Conceptual Framework and

Accounting Standards
Session April 21, 2021
 Learning Objectives

 To understand the concept of cash and cash equivalent; and know the classification of cash flows as
operating, investing and financing.
 To understand the concept of accounting policy, understand the concept of a change in accounting
estimates and know the concept of prior period errors.
 STATEMENT OF CASH FLOWS
 Summarizes the operating, investing and financing activities of an entity.
 Provide information about cash receipts and cash payments of an entity.

Cash
 Comprise of cash on hand and demand deposits

Cash Equivalents
 Short-term highly liquid investments that are readily convertible to known amount of cash and which
are subject to an insignificant risk of change in value
 Maturity <= 3 months before maturity date

Examples:
 3 month BSP treasury bill, 3 month time deposit; 3 month money market instrument
 3 month BSP treasury bill purchased 3 months before maturity date.
 Classification of cash flows
Operating Activities
 Derived primarily from the principal revenue producing activities such as…
 Cash receipts from sale of goods or rendering services
 Cash receipts from royalties, rental, fees, commissions and other revenue
 Cash payments to suppliers for goods and services
 Cash payments for selling, administrative and other expenses
 Cash receipts and payments for securities held for trading

Trading Securities
 Cash flow from purchase and sale of trading securities is part of operating activities (PAS 7 par. 15)
 Classification of cash flows
Investing Activities
 Derived from the acquisition and disposal of long-term assets and other investments not included in
cash equivalent
 Examples of investing activities
 Cash payments to acquire and cash receipts from sale of PPE, Intangibles and long-term assets
 Cash payments to acquire and receipts from sale of equity or debt instruments of other entities
 Cash receipts from repayment of advances and loans made to other parties
 Cash payments for and receipts from futures contract, forward contract, option contract and swap contract

Financing Activities
 Derived from the equity capital and borrowings of the entity
 Equity financing = between the entity and the owners
 Debt financing = between the entity and the creditors
 Classification of cash flows
 Examples of financing activities
 Cash receipts from issuance of ordinary and preference shares
 Cash payments to acquire treasury shares
 Cash receipts from issuing debentures, loans, notes, bonds, mortgages, and other short or long term borrowings
 Cash payments for amounts borrowed
 Cash payments by a lessee for the reduction of the outstanding principal lease liability

Noncash transactions
 Excluded from the statement of cash flows (PAS 7 par. 43)
Examples of noncash transactions:
 Acquisition of asset by assuming directly related liability
 Acquisition of asset by issuing share capital
 Acquisition of asset by issuing bonds payable
 Conversion of bonds payable or preference shares to share capital or ordinary shares, respectively
 Classification of cash flows
Interest
 Interest paid or received shall be classified as operating activities (PAS 7 par. 33)
 Exceptions:
 If interest paid is due to loans then should be part of financing
 If interest received is part of a return on investment then should be part of investing activities

Dividend
 Dividend received classified as operating activity (PAS 7 par. 33)
 Exceptions:
 If dividend received is a return on investment then part of investing activities
 Dividend paid may be reported as part of operating activities to determine the ability of the entity to pay dividends out of
operating cash flow
 Classification of cash flows
Preparation
 Two methods: Direct method and Indirect method
 Accounting Policies, Estimate and Errors
Accounting Policy
 Specific principles, bases, conventions, rules and practices applied by an entity in preparing and
presenting financial statements
 Essential for proper understanding and must be applied consistently for comparability

When to change an accounting policy?

 Required by an accounting standard
 The change will result in more relevant and faithfully represented information about the financial position,
financial performance and cash flows of the entity

A change in accounting policy occurs when the entity adopts a generally accepted accounting principle which is
different from the one previously used by the entity
 Accounting Policies, Estimate and Errors
Examples of change in accounting policy
 Change in the method of inventory pricing from the FIFO to weighted average method
 Change in the method of accounting for long term construction contract from cost recovery method to percentage
of completion method
 The initial adoption of policy to carry assets at revalued amount (Revaluation)
 Change from cost model to fair value model in measuring investment property
 Change to a new policy resulting from the requirement of new PFRS

How to report a change in accounting policy.

 If the change is required by a standard, apply the change in accordance with the transitional provision
 If the change is voluntary then apply retroactively or retrospectively
 Accounting Policies, Estimate and Errors
Retrospective application
 Any change shall be reported as an adjustment to the opening balance of retained earnings
 Prior period F/S shall be restated if comparative information is presented

Hierarchy of guidance in selecting accounting policies

 Requirements of current standards dealing with similar matters
 Definition, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the
conceptual framework for financial reporting
 Most recent pronouncements of other standard-setting bodies that use a similar conceptual framework, other
accounting literature and accepted industry practices.

