carrying amount
of an asset or liability in the statement of financial position
and its tax base. Temporary differences include all timing
differences; however, not all temporary differences are
timing differences. The tax base of an asset or liability is
the amount attribute to that asset or liability for tax
purposes.
⮚ Tax base of an asset - is the amount that will be
deductible for tax purposes against any taxable
economic benefits that will flow to an entity when it
recovers the carrying amount the asset. If those
economic benefits will not be taxable, the tax base of
the asset is equal to its carrying amount.
⮚ Tax base of a liability - is its carrying amount, less an
amount that will be deductible for tax purposes in
respect of that liability in future periods. In the case of
revenue which received in advance, the tax base of the
resulting liability is its carrying amount, less any
amount of the revenue that will be taxable in future
periods. (more on pg208-209)
RECOGNITION
The fundamental principle under PAS 12 is that an entity
shall, with certain limited exceptions, recognize a deferred
tax liability (asset) whenever recovery or settlement of the
carrying amount of an asset or liability would make future
tax payments larger (smaller) than they would be if such
recovery or settlement were to have no tax consequences.
⮚ Deferred tax liability is recognized for all taxable
temporary differences, except those that arise from the
following:
a. initial recognition of goodwill
b. initial recognition of an asset or liability in a
transaction which is not a business combination
and, at the time of the transaction, affects neither
accounting profit nor taxable profit (tax loss).
c. investments in subsidiaries, branches, and
associates, and interests in joint arrangements to
the extent that the entity is able to control the
timing of the reversal of the differences and it is
probable that the reversal will not occur in the
foreseeable future.
⮚ Deferred tax asset is recognized for all deductible
temporary differences, including unused tax losses and
unused tax credits, to the extent that it is probable that
taxable profit will be available against which the
deductible temporary difference can be utilized, unless
the deferred tax asset arises from the initial
recognition of an asset or liability in a transaction that
is not a business combination and, at the time of the
transaction, affects neither accounting profit nor
taxable profit (tax loss).
LIMITATION ON THE RECOGNITION OF DEFERRED TAX
ASSET
A deferred tax asset reduces the tax payment when it
reverses in a future period. However, an entity can benefit
from this reduction only if it earns sufficient taxable profit
against which the reduction can be applied. Accordingly,
PAS 12 permits an entity to recognize deferred tax assets
only when it is probable that taxable profits will be
available against which the deductible temporary
differences can be utilized or there is sufficient taxable
temporary differences that are expected to reverse in the
same period that the deductible temporary differences are
expected to reverse. When it is not probable that a
deferred tax asset will be realized, it is either (a) not
recognized or (b) reduced to its realizable value, whichever
is appropriate. The reduction in deferred tax asset
increases income tax expense but does not affect current
tax expense.
MEASUREMENT
Deferred tax assets and liabilities are measured at the tax
rates that are expected to apply to the period of their
reversal, based on tax rates that have been substantively
enacted by the end of the reporting period. PAS 12
prohibits the discounting of deferred tax assets and
liabilities. Illustration:
Entity A has a taxable temporary difference of P2,000 in
Year 1. The difference is expected to reverse as follows:
P1,000 in Year 2 and P1,000 in Year 3. The tax rate in Year 1
is 30%. However, by the end of Year 1, a tax law is enacted
which requires tax rates of 32% in Year 2 and 35% in Year 3
and in succeeding years.
⮚ Entity A recognizes a deferred tax liability of P670 at
the end of Year 1, computed as follows [(1,000 x 32 %)
+ (1,000 x 35 %)]
PRESENTATION IN THE STATEMENT OF FINANCIAL
POSITION
Deferred tax assets and deferred tax liabilities are
presented separately as noncurrent assets and
noncurrent liabilities, respectively, in a classified
statement of financial position. PAS 12 permits offsetting
of deferred tax assets and deferred tax liabilities only if:
a. the entity has a legally enforceable right to offset
current tax assets against current tax liabilities; and
b. the deferred tax assets and the deferred tax liabilities
relate to income taxes levied by the same taxation
authority.
ACCOUNTING FOR CURRENT TAXES
An entity uses relevant tax laws in computing for its
current taxes. Unpaid current taxes are recognized as
current tax liability, e.g., income tax payable. Excess tax
payments over the current tax due are recognized as
current tax asset, e.g., prepaid income tax. PAS 12 permits
offsetting of current tax assets and current tax liabilities
only if the entity has:
a. a legally enforceable right to offset the recognized
amounts; and
b. an intention to settle/realize the recognized amounts
on a net basis or simultaneously.
PRESENTATIONIN STATEMENT OF COMPREHENSIVE
INCOME
Tax consequences are accounted for in the same way as
the related transactions or events. Thus, if a transaction is
recognized in profit or loss, its tax effect is also recognized
in profit or loss. If a transaction is recognized outside profit
or loss, the tax effect is also recognized outside profit or
loss (e.g., in other comprehensive income or directly in
equity). Current and deferred taxes are usually recognized
in profit or loss. The following are examples taxes that are
recognized outside of profit or loss:
⮚ Taxes recognized in other comprehensive income:
a. Revaluation of property, plant and equipment.
b. Exchange differences arising on the translation of
the financial statements of a foreign operation.
⮚ Taxes recognized directly in equity:
a. Adjustment to the opening balance of retained
earnings resulting from a change in accounting
policy or correction of a prior-period error.
b. Amounts arising on initial recognition of the equity
component of a compound financial instrument.
A tax effect that is recognized directly in equity is
accounted for as a direct adjustment to the related
component of equity, e.g., retained earnings or share
premium, rather than presented in the profit or loss or
other comprehensive income sections of the statement of
comprehensive income.
PROPERTY, PLANT AND EQUIPMENT
PAS 16 prescribes the accounting treatment for property,
plant and equipment (PPE). It addresses the principal
issues of recognition as assets, measurement of carrying
amount and recognition of depreciation charges. PAS 16
applies to all items of PPE except to the following for
which other standards apply:
a. assets classified as held for sale
b. biological assets other than bearer plants. PAS 16
applies to bearer plants but it does not apply to the
produce on bearer plants
c. the recognition and measurement of exploration and
evaluation assets
d. mineral rights and mineral reserves such as oil, natural
gas and similar non-regenerative resources
However, PAS 16 applies to PPE used to develop or
maintain the assets described in (b) - (d).
Property, plant and equipment are:
a. Tangible assets (have physical substance);
b. Used in business (used in the production or supply of
goods or services, for rental, or for administrative
purposes); and
c. Long-term in nature (expected to be used for more
than one period).
Examples of PPE:
a. Land used in business
b. Land held for future plant site
c. Building used in business
d. Equipment used in the production of goods
e. Equipment held for environmental and safety
f. Equipment held for rentals reasons
g. Major spare parts and long-lived stand-by equipment
h. Furniture and fixture
i. Bearer plants
The following are not PPE:
a. Land held for speculation
b. Land held for an undetermined future use
c. Land and/or building classified as investment property
under PAS 40 Investment Property
d. Property held for sale in the ordinary course of
business
e. Assets classified as held for sale under PFRS 5
f. Biological assets related to agricultural activity, other
than bearer plants
g. Intangible assets
h. Minor spare parts and short-lived stand-by equipment
RECOGNITION
An item of PPE is recognized if:
a. it is probable that future economic benefits associated
with item will flow to the entity; and
b. the cost of the item can be measured reliably.
Spare parts, stand-by equipment and servicing equipment
are recognized as PPE if they meet the definition of PPE
(Le., they are expected to be used for more than one
period); otherwise, they are classified as inventory. Safety
and environmental equipment are usually recognized as
PPE because, although they do not directly increase the
future economic benefits of other existing assets, they are
necessary in obtaining the future economic benefits from
other assets.
INITIAL MEASUREMENT
An item of PPE is initially measured at cost. Cost comprises
the following:
a. Purchase price, including import duties, nonrefundable
purchase taxes, less trade discounts and rebates.
b. Direct costs of bringing the asset to the location and
condition necessary for it to be used in the manner
intended by management.
c. Initial estimate of dismantlement, removal and site
restoration costs for which the entity incurs an
obligation by acquiring or using the asset other than to
produce inventories.
Examples of directly attributable costs:
a. Costs of employee benefits arising directly from the
construction or acquisition of PPE;
b. Costs of site preparation;
c. Initial delivery and handling costs (e.g., freight costs);
d. Installation and assembly costs;
e. Testing costs gross of disposal proceeds of samples
produced during testing (the proceeds, and the cost of
the samples which is measured using PAS 2
Inventories, are recognized in profit or loss in
accordance with applicable Standards); and
f. Professional fees.
Examples of costs that are expensed outright:
a. Costs of opening a new facility.
b. Costs of introducing a new product or service
(including costs of advertising and promotional
activities).
c. Costs of conducting business in a new location or with
a new class of customers (including costs of staff
training).
d. Administration and other general overhead costs.
Illustration:
Entity A acquires equipment on January 1, 20x1.
