LESSON 1: DEVELOPMENT OF FINANCIAL
The entity perspective means that the company is
REPORTING FRAMEWORK AND STANDARD
SETTING BODY
The purpose of Accounting and Financial Reporting
Accounting is important for markets, free enterprise, and
competition because it assists in providing information
that leads to capital allocation. Reliable information leads
to a better, more effective process of capital allocation,
which in turn is critical to a healthier economy.
Financial accounting process that culminates in the
preparation of financial reports on the enterprise for use
by both internal and external parties.
Financial statements principal means through which a
company communicates its financial information to those
outside it. The financial statements most frequently
provided are:
1) the statement of financial position,
2) the income statement or statement of comprehensive
income,
3) the statement of cash flows, and
4) the statement of changes in equity.
5) Note disclosures are an integral part of each
financial statement. Other means of financial reporting
include the president’s letter or supplementary
schedules in the corporate annual report,
prospectuses, and reports filed with government
agencies.
The major standard-setters of the world, coupled
with regulatory authorities, now recognize that capital
formation and investor understanding is enhanced if a
single set of high-quality accounting standards is
developed.
OBJECTIVE OF FINANCIAL REPORTING
The objective of general-purpose financial
reporting is to provide financial information about the
reporting entity that is useful to present and potential
equity investors, lenders, and other creditors in making
decisions about providing resources to the entity.
a) General-purpose financial statements provide at
the least cost the most useful information possible to
a wide variety of users.
b) Equity investors and creditors are the primary user
groups and have the most critical and immediate needs
for information in the financial statements. Investors &
acreditors need this information to assess a company’s
ability to generate net cash inflows and to understand
management’s ability to protect & enhance the assets of
a company.
c.
viewed as being separate and distinct from its
investors (both shareholders and creditors). Financial
reporting focused only on the needs of the
shareholder—the proprietary perspective—is not
considered appropriate.
d. Decision-usefulness - help investors assess the
amounts, timing, and uncertainty of prospective cash
inflows from dividends or interest, and the proceeds
from the sale, redemption, or maturity of securities or
loans. For investors to make these assessments, the
financial statements and related explanations must
provide information about the company’s economic
resources, the claims to those resources, and the
changes in them.
BRANCHES OF ACCOUNTING
❖ Financial Accounting - recording of business
transactions and the periodic preparation of reports on
financial position & results of operations. Financial
accountants accord importance to existing accounting
standards.
❖ Management Accounting, as defined by Institute of
Management Accountants (IMA) -a profession that
involves partnering in management decision making,
devising planning and performance management
systems, and providing expertise in financial reporting
and control to assist management in the formulation
and implementation of organization’s strategy.
❖ Cost Accounting deals with the collection, allocation
and control of the cost of producing specific goods and
services.
❖ Auditing an independent examination that ensures
the fairness & reliability of the reports that management
submits to users outside the business entity.
❖ Government Accounting is concerned with the
identification of the sources and uses of government
funds.
❖Tax Accounting preparation of tax returns and the
consideration of tax consequences of proposed
business transactions.
❖Accounting Education employs accountants either
as researchers, professors or reviewers. They
guarantee the continued development of the profession.
To facilitate efficient capital allocation, investors need
relevant information and a faithful representation of that
information to enable them to make comparisons
across borders. A single, widely accepted set of
high-quality accounting standards is a necessity to
ensure adequate comparability. In order to achieve this
goal the following element must be present:
a. A single set of high-quality accounting standards
established by a single standard-setting body.
b. Consistency in application and interpretation.
c. Common disclosures.
d. Common high-quality auditing standards & practices.
E. Common approach to regulatory review &
enforcement.
f. Education and training of market participants.
g. Common delivery systems (e.g., extensible Business
Reporting Language—XBRL).
h. A common approach to corporate governance and
legal frameworks around the world.
STANDARD-SETTING ORGANIZATIONS
The main international standard setting
organization is the International Accounting
Standards Board (IASB), based in London, United
Kingdom. The IASB issues International Financial
Reporting Standards (IFRS) which are used by most
foreign exchanges.
The 2 organizations that have a role in
international standard-setting are the (1) International
Organization of Securities Commissions (IOSCO) & the
(2) IASB.
a) The IOSCO does not set accounting standards; it is
dedicated to ensuring that the global markets can
operate on an efficient and effective basis.
b) The member agencies have agreed to:
1. Cooperate to promote high standards of
regulation in order to maintain just, efficient, and
sound markets.
2. Exchange information on their respective
experiences in order to promote the development of
domestic markets.
3. Unite their efforts to establish standards and an
effective surveillance of international securities
transactions.
4. Provide mutual assistance to promote the integrity of
the markets by a rigorous application of the standards
and by effective enforcement against offenses.
IOSCO recommends that its members allow
multinational issuers to use IFRS in cross-folder
offerings and listings, as supplemented by
reconciliation, disclosure, and interpretation where
necessary, to address outstanding substantive issues at
a national or regional level.
The international standard-setting structure is composed
of the following four organizations:
a. IFRS foundation (22 trustees) provides oversight
to the IASB, IFRS Advisory Council, and IFRS
Interpretations Committee. It appoints members,
reviews effectiveness, and helps in fundraising efforts for
these organizations.
b. International Accounting Standards Board (IASB)
consisting of 16 members, develops in the public
interest a single set of high-quality, enforceable, and
global international financial reporting standards for
general-purpose financial statements.
c. IFRS Advisory Council (30 or more members)
provides advice and council to the IASB on major
policies and technical issues.
d. IFRS Interpretations Committee (IFRIC before) (14
members) assists the IASB through the timely
identification, discussion, & resolution of financial
reporting issues within the IFRS framework.
In addition, as part of the governance structure, a
Monitoring Board was created. It establishes a link
between accounting standard-setters and those
public authorities that generally oversee them (e.g.
IOSCO). It also provides political legitimacy to the
overall organization.
The IASB has a thorough, open and transparent
due process in establishing financial accounting
standards. It consists of the following elements:
a. An independent standard-setting board overseen by
a geographically & professionally diverse body of
trustees.
b. A thorough & systematic process for developing
standards.
c. Engagement with investors, regulators, business
leaders, and the global accountancy profession at every
stage of the process.
d. Collaborative efforts with the worldwide
standard-setting community.
To implement its due process, the IASB follows specific
steps to develop a typical IFRS.
a) Topics are identified & placed on the Board’s agenda.
b) Research & analysis are conducted, & preliminary
views of pros & cons are issued.
c) Public hearings are held on the proposed standard.
d) The Board evaluates research & public responses &
issues an exposure draft.
e) The Board evaluates the responses & changes the
exposure draft, if necessary. Then the final standard is
issued.
The characteristics of the IASB are meant to
reinforce the importance of an open, transparent, and
independent due process.
a) The Board consists of 16 well-paid members, from
different countries, serving 5-year renewable terms.
b) Autonomy: IASB is not part of any professional
organization. It is appointed by & answerable only to the
IFRS Foundation.
c) Independence: Full-time IASB members must sever
all ties with their former employer. Members are selected
for their expertise in standard-setting rather than to
represent a given country.
d) Voting: 9 of 16 votes are needed to issue new IFRS.
The IASB issues 3 major types of pronouncements:
International Financial Reporting Standards: To date
the IASB has issued 13 standards. In addition, the
previous international standard-setting body, the
International Accounting Standards Committee (IASC)
issued 41 International Accounting Standards (IAS).
Those that have not been amended or superseded
are considered under the umbrella of IFRS.
Conceptual Framework for Financial Reporting: IASB
issued the Framework for the Preparation and
Presentation of Financial Statements (referred to as
the Framework) with the intent to create a conceptual
framework that would serve as a tool for solving
existing and emerging problems in a consistent
manner. However, the Framework is not an IFRS
and does not define standards for any measurement
or disclosure issue. Nothing in the Framework overrides
any specific IFRS.
International Financial Reporting Interpretations:
Interpretations are issued by the IFRS Interpretations
Committee and are considered authoritative & must be
followed. 20 have been issued to date. These
interpretations cover (1) newly identified financial
reporting issues not specifically dealt with in IFRS,
and (2) issues where unsatisfactory or conflicting
interpretations have developed, or seem likely to
develop, in the absence of authoritative guidance.
