CHAPTER 6: CONCEPTUAL FRAMEWORK
revenue shall be reported in the same period.
Recognition and Measurement
RECOGNITION
- The Revised Conceptual Framework defines recognition as the
process of capturing for inclusion, in the financial statements an item
that meets the definition of an asset, liability, equity, income or
expense.
Carrying amount
- The amount at which an asset, a liability or equity js recognized in
the statement of financial position is reported
Recognition
- links the elements to the statement of financial position and
statement of financial performance.
The statements are linked because the recognition of an item in one statement
requires the recognition of the same item in another statement.
For example:
- The recognition of income happens simultaneously with the
recognition of an increase in asset or decrease in liability.
- The recognition of expense happens simultaneously with the
recognition of a decrease in asset or increase in liability.
RECOGNITION CRITERIA
- Only items that meet the definition of an asset, a liability or equity
are recognized in the statement of financial position.
- Only items that meet the definition of income or expense are
recognized in the statement of financial performance.
In addition to meeting the definition of an element, items recognized only when
their recognition provides users of financial statements with information that is
both relevant and faithfully represented.
Recognition does not focus anymore on how probable economic benefits will
flow to or from the entity and that the cost can be measured reliably.
An asset or liability and any corresponding income and expenses can exist
even if the probability of inflow or outflow of benefit is low
POINT OF SALE INCOME RECOGNITION
The basic principle of income recognition
- income shall be recognized when earned.
When is income considered to be earned?
With respect to sale of goods in the ordinary course of business, the point of
sale is unquestionably the point of income recognition.
The reason is that 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.
Stated differently, legal title to the goods passes to the buyer at the point of
sale.
Moreover, it is at the point of sale that the entity has transferred control of the
goods to the customer.
However, under certain conditions, income may be recognized at the point of
production, during production and at the point of collection.
EXPENSE RECOGNITION
The basic expense recognition
- expenses are recognized when incurred.
When are expenses incurred?
The expense recognition principle is the application of the matching principle.
The generation of revenue is not without any cost. There has got to be some
cost in earning a revenue.
“There is no gain if there is no pain”.
Matching principle
- It requires that those costs and expenses incurred in earning a
The matching principle has three applications, namely:
1. Cause and effect association
2. Systematic and rational allocation
3. Immediate recognition
1. CAUSE AND EFFECT ASSOCIATION
- Under this principle, the expense is recognized revenue is already
recognized.
This is actually the strict matching concept
- The reason is the presumed direct association of the expense with
specific items of income.
This process, commonly referred to as the “Matching of Cost with Revenue”,
involves the simultaneous or combined recognition of revenue and expenses
that result directly and jointly from the same transactions or events
The best example is the cost of merchandise inventory.
- Such cost is considered as an asset in the meantime that the
merchandise is on hand.
- When the merchandise is sold, the cost thereof is expensed in the
form of “cost of goods sold” because at such time revenue may be
recognized.
Other examples: doubtful accounts, warranty expense and sales commissions.
2. SYSTEMATIC AND RATIONAL ALLOCATION
- Under this principle, some costs are expensed by simply allocating
them over the periods benefited.
The reason for this principle is that the cost incurred will benefit future periods
and that there is an absence of a direct or clear association of the expense
with specific revenue.
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 basis of systematic and allocation
procedures.
Concrete examples: depreciation of property, plant and equipment,
amortization of intangibles, and allocation of prepaid rent, insurance and other
prepayments.
3. IMMEDIATE RECOGNITION
- Under this principle, 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:
a. When an expenditure produces no future economic benefit.
b. When cost incurred does not qualify or ceases to qualify for
recognition as an asset.
Examples: officers' salaries and most administrative expenses, advertising and
most selling expenses, amount to settle lawsuit and worthless intangibles.
Many losses, such as loss from disposal of building, loss from sale of
investments, and casualty loss, are immediately recognized because they are
not directly related to specific revenue.
DERECOGNITION
- The Revised Conceptual Framework defines derecognition as the
removal of all or part of a recognized asset or liability from the
statement of financial position.
- It normally occurs when an item 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 a liability Fair value of liability
- occurs when the entity no longer has a present obligation for all or - is the price that would paid to transfer a liability in an orderly
part of the liability. transaction between market participants at the measurement date.
Fair value can be observed directly
MEASUREMENT - using market price of the asset or liability in an active market.
- it is defined as quantifying in monetary terms the elements in the In cases where fair value cannot be directly measured
Financial statements.
- an entity can use present value of cash flows.
The revised conceptual framework mentions two categories:
Fair value is not adjusted for transaction cost.
1. Historical cost
- The reason is that such cost is a characteristic of the transaction
2. Current value and not of the asset or liability.
B. Value in Use
1. HISTORICAL COST - It is the present value of the cash flows that an entity expects to
- The historical cost or original acquisition cost. derive from the use of an asset and from the ultimate disposal.