Information on costs is as follows:
Purchase price, gross of trade discount 1,000,000
Trade discount available 10,000
Freight costs 20,000
Testing costs 30,000
Disposal proceeds of samples generated
during testing 5,000
Present value of estimated costs of dismantling
the equipment at the end of its useful life 6,209
The initial cost of the equipment is computed as follows:
Purchase price, net of trade discounts (1M-10K) 990,000
Freight costs 20,000
Testing costs 30,000
Present value of dismantlement costs 6,209
Initial investment 1,046,209
INCIDENTAL OPERATIONS
Incidental operations before or during the construction of
a PPE are not necessary in bringing the PPE to the location
and condition necessary for it to be capable of operating in
the manner intended by management Accordingly, income
and related expenses of incidental operations are
recognized in profit or loss, and hence do not affect the
measurement of cost of a PPE.
SELF-CONSTRUCTED ASSETS
The cost of a self-constructed asset is determined using
the same principles as for an acquired asset. Accordingly,
the cost of a self-constructed asset excludes internal
profits (e.g., savings on self-construction) and the cost of
abnormal amounts of wasted material, labor, or other
resources incurred in self-constructing the asset.
BEARER PLANTS
A bearer plant is a living plant that:
a. is used in the production or supply of agricultural
produce;
b. is expected to bear produce for more than one period;
and
c. has a remote likelihood of being sold as agricultural
produce, except for incidental scrap sales.
Bearer plants are accounted for similar to self-constructed
assets. PAS 16 uses the term 'construction' to include
activities that are necessary to cultivate the bearer plants
before they are in the location and condition necessary to
be capable of operating in the manner intended by
management.
MEASUREMENT OF COST
Cost is measured at the cash price equivalent at the
acquisition date. If payment is deferred beyond normal
credit terms, difference between the cash price equivalent
and the so payment is recognized as interest over the
credit period. The cost of a PPE acquired through an
exchange of non-monetary assets is measured using the
following order of priority:
1. Fair value of the asset given up
2. Fair value of the asset received
3. Carrying amount of the asset given up
If the exchange lacks commercial substance, the P
acquired is measured at the carrying amount of the asset
given up
SUBSEQUENT EXPENDITURES ON RECOGNIZED PPE
Capitalization of costs ceases when the PPE is in the
location and condition necessary for it to be capable of
operating in the manner intended by management.
Therefore, costs incurred in using a redeploying a PPE are
not capitalized. The following subsequent expenditures on
PPE 2 recognized as expenses:
a. Costs of day-to-day servicing of a PPE (i.e., repairs
maintenance expense); and
b. Costs incurred while an item capable of operating in
the manner intended by management has yet to be
brought int use or is operated at less than full capacity.
c. Initial operating losses.
d. Costs of relocating or reorganizing part or all of the
entity’s operations.
An entity uses the recognition criteria when determining
whether subsequent expenditures can be capitalized. PAS
specifically addresses the capitalization of the following
subsequent expenditures:
a. Replacement costs - some PPE have parts that need to
be replaced the seats in an aircraft. The cost of
replacing a part of an item of PPE is capitalized it the
recognition criteria are met. The carrying amount of
the replaced part (old part) is derecognized and
charged as loss, regardless of whether it had been
depreciated separately or not. If the carrying amount
of the replaced part cannot be determined, the cost of
the replacement part (new part) is used as an
indication of what the cost of the replaced part was at
the time it was acquired or constructed.
b. Major inspections - Some PPE require regular major
inspections as condition for their continued operation.
Major inspections are accounted for similar to
replacement costs, i.e., the cost of a major inspection is
capitalized while the carrying amount of the previous
inspection is derecognized.
SUBSEQUENT MEASUREMENT
After initial recognition, an entity chooses either the cost
model or the revaluation model as its accounting policy
and applies that policy to an entire class of PPE.
COST MODEL
Under the cost model, a PPE is carried at its cost less any
accumulated depreciation and any accumulated
impairment losses. Cost is the amount of cash or cash
equivalents paid or the fair value of the other
consideration given to acquire an asset at the time of its
acquisition or construction or, where applicable, the
amount attributed to that asset when initially recognized
in accordance with the specific requirements of other
PFRSS.
DEPRECIATION
⮚ Depreciation is the systematic allocation of the
depreciable amount of an asset over its useful life.
⮚ Depreciable amount is the cost of an asset, or other
amount substituted for cost, less its residual value.
⮚ Residual value is the estimated amount that an entity
would currently obtain from disposal of the asset, after
deducting the estimated costs of disposal, if the asset
were already of the age and in the condition expected
at the end of its useful life.
⮚ Useful life is: (a) the period over which an asset is
expected to be available for use by an entity; or (b) the
number of production or similar units expected to be
obtained from the asset by an entity.
⮚ Carrying amount is the amount at which an asset is
recognized accumulated impairment losses.
Each significant part of an item of PPE is depreciated
separately. For example, the engines and airframe of an
aircraft are depreciated separately. Depreciation is
recognized as expense unless it is included in the cost of
producing another asset. For example, the depreciation of
a factory building is included in the cost of inventories.
Depreciation starts when the asset is available for use, in
the manner intended by management. Depreciation stops
when the asset is:
a. derecognized (i.e., sold or disposed of);
b. classified as held for sale under PFRS 5; or
c. fully depreciated. An asset is fully depreciated when its
carrying amount is zero or equal to its residual value.
However, if the residual value decreases below the
carrying amount, the decrease is recognized as an
additional depreciation.
Depreciation does not cease when the asset becomes idle
or is retired from active use. Land and buildings are
accounted for separately even when they are acquired
together. Land is not depreciated because it has an
unlimited useful life (with certain exceptions, such as
quarries and landfill sites). Buildings are depreciated
because they have limited useful life.
DEPRECIATION METHOD
There are a variety of depreciation methods. PAS 16
mentions three examples, namely: straight-line method,
diminishing balance method and units of production
method. However, PAS 16 does not prescribe any specific
method. The choice of depreciation method depends on
management's judgment. When making the judgment, PAS
16 requires management to choose the method that best
reflects the expected pattern of consumption of the future
economic benefits embodied in the asset and to apply that
method consistently from period to period unless there is
a change in the expected pattern of consumption of those
future economic benefits. PAS 16, however, prohibits the
use of a depreciation method that is based on revenue.
Revenue generally reflects factors other than the
consumption of the economic benefits of the asset. PAS 16
requires an annual review of the depreciation method and
the estimates of useful life and residual value at each
year-end. Any change is accounted for as a change in
accounting estimate. The most commonly used
depreciation method is the straight-line method.
Illustration: Straight-line method of depreciation
On January 1, 20x1, Entity A acquires equipment for a total
cost of P1,000,000. The equipment is estimated to have a
useful life of 5 years and a residual value of P50,000.
The annual depreciation is computed as follows:
Cost 1,000,000
Less: Residual value (50,000)
Depreciable amount 950,000
Divide by: Useful life 5 not made through profit or loss.
Annual depreciation 190,000
The carrying amount of the equipment at the end of the
20x1 is computed as follows;
Cost 1,000,000
Accumulated depreciation (190,000 × 1 yr.) (190,000)
Carrying amount - 12/31/20x1 810,000
Entity A recognizes depreciation of P190,000 per year
during the 5-year life of the equipment. The carrying
amount of the asset at December 31, 20x5, when the asset
is fully depreciated, would be P50,000, equal to the
residual value or [1M cost - (190K x 5 yrs.)].
e. aircraft; Revaluation surplus is subsequently accounted for as
f. motor vehicles, follows:
a. If the revalued asset is non-depreciable, e.g., land, the
g. furniture and fixtures;
whole of the revaluation surplus is transferred directly
h. office equipment; and to retained earnings when the asset is derecognized.
i. bearer plants. b. If the revalued asset is depreciable, a portion of the
ACCOUNTING FOR REVALUATIONS revaluation surplus may be transferred directly to
retained earnings as the asset is used. The portion
An increase or decrease in the carrying amount of a PPE
transferred each year is equal to the difference
resulting from revaluation is recognized in other
between the depreciation based on the revalued
comprehensive income and accumulated in equity under
carrying amount and the depreciation based on the
the revaluation surplus account, except for the following:
original cost.
a. An increase that represents a reversal of a previous
Transfers from revaluation surplus to retained earnings are
impairment loss is recognized in profit or loss as
impairment gain.
