CHAPTER 1 accountancy profession in the Philippines.
BOA is
THE ACCOUNTANCY PROFESSION
DEFINITION OF ACCOUNTING
 Accounting is a service activity. The accounting function is
to provide quantitative information, primarily financial in
nature, about economic entities, that is intended to be
useful in making economic decision – Accounting
Standards Council
 Accounting is the art of recording, classifying and
summarizing in a significant manner and in terms of money,
transactions, and events which are in part at least of a
financial character and interpreting the results thereof -
Committee on Accounting Terminology
 Accounting is the process of identifying, measuring and
communicating economic information to permit informed
judgment and decision by users of the information –
American Accounting Association
Accounting has a number of components, namely:
a) Identifying as the analytical component
 recognition or non-recognition of business activities as
“accountable” events
 an event is accountable of quantifiable when it has an
effect on assets, liabilities and equity
 economic activities of an entity are referred to as
transactions which may be classified as external and
internal
 external transactions or exchange transactions are
those economic events involving one entity and another
entity
 internal transactions are the economic activities that
take place entirely within the entity only
b) Measuring as the technical component
 Assigning of peso amounts to the accountable economic
transactions and events
 The measurement bases are historical cost and current
value
 Historical cost is the original acquisition cost and the
most common measure of financial transactions
 Current value includes, fair value, value in use,
fulfillment value and current cost
c) Communicating as the formal component
 Preparing and distributing of accounting reports to
potential users of accounting information
 Implicit in the communication process are the recording,
classifying and summarizing aspects of accounting
 Recording or journalizing is the process of
systematically maintaining a record of all economic
business transactions after they have been identified and
measured
 Classifying is the sorting or grouping of similar and
interrelated economic transactions into their respective
classes
 Summarizing is the preparation of financial statements
which include the sfp, is, sci, sce and scf
The overall objective of accounting is to provide
quantitative financial information about a business useful to
statement users particularly owners and creditors in making
economic decisions.
THE ACCOUNTANCY PROFESSION
 RA 9298 is the law regulating the practice of accountancy in
the Philippines. Also known as the Philippine Accountancy
Act of 2004.
 Board of Accountancy is the body authorized by law to
promulgate rules and regulations affecting the practice of the
responsible for preparing and grading the CPALE
 Single practitioners and partnerships for the practice of
public accountancy shall be registered CPA
 A certificate of accreditation shall be issued to CPAs in
public practice only upon showing accordance with rules
and regulations by BOA that such registrant has acquired
minimum of 3 years of meaningful experience in any of the
areas of public practice including taxation
 SEC shall not register any corporation organized for the
practice of public accountancy
 The PRC shall issue the certificate of registration to practice
public accountancy which shall be valid for 3 years and
renewable every 3 years upon payment of required fees
CPAs generally practice their profession in 3 main areas:
1. PUBLIC ACCOUNTING – public accountants usually
offer 3 kinds of services, namely auditing, taxation &
management advisory services
 Auditing – or external auditing is the examination of
financial statements by independent CPA for the purpose
of expressing an opinion as to the fairness with which the
financial statements are prepared. This is the attest
function of independent CPAs
 Taxation – this service includes the preparation of annual
income tax returns and determination of tax consequences
of certain proposed business endeavors.
 Management advisory services – it has no precise
coverage but is used generally to refer to services to clients
a) Advice on installation of computer system
b) Quality control
c) Installation and modification of accounting system
d) Budgeting
e) Forward planning and forecasting
2. PRIVATE ACCOUNTING
 Many CPAs are employed in business entities in various
capacity as accounting staff, chief accountant, internal
auditor and controller
 The highest accounting officer in an entity is known as the
controller
 The major objective of the private accountant is to assist
management in planning and controlling the entity’s
operations
 Private accounting includes maintaining the records,
producing the financial reports, preparing the budgets and
controlling and allocating the resources of the entity
3. GOVERNMENT ACCOUNTING
 Encompasses the process of analyzing, classifying,
summarizing and communicating all transactions
involving the receipt and disposition of government funds
and property and interpreting the results thereof
 The focus of government accounting is the custody and
administration of public funds
CONTINUING PROFESSIONAL DEVELOPMENT
 RA 10912 is the law mandating and strengthening the
continuing professional development program for all
regulated professions, including the accountancy
profession
 Continuing professional development is the acquisition of
advanced knowledge, skill and proficiency
 Continuing professional development raises and enhances
the technical skill and competence of the CPAs
CPD credit units
 Continuing Professional Development (CPD) credit units
refer to the CPD credit hours required for the renewal of
 CPA license and accreditation of a CPA to practice the
accountancy professions every 3 years
 Under the new BOA resolution, all CPAs shall be required
to comply with 120 CPD credit units
 Excess credit units earned shall not be carried over to the
next 3 years’ period, except credit units earned for
masteral and doctoral degrees
 A CPA shall be permanently exempted from CPD
requirements upon reaching the age of 65 years applied
only to the renewal of CPA license and not for the purpose
of accreditation to practice the accountancy profession
GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP)
 GAAP are the accounting rules, procedures, practices and
standards followed in the preparation and presentation of
financial statements
 GAAP are like laws that must be followed in financial
reporting. The process of establishing GAAP is political
process which incorporates political actions of various
interested user groups as well as professional judgment,
logic and research
 The overall purpose of accounting standards is to identify
proper accounting practices for the preparation and
presentation of financial statements
 A set of high-quality accounting standards is a necessity to
ensure comparability and uniformity in financial
statements based on the same financial information
Financial Reporting Standards Council
 In the Philippines, the development of GAAP is formalized
initially through the creation of the Accounting
Standards Council or ASC
 The Financial Reporting Standards Council (FRSC) now
replaces the ASC
 FRSC is the accounting standard setting body created by the
PRC upon recommendation of the BOA to assist the BOA
in carrying out its powers and functions provided under
RA 9298