The IASB has no regulatory mandate and no
enforcement mechanism. It relies on other regulators
to enforce the use of its standards. Example, the
European Union requires publicly traded member
country companies to use IFRS. Any company
indicating that it prepares its financial statements in
conformity with IFRS must use all of the standards and
interpretations. The hierarchy of authoritative
pronouncements is: IFRS, IAS, Interpretations issued by
either the IFRS Interpretation Committee or its
predecessor the IAS Interpretations Committee, the
Conceptual Framework for Financial Reporting, &
pronouncements of other standard-setting bodies that
use a similar conceptual framework to develop
accounting standards (e.g., U.S. GAAP).
Financial Reporting Challenges
Although IFRS are developed by using sound
research & a conceptual framework that has its
foundation in economic reality, a certain amount of
pressure and influence is brought to bear by groups
interested in or affected by IFRS. The IASB does not
exist in a vacuum, & politics & special-interest pressure
remain a part of the standard-setting process.
Expectations gap is the difference between
what the public thinks accountants should do & what
accountants think they can do. It has been
highlighted by many accounting scandals that have
occurred. In order to meet the needs of society with
highly transparent, clean, and reliable systems,
The significant financial reporting challenges facing
the accounting profession are:
a. Non-financial measurements such as customer
satisfaction indexes, backlog information, and reject
rates on goods purchased. (qualitative)
b. Forward-looking information.
c. Soft assets (intangibles).
d. Timeliness.
In accounting, ethical dilemmas are
encountered frequently. The whole process of ethical
sensitivity & selection among alternatives can be
complicated by pressures that may take the form of time
pressure, job pressures, client pressures, personal
pressures, & peer pressures. And, there is no
comprehensive ethical system to provide guidelines.
Convergence to a single set of high-quality global
financial reporting standards is a real possibility. For
example, the IASB and the FASB (of the United States)
have spent the last 12 years working to converge their
standards.
Costly reconciliation requirements have been
eliminated & hopefully will lead to greater comparability
& transparency.Why the need for high-quality standards?
● To facilitate efficient capital allocation.
● In order to ensure adequate comparability
across borders, a single, widely accepted set of
high-quality accounting standards is a necessity.
● Identify the elements involved:
a) A single set of high-quality accounting standards
established by a single standard-setting body.
b) Consistency in application and interpretation.
c) Common disclosures.
d) Common high-quality auditing standards and
practices.
e) Common approach to regulatory review and
enforcement.
f) Education and training of market participants.
g) Common delivery systems.
h) Common approach to corporate governance and legal
frameworks around the world.
Major standard-setters & regulatory authorities around
the world recognize that capital formation & investor
understanding will be enhanced by a single set of
high-quality accounting standards.
ACCOUNTING STANDARDS IN THE PHILIPPINES
On November 18, 1981, the Philippine Institute of
Certified Public Accountants (PICPA) created the
Accounting Standards Council (ASC) to establish and
improve accounting standards that will be generally
accepted in the Philippines.
The creation of the Council received the support of
the following: the Securities and Exchange
Commission (SEC) and the Central Bank of the
Philippines (CB)-regulatory agencies where the financial
statements are filed; the Professional Regulation
Commission (PRC) through the Board of
Accountancy—which supervises CPAs and auditors, and
the Financial Executives Institute of the Philippines
(FINEX)—which is the largest organization of financial
executives who are responsible for the preparation of the
financial statements. The ASC was composed of eight
(8) members-four from PICPA including the designated
Chairman; and one each from SEC, CB, PRC and
FINEX.
The standards would generally be based on the
following: existing practices in the Philippines,
research or studies by the Council; locally or
internationally available literature on the topic or
subject; & statements, recommendations, studies or
standards issued by other standard-setting bodies
such as the International Accounting Standards Board
(LASB) & the Financial Accounting Standards Board
(FASB).
The statements and interpretations issued by
the Council represent generally accepted accounting
principles in the Philippines. Accounting principles
become generally accepted if they have substantial
authoritative support from the relevant parties interested
in the financial statements-the preparers & users,
auditors & regulatory agencies.
Financial Reporting Standards Council
When created per Section 9(A) of the Rules &
Regulations Implementing Republic Act No. 9298
otherwise known as the Philippine Accountancy Act of
2004, the Financial Reporting Standards Council (FRSC)
shall be the new accounting standard setting body.
The FRSC shall be composed of (15) members with a
Chairman, who had been or presently a senior
accounting practitioner in any of the scope of accounting
practice & (14) representatives from the following:
one each from the BOA, SEC, BSP, BIR, COA & a major
organization composed of preparers & users of
financial statements, & two representatives each from
the accredited national professional organization of
CPAs in public practice, commerce & industry,
education/academe and government.
LESSON 2: CONCEPTUAL FRAMEWORK FOR
FINANCIAL REPORTING
Objective of, and the concepts for, general purpose
financial reporting. The purpose of the Conceptual
Framework is to:
a) assist the International Accounting Standards Board
(Board) to develop IFRS Standards (Standards) that are
based on consistent concepts;
b) assist preparers to develop consistent accounting
policies when no Standard applies to a particular
transaction or other event, or when a Standard allows a
choice of accounting policy; and
c) assist all parties to understand & interpret the
Standards.
Conceptual Framework is not a STANDARD.
Existing and potential investors, lenders and other
creditors need information about:
a) the economic resources of the entity, claims against
the entity and changes in those resources and claims; &;
b) how efficiently and effectively the entity’s
management and governing board have discharged their
responsibilities to use the entity’s economic resources.
Establishing a goal towards which to strive is essential if
financial reporting is to evolve to improve its usefulness.
Economic resources and claims
Information about the nature & amounts of a reporting
entity’s economic resources & claims can help users to
identify the reporting entity’s financial strengths &
weaknesses.
● Help users to assess reporting entity’s liquidity &
solvency, need for financing & success for
obtaining financing.
● Predicts how future cash flow will be distributed.
Changes in economic resources and claims
Result from that entity’s financial performance & from
other events or transactions such as issuing debt or
equity instruments. For proper assessment of future
cash inflows to the reporting entity, users need to be
able to identify those two types of changes.
Financial performance reflected by accrual
accounting
Accrual accounting depicts the effects of transactions &
other events & circumstances on a reporting entity’s
economic resources & claims in the periods in which
those effects occur, even if the resulting cash receipts &
payments occur in a different period. Provides a better
basis for assessing the entity’s past & future
performance than information solely about cash receipts
& payments during that period.
QUALITATIVE CHARACTERISTICS OF USEFUL
FINANCIAL INFORMATION
Identify the types of information that are likely to be most
useful to the existing and potential investors, lenders and
other creditors for making decisions about the reporting
entity on the basis of information in its financial report
(financial information).
FUNDAMENTAL QUALITATIVE CHARACTERISTICS
Relevance
Can make a difference in the decisions made by users.
Must have a predictive value, confirmatory value or both
to make a difference in decision making.
Faithful representation
Represent economic phenomena in words and numbers.
Perfectly faithful 3 characteristics: complete, neutral &
free from error (properly accounted). *avoids misleading
ENHANCING QUALITATIVE CHARACTERISTICS
Conservatism (synonymous with prudence)
If alternatives exist, the one with the least effect should
be chosen. When in doubt: Record loss not gain
Comparability
Enables users to identify and understand similarities in,
and differences among, items. Requires at least 2
items.
Verifiability
Different knowledgeable and independent observers
could reach consensus, although not necessarily
complete agreement, that a depiction is a faithful
representation.
Timeliness
Having information available to decision-makers in time
to be capable of influencing their decisions. Older
information is useless/less useful although some
information can still be useful.
Understandability
Classifying, characterizing and presenting information
clearly and concisely makes it understandable.
FS- prepared for users who have a reasonable
knowledge of business and economic activities and who
review and analyze the information diligently.
The cost constraint on useful financial reporting
Cost is a pervasive constraint on the information that can
be provided by financial reporting. It is important that
those costs are justified by the benefits.
Financial statements
Provide information about economic resources of the
reporting entity, claims against the entity, and changes in
those resources and claims, that meet the definitions of
the elements of financial statements. Useful to users for
assessing the prospects for future net cash inflows to the
reporting entity and in assessing management’s
stewardship of the entity’s economic resource.
a) SFP- by recognizing assets, liabilities & equity;
b) Statement of financial performance- income &
expenses
c) Disclosing info on statements & notes.
i. recognized assets, liabilities, equity, income &
expenses, including information about their
nature & about the risks arising from those
recognized assets and liabilities;
ii. assets and liabilities that have not been
recognized, including information about their
nature and about the risks arising from them;
iii. cash flows;
iv. contributions from holders of equity claims
and distributions to them; &
v. the methods, assumptions and judgments
used in estimating the amounts
presented or disclosed, & changes in those
methods, assumptions and judgement
Reporting period
Financial statements are prepared for a specified period
of time (reporting period) and provide information about:
a) assets and liabilities—including unrecognized assets
and liabilities—and equity that existed at the end of the
reporting period, or during the reporting period; and
b) income and expenses for the reporting period.