Illustration:
b. A decrease in excess of the credit balance in the
"Revaluation surplus" of the asset is recognized in Continuing again the illustration above, the amount of
profit or loss as impairment loss. revaluations surplus to be transferred directly to retained
earnings each year as the asset is used is computed as
The revaluation increases or decrease is computed using
follows:
the following formula:
Depreciation based on revalued carrying 1,700,000
Fair value* xx
amount (17M fair value ÷ 10)
Less: Carrying amount (xx)
Depreciation based on original cost (1,500,000)
Revaluation surplus xx
(15M carrying amount ÷ 10)
Illustration: Amount of revaluation surplus transferred
On December 31, 20x1, Entity A determines that its to retained earnings each year 200,000

REVALUATION MODEL building with historical cost of P20,000,000 and Alternative solution: (20,000,000 revaluation surplus ÷ 10
accumulated depreciation of P5,000,000 has a fair value of years) = 200,000
Under the revaluation model, a PPE is carried at its fair
P17,000,000. Illustration:
value at the date of the revaluation less any subsequent
accumulated depreciation and subsequent accumulated The revaluation surplus is computed as follows: On December 31, 20x1, Entity A acquires a piece of land
impairment losses. Fair value is the price that would be Fair value 17,000,000 for P1,000,000. Entity A revalues the land to fair value on
received to sell an asset or paid to transfer a liability in an Less: Carrying amount (20M - 5M) (15,000,000) the following dates:
Revaluation surplus 2,000,000
orderly transaction between market participants at the 12/31/x2 12/31/x3 12/31/x4
measurement date. DEPRECIATION Fair value 800,000 1,300,000 900,000
The frequency of revaluation depends on the significance After revaluation, a revalued asset is depreciated based on The revaluation decrease on December 31, 20x2
of changes in fair values. Assets whose fair values fluctuate its fair value represents impairment loss because the carrying amount
significantly may need to be revalued annually. Assets Illustration: of the asset is decreased below its original cost.
whose fair values do not fluctuate significantly may be Continuing the illustration above, assume that the building Fair value - 12/31/20x2 800,000
revalued every three or five years. has a remaining useful life of 10 years with no residual Less: Carrying amount (original cost) (1,000,000)
Revaluations are applied to an entire class of PPE. A class Impairment loss (200,000)
value. The annual depreciation in subsequent periods
of PPE is a grouping of assets with similar nature. The using the straight-line method is computed as follows: The impairment loss is recognized in profit or loss rather
following are examples of separate classes: than in other comprehensive income.
Fair value 17,000,000
a. land; Divide by: Remaining useful life 10
b. land and buildings; Annual depreciation 1,700,000
c. machinery; SUBSEQUENT ACCOUNTING FOR REVALUATION SURPLUS
The revaluation increase on December 31, 20x3 is partly
d. ships;
impairment gain and partly revaluation surplus.
Fair value - 12/31/20x3 1,300,000 DISCLOSURE Employers. Employee benefits are all forms of
Less: Carrying amount (fair value on 20x2) (800,000) General disclosures for each class of PPE: consideration given by an entity in exchange for service
Total increase 500,000 rendered by employees or for the termination of
Impairment gain (reversal of the 20x2 a. the measurement bases used
employment. It can be in any form, (cash, goods or
impairment loss) (200,000) b. the depreciation methods used
Revaluation surplus 300,000 services), and may be provided to either the employees or
c. the useful lives or depreciation rates used their dependents. Employees include all employees
The impairment gain of P200,000 is recognized in profit or
d. the gross carrying amount and the accumulated whether regular, part time or casual, and regardless of
loss while the P300,000 revaluation surplus is recognized
depreciation (aggregated with accumulated position in the entity.
in other comprehensive income and accumulated in
equity. (more on pg231) impairment losses) at the beginning and end of the RECOGNITION
period Employee benefits are recognized as expense when
The revaluation decrease on December 31, 20x4 is partly a
decrease in revaluation surplus and an impairment loss. e. a reconciliation of the carrying amount at the employees have rendered service, except to the extent
The decrease in revaluation surplus is recognized in other beginning and end of the period showing: additions, that the employee benefits form part of the cost of
comprehensive income while the impairment loss is disposals, and other changes. another asset (e.g., salaries of factory workers are included
recognized in profit or loss. Additional disclosures: in the cost of inventories). On the other hand, employee
Fair value - 12/31/20x4 900,000 benefits already earned by employees but not yet paid are
a. restrictions on title and PPE pledged as security for
Less: Carrying amount (fair value on 20x3) (1,300,000) recognized as liabilities.
liabilities
Total decrease (400,000) Employee benefits may arise from contractual agreements
Decrease in revaluation surplus 300,000 b. expenditures to construct PPE during the period
(employment contracts), legislation (Social Security System
Impairment loss (100,000) c. contractual commitments for the acquisition of PPE SSS' contributions) or informal practices that create
DERECOGNITION d. compensation for impairment losses constructive obligations. The following are the four
Derecognition is the opposite of recognition. e. proceeds and cost of items produced during testing of categories of employee benefits under PAS 19:
Derecognition refers to the removal of a previously PPE a. Short-term employee benefits
recognized asset or liability from the entity's statement of
f. changes in estimates relating to PPE b. Post-employment benefits
financial position. The carrying amount of a PPE is
derecognized when: Disclosures for revalued PPE: c. Other long-term employee benefits
a. it is disposed (e.g., sold); or a. date of the revaluation d. Termination benefits
b. no future economic benefits are expected from the b. whether an independent valuer was involved SHORT-TERM EMPLOYEE BENEFITS
asset's use or disposal. c. the carrying amount of each revalued class of PPE if Short-term employee benefits are those that are due to
On derecognition, the difference between the carrying they had been measured under the cost model be settled within 12 months after the end of the period in
amount of the derecognized PPE and the net disposal d. revaluation surplus, including changes during the which the employees have rendered the related services.
proceeds, if any, is recognized as gain or loss in profit or period and any restrictions on its distribution to Examples include:
loss. If the asset derecognized is revalued, any balance in shareholders. a. Salaries, wages, and SSS, PhilHealth and Pag-IBIG
the related revaluation surplus is transferred directly to Encouraged disclosures: contributions
retained earnings and will not affect the amount of gain or
a. carrying amount of temporarily idle PPE b. Paid vacation leaves and sick leaves
loss recognized in profit or loss.
b. gross carrying amount of any fully depreciated PPE that c. Profit-sharing and bonuses
Illustration:
is still in use d. Non-monetary benefits (free goods or services)
Entity A sells a machine with carrying amount of $860,000
c. carrying amount of PPE retired from active use and not GENERAL ACCOUNTING REQUIREMENTS
for $1,000,000. Entity A paid broker's commission of
classified as held for sale in accordance with PFRS 5 Employee benefits are recognized as expense (or as part of
P100,000.
d. when the cost model is used, the fair value of PPE the cost of another asset) and as an accrued liability, to
The gain (loss) on the sale is computed as follows:
when this is materially different from the carrying the extent that they are unpaid, after the employee has
Net disposal proceeds (broker’s commission) 900,000
amount rendered service and becomes entitled to payment. If
Carrying amount (860,000)
Gain on sale 40,000 EMPLOYEE BENEFITS payments exceed the benefits earned by employees, the
There is gain because the net selling price exceeds the PAS 19 prescribes the accounting for employee benefits by excess is recognized as a prepaid asset. Short-term
carrying amount. employee benefits are recognized periodically.
SHORT-TERM PAID ABSENCES through post-employment benefits plans, which are The accounting for defined contribution plans is
Short-term paid absences include vacation, holiday referred to in various names including retirement plans straightforward. Since the employer's obligation is limited
(regular and nonworking holidays), maternity, paternity and pension schemes. to the amount that it has agreed to contribute, it simply
and sick leaves. Entitlement to paid absences may be A post-employment benefit plan can be a formal recognizes the contribution as expense (unless it forms
either: arrangement (explicitly stated in employment contracts part of the cost of another asset) and a liability (if unpaid)
and in the entity's employee manual or handbook) or it when employees have rendered service during a period. If
a. Accumulating - those that can be carried forward and
can also be informal (not documented but employees are the amount contributed exceeds the fixed amount of
used future periods if not used in the current period.
entitled to post-employment benefits based on the contribution, the excess is treated as a prepaid asset. The
Accumulating paid absences may be either:
employer's past practice or the minimum requirements of amount of contribution is measured at an undiscounted
i. Vesting - unused entitlement are paid in cash when amount if it is due within 12 months; if due beyond 12
law). Post-employment benefit plans can be:
the employee leaves the entity (monetized). months, it is discounted. Actuarial valuations are not
a. Contributory or Non-contributory; and
ii. Non-vesting - unused entitlement are not necessary; therefore, there are no actuarial gains or losses.
monetized. b. Funded or Unfunded (more on pg243-244)
b. Non-accumulating - those that expire if not used in the Contributory Non-contributory DEFINED BENEFIT PLANS
current period and are not paid in cash when the Under a defined benefit plan, the employer commits to
employee leaves the entity. ● Both the employee and ● Only the employer
pay a definite amount of retirement benefits, which can
employer contribute to contributes to the
Compensated absences are recognized as follows: be determined using a plan formula. The amount of
the retirement benefits retirement benefits fund
a. Accumulating and vesting - all unused entitlements are fund of the employee. of the employee. promised benefits is independent of any fund balance.