The historical cost of an asset - It does not include transaction cost on acquiring the asset but
includes transaction cost on the disposal of the asset.
- if the cost incurred in acquiring or creating the asset comprising the
consideration paid plus transaction cost. - It is an exit price or exit value.

The historical cost of a liability C. Fulfillment Value

- is the consideration received to incur the liability minus transaction - It is the present value of cash that an entity expects to transfer in
cost. paying or settling a liability.

Historical cost - It does not include transaction cost on incurring a liability but
includes transaction cost on fulfillment of a liability.
- it is simply the entry price or entry value to acquire an asset or to
incur a liability. - It is an exit price or exit value.

An application of the historical cost measurement D. Current Cost

- to measure financial asset and financial liability at amortized cost. Current cost of an asset

Amortized cost - is the cost of an equivalent asset at the measurement date

comprising the consideration paid and transaction cost.
- reflects the estimate of future cash flows discounted at a rate
determined at initial recognition. Current cost of a liability

Historical cost updated - is the consideration that would be received less any transaction
cost at measurement date.
1. Historical cost of an asset is updated because of:
Similar to historical cost, current cost is also based on the entry price or entry
a. Depreciation and amortization value but reflects market conditions on measurement date.
b. Payment received as a result of disposing part or all of the asset
Selecting a measurement basis
c. Impairment
In selecting 3 measurement basis for an asset or a liability and for the related
d. Accrual of interest to reflect any financing component of the asset
income and expense
e. Amortized cost measurement of financial asset - it is necessary to consider the nature of the information that the
measurement basis will produce.
2. Historical cost of a liability is updated because of:
- In most cases, no single factor will determine which measurement
a. Payment made or satisfying an obligation to deliver goods basis should be selected.
b. Increase in value of the obligation to transfer economic resources The relative importance of each factor will depend on facts and circumstances.
such that the liability becomes onerous
The information produced by the measurement basis must be useful to the
c. Accrual of interest to reflect any financing component of the liability users of financial statements.
d. Amortized cost measurement of financial liability To achieve this the information must be both relevant and faithfully
represented.

2. CURRENT VALUE Historical cost is the measurement basis most commonly adopted in preparing
financial statements.
Current value includes:
In many situations, it is simpler and less costly to measure historical cost than
a. Fair value it is to measure a current value.
b. Value in use for asset In addition, historical cost is generally well understood and verifiable. IASB did
not mandate a single measurement basis because different measurement
c. Fulfillment value for liability
bases could produce useful information under different circumstances.
d. Current cost CHAPTER 7: CONCEPTUAL FRAMEWORK
Presentation and Disclosure
A. Fair Value
Concepts of Capital
- Fair value is an exit price or exit value.
Fair value of an asset PRESENTATION AND DISCLOSURE
- is the price that would be received to sell an asset in an orderly - an effective communication tool about the information in financial
transaction between market participants at measurement date. statements.
Reporting entity Typically, the statement of financial position and the statement of financial
performance provide summarized o’ condensed information.
- It communicates information about its assets, liabilities, equity,
income and expenses by presenting and disclosing information in More detailed information is provided in the notes to financial statements.
the financial statements.
Effective communication of information in FS
CAPITAL MAINTENANCE
- It makes the information more relevant and contributes to a faithful
representation of an entity's assets liabilities, income and expenses. The financial performance of an entity is determined using two approaches:

- It also enhances the understandability and comparability of 1. The transaction Approach

information in the financial statements.
Effective communication in financial statements
- Is supported by not duplicating information in different parts of the
financial statements.
Duplication
- usually unnecessary and can make financial statements less
understandable.
CLASSIFICATION
- is the sorting of assets, liabilities, equity, income and expenses on
the basis of shared or similar characteristics.
Classifying dissimilar assets, liabilities, equity, income and expenses
- it can obscure relevant information reduce understandability and
comparability and may not provide a faithful representation of
financial information.
- is the traditional preparation of an income statement.
2. The Capital Maintenance Approach
- means that net income occurs only after the capital used from the
beginning of the period is maintained.
Net Income
- is the amount an entity can distribute to its owners and be as “well-
off’ at the end of the year as at the beginning.
The distinction between Return of Capital and Return on Capital is important to
the understanding of net income.
Return on Capital
- Shareholders invest in entity to earn this type of capital in which it is
an amount in excess of their original investment.
Return of capital
- is an erosion of the capital invested in the entity.