Management shall use judgment in applying accounting policies if there is no accounting standard
 Accounting Policies, Estimate and Errors
Accounting Estimates
 A normal recurring correction or adjustment of an asset or liability which is the natural result of the use of an
estimate
 Change in accounting estimate does not require correction of prior periods
 It is different from a correction of an error
 If a change cannot be determined whether it’s a change in policy or change in accounting estimate, treat the change
at change in accounting estimate with proper disclosures

Examples:
 Change in estimate of doubtful accounts
 Inventory losses
 Warranty cost
 Fair value of asset and liability
 Accounting Policies, Estimate and Errors
How to report a change in accounting estimate?
 Apply currently and prospectively
Apply the change in…
 the period of change if the change affects that period only
 The period of change and future periods if the change affects both

Prior period errors

 Omissions and misstatements in the F/S for one or more periods arising from a failure to sue or misuse of reliable
information

How to correct Prior period errors

 Current and prospective application
 If comparative statements are presented, F/S of prior period must be restated
 Events After the Reporting Period
Definition as per PAS 10 Par 3
 Are events, whether favorable or unfavorable, that occur between the end of reporting period and the date on
which the financial statements are authorized for issue.
 A.K.A subsequent events

Types of subsequent events

 Adjusting events
 – provide evidence of condition that exist at the end of reporting period
 Adjustment is necessary
 Nonadjusting events
 indicative of conditions that arise after the end of reporting period
 Only disclosure is required for significant events
 Events After the Reporting Period
Examples of adjusting events
 Settlement after the reporting period of a court case because it confirms that the entity already had a present
obligation at the end of reporting period
 Bankruptcy of a customer which occurs after the reporting period
 Sales of inventories after the reporting period may give evidence about the net realizable value at reporting date
 The determination after the reporting period of the cost of asset purchased or the proceeds from asset sold before
the end of reporting period
 The determination after the reporting period of the profit sharing or bonus payment if the entity has the present
obligation at the end of reporting period to make such payment.
 The discovery of fraud or errors that show the financial statements were incorrect.
 Events After the Reporting Period
Examples of nonadjusting events
 Business combination after the reporting period
 Plan to discontinue an operation
 Major purchase and disposal of asset or expropriation of major asset by government
 Destruction of a major production plant by fire after the reporting period
 Major ordinary share transactions and potential ordinary share transactions after the reporting period
 Announcing or commencing the implementation of a major restructuring
 Abnormally large changes after the reporting period in asset prices of foreign exchange rates
 Entering into significant commitments or contingent liabilities, for example, by issuing guarantees
 Commencing major litigation arising solely from events that occurred after the reporting period
 Change in tax rate enacted or announced after the end of reporting period that has a significant effect on current
and deferred tax asset and liability
 Related Party Disclosure
Criteria to consider a related party?
 There is ability to control the other party
 There is ability to exercise significant influence over the other party
 There is joint control over the reporting entity
 Related Party Disclosure
What is control?
 Control is the power over the investee or the power to govern the financial and operating policies of an entity so as
to obtain benefits
 Control = more than half of the voting power or 50%+1%

What is significant influence?

 It is the power to participate in the financial and operating policy decision of an entity but not control
 Presumptive significant influence = 20%++ of share ownership
 Other evidences of significant influence include :
 Representation in the board of directors
 Participation in policy making process
 Material transactions between the investor and the investee
 Interchange of managerial personnel
 Provision of essential technical information
 Related Party Disclosure
Examples of related parties
 Affiliates: parent, subsidiary and fellow subsidiaries
 Associates: entities over w/c one party exercise significant influence
 Venturer: may include subsidiaries or subsidiaries of the joint venture
 Key management personnel: those persons having authority and responsibility for planning, directing and
controlling the activities of the entity, directly or indirectly.
 Close family members
 Individuals and their close family members
 Post employment benefit plant for the benefit of employees
 Related Party Disclosure
Disclosure Requirements
 Per PAS 24 par 12, requires disclosure of related party relationship when control exists
 Disclose the name of the parent and ultimate controlling party, if applicable, publishes F/S.
 Disclose the next most senior parent that produces F/S for public use if item#2 is not applicable

What to include in the disclosure

 The amount of the transaction
 The amount of outstanding balance, terms and conditions, whether secured or unsecured, and nature of
consideration to be provided in settlement
 The allowance for doubtful accounts related to the outstanding balance
 The doubtful accounts expense recognized during the period in respect of amount due / from related parties
 Related Party Disclosure
Key Management Personnel Disclosure Requirement
 Short-term employee benefits
 Postemployment benefits, for example, retirement pension
 Other long term benefits
 Termination benefits
 Share based payment transactions, for example, share options

What are examples of unrelated parties?

 Two entities simply because they have a common director or key management personnel
 Providers of finance, trade unions, public utilities and government agencies in the course of their normal dealings
with an entity by virtue only of those dealings
 A single customer, supplier, franchisor or general agent with whom an entity transacts a significant volume of
business merely by virtue of the resulting economic dependence
 Two venturers simply because they share joint control over a joint venture