accrued and measured at the expected amount to be Accordingly, if the fund proves to be insufficient to pay for
paid when those entitlements are used or monetized in Funded Unfunded
the promised benefits, the employer is obligated to make
a future period. good the deficiency. Therefore, the risk of fund
● The retirement fund is ● The employer manages insufficiency rests with the employer. (more on
b. Accumulating and non-vesting - only the unused isolated from the any established fund and pg245-246)
entitlements that are expected to be utilized are employer's control and is pays directly the retiring
accrued, taking into account the possibility that transferred to a trustee employees. Defined contribution plan Defined benefit plan
employees may leave before they utilize those (e.g., investment
entitlements. company) who ● The employer commits to ● The employer commits
undertakes to manage make fixed contributions to pay a definite amount
c. Non-accumulating - unused entitlements are not
the fund and pay directly to a fund. The amount of of retirement benefits.
accrued but recognized only when the absences occur.
the retiring employees. benefits that an Such amount is
PROFIT SHARING AND BONUS PLANS employee will receive is independent of any fund
Profit-sharing and bonuses are additional incentives given Post-employment benefit plans are either: dependent on the fund balance.
to eligible employees for a variety of reasons - the most balance.
a. Defined contributions plan; or
obvious is to motivate the employees to be more
b. Defined benefit plans
productive. These are recognized when (a) the entity has a ● The risk that the fund ● The risk that the fund
present obligation to pay for them and (b) the cost can be DEFINED CONTRIBUTIONS PLAN may be insufficient to may be insufficient to
measured reliably. Under a defined contribution plan, the employer commits meet the expected pay for the promised
POST-EMPLOYMENT BENEFITS to make fixed contributions to a fund that will be used to benefits rests with the benefits rests with the
pay for the retirement benefits of the employees. The employee. employer.
Post-employment benefits are employee benefits (other
amount of post-employment benefits to be received on
than termination benefits and short-term employee ACCOUNTING FOR DEFINED BENEFIT PLANS
the amount of contributions to the fund together with the
benefits) that are payable after the completion of
investment income therefrom. If the fund balance is less The employer's obligation under a defined benefit plan is
employment. Examples of post-employment benefits:
than expected, the employer has no obligation to make to provide the agreed benefits. Therefore, the employer
a. Retirement benefits (lump sum payment and pensions) good the deficiency. Therefore, the risk that retirement bears the risk that the promised benefits will cost more
b. Other post-employment benefits (post-employment benefits may be insufficient rests with the employee. than expected it actuarial or investment experience is
life insurance or medical care). ACCOUNTING FOR DEFINED CONTRIBUTION PLAN worse than expected. In such case, the related obligation
Post-employment benefits are provided to employees may need to be increased. Consequently, the accounting
for defined benefits plans is complex because actuarial
assumptions are necessary to measure the obligation on a
discounted basis. This results to actuarial gains or losses.
Also, the retirement benefit cost is not necessarily equal to
contribution due for the period. The accounting for
defined benefit plans involves the following steps:
Step #1: Determine the deficit or surplus
The deficit or surplus is the difference between the
following:
a. Present value of the defined benefit obligation (PV of
DBO)
o PV of DBO represents the entity's obligation for the
accumulated retirement benefits earned by
employees to date This is determined using an
actuarial valuation method called the projected
unit credit method.
b. Fair value of plan assets (FVPA), if any
o FVPA represents the balance of any fund set aside
for the payment of the retirement benefits.
If FVPA is less than PV of DBO, the difference is a deficit. If
FVPA is greater than PV of DBO, the difference is a surplus.
Step #2: Determine the Net defined benefit liability
(asset)
The net defined benefit liability or asset is the amount that
is presented in the statement of financial position. If there
is a deficit, the deficit is a net defined benefit liability. If
there is a surplus, the net defined benefit asset is the
lower of the:
a. surplus, and
b. asset ceiling - the present value of any economic
benefits available in the form of refunds from the plan
or reductions in future contributions to the plan
Step #3: Determine the Defined Benefit Cost
Service cost: (P/L)
(a) Current service cost
(b) Past service cost
(c) Any gain or loss on settlement
Net interest on the net defined benefit liability (asset): (P/L)
(a) Interest cost on the defined benefit obligation
(b) Interest income on plan assets
(c) Interest on the effect of the asset ceiling
Remeasurements of the net defined benefit liability (asset): (OCI)
(a) Actuarial gains and losses
(b) Difference between interest income on plan assets and
return on plan assets
(c) Difference between the interest on the effect of the asset
ceiling and change in the effect of the asset ceiling xx
Total Defined Benefit Cost xx
⮚ Current service cost - is the increase in the PV of DBO
resulting from employee service in the current period.
⮚ Past service cost - is the change in the PV of DBO for
employee service in prior periods resulting from a plan
amendment or curtailment.
⮚ Gain or loss on settlement - arises when the
employer's obligation to provide benefits is eliminated
other than from payment of benefits according to the
terms of the plan.
⮚ Net interest on the net defined benefit liability (asset)
- is the change in the net defined benefit liability
(asset) during the period that arises from the passage
of time. It comprises the three items listed in the
formula above.
⮚ Actuarial gains and losses - are changes in the PV of
DBO resulting from changes in actuarial assumptions.
o Actuarial assumptions are estimates of variables
used in determining the ultimate cost of providing
post-employment benefits. These include
demographic assumptions (employee turnover
rate, mortality or lifespan and health condition) and
financial assumptions (discount rate and future
salary levels).
o The discount rate used in measuring defined
benefit obligations and costs is based on high
quality corporate bonds.
⮚ Return on plan assets - represents the investment
income earned by the plan assets during the year after
deducting the costs of managing the fund and taxes.
(more on pg248-250)
MULTI-EMPLOYER BENEFITS
Under a multiemployer plan, various unrelated employers
xx
xx
contribute to a common fund that is managed by a trustee
xx to provide post-employment benefits to the employees of
the participating employers. Contribution and benefit
xx levels determined without regard to the identities of the
xx employers. A multiemployer plan is classified as either a
xx
defined contribution plan or a defined benefit plan.
xx STATE PLANS
A state plan is one that is established by law and operated
xx
by the government. It is mandatory for all entities within
its scope and is not subject to control or influence by the
entity. Examples include Government Service Insurance
System (GSIS), which covers government employees; and
Social Security System (SSS), which covers those in the
private sector. A state plan is accounted for in the same
way as a multiemployer plan, classified as either a defined
contribution plan or a defined benefit plan. (more on
pg250-253)
INSURED BENEFITS
An employer may pay insurance premiums to fund a
post-employment benefit plan. Such plan is classified as
either defined contribution plan or defined benefit plan. It
is a defined benefit plan if the employer retains the
obligation to either pay directly the benefits to the
employee or make good any deficiency if the insurer fails
to pay in full the benefits.
OTHER LONG-TERM EMPLOYEE BENEFITS
Other long-term employee benefits are employee benefits
(other than post-employment benefits and termination
benefits) that are d to be settled beyond 12 months after
the end of the period in which the employees have
rendered the related service. Examples include:
a. Long-term compensated absences, e.g., sabbatical
leave
b. Jubilee or other long-service benefits
c. Long-term disability benefits
d. Profit-sharing and bonuses payable beyond 12 months
after the end of the period in which the employees
have rendered the related service
e. Deferred compensation payable beyond 12 months
after the end of the period in which it is earned
Other long-term employee benefits are accounted for
similar to defined benefit plans except that all the
components of the defined benefit cost recognized in
profit or loss, including the remeasurements of the net
defined benefit liability (asset).
TERMINATION BENEFITS
Termination benefits are those provided as a result of
either: (a) the entity's decision to terminate the employee
before normal retirement date; or (b) the employee's
decision to accept the employer's offer d benefits in
exchange for termination.
Unlike the other types of employee benefits, the
obligation to pay termination benefits arises from the
employer's act terminating an employee rather than from
employee service. Accordingly, benefits resulting from
termination at the employee's request without the
employer's offer are not termination benefits but rather
post-employment benefits.
RECOGNITION
Termination benefits are recognized as a liability and
expense at the earlier of the following dates:
a. When the entity can no longer withdraw the offer of
those benefits; and
b. When the entity recognizes restructuring costs under
PAS 37 that involve payment of termination benefits.
MEASUREMENT
Termination benefits are accounted for in accordance with
the nature of the employee benefit. If the termination
benefits are:
a. payable within 12 months, they are accounted for
similar to short-term employee benefits.
b. payable beyond 12 months, they are accounted for
similar to other long-term benefits.
c. in substance, enhancement to post-employment
benefits, they are accounted for as post-employment
benefits.
