Chapter 14

Financial Statements
 Introduction
General Purpose Financial
Statements are those intended to
meet the needs of users who are not
in a position to demand reports
tailored to meet their particular
information needs.
Objectives of General Purpose
Financial Statements
a. To provide information about entity’s
financial position, and cash flows that
is useful to a wide range of users in
making economic decisions; and
b. To demonstrate the accountability of
the entity for the resources entrusted
to it.

Responsibility of Financial Statements The responsibility over financial

statements rests with the entity's management, particularly the Head of the Entity
jointly with the Head of Finance/Accounting.

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A Statement of Management Responsibility for Financial Statements shall be
attached to the financial statements as a cover letter.

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Components of General
Purpose Financial
Statements
A complete set of financial statements consists of:
a. Statement of Financial Position;
b. Statement of Financial Performance;
c. Statement of Changes in Net Assets/Equity;
d. Statement of Cash Flows;
e. Statement of Comparison of Budget and Actual Amounts; and
f. Notes to the Financial Statements, comprising a summary of significant
accounting policies and other explanatory notes

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 General Principles

Fair Presentation
╸ means the faithful representation of the effects of transactions and other
events in accordance with the definitions and recognition criteria for
assets, liabilities, revenue, and expenses in the PPSAS (Philippine
Public Sector Accounting Standards). The application of PPSAS, with
appropriate disclosures, if necessary, would result in the fair presentation
of the financial statements.

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 General Principles

Compliance with PPSASs

╸ an entity whose financial statements comply with the PPSASs shall
make an explicit and unreserved statement of such compliance in the
notes. Financial Statements shall not be described as complying with the
PPSASs unless they comply with all the requirements of PPSASs.
Inappropriate accounting policies are not rectified either by disclosure of
the counting policies used, or by notes or explanatory material.

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 General Principles

Departure from PPSAS

╸ in the event that management strongly believes that compliance
with the requirement of PPSAS would result in misleading presentation
that it would contradict the objective of the financial statements, the
entity may depart from that requirement of the relevant regulatory
framework allows, or otherwise does not prohibit, such a departure.

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 General Principles

Going Concern
╸ the financial statements shall be prepared on a going concern basis unless
there is an intention to discontinue the entity operation or there is no
realistic alternative but to do so.
Consistency of Presentation
╸ the presentation and classification of items in the financial statements
shall be retained from one period to the next unless laws, rules and
regulations, and PPSAS require a change in presentation.

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 General Principles

Materiality and Aggregation

╸ each material class of similar items shall be presented separately in the
financial statements. Items of a dissimilar nature or function shall be
presented separately unless they are immaterial. If a line item is not
material, it is aggregated with other items either on the face of the
financial statements or in the Notes. A specific disclosure requirement in
a PPSAS need not be satisfied if the information is not material.

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 General Principles

Offsetting
╸ assets and liabilities, and revenue and expenses shall not be offset unless
(a) required or permitted by a PPSAS, or (b) when offsetting reflects
the substance of the transaction or other event.

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 General Principles

Comparative Information
╸ shall be disclosed with respect to the previous period for all amounts
reported in the financial statements. Comparative Information shall
be included for narrative and descriptive information when it is
relevant to an understanding of the current period's financial
statements.

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 Identification of the
Financial Statements

The financial statements shall be identified clearly, and

distinguished from other information in the same
published document.
The following information shall be displayed prominently and repeatedly:
a. Name of the reporting entity;
b. Whether the financial statements cover the individual entity or a group
entity;

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 Identification of the
Financial Statements

c. The reporting date or the period covered by the financial statements,

whichever is appropriate to that component of the financial statements;
d. Name of fund cluster;
e. The reporting currency; and
f. The level of rounding-off amounts.

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 Reporting Period Financial statements shall be
presented at least annually.
╸ When an entity changes its reporting date such that its annual
financial statements are presented for a period longer or
shorter than one year, the following shall be disclosed:
a. The period covered by the financial statements;
b. The reason for using a longer or shorter period; and
c. The fact that comparative amounts are not entirely comparable.

