FINANCIAL STATEMENTS (FS):

Preparation and Presentation

 Financial Statements (FS)
• Means by which the information accumulated
and processed in financial accounting is
periodically communicated to the users.
• A structured financial representation of the
financial position and financial performance of
the entity.
• The end product of the of the financial
accounting process.
 Responsibility for FS
• The management of an entity has the primary
responsibility for the preparation and
presentation of it FS.
• The Board of Directors or Trustees in
discharging its responsibilities reviews and
authorizes the FS for issue before these are
submitted to the shareholders of the entity.
 Accountability of management
• Management is accountable for the safe
keeping of the entity’s resources and for their
proper, efficient and profitable use.
• Shareholders are interested in information
(the FS) that helps them assess how effective
the management has fulfilled this role as this
relevant to the decision concerning their
investment and the reappointment or
replacement of management.
 General features of FS
• 1. Fair presentation and compliance with PFRS
• 2. Going Concern
• 3. Accrual Basis
• 4. Materiality and aggregation
• 5. Offsetting
• 6. Frequency of reporting
• 7. Comparative information
• 8. Consistency of presentation
 1. Fair Presentation
• Fair presentation is achieved if the FS are prepared in accordance
with the Philippine Financial Reporting Standards (PFRS) which
represent the GAAP in the Philippines.
• Fair presentation is defined as faithful presentation of the effects of
transactions and other events in accordance with the definitions
and recognition criteria for assets, liabilities, income and expenses
laid down in the Framework.
• Fair presentation requires an entity:
– To select and apply accounting policies in accordance with PFRS.
– To present information, including accounting policies, in a manner that
provides relevant, reliable, comparable, and understandable
information.
– To provide additional disclosures when compliance with specific
requirements of PFRS is insufficient to enable users to understand the
impact of particular transactions, other events and conditions on the
entity’s financial position and financial performance.
 2. Going Concern
• It means that the accounting entity is viewed as
continuing in operation indefinitely in the
absence of evidence to the contrary.
• FS shall be prepared on a going concern basis
unless management intends to liquidate the
entity or cease trading or has no realistic option
but to do so.
• If the FS are not prepared on a going concern
basis, such fact shall be disclosed together with
the measurement basis and the reason therefor.
 3. Accrual Basis
• An entity shall prepare its FS, except for cash flow
information, using the accrual basis of
accounting.
• It means that asset are recognized when they are
receivable rather than when physically received,
and liabilities are recognized when they are
payable rather than when actually paid.
• Income is recognized when earned regardless of
when received and expense is recognized when
incurred regardless of when paid.
 4. Materiality and Aggregation
• An entity shall present separately each material
class of similar items. Likewise, those items of
dissimilar in nature and function unless
immaterial.
• For instance, cash on hand, petty cash fund, cash
in bank, and cash equivalents shall be presented
as one item “cash and cash equivalents.”
• Finished goods inventories, goods in process, raw
materials and manufacturing supplies are
aggregated and presented as one item
“inventories”.
 When is an item material?
• There is no strict or uniform rule for determining
whether an item is material or not. Very often, this is
dependent on good judgment, professional expertise
and common sense.
• An item is material if knowledge of it would affect on
influence the decision of the informed users of the FS.
• Another example of the application of materiality is the
common practice of large companies of rounding off
amounts to the nearest thousand pesos in their FS.
• An error of 100,000 in the FS of a multinational
companies may not be important but may be so critical
for small businesses.
 Factors of Materiality
• In the exercise of judgment in determining
materiality, the following factors may be
considered:
– 1. Relative size of the item in relation to the total
of the group to which the item belongs.
– 2. Nature of the item
• An item may be inherently material because by its very
nature it affects economic decision.
• For instance, the discovery of a 20,000 bribe is a
material event even for a very large company.
 5. Offsetting
• Assets and liabilities, and income and expenses, when
material, shall not be offset against each other.
• Offsetting may be done when it is required or
permitted by another PFRS.
• Instances when offsetting is allowed:
– Gain and losses on disposal of noncurrent assets are
reported by deducting from the proceeds the carrying
amount of the assets and related selling expenses.
– Gain and losses arising from a group of similar transactions
are reported on a net basis.