 The main function is to establish and improve accounting
standards that will be generally accepted in the Philippines
 Accounting standards promulgated by the FRSC constitute
the highest hierarchy of GAAP
 The approved statements of the FRSC are known as
Philippine Accounting Standards (PAS) & Philippine
Financial Reporting Standards (PFRS)
 The FRSC is composed of 15 members with a Chairman
who had been or is presently a senior accounting
practitioner and 14 representatives. 3 years term
Philippine Interpretations Committee
 PIC was formed by the FRSC in August 2006 and has
replaced the Interpretations Committee (IC) formed by the
ASC in May 2000
 The role of the PIC is to prepare interpretations of PFRS for
approval by the FRSC and to provide timely guidance on
financial reporting issues not specifically addressed in
current PFRS. Interpretations are intended to give
authoritative guidance on issues.
 The counterpart of the PIC in the International Accounting
Standards Board (IASB) is the International Financial
Reporting Interpretations Committee (IFRIC)
International Accounting Standards Committee
 IASC is an independent private sector body formed in June
1973, with the objective of achieving uniformity in the
accounting principles which are used by business and
other organizations for financial reporting around the
world. Objectives of IASC:
1. To formulate and publish in the public interest
accounting standards to be observed in the
presentation of financial statements and to promote
their worldwide acceptance and observance
2. To work generally for the improvement and
harmonization of regulations, accounting standards
and procedures relating to the presentation of
financial statements
International Accounting Standards Board
 IASB now replaces the IASC
 IASB published standards in a series of pronouncements
called IFRs. However, the IASB has adopted the body of
standards issued by the IASC
 The pronouncements of the IASC continue to be designated
as IAS
 IASB standard-setting process includes in the correct order
research, discussion paper, exposure draft and accounting
standard
 At present, the FRSC has adopted in their entirety all IAS
and IFRS
 The move toward IFRS is essential to achieve the goal of
one uniform and globally accepted financial reporting
standards
Philippine Financial Reporting Standards
FRSC issues standards in a series of pronouncements called
PFRS. PFRS collectively include all of the following:
 PFRS which correspond to IFRS. PFRS are numbered
the same as their counterpart in IFRS
 PAS which correspond to IAS. PAS are numbered the
same as their counterpart in IAS
 Philippine Interpretations which correspond to
Interpretations of the IFRIC and Interpretations
developed by the PIC
CHAPTER 2
OBJECTIVE OF FINANCIAL REPORTING
 Conceptual framework for financial reporting is a
complete, comprehensive and single document
promulgated by the IASB
 It is a summary of the terms and concepts that underlie
the preparation and presentation of FS for external users
 It describes the concepts for general purpose financial
reporting. It is intended to guide standard setters,
preparers and users of financial information in the
preparation and presentation of statements
 It is the underlying theory for the development of
accounting standards and revision of previously issued
accounting standards
 The Conceptual Framework will be used in future
standard setting decision but no changes are made to the
current IFRS
The CF provides the foundation for Standards that:
a) Contribute to transparency by enhancing international
comparability and quality of financial information
b) Strengthen accountability by reducing information gap
between the providers of capital and the people to whom
they have entrusted their money
c) Contribute to economic efficiency by helping investors to
identify opportunities and risks across the world
Authoritative status of conceptual framework
 In the absence of a standard of an interpretation that
specifically applies to a transaction, management shall
 consider the applicability to the CF in developing and
applying an accounting policy that results in information
that is relevant and reliable
 Conceptual framework is not an IFRS
Users of financial information
1. Primary users
 include the existing and potential investors, lenders and
other creditor. These are the parties to whom general
purpose financial reports are primarily directed
 Existing and potential investors are concerned with the
risk inherent in and return provided by their investments.
They need the information to help them determine
whether they should buy, hold or sell
 Lenders and other creditors are interested in information
which enables them to determine whether their loans,
interest thereon and other amounts owing to them will be
paid when due
2. Other users
 include the employees, customers, governments and their
agencies, and the public. Other users are users of
financial information other than the existing and
potential investors, lenders and other creditors
 Employees are interest in information about the stability
and profitability of the entity
 Customers have an interest in information about the
continuance of an entity especially when they have a
long term involvement with or are dependent on the
entity
 Government and their agencies are interested in the
allocation of resources and therefore the activities of the
entity
Scope of revised conceptual framework
1. Objective of financial reporting
2. Qualitative characteristics of useful financial information
3. Financial statements and reporting entity
4. Elements of financial statements
5. Recognition and Derecognition
6. Measurement
7. Presentation and disclosure
8. Concepts of capital and capital maintenance
OBJECTIVE OF FINANCIAL REPORTING
 The overall objective of financial reporting is to provide
financial information about the reporting entity that is
useful to existing and potential investors, lenders and other
creditors in making decisions about providing resources to
the entity
 Financial reporting is the 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
 The principal way of providing financial information to
external users is through the annual financial statements
 Financial reports also include nonfinancial information
Target users
 Financial reporting is directed primarily which compose the
primary user group since they have the most critical and
immediate need for information in financial reports
 Information that meets the needs of the specified primary
users is likely to meet the needs of other users
 Management of a reporting entity is also interested in
financial information about the entity, however,
management need not rely on general purpose financial
reports because it is able to obtain or access additional
financial information internally
Specific objectives of financial reporting
 The overall objective of financial reporting is to provide
information useful for decision making.
 The CF places more emphasis on the importance of
providing information needed to assess the management
stewardship of the entity’s economic resources.
Accordingly, the specific objectives of financial reporting
are:
a) To provide information useful in making 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
Assessing cash flow prospects
 Financial reporting should provide information useful in
assessing the amount, timing and uncertainty of prospects
for future net cash inflows to the entity
 GPFR provide information about the financial position of a