For example, it could be appropriate to classify an asset or a liability into The Conceptual Framework considered Two Concepts of Capital Maintenance
current and noncurrent. or well-offness:

It may be necessary to classify components of equity separately if such A. Financial Capital

components are subject to legal, regulatory and other requirements. - Under this concept, such as invested money or invested purchasing
Should be disclosed separately power, capital is synonymous with net assets or equity of the entity.

- ordinary share capital, preference share capital, share premium and - is the monetary amount of the net assets contributed by
retained earnings shareholders and the amount of the increase in net assets resulting
from earnings retained by the entity.
- is the traditional concept based on historical cost and adopted by
Classification of income and expenses most entities.
Income and expenses
- classified as components of profit loss and components of other Net income under the Financial Capital Concept
comprehensive income.
- net income occurs the nominal amount of the net assets at the end
Statement of financial performance of the year exceeds the nominal amount of the net assets at the
beginning of the period, after excluding distributions to and
- The Revised Conceptual Framework has introduced this term to contributions by owners during the period.
refer to the statement of profit or loss together with the statement
presenting other comprehensive income.
The Statement of profit or loss Illustration

- is the primary source of information about an entity's financial The following assets, liabilities and other financial data pertain to the current
performance for the reporting period. year:

- All income and expenses should be appropriately classified and January 1 December 31
included in the statement of profit or loss. Total assets 2,500,000
1,500,000
However, there are certain items of income and expenses that are presented
Total liabilities 1,000,000 1,200,000
outside of profit or loss but included in other comprehensive income.
Additional investments during the year 400,000
The components of other comprehensive income are subsequently recycled or
reclassified to profit or loss or retained earnings. Dividends paid during the year 300,000

Computation of net income

AGGREGATION
Net assets - December 31 1,300,000
- is the adding together of assets, liabilities, equity, income and
expenses that have similar or shared characteristics and are Add: Dividends paid 300,000
included in the same classification.
Total 1,600,000
- It makes information more useful by summarizing a large volume of
detail. However, aggregation may conceal some of the detail. Less: Net assets - January 1 500,000

Hence, a balance should be made so that relevant information is not obscured Additional investments 400,000 900,000
either by a large amount of insignificant detail or by excessive aggregation. Net income 700,000
Note that the amount of net assets is “the excess of total assets over the total
liabilities”.
This' is the reason this approach is also known as the ”Net Assets Approach”.
B. Physical Capital
- is the quantitative measure of the physical productive capacity to
produce goods and services.
- This concept requires that productive assets be measured at current
cost, rather than historical cost.
- is equal to the net assets of the entity expressed in terms of current
cost.
The physical productive capacity
- may be based on for example, units of output per day or physical
capacity of productive assets to produce goods and services.
Productive Assets
- include inventories and property, plant and equipment.
- The current costs for these productive assets must be maintained in
order that physical capital is also maintained.
Net Income under Physical Concept of Capital
- should be adopted if the main concern of users is the operating
capability of the entity, meaning, the resource or fund needed to
achieve that operating capability or capacity.
- 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.

Illustration
Assume in the previously given illustration, the net assets of P500,000 on
January 1 had a current cost of P800,000 by reason of inflationary condition.
Net assets - December 31 1,300,000
Add: Dividends paid 300,000
Total 1,600,000
Less: Net assets at current cost, January 1 800,000

