CHAPTER 1

FINANCIAL STATEMENTS

Financial Statements Financial Reporting

Definition: - means by which the
information accumulated and
processed in financial
accounting is periodically
communicated to the users
- a structured financial
representation of the financial
position and financial
performance of an entity
- provision of financial
information about an
entity to external
users that is useful to
them in making
economic decisions and
for assessing the
effectiveness of the
entity's management

General purpose financial

statements- statements
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
Components  Statement of financial
position
 Income statement
 Statement of
comprehensive income
 Statement of changes in
equity
 Statement of cash flows
 Notes, comprising a
summary of significant
accounting policies and
other explanatory
information
Objectives 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
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
primary user group-
general purpose
financial reporting is
directed primarily to
the existing and
potential investors,
lenders and other
creditors
- have the most
critical and
immediate need
for information
in financial
reports
Specific objectives:
a. To provide
information useful in
making investing and
credit decisions about
providing resources to
the entity.
b. To provide
information useful in
assessing the cash
flow prospects of the
 entity.
c. To provide
information about
entity resources,
claims and changes in
resources and claims
Information  Assets  Financial
provided  Liabilities statements
 Equity  financial highlights,
 Income and expenses, summary of
including gains and important financial
losses figures and analysis
 Contributions by and of financial
distributions to owners statements
in their capacity as  nonfinancial
owners information such as
 Cash flows description of
financial position- assets, major products and
liabilities and equity a listing of
- pertains to the corporate officers
liquidity, solvency, and and directors.
the need of the entity annual financial
for additional financing statements- principal
financial performance- the way of providing
revenue, expenses and net financial information to
income or loss external users
Performance- the level of
income earned by the entity
through the efficient and
effective use of its resources.
Cash flows- cash receipts and
cash payments arising from
the operating, investing and
financing activities of the
entity
Limitations do not provide all the do not and cannot
 information that users may
need to make economic
decisions
largely portray the financial
effects of past events and do
not necessarily provide
nonfinancial information
provide all of the
information that
existing and potential
investors, lenders and
other creditors need
not designed to show
the value of a reporting
entity

intended to provide
common information to
users and cannot
accommodate every
specific request for
information