reporting entity
 Financial position is an information about the entity’s
economic resources and the claims against the reporting
entity
 Information about the nature and amounts of an entity’s
economic resources and claims can help users identify the
entity’s financial strength and weakness
 Otherwise stated, information about financial position can
help users to assess the entity’s liquidity, solvency and the
need for additional financing
 Liquidity is the availability of cash in the near future to
cover currently maturing obligations
 Solvency is the availability of cash over a long term to meet
financial commitments when they fall due
Changes in economic resources and claims
 Changes in economic resources and claims result from
financial performance and from other events or
transactions such as issuing debt or equity instruments
 The financial performance is the level of income earned by
the entity through the efficient and effective use of its
resources
 Information about financial performance helps users to
understand the return that the entity has produced on the
economic resources
 Information about past financial performance is usually
helpful in predicting the future returns on the entity’s
economic resources
 Information during a period is useful in assessing the
entity’s ability to generate future cash inflows from
operations
Accrual accounting
 The financial performance of the entity must be measured
using the accrual basis of accounting
 Accrual accounting depicts the effects of transactions and
other events and circumstances on an entity’s economic
resources and claims in the period in which those effects
occur even if the resulting cash receipts and payments
occur in a different period
 Under the accrual basis, the effects of transactions and
other events are recognized when they occur and not as
cash is received or paid
 Accrual accounting means that income is recognized when
earned regardless of when received and expense is
recognized when incurred regardless of when paid
 Information about financial performance measured in
accordance with accrual accounting provides a better basis
for assessing past and future performance than information
solely about cash receipts and payments during a period
Limitations of financial reporting
a) GPFR do not and cannot provide all of the information to
primary users. Primary users need to consider pertinent
information from other sources like general economic
conditions, political events, and industry outlook
b) GPFR are not designed to show the value of an entity but the
reports provide information to help the primary users
estimate the value of the entity
c) GPFR are intended to provide common information to users
and cannot accommodate every request for information
d) To a large extent GPFR are based on estimate and judgment
rather than exact depiction
CHAPTER 3
QUALITATIVE CHARACTERISTICS
 Qualitative characteristics are the qualities or attributes
that make financial accounting information useful to the
others.
 Under the conceptual framework for financial reporting,
qualitative characteristics are classified into fundamental
qualitative characteristics and enhancing qualitative
characteristics.
FUNDAMENTAL QUALITATIVE
CHARACTERISTICS
 The fundamental qualitative characteristics relate to the
content or substance of financial information
 Information must be both relevant & faithfully
represented if it is to be useful
Application of qualitative characteristics
The most efficient and effective process of applying the
fundamental qualitative characteristics would usually be:
1. Identify an economic phenomenon or transaction that has
the potential to be useful
2. Identify the type of information about the phenomenon or
transaction that would be most relevant and can be
faithfully represented
3. Determine whether the information if available
A. RELEVANCE
 Relevance is the capacity of the information to
influence a decision
 To be relevant, the financial information must be
capable of making a difference in the decisions made
by users
 To be useful, information must be relevant to the
decision making needs of users
 Financial information is capable of making a difference
in a decision if it has predictive value and confirmatory
value
 Predictive value if it can be used in as an input to
processes employed by users to predict future outcome
 Confirmatory value if it provides feedback about
previous evaluations like when it enables users confirm
or correct earlier expectations
a) Materiality
 Materiality is a practical rule in accounting which
dictates that strict adherence to GAAP is not required
when the items are not significant enough to affect
the evaluation, decision and fairness of the financial
statements. The materiality concept is also known as
the doctrine of convenience
 Materiality is really a quantitative threshold linked
very closely to the qualitative characteristic of
relevance
 The relevance of information is affected by its nature
and materiality
 Materiality is a subquality of relevance based on the
nature or magnitude or both of the items to which the
information relates
 Materiality of an item depends on relative size rather
than absolute size
 An item is material if knowledge of it could
reasonably affect or influence the economic decision
of the primary users of the financial statements. This
is dependent on good judgment, professional
expertise and common sense
 Information is material if omitting, misstating or
obscuring it could reasonably be expected to
influence the economic decisions that primary users
of GPFS make on the basis of those statements which
provide financial info about a specific reporting
entity – IASB
 Materiality depends on the magnitude and nature of
the financial information, the relative size and nature
of an item are considered
B. FAITHFUL REPRESENTATION
 Faithful representation means that financial reports
represent economic phenomena or transactions in
words and numbers
 Stated differently, the descriptions and figures must
match what really existed or happened
 It means that the actual effects of the transactions shall
be properly accounted for and reported in the FS
To be a perfectly faithful representation, a depiction should
have three characteristics, namely:
a) Completeness – requires that relevant info should be
presented in a way that facilitates understanding and
avoids erroneous implication. To be complete, the FS
shall be accompanied by notes to FS. The purpose of
the notes is to provide the necessary disclosure
required by PFRS
b) Neutrality – a neural depiction is without bias in the
preparation or presentation of FS. To be neutral is to be
fair and free from bias.
 Prudence – is the exercise of care and caution
when dealing with the uncertainties in the
measurement process such that assets or income are
not overstated and liabilities or expenses are not
understated. Neutrality is supported by the exercise
of prudence
 Conservatism – means that when alternatives
exist, the alternative which has the east effect on
equity should be chosen
C. FREE FROM ERROR
 Free from error means that there are no errors or
omissions in the description of the phenomenon or
transaction
a) Measurement uncertainty – arises when monetary
amounts in financial reports cannot be observed
directly and must instead be estimated.
b) Substance over form – it is necessary that the
transactions and events are accounted in accordance
with their substance and not merely their legal form