Additional investments 400,000 1,200,000

Net income 400,000

CHAPTER 8: PRESENTATION OF FINANCIAL

STATEMENTS - Statement of Financial Position
PAS 1

FINANCIAL STATEMENTS
- are the means by which the information, accumulated and
processed in financial accounting is periodically communicated to
the users.
- are the end product or main output of the financial accounting
process.
 - are a structured financial representation of the financial position and Definition of asset
financial performance of an entity.
Asset
- is an economic resource controlled by an entity as a result of past
General purpose financial statements event.
An entity shall prepare and present general purpose financial statements in - An economic resource is a right that has the potential to produce
accordance with the International Financial Reporting Standards. economic benefits.
General purpose financial statements or simply referred to as financial Classification of assets
statements
Assets are classified only into two, namely current assets and noncurrent
- are those intended to meet the needs of users who are not in a assets.
position to require an entity to prepare reports tailored to their
particular information needs. When an entity supplies goods or services within a clearly identifiable
operating cycle
- In other words, GPFS are directed to all common users and not to
specific users. - the separate classification of current and noncurrent assets is a
useful information by distinguishing between net assets that are
continuously circulating as working capital from the net assets used
Components of financial statements in long-term operations.
A complete set of financial statements comprises the following components: The operating cycle of an entity
1. Statement of Financial Position - is the time between the acquisition of assets for processing and
their realization in cash or cash equivalents.
2. Income Statement
When the entity's normal operating cycle is not clearly identifiable
3. Statement of Comprehensive Income
- the duration is assumed to be twelve months.
4. Statement of Changes in Equity
5. Statement of Cash Flows
Current assets
6. Notes, comprising a summary of significant accountin, accounting PAS 1, paragraph 66, provides that an entity shall classify an asset as current
policies and other explanatory notes when:
a. The asset is cash or cash equivalent unless the asset is restricted to
Objective of financial statements settle a liability for more than twelve months after the reporting
period.
- is to provide information about the financial position, financial
performance and cash flows of an entity that is useful to a wide b. The entity holds the asset primarily for the purpose of trading.
range of users in making economic decisions.
c. The entity expects to realize the asset within twelve months after the
Financial Statements reporting period.
- also show the results of the management's stewardship of the d. The entity expects to realize the asset or intends to sell or consume
resources entrusted to it. it within the entity's normal operating cycle.
To meet this objective, financial statements provide information about the Presentation of current assets
following:
Current assets are usually listed in the order of liquidity PAS 1, paragraph 54,
a. Assets provides that as a minimum, the line items under current assets are:
b. Liabilities
c. Equity a. Cash and cash equivalents
d. Income and expenses, including gains and losses b. Financial assets at fair value such as trading securities and other
e. Contributions by and distributions to owners in their capacity as investments in quoted equity instruments
owners.
f. Cash flows c. Trade and other receivables
d. Inventories
Frequency of reporting
e. Prepaid expenses
- Financial statements shall be presented at least annually.
When an entity's end of reporting period changes and financial statements are
presented for a period longer or shorter than one year, an entity shall disclose: Noncurrent assets

a. The period covered by the financial statements. The caption “noncurrent assets'" is a residual definition.

b. The reason for using a longer or shorter period. PAS 1, paragraph 66, simply states that “an entity shall classify all other
assets not classified as current as noncurrent".
c. The fact that amounts presented in the financial statements are not In other words, what is not included in the definition of current assets is
entirely comparable. deemed excluded. All others are classified as noncurrent assets. Accordingly,
STATEMENT OF FINANCIAL POSITION noncurrent assets include the following:
a. Property, plant and equipment
- is a formal statement showing the three elements comprising b. Long-term investments
financial position, namely assets, liabilities and equity. c. Intangible assets
d. Deferred tax assets
Investors, creditors and other statement users analyze the statement of e. Other noncurrent assets
financial position to evaluate such factors as:
1. liquidity Property, plant and equipment
2. solvency - PAS 16, paragraph 6, defines property, plant and equipment as
''tangible assets which are held by an entity for use in production or
3. and the need of the entity for additional financing. supply of goods and services, for rental to others, or for
administrative purposes, and are expected to be used during more
than one period”.
Examples of property, plant and equipment: No objection can be raised if the trade accounts and notes payable are
- land, building, machinery, equipment, furniture, fixtures, patterns, separately presented.
molds, dies and tools.
- Most property, plant and equipment, except land, are presented at
cost less accumulated depreciation. Noncurrent liabilities
- The term “noncurrent liabilities" is also a residual definition.
Long-term investments
PAS 1, paragraph 69, provides that all liabilities not classified as current are
- The International Accounting Standards Committee defines classified as noncurrent.
investment as “an asset held by an entity for the accretion of wealth
through capital distribution, such as interest, royalties, dividends and a. Noncurrent portion of long-term debt
rentals, for capital appreciation or for other benefits to the investing b. Finance lease liability
entity such as those obtained through trading relationships .
c. Deferred tax liability