To help users of financial statements to identify
and assess changes and trends, financial statements
also provide comparative information for at least one
preceding reporting period.
Going concern assumption (continuity)
Prepared on the assumption that the reporting entity is
a going concern and will continue in operation for the
foreseeable future. Entity has no intention for
liquidation or cease of trading.

Elements of Financial Statements
ASSET- a present economic resource controlled by the
entity as a result of past events. An economic resource
is a right that has the potential to produce economic
benefits.
This section discusses three aspects of those definitions:
a) right; c) control
b) potential to produce economic benefits; and
LIABILITY a present obligation of the entity to transfer
an economic resource as a result of past events. For a
liability to exist, three criteria must all be satisfied:
a) the entity has an obligation;
b) the obligation is to transfer an economic resource; &
c) the obligation is a present obligation that exists as a
result of past events.
EQUITY is the residual interest in the assets of the entity
after deducting all its liabilities. Equity claims are claims
on the residual interest in the assets of the entity after
deducting all its liabilities. In other words, they are claims
against the entity that do not meet the definition of a
liability. Such claims may be established by contract,
legislation or similar means, and include, to the extent
that they do not meet the definition of a liability:
a) shares of various types, issued by the entity; and
b) some obligations of the entity to issue another equity
claim.
Income is increases in assets, or decreases in liabilities,
that result in increases in equity, other than those
relating to contributions from holders of equity claims.
Expenses are decreases in assets, or increases in
liabilities, that result in decreases in equity, other than
those relating to distributions to holders of equity claims.
Income and expenses are the elements of financial
statements that relate to an entity’s financial
performance. Users of financial statements need
information about both an entity’s financial position
and its financial performance. Hence, although
income and expenses are defined in terms of changes
in assets and liabilities, information about income and
expenses is just as important as information about
assets and liabilities.
Recognition process
Process of capturing for inclusion in the statement of
financial position or the statement(s) of financial
performance an item that meets the definition of one of
the elements of financial statements—an asset, a
liability, equity, income or expenses. Involves depicting
the item in one of those statements.
CARRYING AMOUNT- amount at which an asset, a
liability or equity is recognized in the statement of
financial position.
The statements are linked because the recognition of
one item (or a change in its carrying amount) requires
the recognition or derecognition of one or more other
items (or changes in the carrying amount of one or more
other items). For example:
a) the recognition of income occurs at the same time as:
i. the initial recognition of an asset, or an increase in
the carrying amount of an asset; or
ii. the derecognition of a liability, or a decrease in the
carrying amount of a liability.
b) the recognition of expenses occurs at the same time
as:
i. the initial recognition of a liability, or an increase in
the carrying amount of a liability; or
ii. the derecognition of an asset, or a decrease in the
carrying amount of an asset.
Recognition criteria
Only items that meet the definition of an asset, a liability
or equity are recognized in the statement of financial
position. Only items that meet the definition of income or
expenses are recognized in the statement(s) of financial
performance. Asset or liability is recognized only if
recognition of that asset or liability and of any resulting
income, expenses or changes in equity provides users of
financial statements with information that is useful.
Derecognition
Removal of all or part of a recognized asset or liability
from an entity’s statement of financial position. Occurs
when that item no longer meets the definition of an asset
or of a liability:
a) for an asset, when the entity loses control of all or
part of the recognized asset;
b) for a liability, when the entity no longer has a
present obligation for all or part of the recognized
liability.
MEASUREMENT BASES
An identified feature—for example, historical cost, fair
value or fulfillment value—of an item being measured.
Applying a measurement basis to an asset or liability
creates a measure for that asset or liability and for
related income and expenses.
- HISTORICAL COST - from the price of the transaction
or other event that gave rise to them. It does not reflect
changes in values, except to the extent that those
changes relate to impairment of an asset or a liability
becoming onerous.
- CURRENT VALUE - using information updated to
reflect conditions at the measurement date. Current
value measurement bases include:
a) fair value; c) current cost
b) value in use and fulfillment value for liabilities; and
Measurement of Equity
Total carrying amount of equity (total equity) is not
measured directly. It equals the total of the carrying
amounts of all recognized assets less the total of the
carrying amounts of all recognized liabilities.
Presentation and disclosure as communication tools
It is important to consider whether the benefits
provided to users of financial statements by
presenting or disclosing particular information are
likely to justify the costs of providing and using that
information.
CLASSIFICATION
Sorting of assets, liabilities, equity, income or
expenses based on shared characteristics for
presentation and disclosure purposes. Such
characteristics include—but are not limited to—the
nature of the item, its role (or function) within the
business activities conducted by the entity, and how it is
measured.
Classification of assets and liabilities
Applied to the unit of account selected for an asset or
liability. That would be appropriate when classifying
those components separately would enhance the
usefulness of the resulting financial information.
Offsetting
Entity recognizes and measures both an asset and
liability as separate units of account, but groups them
into a single net amount in the statement of financial
position. Classifies dissimilar items together and
therefore is generally not appropriate.
Classification of equity
Provide useful information, it may be necessary to
classify equity claims separately if those equity claims
have different characteristics .
Classification of income and expenses:
a) income and expenses resulting from the unit of
account selected for an asset or liability; or
b) components of such income and expenses if
those components have different characteristics and
are identified separately. For example, a change in the
current value of an asset can include the effects of value
changes and the accrual of interest. It would be
appropriate to classify those components separately if
doing so would enhance the usefulness of the resulting
financial information.
Profit or loss and other comprehensive income
Income and expenses are classified and included either:
a) in the statement of profit or loss; or
b) outside the statement of profit or loss, in other
comprehensive income
Statement of profit or loss - primary source of
information about an entity’s financial performance for
the reporting period. That statement contains a total for
profit or loss that provides a highly summarized depiction
of the entity’s financial performance for the period.
Aggregation
Adding together assets, liabilities, equity, income or
expenses that have shared characteristics and are
included in the same classification. Makes information
more useful by summarizing a large volume of detail. A
balance needs to be found so that relevant
information is not obscured either by a large amount of
insignificant detail or by excessive aggregation.
CONCEPTS OF CAPITAL
- Financial concept of capital - such as invested money
or invested purchasing power, capital is synonymous
with the net assets or equity of the entity.
- Physical concept of capital - such as operating
capability, capital is regarded as the productive capacity
of the entity based on, example, units of output per day.
a) Financial capital maintenance - profit is earned
only if the financial (or money) amount of the net assets
at the end of the period exceeds the financial (or money)
amount of net assets at the beginning of the
period, after excluding any distributions to, and
contributions from, owners during the period.
Measured in either nominal monetary units or units of
constant purchasing power.
b) Physical capital maintenance - profit is earned
only if the physical productive capacity (or operating
capability) of the entity (or the resources or funds
needed to achieve that capacity) at the end of the
period exceeds the physical productive capacity at the
beginning of the period, after excluding any distributions
to, and contributions from, owners during the period.
LESSON 3: REVIEW OF ACCOUNTING
PROCESS
The steps in accounting process includes:
1. Business events/ Transactions are documented.
2. Analyze the transactions, and for record in the journal.
3. Post journal entries to applicable ledger accounts
4. Trial Balance is prepared
5. Adjusting entries are journalized and posted
6. Preparation of Adjusted Trial Balance
7. Preparation of Financial Statements
8. Preparation of closing entries
9. Preparation of Post Closing Trial Balance
10.Reversing entries are journalized and posted
Business events/ Transactions are documented
This cycle starts with a business event or simply called
transactions. Verifiability of transactions must be
supported by underlying business documents such as
sales receipts, sales invoice, purchase invoice, check
vouchers among others. These source documents will
be the basis for recording of transactions.
Analyzation of the Transactions and for Record in
the Journal
Accounting journals are often called the book of
original entry. It is a record of business transactions and
events for a specific account in chronological order. For
the transactions to be recorded it must influence the
elements of financial statements and meet the criteria of
recognition identified in the framework of accounting:
a. There is a future economic benefit associated with
the item that flow to the entity
b. There is a monetary amount at which the elements
are to be recognized and reported.
The accounting system that requires every business
transaction or event to be recorded in at least two
accounts is called a double entry accounting system.