ENHANCING QUALITATIVE CHARACTERISTICS
 Relate to the presentation or form of the financial
information
 The enhancing qualitative characteristics are intended to
increase the usefulness of the financial info that is
relevant and faithfully represented
A. COMPARABILITY
 Comparability means the ability to bring together for
the purpose of noting points of likeness and difference
 It enables users to identify and understand similarities
and dissimilarities among items
 Comparability may be made within an entity or between
and across entities
 Comparability within an entity is the quality of info that
allows comparisons within a single entity through time
or from one accounting period to the next. This is also
known as horizontal comparability or
intracomparability
 Comparability between and across entities is the quality
of info that allows comparisons between two or more
entities engaged in the same industry. This is also known
as intercomparablity or dimensional comparability
B. CONSISTENCY
 Consistency refers to the use of the same method for the
same item, either from period to period within an entity
or in a single period across entities
 Comparability is the goal and consistency helps to
achieve the goal
C. UNDERSTANDABILITY
 Understandability requires that financial info must be
comprehensible or intelligible if it is to be most useful
 The info should be presented in a form and expressed in
terminology that a user understands
 An essential quality of the info provided in financial
statements is that it is readily understandable by users
 Understandability is very essential because a relevant
and faithfully represented info may prove useless if it is
not understood by users
D. VERIFIABILITY
 Verifiability means that different knowledgeable and
independent observers could reach consensus, although
not necessarily complete agreement, that a particular
depiction is a faithful representation
 The financial info is verifiable in the sense that it is
supported by evidence so that an accountant that would
look into the same evidence would arrive at the same
economic decision or conclusion
 Direct verification means verifying an amount or other
representation through direct observation, for example,
by counting cash
 Indirect verification means checking the inputs to a
model, formula or other technique and recalculating the
inputs using the same methodology
E. TIMELINESS
 Timeliness means that financial info must be available
or communicated early enough when a decision is to be
made
 Timeliness enhances the truism that without knowledge
of the past, the basis for prediction will usually be
lacking and without interest in the future, knowledge of
the past is sterile
 Cost is a pervasive constraint on the info that can be
provided by financial reporting
 Cost constraint is a consideration of the cost incurred in
generating financial info against the benefit to be
obtained from having the information
 The benefit derived from the info should exceed the cost
incurred in obtaining the info
 The evaluation of the cost constraint is substantially a
judgmental process
CHAPTER 4
FINANCIAL STATEMENTS & REPORTING ENTITY
UNDERLYING ASSUMPTIONS
GENERAL OBJECTIVE OF FS
 Financial statements provide info about economic
resources of the reporting entity, claims against the entity
and changes in the economic resources and claims
 FS provide financial info about an entity’s assets,
liabilities, equity, income and expenses useful to users of
FS in assessing future cash flows & assessing
management stewardship of the entity’s economic
resources
Financial information is provided in the following:
1. Statement of financial position
2. Income statement
3. Statement of cash flows
4. Statement of changes in equity
5. Notes to financial statements
Types of financial statements
a) Consolidated financial statements
 FS prepared when the reporting entity comprises
both the parent and its subsidiaries
 It provides info about the A,L,E,I,Ex of both the
parent and its subsidiaries as a single reporting
entity
 Parent is the entity that exercises control over the
subsidiaries
 Consolidated info is useful for primary users in
their assessment of future net cash inflows to the
parent
b) Unconsolidated financial statements
 are the FS prepared when the reporting entity is
the parent alone
 designed to provide info about the parent’s A, L, I
and Ex and not about those of the subsidiaries
 info provided in unconsolidated financial
statements is typically not sufficient to meet the
requirement needs of primary users
c) Combined financial statements
 are the FS when the reporting entity comprises
two or more entities that are not linked by a
parent and subsidiary relationship
Reporting entity
 An entity that is required or chooses to prepare FS
 It can be a single entity or a portion of an entity, or can
comprise more than one entity
 A reporting entity is not necessarily a legal entity
Reporting period
 A period when FS are prepared for GPFR
 FS may be prepared on an interim basis (3, 6, 9 months)
 Interim FS are not required but optional
 However, FS must be prepared on an annual basis
 FS also provide comparative method for at least 1
preceding reporting period to help users of FS to identify
and assess change in trends
UNDERLYING ASSUMPTIONS
 Accounting assumptions or accounting postulates are the
basic notions or fundamental premises on which the
accounting process is based
 Accounting assumptions serves as the foundation or
bedrock of accounting in order to avoid
misunderstanding but rather enhance the understanding
and usefulness of the FS
 The conceptual framework for financial reporting
mentions only one assumption, namely going concern
 However, implicit in accounting are the basic
assumptions of accounting entity, time period and
monetary unit
Going Concern
 Going concern or continuity assumption means that in
the absence of evidence to the contrary, the accounting
entity is viewed as continuing in operation indefinitely
 The FS are normally prepared on the assumption that the
entity will continue in operations for the foreseeable
future
 The going concern postulate is the very foundation of the
cost principle
 Assets are normally recorded at cost. As a rule, market
values are ignored. However, some new standards
require measurement of certain assets at fair value
 The going concern is abandoned if there is an evidence
that the entity would experience large and persistent
losses or that the entity’s operations are to be terminated
Accounting Entity
 Accounting entity is the specific business organization,
which may be a proprietorship, partnership or
corporation
 Under this assumption, the entity is separate from the
owners, managers, and employees who constitute the
entity. The transactions of the entity shall not be merged
with the transactions of the owners
 Each business is an independent accounting entity
Time Period
 This assumption requires that the indefinite life of an
entity is subdivided into accounting periods which are
usually of equal length for the purpose of preparing
financial reports on financial position, performance and
cash flows
 Users of financial information need timely information
for making an economic decision
 By convention, the accounting period or fiscal period is
one year or a period of 12 months
 The 1-year period is traditionally the accounting period
because usually it is after 1 year that government reports
are required
 The accounting period may be a calendar year or a
natural business year
 A calendar year is a 12-month period that ends on Dec.
31. A natural business year is a 12-month period that
ends on any month when the business is at the lowest or
experiencing slack season
Monetary Unit
 Monetary unit assumption has two aspects, namely
quantifiability and stability of the peso
 Quantifiability aspect means that the A, L, E, I and Ex
should be stated in terms of a unit of measure which is
the peso in the Philippines
 Stability of the peso assumption means that the
purchasing power of the peso is stable or constant and
that its instability is insignificant and therefore may be
ignored
 Stable peso postulate is actually an amplification of the
going concern assumption so much so that adjustments
are unnecessary to reflect any changes in purchasing
power
 In today’s world, the assumption that the peso is a stable
measure over time is not necessarily valid
CHAPTER 5
ELEMENTS OF FINANCIAL STATEMENTS
ELEMENTS OF FINANCIAL STATEMENTS
 The elements of FS refer to the quantitative info reported
in the SFP and SI
 The elements of FS are the building blocks from which
FS are constructed
ASSET
 Asset is defined as a present economic resource
controlled by the entity as a result of past events
 Economic resource is a right that has the potential to
produce economic benefits
Essential characteristics of asset
a) The asset is a present economic resource
b) The economic resource is a right that has the
potential to produce economic benefits
c) The economic resource is controlled by the entity
as a result of past events
Right
1. Rights that correspond to an obligation of another entity
a) Right to receive cash
b) Right to receive goods or services
c) Right to exchange economic resources with another
party on favorable terms
d) Right to benefit from an obligation of another party
if a specified uncertain future event occurs
2. Rights that do not correspond to an obligation of
another entity
a) Right over physical objects, like PPE or inventories
b) Right to intellectual property
3. Rights established by contract or legislation such as
owning a debt instrument or an equity instrument or
owning a registered patent
Transfer of an economic resource
a) Obligation to pay cash
b) Obligation to deliver goods or noncash resources
c) Obligation to provide services at some future time
d) Obligation to exchange economic resources with another
party on unfavorable terms
e) Obligation to transfer an economic resource if specified
uncertain future event occurs
Past event
An obligation exists as a result of past event if both of the
following conditions are satisfied:
a) An entity has already obtained economic benefits
b) An entity must transfer an economic resource