are based on estimate

and judgment rather
than exact depiction

Responsibility for financial statements

Management- has the primary responsibility for the preparation and

presentation of financial statements

- accountable for the safekeeping of the resources and their

proper, efficient and profitable use

Board of Directors- reviews and authorizes the financial statements for

issue before these are submitted to the shareholders of the entity

Shareholders- interested in information that helps them assess how

effectively management has fulfilled this role as this is relevant to the
decision concerning their investment and the reappointment or replacement of
management
General features of financial statements
1. Fair presentation and compliance with
PFRS
defined as faithful representation of the
effects of transactions and other events in:
accordance with the definitions and
recognition criteria for assets, liabilities,
income and expenses laid down in the
Conceptual Framework
present fairly the financial position, financial
performance and cash flows of an entity
prepared in accordance with the Philippine
Financial Reporting Standards which
represent the GAAP in the Philippines
comply with PFRS shall make an explicit
(clear) and unreserved (complete) statement
of such compliance in the notes
Fair presentation requires an entity:
a. To select and apply accounting policies in
accordance with PFRS.
b. To present information, including
accounting policies, in a manner that provides
relevant and faithfully represented financial
information.
с. To provide additional disclosures necessary
for the users to understand the entity's
financial statements
Departure from standard
a. In extremely rare circumstances.
b. When management concludes that
compliance with the standard would be
misleading.
c. When the departure from the standard is
necessary to achieve fair presentation.
d. When the regulatory Conceptual
Framework requires or otherwise does not
prohibit such a departure
In such circumstances, it is incumbent
(necessary) upon the entity to disclose the
following:
1. The management has concluded that the
financial statements present fairly the
financial position, financial performance and
cash flows of the entity.
2. That the entity has complied with
applicable standards except that it has
departed from a particular requirement to
achieve a fair presentation.
3. The title of the standard from which the
entity has departed, the nature of the
departure, including the treatment that the
standard would require, the reason why that
treatment would be so misleading and the
treatment adopted.
4. For each period presented, the financial
impact of the departure on each item in the
financial statements that would have been
reported in complying with the requirement.
2. Going concern
(Continuity assumption) accounting entity is
viewed as continuing in operation indefinitely
and financial statements shall be prepared
on a going concern basis in the absence of
evidence to the contrary (management
intends to liquidate the entity or cease
trading or has no realistic option but to do so)
very foundation of the cost principle
assets are normally recorded at original
acquisition cost, market values are ignored,
however, some standards require
measurement of certain assets at· fair value.
1. Accrual basis
accrual basis of accounting except for cash
flow information
effects of transactions and other events are
recognized when they occur and not as cash
or cash equivalent is received or paid, and
they are recorded and reported in the
financial statements of the periods to which
they relate
recognition of accounts receivable, accounts
payable, prepaid expenses, accrued expenses,
deferred income, and accrued income
2. Materiality and aggregation (cluster)
present separately each material class of
similar items and items of dissimilar nature
or function unless they are immaterial
line items- presentation of condensed and
classified data
Materiality dictates that an entity need not
provide a specific disclosure required by
standard if the information is not material.
When is an item material?
dependent on good judgment, professional
expertise and common sense
material if knowledge of it would affect the
decision of the primary users of the financial
statements
New definition of materiality
IASB: Information is material if omitting,
misstating or obscuring it could reasonably
be expected to influence the economic
decisions that primary users of general-
purpose financial statements make on the
basis of those statements which provide
financial information about a specific
reporting entity.
Three important aspects of materiality:
a. Could reasonably be expected to
influence
 reasonability
 information capable of influencing
economic decision of the primary
users shall be included in the financial
statements
b. Obscuring information
 presentation of financial information
not readily understood or not clearly
expressed
 deliberate (intentional) vagueness
(lack of certainty), ambiguity
(inexactness). and abstruseness
(difficult to understand)
Examples:
a. The language is vague or unclear.
b. The information is scattered
throughout the financial statements.
c. Dissimilar items are aggregated
inappropriately.
d. Similar items are disaggregated
inappropriately.
c. Primary users
only primary users are considered because
these groups are the users to whom general
purpose financial statements are primarily
directed
primary users- existing and potential
investors, lenders and other creditors
other users- the employees, customers,
government agencies and the public in general
Materiality is a relativity
Materiality of an item depends on relative
size (proportion to a whole) rather than
absolute size (total of all existence). What is
material for one entity may be immaterial for
another.
Factors of materiality
 Relative size of the item
 Nature of the item (bribe)
3. Offsetting
Assets and liabilities, and income and
expenses, when material, shall not be offset
against each other.
Offsetting may be done when it is required
or permitted by another PFRS.
Gains and losses on disposal of noncurrent
assets- reported by deducting from the