ACCOUNTING FOR GOVERNMENT GRANTS AND
DISCLOSURES OF GOVERNMENT ASSISTANCE
PAS 20 prescribes the accounting and disclosure of
government grants and the disclosure of other forms of
government assistance. PAS 20 does not apply to:
a. accounting for government grants under
hyperinflationary economies;
b. tax benefits such as income tax holidays, investment
tax credits, accelerated depreciation allowances and
reduced income tax rates;
c. government participation in the ownership of the
entity; and
d. government grants covered by PAS 1 Agriculture
GOVERNMENT GRANTS
Government grants (subsidies, subventions, or premiums)
are assistance received from the government in the form
of transfers of resources in exchange for compliance with
certain conditions. Examples of government grants:
a. receipt of cash, land, or other non-cash assets from the TYPES OF GOVERNMENT GRANTS ACCORDING TO
government subject to compliance with certain ATTACHED CONDITION
conditions 1. Grants related to assets - grants whose primary
b. receipt of financial aid in case of loss from a calamity condition is that the recipient entity should acquire or
construct long-term assets. Examples:
c. forgiveness of an existing loan from the government
a. cash is received from the government with the
d. benefit of a government loan with below-market rate
condition that the amount should be used to
of interest
acquire equipment
Only government assistance that meet the asset
b. land is received from the government with the
recognition criteria are recognized as government grants.
condition that a building should be constructed on
Accordingly, government grants exclude government
it.
assistance whose value cannot be reasonably measured or
cannot be distinguished from the entity’s normal trading 2. Grants related to income - grants other than those
transactions. The following are forms of government related to assets.
assistance but are not government grants: MEASUREMENT
a. Tax benefits Non-monetary grants
Monetary grants
b. Free technical or marketing advice (land and other resources)
c. Provision of guarantees a. amount of cash received; a. fair value of the
or non-monetary asset
d. Government procurement policy that is responsible for
b. fair value of amount received; or
a portion of the entity’s sales
receivable b. alternatively, at nominal
If significant, these are disclosed but not recognized as amount
government grants. The following are not government
assistance and therefore are neither disclosed nor Fair value is the price that would be received to sell an
recognized: asset or paid to transfer a liability in an orderly transaction
a. public improvements that benefit the entire between market participants at the measurement date
community Government grants may also be in the form of loan:
b. imposition of trading constraints on competitors a. forgivable loan - a loan that the lender (government)
PAS 20 provides the following reasons why the receipt of waives repayment subject to certain conditions; or
government assistance may be significant in the b. loan at below-market rate of interest or zero-interest
preparation of the financial statements: A forgivable loan is measured at the carrying amount of
1. If resources are received, an appropriate accounting the loan forgiven, while the benefit of a loan at
methos is necessary to account for the receipt; and below-market rate of interest or zero interest is measured
2. The indication of the extent to which the entity has as the difference between the initial carrying amount of
benefited from the assistance during the period the loan and the proceeds received.
improves the comparability of its financial statements. APPROACHES TO THE ACCOUNTING FOR GOVERNMENT
RECOGNITION GRANTS
Government grants are recognized if there is reasonable Capital approach Income approach
assurance that:
Grant is recognized outside Grant is recognized in profit
a. the attached conditions will be complied with; and profit or loss or in equity. or loss over one or more
b. the grants will be received periods.
PAS 20 uses the income approach. The capital approach is
The mere receipt of a grant is not conclusive evidence that
used only when donations are received from shareholders.
the attached condition has been or will be satisfied.
ACCOUNTING FOR GOVERNMENT GRANTS
Government grants are recognized in profit or loss on a
systematic basis over the periods in which the entity
recognizes as expenses the related costs for which the
grants are intended to compensate. The accounting for
government grant uses a matching concept such that, if
the related expense is not yet recognized, income from
government grant is also not yet recognized. Accordingly:
o Grants related to depreciable assets are recognized in
profit or loss over the periods and in the proportions in
which depreciation expense on those assets is
recognized.
o Grants related to non-depreciable assets are
recognized in profit or loss when the costs of fulfilling
the attached condition are incurred.
o Grants received as financial aid for expenses or losses
already incurred are recognized immediately in profit
or loss when the grant becomes receivable
Recognizing government grants in profit or loss on a
receipt basis is prohibited as it violates the accrual basis of
accounting. A receipts basis would only be acceptable if
there is no allocation basis other than the one in which the
grant was received. (more on pg266-267)
PRESENTATION
Grants related to assets. Grants related to assets may be
presented either by gross presentation or net presentation
as follows:
Statement of financial position
Gross presentation Net presentation
The grant is presented as a The grant is deduced from
deferred income (liability) the carrying amount of the
related asset
Statement of comprehensive income (P/L section)
Gross presentation Net presentation
The income from the grant is The income from the grant is
reported separately or deducted from the
included in other income depreciation charge
However, in the statement of cash flows, the cash flows
from the receipt of the grant and the purchase of the
related asset are presented separately, even if the entity
uses the net presentation.
Grants related to income. Grants related to income may
also be presented either by gross presentation or net
presentation as follows:
Statement of comprehensive income (P/L section)
Gross presentation Net presentation
The income from the grant is The income from the grant is
reported separately or deducted from the related
included in other income expense
(more on pg269)
REPAYMENT OF GRANTS
A government grant that becomes repayable is treated as
a change in accounting estimate and accounted for
prospectively. The repayment of a grant related to income
is deducted form the related deferred income balance, if
any. Any excess is recognized immediately as in profit or
loss. On the other hand, the repayment of a grant related
to asset is treated as a reduction in the deferred income
balance or an increase in the carrying amount of the asset.
The cumulative additional depreciation that would have
been recognized in the absence of the grant is recognized
immediately in profit or loss. Following the repayment, the
entity may need to consider the possibility of impairment
of the new carrying amount of the asset.
DISCLOSURE
a. Accounting policy and method of presentation
b. Nature and extent of government grants and other
forms of government assistance from which the entity
has directly benefited
c. Unfulfilled conditions and contingencies attached to
the government grants
THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES
PAS 21 prescribes the accounting for foreign activities and
the translation of financial statements into a presentation
currency. There are two ways of conducting foreign
activities:
1. Foreign currency transactions - e.g., import or export
transactions that are to be settled in a foreign currency.
These transactions need to be translated to Philippine
pesos before they can be recorded in the books of
accounts.
2. Foreign operations - e.g., a branch in another country.
The overseas branch will normally maintain its
accounting records and prepare its financial statements
in a foreign currency. Those financial statements need
to be translated to Philippine pesos before they can be
combined with the home office's financial statements.
TWO MAIN ACCOUNTING ISSUES
Exchange rates are constantly changing. Therefore, the
principal issues in the accounting for foreign activities are
determining:
a. Which exchange rate(s) to use; and
b. How to report the effects of changes in exchange rates
in the financial statements.
FUNCTIONAL CURRENCY
PAS 21 requires an entity to determine and disclose its
functional currency, which is the currency of the primary
economic environment in which the entity operates. This
functional currency is the currency in which t entity's cash
inflows and outflows are normally denominated into and is
not necessarily the currency of the country where the
entity is based. An entity considers the following factors (in
descending order) when determining its functional
currency:
a. Primary factors - the currency that mainly influences
the entity's sale prices and costs of goods or services
b. Secondary factors - the currency in which cash flows
from financing activities and operating activities are
usually generated and retained
Additional factors are considered in determining the
functional currency of a foreign operation, such as
whether the foreign operation is essentially an extension
of the entity (and therefore the foreign operation's
functional currency is the same as that of the entity), the
proportion of the foreign operation's transactions with the
entity, and the nature of the foreign operation's cash flows
in relation to the entity. Once determined, the functional
currency is not changed unless there is a change in
underlying transactions, events and conditions. In such
cases, a change in functional currency is accounted for by
translating the financial statements into the new
functional currency prospectively from the date of change.
All currencies other than the entity's functional currency
are considered foreign currencies.
FOREIGN CURRENCY TRANSACTIONS
A foreign currency transaction is a transaction that is
denominated or requires settlement in a foreign currency.
Examples: purchase or sale of goods, services or other
assets at a price that is denominated in a foreign currency,
and borrowing, lending or settling receivables or payables
at amounts that are denominated in a foreign currency.
INITIAL RECOGNITION related allowances and ● Intangible assets All resulting exchange differences are recognized in other
other financial assets ● Goodwill comprehensive income.
A foreign currency transaction is initially recognized by
measure at amortized ● Provisions that are to be For expediency reasons, an average rate for the period
translating the foreign currency amount into the functional
cost settled by the delivery of may be used, except when exchange rates fluctuate
currency using the spot exchange rate at the
● Finance lease receivables a non-monetary asset significantly. (more on pg 279-281)
date of the transaction.
● Cash surrender value ● Share capital and share
● Spot exchange rate is the exchange rate for immediate FOREIGN OPERATION
premium
delivery or simply, the current exchange rate on a given Monetary liabilities A foreign operation is a subsidiary, associate, joint venture
date. ● Accounts/Notes/Loans or branch that is based in a foreign country and is using a
payable and other
● Date of a transaction is the date on which the foreign currency. The financial statements of a foreign
financial liabilities
transaction first qualifies for recognition in accordance operation need to be translated before they can be
measured at amortized
with PFRSs. incorporated into the reporting entity's financial
cost
statements. The translation procedures discussed above
For example, goods acquired for $100 are initially ● Employee benefits to be
paid in cash apply to the translation of a foreign operation's financial
recognized by translating the $100 into pesos using the
● Provisions and accrued statements. When a foreign operation is disposed of, the
spot exchange rate on the date of acquisition. For practical
payables to be settled in cumulative other comprehensive income and accumulated
reasons, an average rate (e.g., for a week or a month) may
cash in equity is reclassified to profit or loss as a reclassification
be used for all transactions occurring during that period.