 Definition of income
 Income is defined as increases in assets or decreases in
liabilities that result in increases in equity, other than those
relating to contributions from equity holders
 Income encompasses both revenue and gains
 Revenue arises in the course of the ordinary regular
activities and is referred to by variety of different names
including sales, fees, interest, dividends, royalties and rent
 Gains represent other items that meet the definition of
income and do not arise in the course of the ordinary
regular activities
Statement of financial performance
 Statement of financial performance refers to the income
statement and a statement presenting OCI
 This is the primary source of info about an entity’s financial
performance. As a general rule, all income and expenses
are included in profit or loss
Definition of expense
 Expense is defined as decreases in assets or increases in
liabilities that result in decreases in equity, other than
those relating to distributions to equity holders
 Expenses encompass losses as well as those expenses that
arise in the course of the ordinary regular activities
 Expenses that arise in the course of ordinary regular
activities include of COGS, wages and depreciation
 Losses do not arise in the course of the ordinary regular
activities and include losses resulting from disasters
CHAPTER 6
RECOGNITION AND MEASUREMENT
RECOGNITION
 Recognition is the process of capturing for inclusion in the
FS an item that meets the definition of an A,L,E,I,Ex
 The amount recognized in the SFP is reported as carrying
amount.
 Items are recognized only when their recognition provides
users of FS with info that is both relevant and faithfully
represented
Point of sale income recognition
 The basic principle of income recognition is that income
shall be recognized when earned
 With respect to sale of goods in the ordinary course of
business, the point of sale is unquestionably the point of
income recognition
 It is at the point of sale that the entity has transferred to the
buyer the significant risks and rewards of ownership of the
goods
 Legal title to the goods passes to the buyer at the point of
sale
Expense recognition
 The expense recognition principle means that expenses are
recognized when incurred
 The expense recognition principle is the application of the
matching principle
 The matching principle requires that those costs and
expenses incurred in earning a revenue shall be reported in
the same period
The matching principle has three applications, namely:
a) Cause and effect association
 The expense is recognized when the revenue is already
recognized
 This is actually the strict matching principle
b) Systematic and rational allocation
 Some costs are expensed by simply allocating them
over the periods benefited
 When economic benefits are expected to arise over
several accounting periods and the association with
income can only be broadly or indirectly determined,
expenses are recognized on the basis of systematic and
allocation procedures
c) Immediate recognition
 The cost incurred is expensed outright because of
uncertainty of future economic benefits or difficulty of
reliably associating certain costs with future revenue
 An expense is recognized immediately:
i. When an expenditure produces no future economic
benefit
ii. When cost incurred does not qualify or ceases to
qualify for recognition as an asset
DERECOGNITION
 Derecognition is defined as the removal of all or part of
a recognized asset or liability from the SFP
 It occurs normally when an item is no longer meets the
definition of an asset or a liability
 Derecognition of an asset occurs when the entity loses
control of all or part of the asset
 Derecognition of liability occurs when the entity no
longer has a present obligation for all or part of the
liability
MEASUREMENT
Measurement is defined as quantifying in monetary
terms the elements in the FS
1. HISTORICAL COST
 Historical cost or original acquisition cost of an
asset is the cost incurred in acquiring or creating the
asset comprising the consideration paid plus
transaction cost
 Historical cost of a liability is the consideration
received to incur the liability minus transaction cost
 Historical cost is the entry price or entry value to
acquire an asset or to incur a liability
 An application of the historical cost measurement is to
measure financial asset and financial liability at
amortized cost. The amortized cost reflects the
estimate future cash flows discounted at a rate
determined at initial recognition
CURRENT VALUE
1) Fair value
 Fair value of an asset is the price that would be
received to sell an asset in an orderly transaction
between market participants at measurement date
 Fair value of liability is the price that would paid to
transfer a liability in an orderly transaction between
market participants at the measurement date
 Fair value is an exit price or exit value
 In cases where fair value cannot be directly
measured, an entity can use present value of cash
flows
 Fair value is not adjusted for transaction cost. The
reason is that such cost is a characteristic of the
transaction and not of the asset or liability
2) Value in use
 Value in use is the present value of the cash flows
that an entity expects to derive from the use of an
asset and from the ultimate disposal
  It does not include transaction cost on acquiring the
asset but includes transaction cost on the disposal
of the asset
3) Fulfillment value
 Fulfillment value is the present value of cash that
an entity expects to transfer in paying or settling a
liability
 It does not include transaction cost on incurring a
liability but includes transaction cost on fulfillment
of a liability
4) Current cost
 Current cost of an asset is the cost of an equivalent
asset at the measurement date comprising the
consideration paid and transaction cost
 Current cost of a liability is the consideration that
would be received less any transaction cost at
measurement date
Selecting a measurement basis
 In selecting a measurement basis, it is necessary to
consider the nature of the info that the measurement
basis will produce
 The info produced by the measurement basis must be
useful to the users of FS
 To achieve this, the info must be both relevant and
faithfully represented
 Historical cost is the measurement basis most commonly
adopted in preparing FS since it is simpler, less costly to
measure historical cost than it is to measure a current
value, well understood and verifiable
 IASB did not mandate a single measurement basis
because the different measurement bases could produce
useful info under different circumstances
CHAPTER 7
PRESENTATION AND DISCLOSURE
CONCEPTS OF CAPITAL
PRESENTATION AND DISCLOSURE
 The presentation and disclosure can be an effective
communication tool about the info in FS
 A reporting entity communicates information by
presenting and disclosing information in the FS
 Effective communication of information in FS makes
the info more relevant and contributes to a faithful
representation of an entity’s A, L, I, and Ex. It also
enhances the understandability and comparability of info
 Effective communication in FS is supported by not
duplicating info in different parts of the FS
 Duplication is usually unnecessary and can make
financial statements less understandable
Classification
 Classification is the sorting of A, L, E, I, and Ex on the
basis of shared or similar characteristics
 Classifying dissimilar accounts can obscure relevant
info, reduce understandability and comparability and
may not provide a faithful representation of info
Aggregation
 Aggregation is the adding together of A, L, E, I, and Ex
that have similar or shared characteristics and are
included in the same classification
 Aggregation makes info more useful by summarizing a
large volume of detail. However, aggregation may
conceal some of the detail
 Typically, the SFP and the income statement provide
summarized or condensed information
 More detailed information is provided in the notes to FS
CAPITAL MAINTENANCE
 The financial performance of an entity is determined
using two approaches
1) Transaction approach – is the traditional
preparation of an income statement
2) Capital maintenance approach – means that net
income occurs only after the capital used from the
beginning of the period is maintained
 Return of capital is an erosion of the capital invested
in the entity
 Shareholders invest in entity to earn a return on
capital or an amount in excess of their original
investment
 The conceptual framework considered two concepts of
capital maintenance or well-offness
1) Financial capital
 Under this concept, capital is synonymous with net
assets or equity of the entity
 Financial capital is the monetary amount of the
net assets contributed by shareholders and the
amount of the increase in net assets resulting from
earnings retained by the entity
 Financial capital is the traditional concept based on
historical cost and adopted by most entities
2) Physical capital
 Physical capital is the quantitative measure of the
physical productive capacity to produce goods and
services
 The physical productive capacity may be based on,
units of output per day or physical capacity of
productive assets to produce goods or services
 This concept requires that productive assets be
measured at current cost, rather than historical
cost
 Productive assets include inventories and PPE
 Physical capital is equal to the net assets of the
entity expressed in terms of current cost
 Under this concept, net income occurs when the
physical productive capital of the entity at the end
of the year exceeds the physical productive capital
at the beginning of the period, also after excluding
distributions to and contributions from owners
during the period
CHAPTER 8
PRESENTATION OF FINANCIAL STATEMENTS
PAS 1
(Statement of Financial Position)
FINANCIAL STATEMENTS
 Financial statements are the means by which the info
accumulated and processed in financial accounting is
periodically communicated to the users
 The FS are the end product or main output of the
financial accounting process
 FS are a structured financial representation of the
financial position and financial performance of an
entity