proceeds the carrying amount of the assets
and the related selling expenses
expenditure related to a provision and any
reimbursement from a third party can be
offset, and only the net expenditure is
presented as expense
Foreign exchange gains and losses or gains
and losses arising from trading securities are
netted against the other.
The measurement of assets net of valuation
allowance is permitted because technically
this is not offsetting. Thus, accounts
receivable may be shown net of allowance for
doubtful accounts.
4. Frequency of reporting
Annually- entity shall present a complete set
of financial statements
entity shall disclose:
a. The period covered by the financial
statements.
b. The reason for using a longer or
shorter period.
c. The fact that amounts presented in
the financial statements are not
entirely comparable.
7. Comparative information
Except when permitted or required otherwise
by standard, an entity shall disclose
comparative information/figures in respect
of the previous period for all amounts
reported in the current period's financial
statements.
shall be included for narrative and
descriptive information
Third statement of financial position
a. Applies an accounting policy
retrospectively.
b. Makes retrospective restatement of
items in the financial statements.
c. Reclassifies items in the financial
statements.
retrospective will affect presentation of
financial statements for previous periods.
prospective means implementation new
accounting policies for transaction, event, or
other circumstances after new accounting
policies or estimation has been implemented
Under these circumstances, an entity shall
present three statements of financial
position as at:
1. The end of the current period
2. The end of the previous period
3. The beginning of the earliest
comparative period
8. Consistency of presentation
Implicit (not plainly expressed) in the
presentation of comparable information is the
principle of consistency.
accounting methods and practices shall be
applied on a uniform basis from period to
period
Example: If the FIFO method of inventory
valuation is adopted in one year, such method
is followed from year to year.
A change in the presentation and
classification of items in the financial
statements is allowed:
a. When it is required by another
Standard.
b. When a significant change in the
nature of the operations of the entity
will demonstrate a more appropriate
revised presentation and
classification.
It is inappropriate for an entity to leave
accounting policies unchanged when better
and acceptable alternatives exist.
Identification of financial statements
clearly identified and distinguished from
other information in the same published
document
following information shall be prominently
displayed:
a. The name of the reporting entity.
b. Whether the financial statements
cover the individual entity or a group
of entities.
c. The end of the reporting period or
the period covered by the financial
statements or notes.
d. The presentation currency (thousands
or millions).
e. The level of rounding used in the
amounts in the financial statements.
CHAPTER 2
STATEMENT OF FINANCIAL POSITION
statement of financial position- formal
statement showing the three elements
comprising financial position, namely assets,
liabilities. and equity.
Investors, creditors and other statement
users analyze the statement of financial
position to evaluate:
 Liquidity- ability of the entity to meet
currently maturing obligations.
 Solvency- availability of cash over the
longer term to meet maturing obligations.
Current and noncurrent distinction
PAS 1, paragraph 60, provides that an entity
shall present current and noncurrent
assets, and current and noncurrent
liabilities, as separate classifications in the
statement of financial position.
ASSETS
Asset- present economic resource controlled
by the entity as a result of past events;
properties owned
economic resource- a right that has the
potential to produce economic benefits.
The essential characteristics of an asset
are:
a. The asset is controlled by the entity.
b. The asset is the result of a past event.
c. The asset has the potential to produce
economic benefits.
Current assets
PAS 1, paragraph 66, provides that an entity
shall classify an asset as current when:
a. The asset is cash or a cash equivalent
unless the asset is restricted to settle a
liability for more than twelve months
after the reporting period.
b. The entity holds the asset primarily for
the purpose of trading.
c. The entity expects to realize the asset
within twelve months after the
reporting period.
d. The entity expects to realize the asset
or intends to sell or consume it within
the entity's normal operating cycle.
Cash and cash equivalents
includes cash on hand, petty cash fund,
cash in bank and any cash equivalent
unrestricted in use- available anytime for the
payment of current obligations
cash equivalents- short-term, highly liquid
investments that are readily convertible into
known amount of cash and which are subject
to an insignificant risk of changes in value.
PAS 7, paragraph 6
investment- qualifies as a cash equivalent only
when it has a short maturity of three
months or less from the date of acquisition
Examples of cash equivalents
a. Three-month BSP treasury bill
a. Three-year BSP treasury bill purchased
three months before date of maturity
b. Three-month time deposit
c. Three-month money market instrument
date of purchase which should be three
months or less before maturity
Equity securities- cannot qualify as cash
equivalent because shares do not have a
date of maturity.
preference shares with specified redemption
date and acquired three months before
redemption date can qualify as cash
equivalents
Held for trading
held for trading when:
a. It is acquired principally for the purpose
of selling it in the near term.
b. On initial recognition, it is part of a
portfolio of identified financial
instruments that are managed together
and for which there is evidence of a
 recent actual pattern of short-term customers and ultimately collect cash from
profit taking. the sale
c. It is a derivative, except for a derivative
that is a financial guarantee contract or a operating cycle of a manufacturing entity-