– However, if material, such gains and losses are reported
separately.
 6. Frequency of Reporting
• FS shall be presented at least annually.
• When the entity’s end of reporting period
changes and the FS are presented for a period
longer or shorter than 1 year, the entity shall
disclose:
– 1. The period covered by the financial statements.
– 2. The reason for using a longer or shorter period.
– 3. The fact that amounts presented in the financial
statement are not entirely comparable.
 Interim Financial Reporting
• PAS 34 prescribes the minimum content of an interim financial
report and the principles for recognition and measurement in
complete or condensed FS for an interim period.
• Interim financial reporting means the preparation and presentation
of financial information for a period of less than one year, to wit:
– 1. monthly interim reports
– 2. quarterly interim reports (3 months)
– 3. semi-annual interim reports (6 months)
• Publicly traded entities are encouraged to provide interim reports
at least semi-annually and such reports are to be made available
not later than 60 days after the end of interim period.
 2 Views on interim financial reporting
• 1. Integral view
– Each interim period is an integral part of the annual accounting
period.
– Cost incurred which clearly benefit the entire year are allocated
to the interim periods benefited.
– Using the integral view would result to interim income which
would be more indicative of the annual income and thus useful
in predicting future operations and making informed decision.
• 2. Independent view
– Each interim period is a basic accounting period and the results
of operation shall be determined in essentially the same way as
if the interim period were an annual accounting period.
– Annual operating expenses are recognized in the interim period
in which they are incurred.
 Components of an interim financial
report
• PAS 34, paragraph 8, provides that an interim financial report shall include, at a
minimum, the following components:
– 1. Condensed statement of financial position
– 2. Condensed income statement
– 3. Condensed statement of comprehensive income
– 4. Condensed statement of changes in equity
– 5. Condensed statement of cash flows
– 6. Selected explanatory notes
• “Condensed” means that each of the headings and subtotals presented in the
entity’s most recent annual financial statements is required but there is no
requirement to include greater details unless this is specifically required by PAS 34.
• PAS 34, paragraph 19, provides that if an entity’s interim financial report is in
compliance with the PFRS, such fact shall be disclosed.
• PAS 34 assumes also that FS users have an access to the entity’s most recent
annual report to supplements other information not presented in the interim
report.
 Presentation of Comparative Interim
Statements
Current Reporting Period Comparative Period
Semi- annual (6 months):
Financial Position June 30, 2011 December 31, 2010
Income Statement June 30, 2011 June 30, 2010
Statement of Cash Flows June 30, 2011 June 30, 2010
Changes in Equity June 30, 2011 June 30, 2010

Quarterly (3 months):
Financial Position March 31, 2011 December 31, 2010
Income Statement:
3 months ending March 31, 2011 March 31, 2010
6 months ending June 30, 2011 June 30, 2010
Statement of Cash Flow March 31, 2011 March 31, 2010
Changes in Equity March 31, 2011 March 31, 2010
 7. Comparable Information
• The FS of the current period shall be presented with
comparative figures of the FS of the immediate years.
• Comparative information shall be included for narrative
and descriptive information when it is relevant to an
understanding of the current period’s FS.
• When an entity applies an accounting policy
retrospectively or makes retrospective restatement of
items in its FS or when it reclassifies items in its FS, it
shall present 3 statement of financial position as at:
– A. the end of the current period
– B. the end of the previous period
– C. the beginning of the earliest comparative period
 8. Consistency of information
• Inherent in the presentation of comparable
information is the principle of consistency. This
principle requires that “the accounting methods and
practices shall be applied on a uniform basis from
period to period.”
• However, consistency does not mean that no change in
accounting method can be made.
• If the change will result to information that is reliable
and more relevant to the users of FS , then such change
should be made but their should be full disclosure of
the change and the peso effect of the change.
 Identification of FS
• FS shall be clearly identified and distinguished from
other information in the same published documents.
• Each components of the FS shall be clearly identified.
In addition, the following information shall be
prominently displayed:
– 1. the name of the reporting entity
– 2. whether the FS cover the individual or a group entities.
– 3. the end of the reporting period or the period covered by
the FS or notes.