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Statement of Financial
Position

╸ shows the entity's financial condition as at a certain date. It

is presented in comparative, condensed and detailed formats.
1. Condensed Statement of Financial Position - presents only the line
items shown below. The breakdowns and other relevant information
are disclosed in the Notes.
a. Cash and Cash equivalents;
b. Receivable from exchange transactions;

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Statement of Financial
Position

c. Recoverable from non-exchange transactions (taxes and

transfers);
d. Financial assets (excluding amounts shown under (a),
(b), and (c));
e. Inventories;
f. Investment Property
g. Property, Plant and Equipment
h. Intangible assets;

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Statement of Financial
Position

i. Taxes and Transfers Payable;

j. Payable under exchange transactions;
k. Provisions;
l. Financial liabilities (excluding amounts shown under (h), (I) and (j));
and
m. Net assets/equity.
Additional line items, headings, and sub-totals shall be presented
whenever relevant to the understanding of the entity's financial position.

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Statement of Financial
Position

2. Detailed Statement of Financial Position - presents all the asset, liability

and equity accounts in the Revised Chart of Accounts.

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 Statement of Financial
Position Any of the following would lead to the current
classification of an asset or liability.

Current Assets Current Liability

a. Expected to be realized in, or is held for sale or
consumption in, the entity's normal operating cycle.
b. Held primarily for trading.
c. Expected to be realized within 12 months after the
reporting date.
d. It is cash or a cash equivalent, unless it is restricted from
being exchanged or used to settle a liability for at least
twelve months after the reporting date.
a. Expected to be settled in the entity's normal
operating cycle.
b. Held primarily for trading.
c. Due to be settled within 12 months after the
reporting date.
d. The entity does not have an unconditional
right to defer settlement of the liability for at
least twelve months after the reporting date.

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An illustrative statement of
financial position, presented
using the condensed format:

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Statement of Financial
Performance

╸ shows the revenue, expenses and surplus or deficit for the

period. It is presented in comparative, condensed and
detailed formats.
Generally, revenue and expenses are recognized in surplus or deficit, except
for the following which are recognized directly in equity:
a. Correction of prior period errors;
b. Effect of changes in accounting policies; and
c. Gains or losses on remeasuring available-for-sale financial assets.

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Statement of Financial
Performance

The following are the minimum line items to be presented on

the face of the statement of financial performance:
a. Revenue;
b. Finance costs;
c. Share in the surplus or deficit of associates and joint ventures;
d. Gain or loss attributable to discontinuing operations; and
e. Surplus or deficit.

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Statement of Financial
Performance

The nature and amount of material items of revenue and

expense are disclosed separately. Examples of items to be
disclosed separately include the following:
a. Write-downs of assets (e.g., inventory, PPE) and reversals thereof;
b. Restructuring provisions and reversals thereof;
c. Disposals of items of property, plant, and equipment;

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Statement of Financial
Performance

d. Privatizations or other disposals or investments;

e. Discontinuing operations;
f. Litigation settlements; and
g. Other reversals of provisions.
Expenses may be presented according to their function or nature,
whichever is more relevant. If expenses are classified by function,
additional disclosures shall be made on the nature of expenses, including
depreciation, amortization and employee benefits expenses.

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An illustrative statement of
financial performance, presented
using the condensed format:

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Statement of Changes in
Net Assets/Equity

╸ shows the increase or decrease in the entity's net assets

during the period resulting from the following:
a. Surplus or deficit for the period;
b. Items of revenue and expenses that are recognized directly in equity;
c. Effects of changes in accounting policies and corrections of errors; and
d. The balance of accumulated surpluses or deficits at the beginning of the period
and at the reporting date, and the changes during the period.