designated and an effective hedging period of time between acquisition of

instrument. materials entering into a process and their

realization in cash or an instrument that’s
financial assets held for trading - debt and readily convertible into cash
equity securities that are purchased with the
intent of selling them in the "near term" or Presentation of current assets

very soon in order to generate short-term

listed in the statement of financial position in
gain
the order of liquidity

Expected to be realized within twelve

line items under current assets are:
months

a. Cash and cash equivalents

Nontrade receivables- claims arising from
b. Financial assets at fair value through
sources other than the sale of merchandise
profit or loss, such as trading securities
or services in the ordinary course of business
and other investments in quoted equity

current assets if collectible within one year instruments c. Trade 'and other

from the end of reporting period receivables

c. Inventories
Realized, sold or consumed d. Prepaid expenses

refers to trade receivables, inventories and Noncurrent assets- a residual definition

prepayments- current assets because they
are expected to be realized, sold or other assets not classified as current are

consumed within the normal operating cycle noncurrent assets

or one year, whichever is longer

noncurrent assets include the following:

Operating cycle- the time between the

a. Property, plant and equipment
acquisition of assets for processing and their
b. Long-term investments
realization in cash or cash equivalents
c. Intangible assets

basis of determining the proper classification d. Other noncurrent assets

of assets into either current or noncurrent e. deferred tax asset

Property, plant and equipment (fixed

operating cycle of a trading entity- average
assets) -tangible assets which are held by an
period of time that it takes to acquire the
entity for use in production or supply of
merchandise inventory, sell the inventory to
goods and services, for rental to others, or
for administrative purposes, and are
expected to be used during more than one
period
major characteristics
a. tangible assets, meaning with physical
substance.
b. used in business
c. expected to be used over a period of
more than one year.
Assets that are held for sale, including land,
or held for investment are not included in
property, plant and equipment.
Long-term investments
Investment- asset held by an entity for the
accretion of wealth through capital
distribution, such as interest, royalties,
dividends and rentals, for capital appreciation
or for other benefits to the investing entity
such as those obtained through trading
relationship
current investment- readily realizable and is
intended to be held for not more than one
year
noncurrent or long-term investment- to be
held for more than one year
Intangible assets- identifiable nonmonetary
asset without physical substance but are
expected to provide future economic
benefits to the entity
the intangible asset must be controlled by
the entity as a result of past event and from
which future economic benefits are expected
to flow to the entity
an intangible asset is identifiable:
a. When it is separable or capable of being
sold, transferred, licensed, rented or
exchanged separate from the entity.
b. When it arises from contractual or other
legal right
identifiable intangible assets: patent,
franchise, copyright, trademark and
computer software
unidentifiable intangible asset: goodwill
Other noncurrent assets- assets that do not
fit into the definition of the previously
mentioned noncurrent assets
LIABILITIES- a present obligation of an
entity to transfer an economic resource as a
result of past events
The essential characteristics of a liability
are:
a. The entity has a present obligation. The
entity liable must be identified.
b. The obligation is to transfer an economic
resource. Must be to pay cash, transfer
noncash asset or provide service at some
future time.
c. The liability arises from past event. Not
recognized until it is incurred
Current liabilities when
a. The entity expects to settle the liability
within the entity's normal operating
cycle.
b. The entity holds the liability primarily for
the purpose of trading.
c. The liability is due to be settled within
twelve months after the reporting period
d. The entity does not have the right at
the end of reporting period to defer
settlement of the liability for at least
twelve months after the reporting period.
Examples of current liabilities
a. Trade payables and accruals for employee
b. Obligations that are not settled as part
of the normal operating cycle but are due
for settlement within twelve months
after the end of reporting period.
c. Financial liabilities held for trading
Long-term debt currently maturing
liability which is due to be settled within
twelve months after the end of reporting
period is classified as current, even if:
a. The original term was for a period longer
than twelve months.
b. An agreement to refinance or to
reschedule payment on a long-term basis
is completed after the end of reporting
period and before the financial
statements are authorized for issue.
However, if the refinancing on a long-term
basis is completed on or before the end of
the reporting period, the refinancing is an
adjusting event and therefore the obligation
is classified as noncurrent.
Right to roll over
entity has the right at the end of reporting
period to roll over an obligation for at least
twelve months after the reporting period
under an existing loan facility, the obligation
is classified as noncurrent even if it would
otherwise be due within a shorter period
must exist at the end of reporting period-
right to defer settlement of a liability for at
least twelve months after the end of
reporting period
Covenants- often attached to borrowing
agreements which represent undertakings by
the borrower
restrictions on the borrower as to
undertaking further borrowings, paying
dividends, maintaining specified level of
working capital and so forth
liability becomes payable on demand-
conditions relating to the borrower’s financial
situation are breached
current even if the lender has agreed after
the end of reporting period and before the
statements are authorized for issue, not to
demand payment as a consequence of the
breach.
noncurrent if the lender has agreed on or
before the end of reporting period to
provide a grace period ending at least twelve
months after the end of reporting period
grace period- borrower can rectify the
breach and during which the lender cannot
demand immediate payment
Presentation of current liabilities (refer to
CCE notes)
Noncurrent liabilities- residual definition;
liabilities not classified as current liabilities
Working capital- excess of current assets
over current liabilities working capital ratio-
current assets divided by current liabilities
Contingent liability- possible obligation that
arises from past event and whose existence
will be confirmed only by the occurrence or
nonoccurrence of one or more uncertain
future events not wholly within the control of
the entity
present obligation that arises from past
event but is not recognized because:
a. It is not probable that an outflow of
resources embodying economic benefits
will be required to settle the obligation.
b. The amount of the obligation cannot be
measured reliably.
Range of outcome
a. Probable- The future event is likely to
occur. As a rule of thum' probable means
more than 50% likely.
b. Possible - The future event is less likely
to occur. The occurrence is 50% or less.
c. Remote- The future event is least likely
to occur or the chance of the future
event occurring is very slight. The
occurrence is 10% or less.
Treatment of contingent liability
A contingent liability is not recognized in the
financial statements. A contingent liability
shall be disclosed only.
a. Possible and measurable - disclosure only
b. Probable but not measurable - disclosure
only
c. Remote and measurable - no disclosure
d. Probable and measurable - recognize loss
and an estimated liability as a provision
Contingent asset- possible asset that arises
from past event and whose existence will be
confirmed only by the occurrence or
nonoccurrence of one or more uncertain
future events not wholly within the control of
the entity
Example: a claim that an entity is pursuing
through legal processes when the outcome is
uncertain
Treatment of contingent asset-shall not be
recognized because this may result to
recognition of income that may never be
realized
Reporting of contingent asset
a. A contingent asset is recognized in the
period when realized.
b. A contingent asset is only disclosed when
it is probable.
c. If the contingent asset is possible, no
disclosure is required.
d. If the contingent asset is remote, no
disclosure is required.
Equity- the residual interest in the assets of
the entity after deducting all of the
liabilities; net assets or total assets minus
liabilities
increased by profitable operations and
contribution by owners
decreased by unprofitable operations and
distribution to owners
terms used in reporting the equity: Share capital and share premium

a. Owner's equity in a proprietorship Share capital- portion of the paid in capital

b. Partners' equity in a partnership representing the total par or stated value of
c. Shareholders' equity in a corporation the shares issued