This is the same concept behind the accounting
equation. Every debit that is recorded must be matched
with a credit and must be equal in every accounting
transaction in their total There are two general
classification of journal, the General Journal and the
Special Journal
General journal is often used by small entity with only
few transactions and also called two column journals.
For an entity with numerous transactions, special
journals are being used in addition to general journals
that are used to help divide and organize business
transactions.
Here’s a list of the special accounting journals used:
● Cash Receipts Journal
● Cash Disbursements Journal
● Purchases Journal
● Sales Journal
Each of the journals has a specific purpose and are used
for recording specific types of transactions. For example,
the cash receipts journal contains all of the cash sale
transactions. The accounts receivable or credit sales
journal contains all the transactions for credit sales.
Purchases Journal are used for all credit purchases,
while cash purchases transactions are recorded in cash
disbursement journals. All other transactions such as
adjusting and closing, and reversing entries are recorded
in the general journal. The use of a special journal helps
management organize and analyze accounting
information.
Post journal entries to applicable ledger accounts
LEDGER is a complete listing of all the accounts used in
the chart of accounts. The entries from the journals are
transferred to this ledger account. Each journal entry is
transferred from the journal to the corresponding ledger
accounts. The debits are always transferred to the left
side and the credits are always transferred to the right
side of the ledger. Since most accounts will be affected
by multiple journal entries and transactions, there are
usually several numbers in both the debit and credit
columns. The account balances of each account are
calculated at the bottom and get its total. This process is
called pencil footing. Notice that these are account
balances—not column balances. The total difference
between the debit and credit columns will be displayed
on the bottom of the corresponding side. The purpose of
this process is to show the effects of transactions on the
elements of financial statements. The use of special
journals facilitates the posting process and only the total
are entered in the ledger. However, the general journal is
posted individually.
For controlling account in the ledger, the entity has
subsidiary ledger for accounts with various details. For
instance, the customers account serves as subsidiary
ledger for accounts receivable, creditors accounts for
accounts payable, raw materials inventory accounts and
different property items for property and equipment
accounts.
Most entities have computerized accounting systems
that update ledger accounts as soon as the journal
entries are input into the accounting system. Manual
accounting systems are usually posted weekly or
monthly. Just like journalizing, posting entries is done
throughout each accounting period.
Trial Balance is prepared
The preparation of Trial Balance determines the equality
of debits and credits in the ledger but does not give
assurance of error free during the journalizing and
posting process. The total amount indicated in the Trial
Balance summarizes the effect of the transactions on
each account of the ledger for an accounting period.
Accounts are usually listed in order of their account
number. Most charts of accounts are numbered and
presented in the order starting with the assets, liabilities,
equity accounts and ending with income and expense
accounts. The total balances of the accounts are not yet
updated and may require adjustments. Adjusting entries
are journalized and posted
Adjusting entries are journalized and posted
Adjusting entries, also called adjusting journal entries
(AJE’s) are made at the end of the accounting period
before the financial statements are prepared. This is the
fourth step in the accounting cycle. Adjusting entries are
most used in accordance with the matching principle - to
match revenue and expenses in the period in which they
occur. Adjustments are also necessary for revenues
from which cash are not yet collected and for expenses
incurred but not yet been paid these commonly called
accruals. While accounts recorded cash receipts from
which revenue have not yet been earned and for
recorded cash
payments for which expenses that are not yet incurred
are called deferrals. Adjustments for financial assets like
receivables are needed to reflect its impairment. The
adjusting entries affects the real account also known as
permanent account and nominal account also known as
temporary accounts. Real accounts are assets, liabilities
and equity from which its balances are being carried
forward to the next accounting period while nominal
accounts such as income,
expenses, income summary and drawings are brought to
zero. The three (3) different types of adjusting journal
entries as follows:
1. Prepayments
2. Accruals
3. Non-cash expenses (Asset Depreciation and
amortization, Impairment of Asset)
Each one of these entries adjusts income or expenses to
match the current accounting period usage. This concept
is based on the time period principles which states that
accounting records and activities can be divided into
separate time periods.
In this process, we are separating the income and
expenses into the amounts that were used in the current
accounting period and deferring the amounts that are
going to be used in future periods.
Prepayments
Prepaid expenses are goods or services used in the
operations of the entity that have been paid for but have
not been consumed at the end of the accounting period.
Upon purchase the amount is initially recorded either as
an asset or expense account. As the time passes its
operations, it is necessary to determine the portion used
up during the current period and the unused portion for
use in subsequent period. If the prepayment was
originally recorded to the expense account, the year end
adjustment recognizes the asset portion or the unused
balance. While if the prepayment was originally recorded
as an asset, the year end adjustment recognizes the
expense and recognizes the expenses or used portion.
Both instances needed adjusting entries for the asset
account would represent the unused portion while the
expense account reports the balance representing the
used portion during the accounting period.
On the other hand, unearned revenues consist of
income received from customers, but no goods or
services have yet been provided to them. In this case,
the entity owes the customers a good or service and
must record the liability in the current period until the
goods or services are provided. The entity that received
cash before the sale of goods and services may record
the collection with the option of recording using the
revenue method or the liability method. At the end of the
accounting period, the portion of the amount collected
that is not yet earned and for delivery on future date, the
account originally credited represents mixed account-
revenue & liability. This needed adjustment before
preparing the financial statements to adjust the mixed
account and identify revenue earned in the current
period and the amount deferred for future periods.
Accruals
Some expenses accrue from day to day, but the
company ordinarily records them only when they are
paid. Accrued expenses are expenses incurred but are
not yet paid at the end of the fiscal period. They are both
an expense and a liability. Hence, they are referred to as
accrued liability, accrued payable, or accrued expense.
On the other hand, accrued revenues are revenues
earned but not yet received at the end of the period. An
example of this type of adjustment would be services
that have been performed but have not been billed or
collected. To present an accurate picture of the affairs of
the business, the revenue earned must be recognized
on the income statement and the asset on the balance
sheet.
Non-cash expenses
Adjusting journal entries are also used to record
expenses like depreciation, amortization, and depletion.
These expenses are often recorded at the end of the
accounting period because they are usually calculated
on a period basis. For example, depreciation is usually
calculated on an annual basis. Thus, it is recorded at the
end of the year. This also relates to the matching
principle where the assets are used during the year and
written off after they are used.
Property Plant and Equipment (PPE) and Intangible
asset (IA) accounts are assets of the entities that are
being used for its operations and recorded that must be
also adjusted to reflect its value. The recognition of
depreciation for PPE and amortization of IA applies the
recognition principle of systematic and rational
allocation. Depreciation is the systematic allocation of
expense on the life or usefulness of the asset. The
adjustment recognizes the Depreciation Expense and
the decrease is recorded by crediting the contra asset
account – Accumulated Depreciation.
For intangible assets (IA), the charge to operation for
its utilization is recorded by crediting Accumulated
Amortization. Such as amortization is the systematic and
rational allocation of cost of the intangible assets over its
economic benefits. The cost of these assets is initially
recognized as an asset and systematically spreads the
expense portion over its period of benefit or usefulness.
For impairment of assets, accounts such as loans and
receivables should be appropriately reported at net
realizable value. The significant portion of credit sales
regardless of the entity's effort of its collection, there is
always a probability of not being collected at its full
amount. At the end of the accounting period the
unrecoverable amount is recognized as impairment loss
or also known as Bad debts or Uncollectibles. Based on
this, an adjusting entry is made by debit to Uncollectible
Accounts Expense and credit the contra asset account
Allowance for Uncollectible (if using the allowance
method).
As to inventories, there are two methods of inventory
systems – the Perpetual Inventory and Periodic
Inventory system. When the entity uses periodic
(physical system) in recording inventory, an adjustment
is necessary to set-up the ending inventory. Before the
end of accounting period adjustments, the inventory
account still reflects its beginning balances since the
purchases of merchandise are recorded using
Purchases account. Thus, the amount ofending
inventory are cannot be determined unless a physical
count is made for the period. The adjustment of
inventory is accompanied by recognizing the Cost of
Goods Sold using the function expense method for
presentation for operating expenses in the Statement of
Income and Expenses.
The other alternative of the entity to record the
adjustment for inventory that does not establish the
Cost of Goods Sold in the accounts but merely
adjust the Inventory account is in the Closing entry
using the temporary account Income Summary.
When perpetual inventory records are maintained, the
Inventory and the Cost of Goods Sold balance that
appears in the ledger reflects the updated amounts and
does not need to require further adjusting entry.