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An illustrative statement of
changes in net assets/equity
is shown:

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 shows the sources and utilizations of cash and
Statement of Cash Flows
cash equivalents during the period according
to the following activities:
a. Operating Activities - cash flows from operating Activities are primarily
derived from the principal cash - generating activities of the entity.
They normally include cash flows on items of revenue and expenses.
period. Examples include:
i. Receipt of NCA and reversion of unused NCA
ii. Receipt of provision of assistance and subsidy to other entities
iii. Collection of income and receivables
iv. Payments of expenses, cash advances and payables
v. Inter or intra-entity transfers of funds

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Statement of Cash Flows

b. Investing Activities - involve the acquisition and disposal of

noncurrent assets and other investments. Examples include:
i. Acquisition and disposal of PPE, investment property, intangible
assets and other noncurrent assets
ii. Acquisition and disposal of investment securities and derivatives
iii. Collection and provision of long-term loans

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Statement of Cash Flows

c. Financing Activities - are activities that affect the entity's equity capital
and borrowings. Examples include:
i. Issuing of notes, loans, and bond payable, and their repayments
ii. Finance lease payments pertaining to the reduction of the
outstanding finance lease liability

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Statement of Cash Flows

• Cash flow information provides basis for assessing an

entity's ability to generate cash and cash equivalents and it's
utilization of funds.
• Cash flows exclude movements between 'cash' and 'cash
equivalents’(e.g., investment of excess cash in cash
equivalents) because these are part of the entity’s cash
management rather than operating, investing or financing
activities.

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 Presentation of Cash
Flows
(Operating Activities)
╸ cash flows from (used in) operating activities are presented
using the Direct Method. Under this method, major
classes of gross cash receipts and gross cash payments are
presented. The indirect method, which is available to
business entities, is not allowed for government entities.

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 Presentation of Cash
Flows
(Operating Activities)
Information about major classes of gross cash receipts and gross cash
payments may be obtained either:
a. From the accounting records of the entity; or
b. By adjusting relevant accounts for changes during the period, non-
cash items, and other items whose effects are investing or financing
cash flows. This can be done through T-account analyses.
• A reconciliation of the accrual basis surplus or deficit with the net cash
flow from operating activities shall be provided in the notes to financial
statements.

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 Presentation of Cash
Flows
(Investing & Financing
Activities)
╸ cash flows from (used in) investing and financing activities
are also presented according to major classes of gross cash
receipts and gross cash payments.

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 Presentation of Cash
Flows
(Investing & Financing
Activities)
Cash flows may be reported on a net basis for:
a. Receipts and payments made on behalf of customers,
taxpayers or beneficiaries that reflect the activities of the
other party rather than those of the entity; and
b. Receipts and payments for items with quick turnover,
large amount, and short maturities.

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 Presentation of Cash
Flows
(Investing & Financing
Activities)
• Cash flows denominated in a foreign currency are translated using the
spot exchange rate at the date of the cash flow. Exchange differences
are not cash flows but a reconciliation of cash and cash equivalents at
the beginning and end of the period. Exchange differences are reported
in the statement of cash flows separately from the operating, investing,
and financing activities.
• Any significant amount of cash and cash equivalents held that is not
available for the entity's use shall be disclosed in the notes.

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An illustrative statement of
cash flows is shown:

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Statement of Comparison
of Budget and Actual
Amounts
╸ shows the differences (variances) between budgeted amounts and actual
results for a given reporting period. This enhances the transparency of
financial reporting of the government.
The statement of Comparison of Budget and actual amounts shows
the following:
a. Budget information - consists of, among others, data on appropriations,
allotments, obligations, revenues and other receipts, and disbursements.
This is based on the budget registries and include the following:

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Statement of Comparison
of Budget and Actual
Amounts
i. Original Budget - is the initially approved budget for the period, usually
the General Appropriations Act. The original Budget may include residual
appropriated amounts automatically carried over from prior years by law such
as prior year commitments or possible future liabilities based on a current
contractual agreement (e.g., prior year's not yet due and demandable
obligations).
ii. Final Budget - is the original Budget adjusted for all reserves, carry-over
amounts, realignments, transfers, allocations and other authorized legislative
or similar authority changes applicable to the period.