General purpose financial statements
 Simply referred to as FS are those intended to meet the
needs of users who are not in a position to require an
entity to prepare reports tailored to their particular info
needs
 These are directed to all common users and not to
specific users
Components of financial statements
1) Statement of financial position
2) Income statement
3) Statement of comprehensive income
4) Statement of changes in equity
5) Statement of cash flows
6) Notes, comprising a summary of significant accounting
policies and other explanatory notes
Objectives of financial statements
The objective of FS is to provide info 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. It also shows the results of the management’s
stewardship of the resources entrusted to it.
a) Assets
b) Liabilities
c) Equity
d) Income and expenses; including gains and losses
e) Contributions by and distributions to owners in their
capacity as owners
f) Cash flows
Frequency of reporting
 Financial statements shall be presented at least annually
 When an entity’s end of reporting period changes and FS
are presented for a period longer or shorter than one
year, an entity shall disclose:
a) The period covered by the FS
b) The reason for using a longer or shorter period
c) The fact that amounts presented in the FS are not
entirely comparable
Statement of financial position
 SFP is a formal statement showing the 3 elements
comprising financial position, namely assets, liabilities
and equity
 Primary users analyze the SFP to evaluate such factors
as liquidity, solvency and the need of the entity for
additional financing
Classification of assets
 Assets are classified into current and non-current assets
 Operating cycle is the time between the acquisition of
assets and their realization in cash
a) Current assets
 The asset is cash or cash equivalent unless the
asset is restricted to settle a liability for more than
12 months after the reporting period
 The entity holds the asset primarily for the purpose
of trading
 The entity expects to realize the asset within 12
months after the reporting period
 The entity expects to realize the asset or intends to
sell or consume it within the entity’s normal
operating cycle
b) Non-current assets
 PPE – as “tangible assets which are held by an
 entity for use in production or supply of goods and
services, for rental to others, or for administrative
purposes, and are expected to be used during more
than one period”. Most PPE, except land are
presented at cost less accumulated depreciation
 Long-term investments – an 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 relationships
 Intangible assets – an identifiable nonmonetary
asset without physical substance
 Deferred tax assets
 Other noncurrent assets - those assets that do not
fit into the definition of the previously mentioned
noncurrent assets
Classification of liabilities
Liabilities are classified into current liabilities and
noncurrent liabilities
a) Current liabilities
 The entity expects to settle the liability within the
entity’s normal operating cycle
 The entity holds the liability primarily for the
purpose of trading
 The liability is due to be settled within 12 months
after the reporting period
 The entity does not have a right to defer
settlement of the liability for at least 12 months
after the reporting period
b) Noncurrent liabilities
 Noncurrent portion of long term debt
 Finance lease liability
 Deferred tax liability
 Long term obligations to company officers
 Long term deferred revenue
Definition of equity
 Equity is the residual interest in the assets of the entity
after deducting all of its liabilities
Currently maturing long-term debt
A liability which is due to be settled within 12 months after
the reporting period is classified as current, even if
a) The original term was for a period longer than 12
b) An agreement to refinance or to reschedule
payment on a long term basis is completed after
the reporting period and before the financial
statements are authorized for issue
Covenants
 Covenants are actually restrictions on the borrower as
to undertaking further borrowings, paying dividends,
maintaining specified level of working capital, etc.
Shareholders’ equity
 Shareholders’ equity is the residual interest of owners
in the net assets of a corporation measured by the
excess of assets over liabilities
Notes to financial statements
 Notes to FS provide narrative description or
disaggregation of items presented in the fs and
information about items that do not qualify for
recognition
  These are used to report info that does not fit into the
body of the fs in order to enhance the understandability
of the fs
 The purpose of the notes is to provide the necessary
disclosures required by PFRS
Forms of SFP
a) Report form – sets forth the 3 major sections in a
downward sequence of A, L and E
b) Account form – presentation allows that of an
account, meaning, the assets are shown on the left
side and the liabilities and equity on the right side
of SFP
CHAPTER 9
PRESENTATION OF FINANCIAL STATEMENTS
(Income Statement)
INCOME STATEMENT
 Income statement is a formal statement showing the
financial performance of an entity for a given period of
time
 Financial performance of an entity is primarily measured
in terms of the level of income earned by the entity through
the effective and efficient utilization of its resources. This
is also known as the results of operations of the entity
 Information about financial performance is useful in
predicting future performance and ability to generate
future cash flows
Source of income
a) Sales of merchandise to customers – sales returns,
allowances and discounts shall be deducted from gross
sales to arrive at net sales
b) Rendering of services – income from rendering of services,
among others, includes professional fees, media
advertising commissions, admission fees for artistic
performance and tuition fees
c) Use of entity resources – this income category includes
interest, rent, royalty and dividend income
d) Disposal of resources other than products – examples
include gain on sale of investments and gain on sale of
PPE
Components of expense
a) Cost of goods sold of cost of sales
b) Distribution costs or selling expenses
c) Administrative expenses
d) Other expenses
e) Income tax expense
Classifications of expenses
Distribution costs constitute costs which are directly related
to selling, advertising and delivery of goods to customers
a) Salesmen’s salaries
b) Salesmen’s commissions
c) Travelling and marketing expenses
d) Advertising and publicity
e) Freight out
f) Depreciation of delivery equipment and store equipment
Administrative expenses constitute cost of administering the
business
a) Doubtful accounts
b) Office salaries
c) Expenses of general executives
d) Expenses of general accounting and credit department
e) Office supplies used
f) Certain taxes
g) Contribution
h) Professional fees
i) Depreciation of office building and office equipment
j) Amortization of intangible assets
Other expenses are those expenses which are not directly
related to the selling and administrative function
a) Loss on sale of trading investments
b) Loss on disposal of PPE
c) Casualty loss – flood, earthquake, fire
No more extraordinary items
PAS 1, paragraph 87, specifically mandates that an entity
shall not present any items of income and expenses as
extraordinary either on the face of the income statement or
statement of comprehensive income or in the notes
Line items
PAS 1, paragraph 82, provides that as a minimum, the
income statement and SCI shall include the ff. line items:
a) Revenue
b) Gain and loss from Derecognition of financial asset
measured at amortized cost as required by PFRS 9
c) Finance cost
d) Share in income or loss of associate and joint
venture accounted for using the equity method
e) Gain or loss on the reclassification of financial
asset from fair value OCI to fair value profit or loss
f) Gain or loss from extinguishment of a financial
liability by issuing equity instrument as required by
IFRIC 19
g) Income tax expense
h) A single amount comprising discontinued operation
i) Profit or loss for the period
j) Total OCI
k) Comprehensive income for the period being the
total of profit or loss and OCI
The following items shall be disclosed on the face of the
income statement and SCI
a) Profit or loss for the period attributable to non-
controlling interest and owners of the parent
b) Total comprehensive income for the period
attributable to non-controlling interest and owners
of the parent
Forms of income statement
PAS 1, paragraph 99, provides that an entity shall present an
analysis of expenses using a classification based on either
the function of expenses or their nature within the entity,
whichever provides info that is reliable and more relevant
1. Functional presentation – it classifies expenses
according to their function as part of COGS,
distribution costs, administrative expenses and
other expenses. This is also known as the cost of
goods sold method.
2. Natural presentation – referred to as the nature of
expense method. The expenses are aggregated
according to their nature and not allocated among
the various functions within the entity. The
expenses are no longer classified as COGS,
distribution costs, administrative expenses, etc.
PAS 1, paragraph 105 simply states that because each
method of presentation has merit for different types of
entities, management is required to select the presentation
that is reliable and more relevant.
Comprehensive income – is the change in equity during a
period resulting from transactions and other events, other
than changes resulting from transactions with owners in
their capacity as owners.
1. Profit or loss – profit or loss is the total of income
less expenses, excluding the components of OCI.
This is the bottom line in the traditional income stt.
2. Other comprehensive income – comprises items
of income and expense that are not recognized in
profit or loss or not shown in the traditional income
statement
reporting period and the date on which the FS are authorized
for issue
CHAPTER 13
RELATED PARTY DISCLOSURES
PAS 24
Requires disclosure of related party relationships where
control exists irrespective of whether there have been
transactions between the related parties