Inventories are required to be stated at lower cost or
market and reduced to net realizable value.
An entity should account for the tax consequences of
each transaction and other events in the same way it
accounts for other events or transactions. For proper
measurement of the profit or loss of an entity,
adjustments for income taxes must be made. Income
taxes may not be paid within the same accounting
period, but this represents liability for the current period.
Normally the adjusting entries for income taxes are
prepared after all the accounts have been adjusted and
the profit and loss are computed. The computed tax
expense is to be debited to Income Tax Expense and
credited to Income Tax Payable. Additional adjusting
entries for the recognition of deferred tax asset and
deferred tax liability coming from the existence of taxable
temporary differences and deductible temporary
differences.
In general, recording adjusting journal entries is quite
simple and involves these three main steps as follows:
1. Determine current account balance
2. Determine what current balance should be
3. Record adjusting entry
These adjustments are then made in journals and
carried over to the account ledgers and accounting
worksheet. This accounting worksheet is a tool and
optional in the process but will help the preparation of
the financial reports.
After the balances on the unadjusted trial balance, the
entity can then make end of period adjustments like
depreciation expense and expense accruals. These
adjusted journal entries are posted to the trial balance
turning it into an adjusted trial balance.
Preparation of Adjusted Trial balance
An adjusted trial balance is a listing of all company
accounts that will appear on the financial statements
after year-end adjusting journal entries have been made.
Both the debit & credit columns are calculated at the
bottom of a trial balance and these debit and credit totals
must always be equal. If they aren’t equal, the trial
balance was prepared incorrectly, or the journal entries
weren’t transferred to the ledger accounts accurately.
This step is included in the preparation of the worksheet
have been done. The accounting worksheet is
essentially a spreadsheet that tracks each step of the
accounting cycle. This is typically having five sets of
columns that start with the unadjusted trial balance
accounts and end with the financial statements. In other
words, an accounting worksheet is basically a
spreadsheet that shows all of the major steps in the
accounting cycle side by side.
Preparation of Financial Statements
The financial statements are the end results of the
accounting process. These presents the effects of
transactions completed by the entity during the
accounting period. The concept of financial reporting and
the process of the accounting cycle are focused on
providing external users with useful information in the
form of financial statements. The financial statements
prepared by the entity include:
• statement of financial position, at the end of the period;
• a statement of profit or loss and other comprehensive
income for the period;
• a statement of changes in equity for the period;
• a statement of cash flows for the period;
• notes, comprising significant accounting policies and
other explanatory information
IAS 1 sets out framework and overall requirements for
the preparation and presentation of financial statements.
These guidelines are for their structure and minimum
requirements of the content of financial statements. The
requirement for an entity to present a complete set of
financial statements Summary, Profit and Loss
Summary, or Expenses and Revenue Summary which
summarizes the net effect of total income and expenses.
The balance of these accounts represents the profit or
loss for the period. If the result is credit balance there is
profit, if debit balance there is loss.
Preparation of closing entries
In the closing process, each account affects the
computation of the profit or loss for the period is to be
debited or credited for the amount that will result in zero
balance, such account is the Income Summary account.
The Income Summary account & the Dividends account
are finally transferred to Retained Earnings account. At
the end of the year, all the temporary accounts are
closed and only nominal (temporary) accounts are being
carried for the next accounting period.
Preparation of Post Closing Trial Balance
The post closing trial balance is a list of all accounts and
their balances after the closing entries have been
journalized and posted to the ledger. The purpose of
preparing the post closing the trial balance is to verify
that all temporary accounts have been closed properly.
The only accounts in the post closing trial balance are
the accounts that are found in the statement of financial
position. These accounts are the real (permanent)
accounts which represent the asset, liabilities and equity
accounts for the next accounting period.
Preparation of Reversing Entries
Reversing entries, or reversing journal entries, are
journal entries made at the beginning of the next
accounting period to reverse or cancel out adjusting
journal entries made at the end of the previous
accounting period. This is the last step in the accounting
cycle. Reversing entries are made because previous
year accruals and prepayments will be paid off or used
during the new accounting period and no longer needed
to be recorded as liabilities and assets. These entries
are optional depending on whether or not there are
adjusting entries that need to be reversed. Not all
adjusting entries need to be reversed, only these type of
adjustments as follows:
• For accruals – Accrued Income, Accrued Expenses
• For deferrals– Only that create and asset or liability and
are originally entered in nominal accounts such as:
O Prepaid Expenses using the expense method
O Unearned income using the income method
When the adjusting entries made for accrued income or
expense account, a reversing entry must be made to
eliminate the need for monitoring their respective
balances of the receivable and payable which are
created during the adjusting entries. The collection &
payment in the ensuing period are recorded in the usual
revenue and expense account.
LESSON 4: PRESENTATION OF FINANCIAL
STATEMENTS
OBJECTIVE OF THE FINANCIAL STATEMENTS
Provide information about the financial position, financial
performance & cash flows of an entity that is useful to a
wide range of users in making economic decisions.
Financial statements also show the results of the
management’s stewardship of the resources entrusted to
it.
To meet this objective, financial statements provide
information about an entity’s:
• assets; • cash flows.
• liabilities;
• equity;
• income and expenses, including gains and losses;
• contributions by & distributions to owners in their
capacity as owners; and
That information, along with other information in the
notes, assists users of financial statements in predicting
the entity's future cash flows and their timing and
certainty.
COMPONENTS OF FINANCIAL STATEMENTS
A complete set of financial statements comprises:
• a statement of financial position as at the end of the
period;
• a statement of profit or loss and other comprehensive
income for the period;
• a statement of changes in equity for the period;
• a statement of cash flows for the period;
• notes, comprising significant accounting policies and
other explanatory information;
• comparative information in respect of the preceding
period
• a statement of financial position as at the beginning of
the preceding period when an entity applies an
accounting policy retrospectively or makes a
retrospective restatement of items in its financial
statements, or when it reclassifies items in its
financial statements.
Statement of Financial Position - presents the assets,
liabilities, and equity.
ASSETS
An entity shall classify an asset as current when:
• It expects to realize the asset, or intends to sell or
consume it, in its normal operating cycle
• It holds the asset primarily for the purpose of trading
• It expects to realize the asset within twelve months
after the reporting period
• The asset is cash or a cash equivalent (as defined in
IAS 7) unless the asset is restricted from being
exchanged or used to settle a liability for at least twelve
months after the reporting period.
Normal Operating Cycle – time between the
acquisition of assets for processing and their realization
cash or cash equivalents. When the entity’s normal
operating cycle is not clearly identifiable, its duration is
assumed to be twelve months.
Line items under current assets are
• Cash and cash equivalents
• Trade and other receivables
• Financial asset at Fair Value through Profit of Loss
• Inventories
• Prepaid expenses
“Noncurrent assets” is a residual definition. PAS 1
provides that an entity shall classify all other assets as
non-current.
The following are examples of non-current assets:
• Property, plant, and equipment
• Intangible assets
• Investment property
• Financial assets that are not expected to be realized in
cash in the entity’s normal operating cycle or within
twelve months after the reporting period
LIABILITIES
An entity shall classify a liability as current when:
• It expects to settle the liability in its normal operating
cycle
• It holds the liability primarily for the purpose of trading
• The liability is due to be settled within twelve months
after the reporting period
• The entity does not have an unconditional right to
defer settlement of the liability for at least twelve months
after the reporting period
Current liabilities include
• Trade and other payables
• Current provisions
• Short-term borrowings
• Current portion of long-term debt
• Current tax liability
An entity shall classify all other liabilities as non-current,
such as:
• Long term notes payable that are due beyond 12
months from the end of the reporting period
• Bonds payable that are due beyond twelve months
after the reporting period
• Long-term notes payable that are due within
twelve months after the reporting period, but which
terms are extended on a long-term basis and negotiation
has been completed before the end of the reporting
period.
An entity classifies its financial liabilities as current when
they are due to be settled within twelve months after the
end of the reporting period, even if:
• The original term was for a period longer than twelve
months; &
• The intention is supported by an agreement to
refinance, or reschedule the payments, on a long-term
basis is completed after the end of the reporting period
and completed before the financial statements are
authorized for issue.
a) If the entity has the discretion to refinance, or to roll
over the obligation for at least twelve months after the
end of the reporting period under an existing loan
facility, it classifies the obligation as non-current, even
if it would be due within a shorter period.
b) a liability has become payable on demand
because an entity has breached an undertaking
under a long-term loan agreement on or before the end
of the reporting period, the liability is current, even if the
lender has agreed, after the end of the reporting period
and before the authorization of the financial statements
for issue, not to demand payment as a consequence of
the breach. However, the liability is classified as
non-current if the lender agreed by the end of the
reporting period to provide a period of grace ending at
least 12 months after the end of the reporting period,
within which the entity can rectify the breach and during
which the lender cannot demand immediate repayment.