Equity- used for all business entities Subscribed share capital- portion of the
authorized share capital that has been
Shareholders’' equity/ stockholders' equity- subscribed but not yet fully paid and
residual interest of owners in the net assets therefore still unissued
of a corporation measured by the excess of
assets over liabilities. Subscriptions receivable- reflected as a
deduction from the related subscribed share
Philippine term IAS term capital; collectible within one year shall be
classified as current asset
Capital stock Share capital
Share premium- capital contributed by the
Subscribed Subscribed shareholders in excess of the par or stated
capital stock share capital
value of the shares subscribed and issued

Common stock Ordinary share

Retained earnings- cumulative balance of
capital
periodic net income or loss, dividend
Preferred stock Preference distributions, prior period errors, changes in
share capital accounting policy and other capital
adjustments
Additional paid Share premium
capital Unappropriated retained earnings- portion
which is free and can be declared as
Retained Accumulated
dividends to the shareholders
earnings(deficit) profits (losses)

Appropriated retained earnings- portion

Retained Appropriation
earnings reserve which is restricted and therefore not
appropriated available for any dividend declaration

Revaluation Revaluation Deficit- debit balance in retained earnings;

surplus reserve not presented as an asset but as deduction
from shareholders' equity
Treasury stock Treasury share
Revaluation surplus- excess of sound value
over carrying amount of the revalued asset