● Cash dividends payable adjustment.
However, if exchange rates fluctuate significantly, the use
of the average rate for a period is inappropriate. DISCLOSURE
EXCHANGE DIFFERENCES
SUBSEQUENT MEASUREMENT a. Exchange differences recognized in prom loss and OCI
Exchange difference is the difference resulting from
At each reporting date, the following items are translated b. The fact and reason for using a different presentation
translating a given number of units of one currency into
as follows: currency from the entity's functional currency.
another currency at different exchange rates. Exchange
differences arising from settling or translating: c. The fact and reason for a change in functional
Items Translated using currency.
a. Monetary items - recognized in profit or loss in the
a. Monetary items ⮚ Closing rate period in which they arise BORROWING COSTS
b. Nonmonetary items - if the gain or loss is recognized in Borrowing costs that are directly attributable to the
b. Nonmonetary items ⮚ Exchange rate at the date
other comprehensive income, the exchange acquisition, construction or production of a qualifying
measured at historical of transaction
component of the gain or loss is also recognized in the asset are capitalized as cost of that asset. Other borrowing
cost
OCT. Conversely, if the gain or loss is recognized in costs are expensed when incurred.
c. Nonmonetary items ⮚ Exchange rate at the date profit or loss, the exchange component is also
⮚ Borrowing costs (interest or finance costs) - are costs
measured at fair value when the fair value was recognized in P/L. (more on pg277-278)
incurred in relation to the borrowing of funds.
determined
TRANSLATION OF FINANCIAL STATEMENTS Examples:
Closing rate - the spot exchange rate at the reporting date. An entity is required to present its financial statements a. interest expense on financial liabilities or lease
using its functional currency (i.e., Philippine pesos). liabilities computed using the effective interest
MONETARY ITEMS VS NON-MONETARY ITEMS
However, whenever needed, the entity may translate its method; and
Monetary items are currencies held and assets and financial statements into any presentation currency (e.g.,
liabilities to be received or paid in a fixed or determinable b. exchange differences on foreign borrowings that
Japanese yen, US dollars, etc) as follows:
amount of money. Non-monetary items are those which are regarded as an adjustment to interest costs.
do not give rise to the receipt or payment of a fixed or Items Translated using Borrowing costs do not include actual or imputed cost
determinable amount of money. of equity or capital.
a. Assets and Liabilities ⮚ Closing rate at the date
⮚ Qualifying asset - is an asset that necessarily takes a
Monetary assets Non-monetary items (including comparatives) of the statement of
financial position substantial period of time to get ready for its intended
● Cash and cash ● Inventories use or sale." Examples:
equivalents ● Prepaid assets b. Income and Expenses ⮚ Exchange rates at the
(including comparatives) date of the transactions Qualifying items Not qualifying items
● Accounts/Notes/Loans ● PPE
receivable and their ● Investment property
 a. Inventories that take a a. Financial assets proceeds of the loan were temporarily invested and 5. A joint venture and an associate of a common investor.
long period of time to b. Inventories that are earned interest income of P20,000. The construction was 6. Key management personnel of the reporting entity or
produce routinely produced completed on December 31, 20x1. of the reporting entity's parent.
b. Items of PPE (e.g., over a short period
⮚ CBC= (1M x 10%) -20,000 = 80,000 7. A person who has control, significant influence or joint
building) that take a time or are
long period of time to mass-produced on a GENERAL BORROWING control over the reporting entity.
construct or to get repetitive basis General borrowings are those obtained for more than one 8. Close family member of the person referred to in (6)
ready for their c. Assets that are ready purpose, e.g., the acquisition or construction of a and (7).
intended use for their intended use qualifying asset and some other purposes. The 9. Post-employment benefit plan of the employees of
c. Intangible assets that or sale when acquired capitalizable borrowing costs on general borrowings are either the reporting entity or an entity related to the
take a long period of d. Assets measured at computed as follows: reporting entity.
time to develop fair value.
Key management personnel are those persons having
CBC = Ave. Expenditure x Capitalization Rate
CAPITALIZATION OF BORROWING COSTS authority and responsibility for planning, directing and
The borrowing cost to be capitalized is the lower of the controlling the activities of the entity, directly or indirectly
Borrowing costs are capitalized if they are avoidable,
amount computed using the formula above and the actual including any director (whether executive or otherwise) of
meaning they would not have been incurred if the
borrowing costs. (more on pg288-289) that entity. Close family member is one who may be
expenditure on the qualifying asset had not been made.
expected to influence or be influenced by, the person in
Capitalization of borrowing costs starts when all of the DISCLOSURE
his/her dealings with the reporting entity. It includes the
following conditions are met: a. The amount of borrowing costs capitalized during the person's spouse, their children and their dependents.
a. expenditures for the asset are being incurred; period.
The following are not related parties:
b. borrowing costs are being incurred; and b. The capitalization rate used to determine the
a. Two entities simply because they have one director or
c. activities necessary to prepare the asset for its capitalizable borrowing costs.
key management personnel in common.
intended use or sale are being undertaken. RELATED PARTY DISCLOSURES
b. Two joint venturers simply because they are
Capitalization is suspended during extended periods in PAS 24 prescribes the guidelines in identifying related co-venturers in a joint venture.
which active development is interrupted. Borrowing costs party relationships, transactions, outstanding balances
c. Financers, trade unions, public utilities, and
during these periods are expensed. Capitalization, commitments, and the necessary disclosures for these
government agencies that do not control, jointly
however, is not suspended if substantial technical and items. Related party relationships are a common feature of
control or significantly influence the reporting entity,
administrative work is being performed or a temporary business. Sometimes the mere existence of a related party
simply by virtue of their normal dealings with the
delay is a necessary part of the development process. relationship is sufficient to affect an entity's financial
entity, even though they may place some restrictions
Capitalization of borrowing costs ceases when the position and performance even in the absence of related
on the entity or participate it its decision-makings.
qualifying asset is substantially complete. If the party transactions.
construction of a qualifying asset is completed in parts, d. A customer, supplier, or other business that the entity
RELATED PARTIES
capitalization ceases for each part that is completed and does significant transactions with, simply because of
Parties are related if one party has the ability to affect the economic dependence.
ready for its intended use Capitalization continues for the
financial and operating decisions of the other party
uncompleted parts. DISCLOSURE
through contes significant influence or joint control.
SPECIFIC BORROWING Control, significant influence and joint control refer to the Relationships between parents and subsidiaries. A
Specific borrowing refers to funds borrowed specifically for degree of one party's ability to affect the relevant parent-subsidiary relationship is disclosed even if there
the Specific borrowing purpose of obtaining a qualifying decisions d another. These are defined and discussed in have been no transactions between them during the
asset. The capitalizable borrowing costs on specific are the other sections this book. Examples of related parties: period. A subsidiary discloses the name of its parent, and if
computed as follows: different, the name of the ultimate parent. If neither of
1. Parent and its subsidiary.
these two prepares consolidated financial statements for
CBC = Actual borrowing costs - Investment income borrowings 2. Fellow subsidiaries with a common parent. public use, the subsidiary discloses the name of the next
3. Investor and its associate; and the associate's most senior parent that does so.
Illustration:
subsidiary. Key management personnel compensation. An entity
On January 1, 20x1, Entity A obtained a 10%, P1M loan,
4. Venturer and the joint venture; and the joint ventures discloses the total key management compensation broken
specifically to finance the construction of a building. The
subsidiary. down as follows:
a. short-term employee benefits
b. post-employment benefits;
c. other long-term benefits;
d. termination benefits; and
e. share-based payment.
Related party transactions. A related party transaction is
a transfer of resources, services or obligations between a
reporting entity and a related party, regardless of whether
a price is charged. Examples of transactions that are
disclosed if they are with a related party:
a. purchases or sales of goods, services or other assets
b. leases
c. transfers of research and development
d. transfers under license agreements
e. loans and other financing arrangements, including
equity contributions
f. provision of guarantees or collateral
g. commitments
h. settlement of liabilities by or on behalf of either party
i. participation by a parent or subsidiary in a defined
benefit plan wherein risks are shared
The following are disclosed when there are related party
transactions during the periods covered by the financial
statements:
a. nature of the related party relationship
b. nature, terms and amount of the transaction and
outstanding balances
c. doubtful debts recognized on the outstanding balances
Related party transactions and their outstanding balances
are disclosed in an entity's separate or individual financial
statements. These, however, are eliminated in the group's
consolidated financial statements. Disclosures that related
party transactions were on arm's length basis are not
made unless this can be substantiated.