EQUITY
Equity is the residual interest in the assets of the
entity after deducting all the liabilities. Simply put,
equity means net asset or total assets minus total
liabilities.
The account name in reporting the equity of an entity
depends on the form of the business organization:
● Sole proprietorship - Owner’s equity
● Partnership - Partner’s equity
● Corporation - Stockholders’ equity or
shareholders’ equity
Forms of the Statement of Financial Position
A statement of financial position may be prepared using
any of the following formats:
• Account form, which looks like a T account, where
assets are listed on the left side of the statement while
liabilities and equity are listed on the right side
• Report form presents the assets, liabilities, and
equity in a continuous format. Liabilities are presented
after total assets and equity accounts are listed after the
liabilities section
• Financial position form emphasizes working capital
of the firm. In this format, net assets are equal to the
equity.
STATEMENT OF COMPREHENSIVE INCOME
Comprehensive income - is the change of equity
during a period other than changes resulting from
transactions with owners in their capacity as such.
Includes profit or loss and other comprehensive income.
Profit and Loss - is the total income less expenses
excluding the components of other comprehensive
income.
It shall include line items that present the following
amounts for the period:
• revenue, presenting separately interest revenue
calculated using the effective interest method and
insurance revenue
• gains and losses arising from the derecognition of
financial assets measured at amortized cost
• insurance service expenses from contracts issued
within the scope of IFRS 17 income or expenses from
reinsurance contracts held
• finance costs
• impairment losses (including reversals of impairment
losses or impairment gains) determined in accordance
with Section 5.5 of IFRS 9
• insurance finance income or expenses from contracts
issued within the scope of IFRS 17
• finance income or expenses from reinsurance
contracts held
• share of the profit or loss of associates and joint
ventures accounted for using the equity method
• if a financial asset is reclassified out of the amortized
cost measurement category so that it is measured at fair
value through profit or loss, any gain or loss arising from
a difference between the previous amortized cost of the
financial asset and its fair value at the reclassification
date (as defined in IFRS 9)
• if a financial asset is reclassified out of the fair value
through other comprehensive income measurement
category so that it is measured at fair value through
profit or loss, any cumulative gain or loss previously
recognized in other comprehensive income that is
reclassified to profit or loss;
• tax expense
• a single amount for the total of discontinued operations
Other comprehensive income
Comprises Items of income and expenses including
reclassification adjustments that are not in Profit and
Loss as required by a standard or interpretation. There
are 2 types of OCI items, those that are reclassified to
profit or loss & those that are reclassified to Retained
Earnings.
OCI includes the following Components of OCI that will
be reclassified subsequently to profit, or loss include the
following:
• Unrealized gain or loss on debt investments measured
at fair value through other comprehensive income
• Unrealized gain or loss from derivative contracts
designated as cash flow hedge
• Translation gains and losses of foreign operations
Components of OCI that will be reclassified
subsequently to retained earnings include the following:
• Unrealized gain or loss on equity investments
measured at fair value through other comprehensive
income
• Change in Revaluation Surplus
• Remeasurement gains and losses for defined benefit
plans
• Change in fair value arising from credit risk for
financial liabilities measured at fair value through profit
or loss
An entity shall disclose the following items in the
statement of comprehensive income as allocations of
profit or loss for the period:
• Profit or loss for the period attributable to Minority
interest and Owners of the parent.
• Total comprehensive income for the period
attributable to Minority interest and Owners of the
parent.
Statement of comprehensive income present income
and expense for a given reporting period. An entity shall
present all items of income and expense recognized in a
period:
• In a single statement of comprehensive income, or
• In two statements: a statement displaying
components of profit or loss (separate income
statement) and a second statement beginning with
profit or loss and displaying components of other
comprehensive income (statement of comprehensive
income).
An entity shall present either an analysis of expenses
using a classification based on either the nature of
expenses or their function within the entity, whichever
provides information that is reliable and more relevant.
Nature of expense method – Expenses are
aggregated in the income statement according to their
nature & are not reallocated among various functions
within the entity.
Function of expense or cost of sales method –
Classifies expenses according to their function as part of
cost of sales or, for example, the cost of distribution or
administrative activities.
- An entity classifying expenses by function shall
disclose additional information on the nature of
expenses, including depreciation & amortization
expense and employee benefits expense. An entity
shall not present any items of income and expense as
extraordinary items, either on the face of the income
statement or in the notes
Statement of Changes in Equity
An entity shall present a statement of changes in equity
showing in the statement:
• Total comprehensive income for the period, showing
separately the total amounts attributable to owners of the
parent and to non‑controlling interests
• For each component of equity, the effects of
retrospective application or retrospective restatement
recognized in accordance with PAS 8
• For each component of equity, a reconciliation
between the carrying amount at the beginning and the
end of the period, separately (as a minimum) disclosing
changes resulting from:
– profit or loss;
– other comprehensive income; and
– transactions with owners in their capacity as
owners, showing separately contributions by and
distributions to owners and changes in ownership
interests in subsidiaries that do not result in a loss of
control.
An entity shall present, either in the statement of
changes in equity or in the notes, the amount of
dividends recognized as distributions to owners
during the period, and the related amount per share.
Statement of Cash Flows
Cash flow information provides users of financial
statements with a basis to assess the ability of the entity
to generate cash and cash equivalents and the needs of
the entity to utilize those cash flows.
Classification
The statement of cash flows presents
information on the inflows and outflows of cash and cash
equivalent classified into:
● operating activities,
● investing activities,
● financing activities.
Cash flows from operating activities - are primarily
derived from the principal revenue‑producing activities
of the entity.
Examples of cash flows from operating activities are:
• cash receipts from the sale of goods and the rendering
of services;
• cash receipts from royalties, fees, commissions and
other revenue;
• cash payments to suppliers for goods and services;
• cash payments to and on behalf of employees;
• cash payments or refunds of income taxes unless they
can be specifically identified with financing and investing
activities; and
• cash receipts and payments from contracts held for
dealing or trading purposes.
An entity may hold securities and loans for dealing or
trading purposes, in which case they are similar to
inventory acquired specifically for resale. Therefore,
cash flows arising from the purchase and sale of dealing
or trading securities are classified as operating activities.
Similarly, cash advances & loans made by financial
institutions are usually classified as operating
activities since they relate to the main revenue‑producing
activity of that entity.
INVESTING ACTIVITIES - are the cash flows derived
from the acquisition & disposal of long term assets &
other investment not included in cash equivalents. Only
expenditures that result in a recognized asset in the
statement of financial position are eligible for
classification as investing activities.
Examples of cash flows arising from investing activities are:
• cash payments to acquire property, plant and
equipment, intangibles and other long‑term assets.
These payments include those relating to capitalized
development costs and self‑constructed property, plant
and equipment;
• cash receipts from sales of property, plant and
equipment, intangibles and other long‑term assets;
• cash payments to acquire equity or debt instruments of
other entities and interests in joint ventures (other than
payments for those instruments considered to be
cash equivalents or those held for dealing or trading
purposes);
• cash receipts from sales of equity or debt instruments
of other entities and interests in joint ventures (other
than receipts for those instruments considered to be
cash equivalents and those held for dealing or trading
purposes);
• cash advances and loans made to other parties (other
than advances and loans made by a financial institution);
• cash receipts from the repayment of advances and
loans made to other parties (other than advances and
loans of a financial institution);
• cash payments for futures contracts, forward
contracts, option contracts and swap contracts except
when the contracts are held for dealing or trading
purposes, or the payments are classified as financing
activities; and
• cash receipts from futures contracts, forward
contracts, option contracts and swap contracts except
when the contracts are held for dealing or trading
purposes, or the receipts are classified as financing
activities.
FINANCING ACTIVITIES - include cash transactions
affecting non-trade liabilities, and shareholders’ equity.
Examples of cash flows arising from financing activities
are:
• cash proceeds from issuing shares or other equity
instruments;
• cash payments to owners to acquire or redeem the
entity’s shares;
• cash proceeds from issuing debentures, loans, notes,
bonds, mortgages and other short-term or long‑term
borrowings;
• cash repayments of amounts borrowed; and
• cash payments by a lessee for the reduction of the
outstanding liability relating to a lease.