Sound value- equal to the fair value or

depreciated replacement cost
Depreciated replacement cost- equal to
replacement cost minus accumulated
depreciation
Carrying amount- deducting accumulated
depreciation on cost from historical cost
Treasury shares- entity's own shares that
have been issued and then reacquired but not
canceled; recorded at cost and are not
recognized as an asset
cost of treasury shares- deduction from the
shareholders' equity
When treasury shares are acquired, the
retained earnings must be appropriated to
the extent of the cost of the treasury
shares.
Reserves- based on whether a reserve is part
of distributable equity or nondistributable
equity
Distributable equity- portion that can be
distributed to shareholders as dividends
without, impairing the legal capital of the
entity; unappropriated retained earnings.
Nondistributable equity- portion that cannot
be distributed to the shareholders in any
form during the lifetime of the entity
nondistributable equity reserves- items of
equity other than the aggregate par or stated
value of share capital and retained earnings
unappropriated
Examples of reserves
a. Share premium reserve or additional paid
in capital
b. Appropriation reserve or technically
known as retained earnings appropriated
c. Asset revaluation reserve or revaluation
surplus
d. Other comprehensive income reserve
Line items - Statement of Financial Position
(refer to CCE notes)
The listing of the line items is not exclusive
Paragraph 54- list of items that are
sufficiently different in nature and function
to warrant separate presentation on the face
of the statement of financial position
Paragraph 55- additional line items,
headings and subtotals shall be presented on
the face of the statement of financial
position when such presentation is relevant
to the understanding of the financial
position of an entity.
The judgment on whether additional line
items are presented separately is based on
the assessment of the following:
a. Nature and liquidity of assets
b. Function of assets within the entity
c. Amount, nature and timing of liabilities
Forms of statement of financial position
a. Report form- sets forth the three major
sections in a downward sequence of assets,
liabilities and equity
b. Account form- assets are shown on the
left side and the liabilities and equity on the
right side of the statement of financial
position
statement of financial position is an
expansion of the accounting equation “asset
equals liability plus equity”.
PAS 1, paragraph 57, provides that the
standard does not prescribe the order or
format in which line items are to be
presented.
common practice: current assets before
noncurrent assets, current liabilities before
noncurrent liabilities, and equity after
liabilities
CHAPTER 3
NOTES TO FINANCIAL STATEMENTS
Related parties
Events after reporting period
Notes to financial statements- narrative
description or disaggregation of items
presented in the financial statements and
information about items that do not qualify
for recognition
used to report information that does not fit
into the body of the statements in order to
enhance the understandability of the
statements; additional information and help
clarify the items presented in the financial
statements
present notes in a systematic manner
Purpose of notes to financial statements-
provide the necessary disclosures required
by Philippine Financial Reporting Standards
the notes to financial statements shall:
a. Present information about the basis of
preparation of the financial statements
and the specific accounting policies.
b. Disclose the information required by
Philippine Financial Reporting Standards
that is not presented in the financial
statements.
c. Provide additional information which is
not presented in the financial statements
but is relevant to an understanding of the
financial statements.
Order of presenting the notes
 Statement of compliance with PFRS
 Summary of significant accounting policies
used
 Supporting information or computation
for line items presented in the financial
statements
 Other disclosures, such contingent
liabilities, unrecognized contractual
commitments and nonfinancial disclosures
compliance with PFRS: entity whose financial
statements comply with Philippine Financial
Reporting Standards shall make an explicit
and unreserved statement of such compliance
in the notes
accounting policies
Accounting policies- specific principles,
methods, practices, rules, bases and
conventions adopted by an entity in preparing
and presenting financial statements
Accounting standards- set out the required
recognition and measurement principles and
shall often prescribe the accounting policy to
be adopted.
Significant accounting policies shall disclose
the following:
 The measurement basis used- the basis
on which the entity prepares the financial
statements significantly affects the
users' analysis
historical cost and current value-
measurement bases
Current value- fair value, value in use,
fulfillment value and current cost
 The accounting policies used-
management shall consider whether the
disclosure would assist users in
understanding how transactions, other
events and conditions are reflected in the
financial statements; useful to users when
those policies are selected from
alternatives allowed in Philippine Financial
Reporting Standards.
Disclosure of judgment- disclose judgments
made in the process of applying accounting
policies
management makes judgment in determining
the following:
 Whether financial assets are to be
measured at fair value or at amortized
cost.
 Whether in substance particular sales of
goods are product financing arrangement
and therefore do not give rise to revenue.
The disclosure of information about judgment
is mandatory.
Disclosure of estimation uncertainty-
disclose information about the assumptions it
makes about the future, and other major
sources of uncertainty that have a significant
risk of resulting in a material adjustment to
the carrying amount of assets and Liabilities
within the next financial year
The disclosure of information about key
sources of estimation uncertainty is
mandatory
Other disclosures
PAS 1, paragraph 138:
a. The domicile and legal form of the
entity, its country of incorporation and
the address of the registered office or
principal place of business.
b. A description of the nature of the
entity's operations and its principal
activities.
c. The name of the parent and the ultimate
parent of the group.
Paragraph 137:
a. The amount of dividends proposed or
declared before the financial statements
were authorized for issue but not
recognized as distribution during the
period and the related amount per share.
b. The amount of any cumulative preference
dividends not recognized.
Examples of notes to financial statements
 Note 1-Compliance with PFRS
 Note 2-Significant accounting policies
 Note 3-Inventories
 Note 4-Property, plant and equipment
 Note 5-Contingent liability
 Note 6-Long term debt
 Note 7- Shareholders' equity
 Note 8-Share options
RELATED PARTIES
 The ability to control the other party.
 The ability to exercise significant
influence over the other party.
 Joint control over the entity.
Control- power over the investee or the
power to govern; ownership more than half of
the voting power of an entity
Significant influence- power to participate
in the financial and operating policy decision
of an entity, but not control of those policies;
gained by share ownership of 20% or more
(of the voting power)
significant influence is usually evidenced by
the following factors:
 Representation in the board of directors
 Participation in policy making process
 Material transactions between the
investor and the investee
 Interchange of managerial personnel,
 Provision of essential technical
information
Joint control- contractually agreed sharing
of control over an economic activity
Examples of related parties
1. Affiliates- meaning the parent, the
subsidiary and fellow subsidiaries.
Parent- investor owns more than 50% of an
investee
Subsidiary- the investee; parent and fellow
subsidiaries of one parent are also related to
each other
2. Associates -meaning the entities over
which one party exercises significant
influence.
Associate- is the investee if the investor
owns at least 20% of the investee; related to
the investor; subsidiary or subsidiaries of the
associate
3. Venturers- related to the joint venture
because they have joint control of the
activities of the joint venture; fellow
venturers are not related to each other,
unlike fellow subsidiaries
Other related parties
1. Key management personnel- persons with
managerial positions, like the president,
vice-president, chief executive officer and
other officers with responsibility of
controlling the activities of entity
2. Close family members of key
management personnel
a. The individual's spouse and children
b. Children of the individual's spouse
c. Dependents of the individual or the
individual's spouse.
3. Individuals or shareholders owning at
least 20% of the reporting entity. The
close family members of such individuals
are also related to the reporting entity.
4. Postemployment benefit plan for the
benefit of employees
retirement plan of an entity is funded by
contributions from the entity. Such
contributions constitute the trust fund
handled by a trustee. Such trust fund is
related to the reporting entity.
Related party transaction- transfer of
resources or obligations between related
parties, regardless of whether a price is
charged
examples of related party transaction:
 Purchase and sale of goods
 Purchase and sale of property and other
asset
 Rendering or receiving services
 Leases
 Transfer of research and development
 License agreement
 Finance. arrangements, including loans and
equity contributions in cash or in kind.
 Guarantee and collateral
 Settlement of liabilities on behalf of the
entity or by the entity on behalf of
another party.
Related party disclosures
PAS 24, paragraph 12, requires disclosure
of related party relationships where
control exists irrespective of whether
there have been transactions between the
related parties.
disclose the name of the entity's parent and
if different, the ultimate controlling party
If neither the entity's parent nor the
ultimate controlling party produces financial
statements available for public use, the name
of the next most senior parent that does so
shall also be disclosed
Disclosures of related party transaction
PAS 24, paragraph 17, provides that if there
have been transactions between related
parties, an entity shall disclose the nature
of the related party relationship as well as
information about the transactions and
outstanding balances necessary for an
understanding of the financial statements.
disclosures of related party transaction
shall include:
 The amount of the transaction.
 The amount of outstanding balance,
terms and conditions, whether secured or
unsecured, and nature of consideration to
be provided in settlement.
 The allowance for doubtful accounts
related to the outstanding balance.
 The expense recognized during the period
in respect of doubtful accounts due from
related parties.
Key management personnel compensation
PAS 24, paragraph 16, provides that an entity
shall disclose key management personnel
compensation in total and for each of the
following categories:
 Short-term employee benefits
 Postemployment benefits, for example,
retirement pensions
 Other long-term benefits
 Termination benefits
 Share based payment transactions, for
example, share options
Unrelated parties
 Two entities simply because they have
director or key management personnel in
common.
 Providers of finance, trade unions, public
utilities and government agencies in the
course of their normal dealings with an
entity by virtue only of those dealings.
 A single customer, supplier, franchisor or
general agent with whom an entity
transacts a significant volume of business
merely by virtue of the resulting
economic dependence.
 Two venturers simply because they share
joint control over a joint venture. Fellow
venturers are unrelated to each other.
Transactions with government-related
entities
A reporting entity is exempted from
providing the normal disclosures for
transactions with:
 A government that has control, joint
control or significant influence over the
entity.
 Other entities controlled, jointly
controlled or significantly influenced by
the same government.
In applying the exemption, the reporting
entity is required to disclose only the
following:
 The name of the government and the
nature of the relationship with the
reporting entity.
 The information on the nature and
amount of each "individually" significant
transaction with the government.
Related party disclosures not required
Paragraph 4 provides that intragroup related
party transactions and outstanding balances
are eliminated in the preparation of
consolidated financial statements of the
group.
Pricing policies
PAS 24 did not provide for the measurement
of related party transactions. However, a
variety of methods is used to price
transactions between related parties.
1. Uncontrolled price method - This sets the
price by reference to comparable goods sold
in an economically comparable market to a
buyer unrelated to the seller.
2. Resale price method -This method is often
used where goods are transferred between
related parties before a sale to an
independent party is made.
This reduces the resale price by a margin,
representing an amount from which the
reseller would seek to recover costs and
make an appropriate profit.
3. Cost plus method - This method seeks to
add an appropriate markup to the supplier's
cost.
4. No price method -Literally, no price is
charged, as in the case of free provision of
management services and the extension of
free credit on a debt.
EVENTS AFTER REPORTING PERIOD-
events, whether favorable or unfavorable,
that occur between the end of reporting
period and the date on which the financial
statements are authorized for issue
Types of events after the reporting period
a. Adjusting events after the reporting
period are those that provide evidence of
conditions that exist at the end of
reporting period.
b. non-adjusting events after reporting
period are those that are indicative of
conditions that arise after the end of
reporting period.
(Examples on the book)
Financial statements authorized for issue-
when the board of directors reviews the
financial statements and authorizes them
issue
financial statements are authorized for
issue on the date of issue by the board of
directors and not on the date when
shareholders approve the financial
statements.
Disclosure of date of authorization for
issue- when the financial statements are
authorized for issue and who gave the
authorization
It is important for users to know when the
financial statements are authorized for issue
because the financial statements do not
reflect events after this date.
CHAPTER 4
STATEMENT OF COMPREHENSIVE
INCOME
INCOME STATEMENT- formal statement
showing the financial performance or profit
or loss of an entity for a period of time;
presents the income, expenses, gains,