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Statement of Comparison
of Budget and Actual
Amounts
• Explanations regarding changes from original to final budget
(i.e., whether they are a consequence of reallocations within the
budget) are disclosed in the notes.
• Moreover, the budgetary basis (cash, accrual or some
modification thereof) used in preparing the budget information
vis-à-vis the accounting basis used in preparing the financial
statement shall be disclosed in the notes.

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Statement of Comparison
of Budget and Actual
Amounts
b. Actual amounts on a comparable basis - these represent the
actual disbursements made during the period.
Since the 'actual amounts on a comparable basis‘ to the
budgeted amounts are on a 'cash basis', they may not always
be equal to the amounts presented in the other financial
statements, which are on 'accrual basis'.

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Statement of Comparison
of Budget and Actual
Amounts
These, therefore, are reconciled in the notes. The differences are
classified as follows:
i. Basis Differences - occur when the approved budget is prepared
on a basis other than the accounting basis;
ii. Timing Differences - occur when the budget period differs from
the reporting period reflected in the financial statements; and
iii. Entity Differences - occur when the budget omits program or
entities that are part of the entity for which the financial
statements are prepared.

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Statement of Comparison
of Budget and Actual
Amounts
c. Differences between (a) and (b) above - explanations of
material differences shall be made in the notes.

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Example:
Entity A's appropriation for Capital Outlays for the current year amounts to ₱1M.
The original budget is ₱1M.
During the year, ₱50,000 is realigned to personnel services. The final budget is
₱950,000 (1M - 50K).
Actual disbursements during the period totaled ₱870,000. The actual amounts
on a comparable basis is ₱870,000. The additions to capital assets reflected in
the financial statements is ₱930,000. This is calculated on the accrual basis. The
'basis difference' of ₱60,000 is disclosed in the notes.
The difference between the 'final budget' and 'actual amount on comparable basis'
is ₱80,000 (950,000 - 870,000). This difference is reconciled with, among others,
the unreleased appropriations, unobligated allotments, and unpaid obligations, as
shown in the budget registries.

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The statement of comparison of budget and actual amounts will show the following
information:

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The statement of comparison of budget and actual amounts is peculiar to government entities.
Business entities are not required to prepare this statement for their external reporting, although
they may prepare a similar statement for their internal reporting.

An illustrative statement of
comparison of budget and actual
amounts is shown:

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 Notes to Financial
Statements

╸ provides information in addition to those presented in the

other financial statements. It is an integral part of a complete
set of financial statements. All the other financial statements
are intended to be read in conjunction with the notes.
Accordingly, information in the other financial statements
shall be cross-references to the notes.

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 Notes to Financial
Statements

The notes shall be structured in a systematic and logical manner to

show the following:
1. General information on the reporting entity.
2. Statement of compliance with the PPSAS and basis of preparation of
financial statements.
3. Summary of significant accounting policies.
This include narrative description of the line item in the other
financial statements, measurement bases, transitional provisions,
and other relevant information.

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 Notes to Financial
Statements

4. Disaggregation (breakdowns) and other supporting

information for the line items in the other financial
statements.
5. Other disclosures required by PPSAS, such as:
a. Explanations for the differences between budgeted and
actual amounts;
b. Events after the reporting date, if material;

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 Notes to Financial
Statements

c. Changes in accounting policies and accounting estimates and prior

period errors;
d. Contingent liabilities, contingent assets, and unrecognized
contractual commitments;
e. Related party disclosure; and
f. Non-financial disclosures, e.g., the entity's financial risk
management objectives and policies.
6. Other disclosures not required by PPSAS but the
management deems relevant to the understanding of the
financial statements.
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Illustrations: Excerpts from Notes to financial statements

same data as the signing

Of the Statement of
Management Responsibility
for Financial Statements.