Interest and dividends
a) Cash flows from interest and dividends received
and paid shall each be disclosed separately. Each
shall be classified in a consistent manner from
period to period as either operating, investing or
financing activities.
b) Interest paid and interest and dividends received
may be classified as operating cash flows because
they enter into the determination of profit or loss.
Interest paid and interest and dividends received may be
classified as financing cash flows and investing cash
flows respectively, because they are costs of obtaining
financial resources or returns on investments.
c) Dividends paid may be classified as a financing cash
flow because they are a cost of obtaining financial
resources. Alternatively, dividends paid may be
classified as a component of cash flows from operating
activities in order to assist users to determine the ability
of an entity to pay dividends out of operating cash flows.
Taxes on income
Cash flows arising from taxes on income shall be
separately disclosed and shall be classified as cash
flows from operating activities unless they can be
specifically identified with financing & investing activities.
Presentation of Cash Flows
An entity shall report cash flows from operating activities
using either:
• direct method, whereby major classes of gross
cash receipts & gross cash payments are disclosed; or
• indirect method whereby profit or loss is adjusted for
the effects of transactions of a non‑cash nature, any
deferrals or accruals of past or future operating cash
receipts or payments, & items of income or expense
associated with investing or financing cash flows.
Direct method
Information about major classes of gross cash receipts
and gross cash payments may be obtained either:
• from the accounting records of the entity; or
• by adjusting sales, cost of sales (interest and similar
income and interest expense and similar charges for a
financial institution) and other items in the statement
of comprehensive income for:
– changes during the period in inventories and
operating receivables and payables;
– other non‑cash items; and
– other items for which the cash effects are investing or
financing cash flows.
Indirect method
Net cash flow from operating activities is determined by
adjusting profit or loss for the effects of:
• changes during the period in inventories and operating
receivables and payables;
• non‑cash items such as depreciation, provisions,
deferred taxes, unrealized foreign currency gains and
losses, and undistributed profits of associates; and
• all other items for which the cash effects are investing
or financing cash flows.
Based on the foregoing, the following guidelines may be
used in adjusting accrual basis net income to the cash
basis net income under the indirect method:
Notes to the Financial Statements
The notes must:
• Present information about the basis of preparation of
the financial statements and the specific accounting
policies used;
• Disclose any information required by PFRSs that is not
presented on the face of the statement of financial
position, income statement, statement of changes in
equity, or statement of cash flows
• Provide additional information that is not presented on
the face of the statement of financial position, income
statement, statement of changes in equity, or statement
of cash flows that is deemed relevant to an
understanding of any of them.
Notes should be cross-referenced from the face of the
financial statements to the relevant note. The notes
should normally be presented in the following order:
• A statement of compliance with PFRSs
• summary of significant accounting policies applied,
including:
– The measurement basis (or bases) used in
preparing the financial
statements; and
– The other accounting policies used that are relevant to
an understanding of the financial statements.
• Supporting information for items presented on the face
of the statement of financial position, income statement,
statement of changes in equity, and statement of cash
flows, in the order in which each statement and each line
item is presented.
• Other disclosures, including:
– Contingent liabilities and unrecognized contractual
commitments
– Non-financial disclosures, such as the entity's
financial risk management objectives and policies.
Disclosure of judgments - an entity must disclose, in
the summary of significant accounting policies or other
notes, the judgments, apart from those involving
estimations, that management has made in the process
of applying the entity's accounting policies that have the
most significant effect on the amounts recognized in the
financial statements.
Disclosure of judgments - an entity must disclose, in
the summary of significant accounting policies or other
notes, the judgments, apart from those involving
estimations, that management has made in the process
of applying the entity's accounting policies that have the
most significant effect on the amounts recognized in the
financial statements.
HIERARCHY IN THE FORMATION OF ACCOUNTING
POLICIES
When an IFRS specifically applies to a transaction,
other event or condition, the accounting policy or
policies applied to that item shall be determined by
applying the IFRS.
In the absence of an IFRS that specifically applies
to a transaction, other event or condition,
management shall use its judgment in developing and
applying an accounting policy that results in information
that is:
• relevant to the economic decision‑making needs of
users; and
• reliable, in that the financial statements:
– represent faithfully the financial position, financial
performance and cash flows of the entity;
– reflect the economic substance of transactions, other
events and conditions, and not merely the legal form;
– are neutral, free from bias;
– are prudent; and
– are complete in all material respects.
In making the judgment described, management shall
refer to, and consider the applicability of, the following
sources in descending order:
• the requirements in IFRSs dealing with similar and
related issues; And
• the definitions, recognition criteria and measurement
concepts for assets, liabilities, income and expenses in
the Conceptual Framework for Financial Reporting
(Conceptual Framework).
Management may also consider the most recent
pronouncements of other standard‑setting bodies that
use a similar conceptual framework to develop
accounting standards, other accounting literature and
accepted industry practices, to the extent that these do
not conflict with the sources mentioned above.
GENERAL FEATURES IN THE PRESENTATION OF
THE FINANCIAL STATEMENTS
● Fair presentation and compliance with PFRS
● Going concern
● Accrual basis
● Materiality and aggregation
● Offsetting
● Frequency of reporting
● Comparative information
● Consistency of presentation
LIMITATIONS OF THE FINANCIAL STATEMENTS
● Use of different measurement bases
● Inflationary effects.
● Measurement uncertainty
● Now always comparable across companies
● Non-financial information is not reported
● No predictive value
The Commission shall have the powers and
functions provided by the Securities Regulation Code,
Presidential Decree No. 902-A, as amended, the
Corporation Code, the Investment Houses Law, the
Financing Company Act, and other existing laws. Under
Section 5 of the Securities Regulation Code, Rep. Act.
8799, the Commission shall have, among others, the
following powers & functions:
(a) Have jurisdiction and supervision over all
corporations, partnerships or associations who are the
grantees of primary franchises and/or a license or
permit issued by the Government;
(b) Formulate policies and recommendations on
issues concerning the securities market, advise
Congress and other government agencies on all aspects
of the securities market and propose legislation and
amendments thereto;
(c) Approve, reject, suspend, revoke or require
amendments to registration statements, and registration
and licensing applications;
(d) Regulate, investigate or supervise the activities of
persons to ensure compliance;
(e) Supervise, monitor, suspend or take over the
activities of exchanges, clearing agencies and other
SROs;
(f) Impose sanctions for the violation of laws and the
rules, regulations and orders issued pursuant thereto;
(g) Prepare, approve, amend or repeal rules,
regulations and orders, and issue opinions and provide
guidance on and supervise compliance with such rules,
regulations and orders;
(h) Enlist the aid and support of and/or deputize any
and all enforcement agencies of the Government, civil or
military as well as any private institution, corporation,
firm, association or person in the implementation of its
powers and functions under this Code;
(i) Issue cease and desist orders to prevent fraud or
injury to the investing public;
(j) Punish for contempt of the Commission, both direct
and indirect, in accordance with the pertinent provisions
of and penalties prescribed by the Rules of Court;
(k) Compel the officers of any registered corporation
or association to call meetings of stockholders or
members thereof under its supervision;
(l) Issue subpoena duces tecum and summon
witnesses to appear in any proceedings of the
Commission and in appropriate cases, order the
examination, search and seizure of all documents,
papers, files and records, tax returns, and books of
accounts of any entity or person under investigation as
may be necessary for the proper disposition of the cases
before it, subject to the provisions of existing laws;
(m) Suspend, or revoke, after proper notice and
hearing the franchise or certificate of registration of
corporations, partnerships or associations, upon any
of the grounds provided by law; and
(n) Exercise such other powers as may be provided by
law as well as those which may be implied from, or
which are necessary or incidental to the carrying
out of, the express powers granted the Commission to
achieve the objectives and purposes of these laws.
Under Section 5.2 of the Securities Regulation Code,
the Commission’s jurisdiction over all cases enumerated
under Section 5 of PD 902-A has been transferred to
the Courts of general jurisdiction or the appropriate
Regional Trial Court. The Commission shall retain
jurisdiction over pending cases involving intra-corporate
disputes submitted for final resolution which should be
resolved within one (1) year from the enactment of
the Code. The Commission shall retain jurisdiction
over pending suspension of payments/rehabilitation
cases filed as of 30 June 2000 until finally disposed.