Government-related entities. A government-related entity
is an entity that is controlled, jointly controlled or
significantly influenced by a government. A
government-related entity discloses the following if there
have been related party transactions with the government:
a. name of the government and the nature of the
relationship
b. nature and amount of each individually significant
transaction
c. other transactions that are collectively significant but
are individually insignificant
ACCOUNTING AND REPORTING ENTITY BY RETIREMENT
BENEFIT PLANS
PAS 26 applies to the preparation of financial statements
of retirement benefit plans (also called 'pension schemes,
reporting 'superannuation schemes' or 'retirement benefit
schemes"). PAS 26 views a retirement benefit plan as a
entity separate from the employers of the participants in
the plan Accordingly, the retirement benefit plan may have
its own financial statements. PAS 26 deals with the
accounting and reporting by the plan to all participants as
a group, rather than individually regarding their retirement
benefit rights.
PAS 19 PAS 26
Applied by an employer in Applied by, for example, a
(among others) determining trustee when preparing the
the cost of providing financial statements of a
retirement benefits. retirement benefit plan, PAS
26 complements PAS 19
PAS 26 applies to all retirement benefit plans whether
formal or informal, contributory or non-contributory,
funded (managed by a trustee) or unfunded (managed by
the employer), and defined contribution plan or defined
benefit plan. Some plans may have characteristics of both
a defined contribution plan and a defined benefit plan.
Such hybrid plans are considered defined benefit plans
under PAS 26. However, PAS 26 does not apply to
government social security type arrangements and
employee benefits other than retirement benefits.
Funding is the transfer of assets to an entity (the fund)
separate from the employer's entity to meet future
obligations for the payment of retirement benefits.
DEFINED CONTRIBUTION PLANS
Under a defined contribution plan, the employer's
obligation is usually discharged by making the agreed
contributions. The benefits to be received by employees
are dependent on the contributions and investment
income of the fund. The participants therefore are
interested in information about actual contributions and
the plan's investment performance. To address the
foregoing needs the financial statements of a defined
contribution plan shall contain the following:
a. a statement of net assets available for benefits;
b. a statement of changes in net assets available for
benefits; and
c. accompanying notes to the financial statements
Net assets available for benefits are the assets of a plan
less liabilities other than the actuarial present value of
promised retirement benefits. (more on pg301-302)
DEFINED BENEFIT PLANS
Under a defined benefit plan, the benefits to be received
by employees are definite amounts which can be
determined by reference to the plan formula. The
employer's obligation is not discharged simply by making
contributions to a fund, but rather by actually paying the
promised benefits when they become due. The payment
of benefits therefore is dependent on the availability of
earmarked funds and the employer's ability to make good
any deficiency in those funds. Accordingly, the plan
participants are not only interested in information on the
earmarked funds (net assets available for benefits) but
also on the obligation (actuarial present value of promised
retirement benefits) for which those funds were set aside.
Thus, the financial statements of a defined benefit plan
requires the reporting of the actuarial present value of
promised retirement benefits either within those financial
statements or by reference to an accompanying separate
actuarial report.
The financial statements of a defined benefit plan contain
either:
1. a statement that shows:
a. the net assets available for benefits;
b. the actuarial present value of promised retirement
benefits, distinguishing between vested benefits
and non-vested benefits; and
c. the resulting excess or deficit
2. or a statement of net assets available for benefits
including either:
a. a note disclosing the actuarial present value of
promised benefits, distinguishing between vested
benefits and non-vested benefits; or
b. a reference to this information in an accompanying
actuarial report.
A statement of changes in net assets available for benefits
and accompanying notes are provided in both (1) and (2)
above. Vested benefits are benefits, the rights to which,
under the conditions of a retirement benefit plan, are not
conditional on continued employment.
ACTUARIAL PRESENT VALUE OF PROMISED RETIREMENT
BENEFITS
Actuarial present value of promised retirement benefits
is the present value of the expected payments by a
retirement benefit plan to existing and past employees,
attributable to the service already rendered. The present
value of the retirement benefits may be calculated using
either current salary levels or projected salary levels at the
retirement dates. Actuarial valuations are frequently
prepared every three years. If an actuarial valuation has
not been made prepared at the date of the financial
statements, the latest actuarial valuation is used as the
basis. The valuation date is disclosed.
VALUATION OF PLAN ASSETS
Plan assets are measured at fair value or market value.
Securities with fixed redemption values that have been
acquired to match the obligations of the plan may be
measured at their final redemption values. If an estimate
of fair value is not possible, the reason for this is disclosed.
DISCLOSURE
Aside from a statement of net assets available for benefits
and a statement of changes in net assets available for
benefits, the financial statements of either a defined
contribution plan or a defined benefit plan shall also
provide information on the following:
a. summary of significant accounting policies
b. description of the plan and the effect of any changes in
the plan during the period
c. details of any single investment exceeding 5% of net
assets or 5% of any category of investment
d. details of any investment in the employer
e. contributions of employer and employee, if applicable
f. analysis of benefits paid or payable according to, for
example, retirement, death and disability benefits, and
lump sum payments
g. funding policies and, for defined contribution plans,
investment policies
h. investment income on the plan assets
i. administrative, tax, and other expenses The entity applies the same accounting for each
j. transfers from or to other plans investment category (i.e., subsidiaries, associates, and
joint ventures). If the investments are measured at fair
k. for defined benefit plans, the actuarial present value of
value through profit or loss in non-separate financial
promised retirement benefits, including information on
statements, that same measurement is also used in the
significant actuarial assumptions, the methods used,
separate financial statements. Investments classified for as
the number of plan participants, a description of the
held for sale are accounted for in accordance with PFRS 5
promised benefits, and the names of the employers
Non-current Assets Held for Sale and Discontinued
and the employee groups covered. These may be
Operations.
presented either within the financial
DIVIDENDS
statements or in a separate report.
Dividends from a subsidiary, associate or joint venture are
SEPARATE FINANCIAL STATEMENTS
recognized in profit or loss when the entity's right to
PAS 27 prescribes the accounting and disclosure receive the dividends is established, except when the
requirements for investments in subsidiaries, associates investment is accounted for using the equity method, in
and joint ventures when an entity prepares separate which case the dividends are recognized as deduction to
financial statements. PAS 27 does not mandate which the carrying amount of the investment.
entities should produce separate financial statements. PAS
INVESTMENTS IN ASSOCIATES AND JOINT VENTURES
27 is applied when an entity chooses, or is required by law,
PAS 28 prescribes the accounting for investments in
to present separate financial statements that comply with
PFRSs. Separate financial statements are those presented associates and the application of the equity method to
in addition to: investments in associates and joint ventures. Investors
apply PAS 28 when they have significant influence or joint
a. consolidated financial statements; or
control over an investee
b. the financial statements of an entity with an
INVESTMENT IN ASSOCIATE
investment in associate or joint venture that is
An associate is an entity over which the investor has
accounted for using equity method in accordance with
PAS 28 Investments in Associates and Joint Ventures. significant influence. The existence of significant influence
distinguishes an investment in associate from all other
The financial statements of an entity that does not have an
types of investments.
investment in subsidiary, associate or joint venturer are
not separate financial statements. Entities exempted from
Nature of Applicable
preparing consolidated financial statements present
Type of Investment relationship reporting
separate financial statements as their only financial with investee standard
statements. Consolidated financial statements are the
financial statements of a group in which the assets, ● Investment
measured at fair
liabilities, equity, income, expenses and cash flows of the Regular investor PFRS 9
value
parent and its subsidiaries are presented as those of a
single economic entity. ● Investment in
Significant
PREPARATION OF SEPARATE FINANCIAL STATEMENTS associate PAS 28
influence
Separate financial statements are prepared in accordance ● Investment in
PFRS 3 and
with all applicable PFRSs, except that investments in subsidiary Control
PFRS 10
subsidiaries, associates or joint ventures are accounted for
either: ● Investment in joint
PFRS 11 and
venture Joint control
a. at cost, PAS 28
b. in accordance with PFRS 9 Financial Instruments, or Significant influence is the power to participate in the
c. using the equity method under PAS 28 Investments in financial and operating policy decisions of the investee but
Associates and Joint Ventures is not control or joint control of those policies. Significant
influence is presumed to exist if the investor holds, directly b. dividends - decrease - no effect CUMULATIVE PREFERENCE SHARES
or indirectly (e.g. through subsidiaries), 20% or more of If the investee has outstanding cumulative preference
c. oci - increase for - no effect; the
the voting power of the investee. Conversely, significant shares that are held by parties other than the investor and
share in share in oci is
influence is presumed not to exist if the voting power is classified as equity, the investor computes its share of
gain/decrease included in
less than. However, these are only presumptions, meaning profits or losses after deducting one-year dividends on
for share in loss the investor’s
they are generally held to be true in the absence of oci those shares, whether declared or not.