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Illustrations: Excerpts from Notes to financial statements

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Illustrations: Excerpts from Notes to financial statements

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Illustrations: Excerpts from Notes to financial statements

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 Events After the
Reporting Date

╸ are those events, both favorable and unfavorable, that

occur between the reporting date and the date when the
financial statements are authorized for issue. These include
the following:
1. Adjusting events - those that provide evidence of conditions
that existed at the reporting date; and
2. Non-adjusting events - those that are indicative of
conditions that arose after the reporting date.
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 Events After the
Reporting Date

• Reporting date - end of the calendar year (i.e., December

31).
• Date of authorization of financial statements for issue –
date of signing of the Statement of Management's
Responsibility for Financial Statements by the Head of
Agency and Head of Finance Department.

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Adjusting events after Examples:
the reporting date

a. Settlement of a court case that evidences a present

obligation at the reporting date.
b. Bankruptcy of a debtor that evidences an impairment of a
receivable at the reporting date.
c. Sale of inventories that evidences the correct NRV of
inventories at the reporting date.

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Adjusting events after Examples:
the reporting date

d. Determination of the amount of revenue pursuant to a

revenue sharing agreement with another entity.
e. Determination of employee bonuses, if the entity has a
present obligation to make payments as of the reporting
date.
f. Discovery of fraud or errors that show that the financial
statements were incorrect.

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 Non-adjusting events are disclosed only, if they are
after the reporting date material. Example:

a. Acquisition or disposal of a major controlled entity.

b. Announcement of a plan to discontinue an operation or a
major program.
c. Major purchases and disposal of asset.
d. Destruction of a building by a fire after the reporting date .

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 Changes in
Accounting Policies

• Accounting Policies - are the specific principles, bases,

conventions, rules and practices applied by an entity in
preparing and presenting financial statements.
• An entity shall select accounting policies using the guidance
in the PPSAS as well as the guidance issued by COA and
shall apply them consistently to similar transactions.

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 Changes in
Accounting Policies

An entity may change an accounting policy if the change:

a. Is required by PPSAS; or
b. results to a reliable and more relevant information.
The following are considered changes in accounting policies:
c. Change from one basis of accounting to another basis of accounting;
and
d. Change in the accounting treatment, recognition or measurement of a
transaction, event or condition within a basis of accounting.

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 Changes in
Accounting Policies

A change in accounting policy is accounted for as follows:

a. Using the transitional provision, if any;
b. In the absence of a transitional provision, by retrospective
application; or
c. If retrospective application is impracticable, by
prospective application.

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 Changes in
Accounting Policies

• Retrospective application involves adjusting the opening balance of each

affected account for the earliest period presented as if the new accounting
policy had always been applied. The net effect of the adjustments is
adjusted to the opening balance of equity for the earliest period presented.
• When it is difficult to distinguish a change in an accounting policy from a
change in an accounting estimate, the change is treated as a change in
accounting estimate.

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 Changes in
Accounting Estimates

╸ result from new information or new developments and, accordingly,

are not correction of errors.
Examples include changes in estimates of: bad debts, provisions,
useful life of an asset, residual value, and the like.
• A change in accounting estimates is accounted for by prospective
application. Prospective application involves recognizing the effect of
the change in surplus or deficit either in the (a) period of change or (b)
period of change and future periods, if the change affects both.

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 Errors

include mathematical mistakes, incorrect application of

accounting policies, oversights or misinterpretations of
facts, and fraud. Errors can arise in respect of recognition,
measurement, presentation or disclosure of items in the
financial statements. Financial statements do not comply
with the PPSAS if they contain material errors or immaterial
errors made intentionally.

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 Errors

Errors can be classified as follows:

a. Current period errors - errors committed, and
discovered, in the current year. These are corrected by
correcting entries within the same year.
b. Prior period errors - errors committed in prior years that
are discovered in the current year.

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 Errors

These arise from failure to use information that:

i. was available when the prior year's financial statements
were authorized for issue; and
ii. could reasonably be expected to have been obtained and
taken into account when preparing those financial
statements.

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 Errors

• Material prior period errors are corrected by retrospective restatement.

Retrospective restatement involves correcting the prior period errors as
if they have never occurred. The procedures are similar to the
retrospective application for a change in accounting policy
• Retrospective restatement shall be applied as far back as practicable. If
this is not practicable, prior period errors are corrected prospectively.