Considering that only Sections 2, 4, and 8 of PD 902-A,
as amended, have been expressly repealed by the
Securities Regulation Code, the Commission retains the
powers enumerated in Section 6 of said Decree, unless
these are inconsistent with any provision of the Code.
PHILIPPINE FINANCIAL REPORTING FRAMEWORKS
AND THE REPORTING ENTITIES
Financial reporting frameworks applicable to different
reporting entities are as follows:
Reporting Entities Financial Reporting
Frameworks
Large and/or publicly Full PFRS/IFRS
accountable entities
Medium-sized entities PFRS for Small &
Medium-Sized Entities
(PFRS/IFRS for SMEs)
Small entities PFRS for Small Entities
Micro entities Income tax Reporting
LARGE and/or PUBLICLY ACCOUNTABLE ENTITIES
Large entities are those with total assets of more than
P350 million or total liabilities of more than P250 million.
Public entities are those that meet any of the following
criteria:
• Holders of secondary licenses issues by regulatory
agencies
• Required to file financial statements under Part II of
SRC Rule 68
• In the process of filing their financial statements for the
purpose of issuing any class of instrument in a public
market
• Imbued with public interest as the SEC may consider
in the future
Large and/or public interest entities shall use the
PFRS, as adopted by the Commission, as their financial
reporting framework. However, a set of financial
reporting frameworks other than the full PFRS may be
allowed by the Commission for certain sub-class (e.g.,
banks, insurance companies) of these entities upon
consideration of the pronouncements or interpretations.
MEDIUM SIZED ENTITIES
Medium-sized entities are those that meet all of the f.f criteria:
• Total assets of more than P100 million to P350 million
or total liabilities of more than P100 million to P250
million. If the entity is a parent company, the said
amounts shall be based on the consolidated figures.
• Not required to file financial statements under Part II of
SRC Rule 68
• Not in the process of filing their financial statements for
the purpose of issuing any class of instrument in a public
market
• Not holders of secondary licenses issues by regulatory
agencies
They shall use as their financial reporting framework the
PFRS for SMEs as adopted by the SEC. However, the
following medium-sized entities shall be exempt from the
mandatory adoption of the PFRS for SME’s and may
instead apply, at their option, the full PFRS:
• An SME which is a subsidiary of a foreign parent
company reporting under the full PFRS
• An SME which is a subsidiary of a foreign parent
company which will be moving towards International
Financial Reporting Standards pursuant to the foreign
country’s published convergence plan
• An SME either as a significant joint venture or
associate, which is part of a group that is reporting under
the full PFRS
• An SME which is a branch office or regional
operating headquarter of a foreign company reporting
under the full PFRS
• An SME which has a subsidiary that is mandated to
report under the full PFRS
• An SME which has a short-term projection that
shows that it will breach the quantitative thresholds
set in the criteria for an SME. The breach is expected to
be significant and continuing due to its long-term effect
on the company’s asset or liability size
• An SME which has c concrete plan to conduct an initial
public offering within the next two years
• An SME which has been preparing financial
statements using full PFRS and has decided to
liquidate
• Such other cases that the Commission may consider
as valid exceptions from the mandatory adoption of
PFRS for SMEs
SMALL ENTITIES
Small entities are those that meet all of the following criteria:
• Total assets of between P3 million to P100 million or
total liabilities between P3 million to P100 million. If the
entity is a parent company, the said amounts shall be
based on the consolidated figures.
• Are not required to file financial statements under Part
II of SRC Rule 68
• Are not in the process of filing their financial
statements for the purpose of issuing any class of
instruments in a public market
• Are not holders of secondary licenses issues by
regulatory agencies
Small entities shall use their financial reporting
framework the PFRS for SEs as adopted by the
Commission. However, entities who have operations or
investments that are based or conducted in a different
country with different functional currency shall not apply
this framework & should instead apply the full PFRS or
PFRS for SMEs.
The following small entities shall also be exempt
from the mandatory adoption of the PFRS for SEs & may
instead apply, as appropriate, the full PFRS or PFRS for
SMEs:
• A small entity which is a subsidiary of a foreign parent
company reporting under the full PFRS or PFRS for
SMEs
• A small entity which is a subsidiary of a foreign parent
company which will be moving towards International
Financial Reporting Standards or IFRS for SMEs
pursuant to the foreign country’s published convergence
plan
• A small entity either as a significant joint venture or
associate, which is part of a group that is reporting under
the full PFRS or PFRS for SMEs.
• A small entity which has a subsidiary that is mandated
to report under the full PFRS or PFRS for SMEs
• A small entity which has a short-term projection
that shows that it will breach the quantitative
thresholds set in the criteria for a small entity. The
breach is expected to be significant and continuing due
to its long-term effect on the company’s asset size
• A small entity which has been preparing financial
statements using full PFRS or PFRS for SMEs and has
decided to liquidate
• Such other cases that the Commission may
consider as valid exceptions from the mandatory
adoption of PFRS for SMs
• A small entity which is a branch office or regional
operating headquarter of a foreign company reporting
under the full PFRS or PFRS for SMEs
MICRO ENTITIES
Micro entities are those that meet all of the following criteria:
• Total assets and liabilities are below P3 million
• Are not required to file financial statements under Part
II of SRC Rule 68
• Are not in the process of filing their financial
statements for the purpose of issuing any class of
instruments in a public market
• Are not holders of secondary licenses issues by
regulatory agencies
They have the option to use as their
financial reporting framework either the income tax
basis or PFRS for SEs, provided however, that the
financial statements shall at least consist of the
Statement of Management’s Responsibility (SMR),
Auditor’s Report, Statement of Financial Position,
Statement of Income and Notes to Financial Statements,
all of which cover the 2-year comparative periods, if
applicable.
In the event where an entity breaches the
prescribed threshold in terms of total assets or total
liabilities and thus it falls within a different classification,
the Audited Financial Statements of said entity shall be
prepared in accordance with the higher framework.
LESSON 5: EVENTS AT THE END OF THE
REPORTING PERIOD
Objective and Scope
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
Events after the reporting period are “those events,
favorable or unfavorable, that occur between the end of
the reporting period and the date that the financial
statements are authorized for issue.” (PAS 10.3)
Date of authorization of the financial statements
This date is the date when management authorizes the
financial statements for issue regardless of whether such
authorization for issue is for further approval or for final
issuance to users.
EXAMPLE: Entity A’s reporting period ends on
December 31, 2021 and its financial statements are
authorized for issued on March 31, 2022.
Events after the reporting period are those
events that occur from January 1, 2022 to March 31,
2022.
2 types of events after the reporting period
1) Adjusting events after the reporting period – are
those that provide evidence of conditions that existed at
the end of the reporting period. (requires adjustments of
amounts)
Examples of adjusting events:
a) The settlement after the reporting period of a court
case that confirms that the entity has a present
obligation at the end of the 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 discovery of fraud or errors that indicate that the
financial statements are incorrect.
EXAMPLES:
Entity A’s inventories on December 31, 2020 have a cost
of Php100,000 and a net realizable value of Php80,000.
Shortly after December 31, 2020, but before the financial
statements were authorized for issue, the inventories
were sold for a net sale proceeds of Php70,000.
Requirement: How much is the correct valuation of Entity
A’s inventories in the December 31, 2020 financial
statements?
Answer: Php70,000
● Announcing a plan to discontinue an operation
after the reporting period.
● Declaration of dividends after the reporting
period
Dividends - declared after the reporting period are not
recognized as liability at the end of the reporting period.
Going Concern
PAS 10 prohibits the preparation of financial statements
on a going concern basis if the 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.
Disclosures
● Date of authorization for issue
● Adjusting events
● Material Non-adjusting events
NOTES:

Entity A recognized a provision for a pending litigation

amounting to Php50,000 on December 31, 2020 (end of
current reporting period). This amount is reflected in
Entity A’s reported profit of Php600,000 for the year
2020. Shortly after December 31, 2020, but before the
financial statements were authorized for issue, the
litigation was settled for Php40,000.
Requirement: How much should be the profit in 2020?
Answer: P610,000

2) Non-adjusting events after the reporting period –

those that are indicative of conditions that arose after the
reporting period. (disclosure only)
Examples of non-adjusting events
● Changes in fair values, foreign exchange rates,
interest rates or market prices after the reporting
period.
● Casualty losses (e.g., fire, storm, or earthquake)
occurring after the reporting period but before
the financial statements were authorized for
issue.
● Litigation arising solely from events occurring
after the reporting period.
● Major ordinary share transactions and potential
ordinary share transactions after the reporting
period.
● Major business combination after the reporting
period.