losses and net income or loss recognized
during the period
financial performance of an entity/ results
of operations - primarily measured in terms
of the level of income earned by the entity
through the effective and efficient
utilization of resources.
transaction approach- conventional or
traditional preparation of income statement
in conformity with PFRS; requires the
determination of how much income was
earned during the year and how much
expenses were incurred in earning the
revenue
profitability- useful in predicting the
capacity of the entity to generate cash flows
from existing resources
Comprehensive income- change in equity
during a period resulting from transactions
and other events, other than changes
resulting from transactions with owners in
their capacity as owners; includes profit or
loss and other comprehensive income.
Profit or loss- total of income less expenses,
excluding the components of other
comprehensive income; bottom line in the
traditional income statement; entity may use
net income or net loss to describe profit or
loss
Other comprehensive income (OCI)-
comprises items of income and expense
including reclassification adjustments that
are not recognized in profit or loss as
required or permitted by Philippine Financial
Reporting Standards
The components of other comprehensive
income include the following:
a. Unrealized gain or loss on equity
investment measured at fair value
through other comprehensive income
b. Unrealized gain or loss on debt
investment measured at fair value
through other comprehensive income
c. Gain or loss from translating the financial
statements of a foreign operation
d. Revaluation surplus during the year
e. Unrealized gain or loss from derivative
contracts designated as cash flow hedge
f. Remeasurements of defined benefit plan
g. Change in fair value attributable to credit
risk of a financial liability designated at
fair value profit or loss
Presentation of other comprehensive
income- classified by nature
The line items for amounts of OCI shall be
grouped as:
a. OCI that will be reclassified
subsequently to profit or loss when
specific conditions are met.
Reclassification adjustments are amounts
reclassified to profit or loss in the current
period that were recognized in other
comprehensive income in the current or
previous periods.
b. OCI that will be reclassified
subsequently to retained earnings.
(Examples on the book)
Presentation of comprehensive income
1. Two-statement approach
 An income statement showing the
components of profit or loss.
 A statement of comprehensive income
beginning with profit or loss as shown in
the income statement plus or minus the
components of other comprehensive
income.
2. Single statement approach
This is the combined statement showing the
components of profit or loss and components
of other comprehensive income in a single
statement of comprehensive income.
Sources of income
a. Sales of merchandise to customers
The income from sales shall include all sales
to customers during the period minus sales.
returns, allowances and discounts.
b. Rendering of services
Income from rendering of services, among
others, includes professional fees, media
advertising commissions, insurance agency
commissions, admission fees for artistic
performance and tuition fees.
c. Use of entity resources
This income includes interest, rent, royalty
and dividend income.
d. Disposal of resources other than
products
Examples include gain on sale of investments,
gain on sale of property, plant and equipment
and gain on sale of intangible assets.
Components of expense
a. Cost of goods sold or cost of sales
b. Distribution costs or selling expenses
c. administrative expenses
d. other expenses
e. Income tax expense
Classifications of expenses
Distribution costs or selling expenses
constitute costs which are directly related to
selling, advertising and delivery of goods to
customers. (Examples on the book)
Administrative expenses constitute cost of
administering the business. These ordinarily
include all operating expenses not related to
selling and cost of goods sold.
Other expenses are those expenses which
are not directly related to the distribution
and administrative function; expenses and
losses from peripheral or incidental
transactions of the entity
No more extraordinary items
PAS 1, paragraph87, specifically mandates
that an entity shall not present any items of
income and expense as extraordinary items,
in the income statement or statement of
comprehensive income or in the notes.
Unusual and infrequent items of income and
expense are considered component of income
from continuing operations.
expropriation loss and casualty loss from
earthquakes, typhoon, flood, fire and other
natural disaster are considered component of
income from continuing operations
Separate disclosure
PAS 1, paragraph 97, provides that when
items of income and expense are material,
their nature and amount shall be disclosed
separately (ex. On the book)
Line items of comprehensive income are:
a. Revenue
b. Gain or loss from derecognition of
financial asset measured at amortized
cost
c. Finance cost
d. Share of income or loss of associate and
joint venture accounted for using the
equity method
e. e. Income tax expense
f. Gain or loss on reclassification of a
financial asset from amortized cost to
fair value through profit or loss.
g. Gain or loss on reclassification of a
financial asset from fair value through
OCI to fair value though profit or loss.
a. The cumulative amount in OCI is
reclassified to profit or loss.
h. A single amount comprising discontinued
operations
i. Profit or loss for the period
j. Other comprehensive income
k. Comprehensive income for the period
items shall be disclosed on the face of the
income statement and statement of
comprehensive income:
a. Proft or loss attributable to
noncontrolling interest and owners of the
parent.
b. Total comprehensive income attributable
to noncontrolling interest and owners of
the parent.
additional line items- such presentation is measured more broadly than the income as
relevant to an understanding of the financial traditionally computed
performance of the entity.
Single statement of comprehensive income-
Forms of income statement combined income statement and statement of
comprehensive income.
Functional presentation- traditional and
common form of income statement; also
known as the cost of goods sold method;
classifies expenses according to their
function as part of cost of goods sold,
distribution costs, administrative activities
and other activities

Entities classifying expenses by function

shall disclose additional information on the
nature of expenses, including depreciation,
amortization and employee benefit costs.

Natural presentation- nature of expense

method; expenses are aggregated according
to their nature and not allocated among the
various functions within the entity; natural
expenses are no longer classified as cost of
goods sold, distribution costs, administrative
and other activities; expenses which are of
the same nature are grouped or aggregated
and presented as one item.

Which form of income statement?

There is no prescribed format. management

is required to select the presentation that is
reliable and more relevant

cost of goods sold method usually would

provide more relevant information to the
users
STATEMENT OF COMPREHENSIVE
INCOME- starts with the net income or loss
as shown in the income statement plus or
minus the components of other comprehensive
income

purpose: provide a more comprehensive

information on financial performance