evidence to the contrary. Thus, an investor may have
SHARE IN LOSSES
significant influence even if it has less than 20% voting APPLICATION OF THE EQUITY METHOD
power, and conversely, may not have significant influence The investor shares in the investee's losses only up to the
An investor starts using the equity method as from the amount of its interest in the associate or joint venture.
even if it has more than 20% voting power, if these can be
date when obtains significant influence or joint control ⮚ Interest in the associate or joint venture includes the
clearly demonstrated. When determining the existence of
over an investee. On acquisition, the difference between following:
significant influence, an entity considers the effect of
the cost of the investment and the entity's share in the net a. Carrying amount of the investment in associate/joint
potential voting rights that are currently exercisable. Any
fair value of the investee's identifiable assets and liabilities venture
of the following may provide evidence of the existence of
is accounted for as follows:
significant influence: b. Investment in preference shares of the associate/joint
⮚ If cost is greater than the fair value of the interest venture
a. representation on the board of directors or equivalent
acquired, the excess is goodwill.
governing body of the investee; c. Unsecured, long-term receivables or loans
⮚ If cost is less than the fair value of the interest
b. participation in policy-making processes, including Interest in the associate or joint venture does not include
acquired, the deficiency is included as income in
participation in decisions about dividends other or trade receivables and payables and secured long-term
determining the entity's share in the investee's profit
distributions; receivables or loans. Shares in losses are applied first to
or loss in the period of acquisition.
c. material transactions between the entity and its the carrying amount of e investment in associate/joint
Any resulting goodwill is included in the carrying amount venture. After this is zeroed-out, shares in losses are
investee;
of the investment and is not accounted for separately. applied to the other components of the interest in the
d. interchange of managerial personnel; or Meaning, the goodwill is neither amortized nor tested for associate or joint venture in the reverse order of their
e. provision of essential technical information. impairment separately. Adjustments are subsequently seniority (reverse order of priority in liquidation). After the
Percentage of ownership made on the entity's share in the investee's profit or loss total balance of the interest in the associate or joint sure is
Type of investment
interest to account for the depreciation or amortization of any zeroed-out, the investor stops sharing, in further losses,
Less than 20% Financial assets at fair value undervaluation or overvaluation in the investee's except to the extent that the investor
20% to 50% Investment in associate identifiable assets and liabilities.
51% to 100% Investment in subsidiary a. has incurred legal or constructive obligations or
Contractually agreed sharing INVESTEE’S FINANCIAL STATEMENTS AND ACCOUNTING
Investment in joint venture b. made payments on behalf of the associate.
of control POLICIES
If the investee subsequently reports profits, the investor
ACCOUNTING FOR INVESTMENTS IN ASSOCIATES When applying the equity method, the investor uses the
resumes recognizing its share in those profits only after its
investee's most recent financial statements. When the
Investments in associates are accounted for using the share in the profits equals the share in losses not
reporting periods of the investee and the investor do not
equity method. Under the equity method, the investment recognized. from
coincide, the investee shall prepare financial statements
is initially recognized at cost and subsequently adjusted for EXEMPTIONS FROM APPLYING THE EQUITY METHOD
that coincide with the investor's reporting period for
the investor's share in the investee's changes in equity
purposes of applying the equity method. If this is An investor is exempt from applying the equity method if it
(e.g., profit or loss, dividends and other comprehensive
impracticable, adjustments shall be made for significant is exempted from preparing consolidated financial
income). (more on pg312-313)
transactions and events that occur between the end of the statements, e.g the investor is a parent but is a subsidiary
Share in Effect on investment Effect on investee's reporting period and that of the investor's. The of another parent and its securities are not being traded.
associate’s in associate investment income
difference between the investor's and investee's end of Investments in associates and joint ventures held by an
a. profit or - increase for - increase for
reporting periods shall not exceed three months. Uniform entity that is a venture capital organization, mutual fund,
loss share in share in
accounting policies shall be used. If the investee uses unit trust, investment-linked insurance fund and similar
profit/decrease profit;
for share in loss decrease for different accounting policies, its financial statements need entities may be measured at fair value through profit or
share in loss to be adjusted before the investor uses them for purposes loss in accordance with PFRS 9 Financial Instruments.
of applying the equity method. CLASSIFICATIONS HELD FOR SALE
Investments in associates or joint ventures that are
classified as held for sale in accordance with PFRS 5
Non-current Assets Held for Sale and Discontinued
Operation are accounted for using that standard. If only a
portion of the investment is classified as held for sale, the
remaining portion is accounted for using the equity
method until the portion classified as held for sale is
actually sold. After the sale, the retained portion is
accounted for under PFRS 9, unless significant influence or
joint control remains, in which case the equity method
continues to be applied. If the investment previously
classified as held for ceases to be so classified, it is
accounted for using the equity method retrospectively
from the date of its classification as for sale. The prior year
financial statements are restated accordingly.
DISCONTINUANCE OF EQUITY METHOD
An entity stops using the equity method as from the date
when loses significant influence or joint control over the
investee.
⮚ If the investment becomes a subsidiary, it is accounted
for using PFRS 3 Business Combinations and PFRS 10
Consolidated Financial Statements.
⮚ If the investment becomes a regular investment, it is
accounted for using PFRS 9. The fair value of the
retained interest is regarded as its fair value on initial
recognition under PFRS 9. The difference between the
following is recognized in profit or loss:
a. the fair value of the retained interest and any
proceeds from disposing part of the investment;
and
b. the carrying amount of the investment at the date
the equity method was discontinued.
If an investment in associate becomes an investment in
joint venture or vice versa, the entity continues to apply
the equity method and does not remeasure the retained
interest. When the equity method is discontinued, all
amounts previously recognized in other comprehensive
income in relation to the investment are either reclassified
to profit or loss as a reclassification adjustment or
transferred directly to retained earnings using the
provisions of other PFRSs. For example, revaluation surplus
is transferred directly to retained earnings while exchange
differences from translating foreign operations are
reclassified to profit or loss. If ownership interest is
reduced but significant influence or joint control is not
lost, only a proportionate amount of the OCI relating to
the reduction of interest is reclassified to profit or loss or
transferred directly to retained earnings, as appropriate.
Gains and losses resulting from transactions between an
entity and its associate or joint venture are recognized in
the entity's financial statements only to the extent of
unrelated investors' interests in the associate or joint
venture.
INVESTMENT IN JOINT VENTURE
The investor uses PFRS 11 Joint Arrangements to
determine whether its interest in a joint arrangement is an
investment in joint venture. If this is so, the investor
accounts for the investment in joint venture in accordance
with PAS 28 i.e., using the equity method similar to an
investment in associate.
FINANCIAL REPORTING IN HYPERINFLATIONARY
ECONOMIES
PAS 29 prescribes the restatement procedures for the
financial statements of an entity whose functional
currency is the currency of a hyperinflationary economy.
Inflation is normally ignored in accounting due to the
stable monetary unit assumption. However, when inflation
is very high (hyper), it can no longer be ignored. This is
because financial statements are stated in terms of money
and when money loses its purchasing power at a very high
rate, the financial statements become misleading. The
financial statements therefore must be restated otherwise
they are useless. Inflation refers to a general increase in
prices and decrease in the purchasing power of money.
PAS 29 does not prescribe an absolute rate at which
hyperinflation is deemed to arise. This is a matter of
judgment Instead, PAS 29 provides the following indicators
which an entity considers when determining the existence
of hyperinflation:
a. the general population prefers to keep its wealth in
non-monetary assets or in a relatively stable foreign
currency Amounts of local currency held are
immediately invested to maintain purchasing power;
b. the general population regards monetary amounts not
in terms of the local currency but in terms of a
relatively stable foreign currency. Prices may be quoted
in that currency;
c. sales and purchases on credit take place at prices that
compensate for the expected loss of purchasing, power
during, the credit period, even if the period is short;
d. interest rates, wages and prices are linked to a price
index, and
e. the cumulative inflation rate over three years is
approaching, or interest exceeds, 100%.
CORE PRINCIPLE
The financial statements of an entity that reports in the
currency of a hyperinflationary economy, whether they are
based on historical cost or current cost, shall be stated in
terms of the measuring unit current at the end of the
reporting period. Comparative figures for prior period(s)
shall also be restated into the same current measuring
unit. PAS 29 prohibits the presentation of the required
information as supplement to unrestated financial
statements. PAS 29 discourages the separate presentation
of the financial statements before restatement. (more on
321-322)
CONSOLIDATED FINANCIAL STATEMENTS
If any of the entities belonging to a group entity reports in
a hyperinflationary economy, the financial statements of
that entity needs to be restated first before they are
consolidated in the group's financial statements. If a
foreign operation reports in a hyperinflationary economy,
its financial statements are also restated first under PAS 29
before they are translated in accordance with PAS 21.
DISCLOSURES
a. the fact that the financial statements, including
corresponding figures, have been restated for changes
in the general purchasing power of the reporting
currency.
b. whether the financial statements are based on
historical cost or current cost.
c. the identity and level of the price index at the end of
the reporting period and the movements during the
current and previous reporting periods.