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 Consolidated and
Separate Financial
Statements
╸ a controlling entity is required to present consolidated
financial statements, except in cases where the controlling
entity is a controlled entity itself and it's securities are not
being traded.
 Consolidated Financial Statements - are the financial
statements of an economic entity (controlling entity and
controlled entities) presented as those of a single entity.

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 Consolidated and
Separate Financial
Statements
 Controlling Entity - is an entity that has one or more
controlled entities.
 Controlled Entity - is an entity, including an unincorporated
entity such as a partnership, which is under the control of
another entity (known as the controlling entity).

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 Consolidated and
Separate Financial
Statements
• All controlled entities shall be consolidated, except for one
that is held to be sold within 12 months from acquisition. A
controlled entity is not excluded from consolidation simply
because its activities are dissimilar to those of the other
entities in the group.

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Control exists if the entity has both the power to govern the financial and operating policies of
another entity and the ability to benefit from the activities of the other entity. Examples of
indicators of control are shown below:

Power Condition Benefit Condition

a. Ownership of majority voting interest
(whether directly or indirectly).
b.
Power to appoint majority of the
members of board of directors.
c. Power to cast majority votes during
board of directors or general meetings.
a. Ability to dissolve the other
entity and obtain significant
residual economic benefits or
bear significant obligations.
b. Ability to extract distributions
of assets from the other entity
and exposure to certain
obligations of the other entity.

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 Consolidation
Procedures

1. Similar items of assets, liabilities, revenue and expenses are

added line by line.
2. The carrying amount of the controlling entity's investment in
the controlled entity is eliminated. The resulting Goodwill is
recognized.
3. The minority interests in the surplus or deficit and net assets
of the controlled entity are recognized and presented
separately.
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 Consolidation
Procedures

• The minority interest in the net assets is presented within

equity but separately from the equity of the controlling
entity. This consists of:
a. The minority interest in the net assets as at the
combination date; and
b. The minority's share in the subsequent changes in the
controlled entity's equity since the combination date

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 Consolidation
Procedures

4. The effects of inter-entity transactions are eliminated in full.

 Separate Financial Statements - are those presented by a controlling
entity, an investor in an associate, or a venturer in a jointly controlled
entity, in which the investments are accounted for on the basis of the
direct net assets/equity interest rather than on the basis of the reported
results and net assets of the investees.

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 Consolidation
Procedures

• In the separate Financial statements, investments in

controlled entities, jointly controlled entities, and associates
are accounted for:
a. Using the equity method; or
b. As a financial instrument (i.e., at fair value).

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Interim Financial
Statements

Government entities prepare interim Financial

statements on a quarterly basis using the same
accounting policies used in annual reports.

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Other Reports

In addition to the financial statements, government entities

are also required to prepare and submit the following
reports:
1. Trial balances (Pre-closing and Post-closing)
2. Other schedules:
a. Regional Breakdown of Income
b. Regional Breakdown of Expenses

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Deadlines on Submission
A. Provincial offices and Operating Units
of Reports

Report Deadline Submit to:

Monthly TBs & SSs 10 days after end of the month
Auditor,
Quarterly FSs, TBs & SSs 10 days after end of the month Regional
Accountant
Yearend FSs, TBs & SSs On or before January 20 of the following year

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Deadlines on Submission
B. Regional/Branch Office
of Reports

Report Deadline Submit to:

Monthly TBs & SSs 10 days after end of the month Regional
Auditor,
Quarterly FSs, TBs & SSs 10 days after end of the month Central Office
Chief
Yearend FSs, TBs & SSs On or before January 31 of the following year Accountant

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 Deadlines on Submission
C. Central/Head/Main Office:
of Reports

Report Deadline Submit to:

Monthly TBs & SSs 10 days after end of the month Regional Auditor,
Central Office
Chief
Quarterly FSs, TBs & SSs 10 days after end of the month
Accountant
FSs, TBs & SSs
COA Auditor,
Yearend (combined Cos, ROs & February 14 of the following year
DBM, COA-GAS
OUs)

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THANK YOU!

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