a) Unrealized gain or loss on equity investment measured CHAPTER 14

at FVOCI INVENTORIES
b) Unrealized gain or loss on debt investment measured at PAS 2
FVOCI
c) Gain or loss from translation of the financial statements Inventories are assets held for sale in the ordinary course of
of a foreign operation business, in the process of production for such sale or in the
d) Revaluation surplus during the year form of materials or supplies to be consumed in the
e) Unrealized gain or loss from derivative contracts production process or in the rendering of services
designated as cash flow hedge
f) Remeasurements of defined benefit plan, including
actuarial gain or loss CHAPTER 15
g) Change in fair value attributable to credit risk of a PROPERTY, PLANT AND EQUIPMENT
financial liability designated at FVPL PAS 16

Statement of comprehensive income
 This statement is prepared in order to show the total
comprehensive income
 It starts with the net income or loss as shown in the
income statement plus or minus the components of OCI
 The purpose of this is to provide a more comprehensive
info on financial performance measured more broadly
than the income as traditionally computed
Property, plant and equipment are tangible assets that are
held for use in production or supply of goods or services, for
rental to others, or for administrative purposes and are
expected to be used during more than one period
CHAPTER 16
GOVERNMENT GRANT
PAS 20

CHAPTER 10 Government grant is an assistance by government in the

STATEMENT OF CASH FLOWS form of transfer of resources to an entity in return for part or
PAS 7 future compliance with certain conditions relating to the
operating activities of the entity
The primary purpose of a statement of cash flows is to
provide relevant info about cash receipts and cash
payments of an entity during a period CHAPTER 17
BORROWING COSTS
PAS 23
CHAPTER 11
ACCOUNTING POLICIES, ESTIMATE Borrowing costs are interest and other costs that an entity
AND ERRORS incurs in connection with borrowing of funds
PAS 8

Accounting Policies – are the specific principles, bases, CHAPTER 18

conventions, rules and practices applied by an entity in INVESTMENT IN ASSOCIATES
preparing and presenting financial statements PAS 28

Accounting Estimate – is a normal recurring correction or An associate is simply defined as an entity over which the
adjustment of an asset or liability which is the natural result investor has significant influence
of the use of an estimate

Prior Period Errors – are omissions and misstatements in CHAPTER 19

the FS for one or more periods arising from a failure to use IMPAIRMENT OF ASSETS
or misuse of reliable info PAS 36