– 4. the presentation currency
– 5. the level of rounding used in the amounts in the FS
 Components of Financial Statements
• 1. Statement of Financial Position (Balance
Sheet)
• 2. Statement of Financial Performance
(Income Statement)\
• 3. Statement of Comprehensive Income
• 4. Statement of Changes in Equity
• 5. Statement of Cash Flows
• 6. Notes and other explanatory notes
 Presentation of
Statement of Financial Position
• Presentation of Current Assets
– Usually listed in the order of liquidity.
– The line items under current assets are:
• 1. Cash and cash equivalents
• 2. Marketable securities
• 3. Trade and other receivables
• 4. Inventories
• 5. Prepaid expenses
 Presentation of
Statement of Financial Position
• Presentation of Noncurrent Assets
– PAS 1 simply states that “an entity shall classify all
other assets not classified as current as noncurrent.”
– What is not included in the current assets is classified
as noncurrent assets. Accordingly, noncurrent assets
include the following:
• Property, plant and equipment
• Long-term investments
• Intangible assets
• Other noncurrent assets
• Property, plant and equipment (PPE)
– PAS 16 defines PPE as “tangible assets which are held by an
entity for use in production or supply of goods and services, for
rental to other, or for administrative purposes, and expected to
be used during more than one period.
• Long-term investment
– The International Accounting Standard Committee (IASC)
defines investment as “as asset held by an entity for the
accretion of wealth thru capital distribution, such as interest,
royalties, dividends and rentals, for capital appreciation or for
other benefits to the investing entity such as those obtained
thru trading relationships.”
• Intangible assets
– Is simply defined as “an identifiable nonmonetary assets
without physical substance.”
• Other noncurrent assets
– Other noncurrent assets are those assets that do not fit into the
definition of the previously noncurrent assets.
 Presentation of
Statement of Financial Position
• Presentation of current liabilities
– Under PAS 1, as a minimum, the face of the statement
of financial position shall include the following line
items for current liabilities:
• 1. trade and other payables
• 2. current provision
• 3. Short-term borrowings
• 4. current portion of long-term debts
• 5. current tax liability
– The term “trade and other payables” is a line item for
accounts payable, notes payable, accrued expenses on
note payable, dividends payable, and accrued
expenses
 Presentation of
Statement of Financial Position
• Presentation of noncurrent liabilities
– All liabilities not classified as current are classified
as noncurrent. Examples of noncurrent liabilities
are:
• 1. noncurrent portion of long-term debt
• 2. finance lease liability
• 3. deferred tax liability
• 4. long-term obligation to company officers
• 5. long-term deferred revenue
 Presentation of
Statement of Financial Position
• Presentation of equity
– The term “equity” is the residual interest in the assets
of the entity after deducting all its liabilities.
– The term used in reporting the equity of an entity
depends on the form of business organization,
namely:
• Owner’s equity in a proprietorship
• Partners’ equity in a partnership
• Stockholders’ equity or shareholders’ equity in a corporation
• Shareholders’ Equity
– Generally, the elements constituting shareholders’
equity with their equivalent in International
Accounting Standard (IAS) term are:

• Philippine Term IAS Term

– Capital Stock -Share Capital
– Subscribed capital stock -Subscribed share capital
– Preferred stock -Preference share capital
– Common stock -Ordinary share capital
– Additional paid capital -Share premium
– Retained earnings (deficit) -Accumulated profits (losses)
– Retained earnings appropriated -Appropriation reserve
– Revaluation surplus -Revaluation reserve
– Treasury stock -Treasury share
 Presentation of
Statement of Income Statement
• An entity has 2 options of presenting
comprehensive income, namely:
– 1. Two Statements:
• A. An income statement showing the components of profit
or loss
• B. a statement of comprehensive income beginning with
profit or loss as shown in the income statement plus or
minus the components of other comprehensive income.
– 2. Single statement of comprehensive income
• This is the combined statement showing the components of
profit or loss and components of other comprehensive
income in a single statement.
Components of Income Statements
• 1. Income
– From sales of merchandise
– From rendering of services
– Use of entity resources
– Disposal of resources other than products
• 2. Expenses
– Cost of sales
– Distribution costs or selling expenses
– Administrative expenses
– Other expenses
– Income tax expenses
 Components of Comprehensive
Income
• Comprehensive income is the changes in equity
during a period resulting from transactions and
other events, other than changes resulting from
transactions with owners in their capacity as
owners.
• In other words, comprehensive income includes
the following:
– 1. Components of income statement (net income or
loss)
– 2. Components of other comprehensive income
 Components of other comprehensive
income
• The term other comprehensive income comprises items of income
and expenses including reclassification adjustments that are not
recognized in income statement as required or permitted by
Philippine Financial Reporting Standards (PFRS).
• The components include the following:
– 1. Unrealized gain or loss on investment in equity instruments
measured at fair value thru other comprehensive income.
– 2. Gain or loss from transaction of the financial statements of a foreign
operation
– 3. Changes in revaluation surplus
– 4. Unrealized gain or loss from derivative contracts designated as cash
flow hedge
– 5. Actuarial gain or loss on defined benefit plan accounted for full
recognition approach.
 Presentation of
Statement of Changes in Equity
• The statement of changes in equity is a basic statement that shows the
movements in the elements or components of the shareholders’ equity.
• An entity shall present a statement of changes in equity showing the
following:
– 1. total comprehensive income for the period
– 2. the effect of changes in accounting policies and correction of errors
– 3. a reconciliation between the carrying amount at the beginning and
end of the period, separately disclosing changes from:
• Profit or loss
• Each item of other comprehensive income
• Transactions with owners in their capacity as owners showing
separately contributions by and distributions to owners.
 Statement of Cash Flows
• The statement of cash flow is a basic
component of the financial statements which
summarizes the operating, investing, and
financing activities of the entity.
• The statement of cash flow provides
information about the cash receipts and cash
payments of an entity during a period.
 Notes to FS
• Notes to FS provide narrative description of items
presented in the FS and information about items
do not qualify for recognition
• Notes also contain information in addition to that
presented in the statement of financial position,
income statement, statement of comprehensive
income, statement of changes in equity, and
statement of cash flows.
• The purpose of the notes to FS is to provide the
necessary disclosures required by the PFRS.
 Segment Reporting
• Globally, many diversified entities or entities operating
in several different industries have merged. Entities
that previously operated in a single industry moved
into additional industries as a result of natural growth
or by acquiring other entities.
• When a highly diversified entity presents only a total
entity information, the results of operations and
growth potential major operating segments cannot be
analyzed and compared. As a result, segment
reporting is required to present to assess individual
profitability of the segments.
 Segment Reporting
• PFRS 8 sets out the requirements for disclosure of
information about operating segments with the
rationale as follows:
– “An entity shall disclose information to enable users of its
FS to evaluate the nature and financial effects of the
business activities in which it engages and the economic
environment in which it operates.”
• In accordance with the 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.
 Identifying Reportable Segment
• An entity shall report information about an operating segment that
meets any of the following quantitative thresholds:
– 1. The segment revenue, including both sales to external customers
and intersegment sales or transfers, is 10% or more of the combined
revenue, internal and external, of all operating segments.
– 2. The absolute amount of profit or loss of the segment is 10% or more
of the greater in absolute amount of:
• A. combined profit of all operating segments that reported profit.
• B. Combined loss of all operating segments that reported a loss.
– 3. The assets of the segment are 10% or more of the combined assets
of all operating segments.
– 4. 75% of entity external revenue threshold. If the total external
revenue of reportable operating segments is less than 75% of the total
entity external revenue, additional segments shall be identified as
reportable segment even if they didn’t meet the 10% quantitative
threshold until at least 75% of the entity external revenue is included
in the total reportable segments.
 Illustration of Identifying Reportable
Segment
• Revenue, profit or loss, and assets for each
operating segment are as follows:
– Revenue External Rev. Profit (Loss) Assets
– Seg. A 16 M 9M 1.7M 25 M
– Seg. B 13 M 1M .5 M 11 M
– Seg. C 6M 2M (1 M) 3M
– Seg. D 4M 4M .2 M 2M
– Seg. E 2M 1M (.1 M) 4M

• Question: Identify the reportable segments?