There is an established principle that an asset shall not be

CHAPTER 12 carried at above the recoverable amount
EVENTS AFTER THE REPORTING PERIOD
PAS 10
CHAPTER 20
Events after the reporting period as those events, whether INTANGIBLE ASSETS
favorable or unfavorable, that occur between the end of PAS 38

An intangible asset is simply defined as an identifiable
nonmonetary asset without physical substance
CHAPTER 21
INVESTMENT PROPERTY
PAS 40
Investment property is defined as property (land or building
or part of a building or both) held by an owner or by the
lessee under a finance lease to earn rentals or for capital
appreciation or both
CHAPTER 22
AGRICULTURE
Biological asset and agricultural produce
PAS 41
Biological assets are living animals and living plants.
Agricultural produce is the harvested product of an
entity’s biological assets.
Harvest is the detachment of produce from a biological
asset or the cessation of a biological asset’s life processes
Bearer plants is a living plant used in the production of
agricultural produce, expected to bear produce for more than
one period and has a remote likelihood of being sold as
agricultural produce, except as incidental scrap
CHAPTER 23
PROVISION, CONTINGENT LIABILITY AND ASSET
PAS 37
Provision – is an existing liability of uncertain timing or
uncertain amount
Contingent liability – is a possible obligation that arises
from past event and whose existence will be confirmed only
by the occurrence or nonoccurrence of uncertain future
events
Contingent asset – is a possible asset arises from past event
and whose existence will be confirmed only by the
occurrence or nonoccurrence of uncertain future events
CHAPTER 24
FINANCIAL INSTRUMENTS – PRESENTATION
PAS 22
Financial instrument as any contract that gives rise to both a
financial asset of one entity and a financial liability or equity
instrument of another entity
CHAPTER 25
INCOME TAXES
PAS 12
Accounting income – is the net income for the period
before deducting income tax expense
Taxable income – is the income for the period determined
in accordance with tax law upon which income taxes are
payable or recoverable
Deferred tax liability – arises when accounting income is
higher than taxable income because of future taxable amount
CHAPTER 26
EMPLOYEE BENEFITS
PAS 19
Employee benefits are all forms of consideration given by
an entity in exchange for services rendered by employees or
for the termination of employment
CHAPTER 27
EARNINGS PER SHARE
PAS 33
EPS is the amount attributable to every ordinary share
outstanding during the period.
Basic EPS = net income / ordinary shares outstanding
CHAPTER 28
INTERIM FINANCIAL REPORTING
PAS 34
Interim financial reporting means the preparation and
presentation of FS for a period of less than one year.
PAS 34, par 28, provides that an entity shall apply the same
accounting policies in the interim financial statements as
are applied in the annual financial statements
CHAPTER 29
REPORTING IN HYPERINFLATIONARY
ECONOMY
PAS 29
PAS 29 on financial reporting in a hyperinflationary
economy does not establish an absolute rate at which
hyperinflation is deemed to arise.
The FS of an entity that reports in the currency of a
hyperinflationary economy shall be stated in terms of the
measuring unit current at the end of reporting period
CHAPTER 30
FIRST TIME ADOPTION OF PFRS
PFRS 1
First time adopter is an entity that presents for the first
time its FS in conformity with PFRS
The first PFRS FS are the first annual statements in which
an entity adopts PFRS by an explicit and unreserved
statement of compliance with PFRS
CHAPTER 31
SHARE-BASED PAYMENT
PFRS 2
Share-based compensation plan is a compensation
arrangement established by the entity whereby the entity’s
employees shall receive equity shares in exchange for their
services or receive cash based on the price of its shares
 CHAPTER 23
NONCURRENT ASSET HELD FOR SALE
PFRS 5 CHAPTER 39
LEASES
Noncurrent asset is classified as held for sale if the carrying PFRS 16
amount will be recovered principally through a sale
transaction rather than through continuing use Lease is defined as a contract or part of a contract that
conveys the right to use the underlying asset for a period of
time in exchange for consideration

CHAPTER 33 CHAPTER 40
DISCONTINUED OPERATION IFRIC INTERPRETATIONS
PFRS 5
IFRIC 1 – Decommissioning liability
PFRS 5, par 12, prohibits the retroactive classification as An obligation to dismantle, remove and restore an item of
a discontinued operation when the discontinued criteria are PPE as required by law or contract
met after the end of reporting period
IFRIC 17 – Distribution of noncash asset to owners
The distribution of noncash asset to owners is actually
CHAPTER 34 payment of property dividend to shareholders. IFRIC 17
EXPLORATION AND EVALUATION OF provides that an entity shall measure a liability to distribute
MINERAL RESOURCES noncash asset as a dividend to its owners at the fair value of
PFRS 6 the asset to be distributed

Exploration and evaluation of mineral resources is defined
as the search for mineral resources after the entity has
obtained legal right to explore in a specific area as well as
the determination of the technical feasibility and commercial
viability of extracting the mineral resources
CHAPTER 35
OPERATING SEGMENTS
PFRS 8
Segment reporting is the disclosure of certain financial
information about the products and services an entity
produces and the geographical areas in which an entity
operates
IFRIC 19 – Extinguishment of financial liability
This transaction is simply known as equity swap. Equity
swap is the issuance of share capital by the debtor to the
creditor in full or partial payment of an obligation.
IFRIC 19 provides that the equity instrument issued to
extinguish a financial liability shall be measured at the
following amounts in the order of priority:
a) Fair value of equity instrument issued
b) Fair value of liability extinguished
c) Carrying mount of liability extinguished
IFRIC 2 – Members’ shares in cooperative entities
Members’ shares in cooperative entities may be classified as
equity or liability depending on the terms and conditions of
the FS.

CHAPTER 36
FINANCIAL INSTRUMENTS
Measurement of financial asset
PFRS 9

It provides that at initial recognition, an entity shall measure

a financial asset at fair value

CHAPTER 37
FAIR VALUE MEASUREMENT
PFRS 13

Fair value of an asset is the price that would be received to

sell an asset in an orderly transaction between market
participants
Fair value of liability is the price that would be paid to
transfer a liability in an orderly transaction between market
participants

CHAPTER 38
REVENUE FROM CONTRACTS WITH CUSTOMERS
PFRS 15

PFRS 15 is the new global framework for revenue

recognition