Intangible assets d. Long-term obligations to company officers

- An intangible asset is simply defined as an identifiable nonmonetary e. Long-term deferred revenue

asset without physical substance.
The common examples of identifiable intangible assets:
- patent, franchise, copyright, lease right, trademark and computer
software.
An example of an unidentifiable intangible asset is goodwill.
Other noncurrent assets
- are those assets that do not fit into the definition of the previously
mentioned noncurrent assets.
Examples of other noncurrent assets:
- long-term advances to officers, directors, shareholders and
employees, or abandoned property and long-term refundable
deposit.
Currently maturing long-term debt
A liability which is due to be settled within twelve months after the reporting
period is classified as current, even if：
a. The original term was for a period longer than twelve months.
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.
However, if the refinancing on a long-term basis is completed on or before the
end of the reporting period, the refinancing is an adjusting event and therefore
the obligation is classified as noncurrent.
Discretion to refinance

Definition of liability If the entity has the discretion to refinance or roll over an obligation for at least
twelve months after the reporting period under an existing loan facility
Liability
- the obligation is classified as noncurrent even if it would otherwise
- is a present obligation of an entity to transfer an economic resource be due within a shorter period.
as a result of past event.
The reason for this treatment
An obligation
- is that such obligation is considered to form part of the entity’s long-
- is a duty or responsibility that an entity has no practical ability to term refinancing because the entity has an unconditional right under
avoid. the existing loan agreement to defer payment for at least twelve
months after the end of the reporting period.
- can either be legal or constructive.
Note that the refinancing or rolling over must be at the discretion of the entity.
A liability is classified as current and noncurrent.
Otherwise, if the refinancing or rolling over is not at the discretion of the entity,
Current liabilities the obligation is classified as a current liability.
PAS 1, paragraph 69, provides that an entity shall classify a liability as current
when:
Covenants
a. The entity expects to settle the liability within the entity's normal
operating cycle. - are often attached to borrowing agreements which represent
undertakings by the borrower.
b. The entity holds the liability primarily for the purpose of trading.
- are actually restrictions on the borrower as to undertaking further
c. The liability is due to be settled within twelve months after the borrowings, paying dividends, maintaining specified level of working
reporting period. capital and so forth.
d. The entity does not have an unconditional right to defer settlement Under these covenants, if certain conditions relating to the borrower's financial
of the liability for at least twelve months after the reporting period. situation are breached, the liability becomes payable on demand.
Presentation of current liabilities Effect of breach of covenants ,
PAS 1, paragraph 54, provides that as a minimum, the face of the statement of - PAS 1, paragraph 74, provides that the liability is classified as
financial position shall include the following line items for current liabilities: current even if the lender has agreed, after the reporting period and
a. Trade and other payables before the statements are authorized for issue, not to demand
payment as a consequence of the breach.
b. Current provisions
- This liability is classified as current because at reporting date the
c. Short-term borrowing borrower does not have an unconditional right to defer payment for
at least twelve months after the reporting period.
d. Current portion of long-term debt
- However, Paragraph 75 provides that the liability is classified as
e. Current tax liability noncurrent if the lender has agreed on or before the end of reporting
The term "trade and other payables" period to provide a grace period ending at least twelve months after
the end of reporting period.
- is a line item for accounts payable, notes payable, accrued interest
on note payable, dividends payable and accrued expenses.
Definition of equity
Equity - As the title suggests, the presentation follows that of an account,
meaning, the assets are shown on the left side and the liabilities and
- is the residual interest in the assets of the entity after deducting all of equity on the right side of the statement of financial position.
its liabilities.
The following is an illustration of the two forms of statement of financial
Simply stated, equity means “net assets or total assets minus liabilities. position.
The terms used in reporting the equity of an entity depending on the form of REPORT FORM
the business organization are:
a. Owner’s equity in a proprietorship (Share Capital)
b. Partners’ equity in a partnership (Premium or Surplus)
c. Stockholders’ equity or shareholders" equity in a corporation
(Retained Earnings
However, the term equity may simply be used for all business entities.
Owners.
- Under PAS 1, paragraph 7，the holders of instruments classified as
equity
Shareholders’ equity
- is the residual interest of owners in the net assets of a corporation
measured by the excess of assets over liabilities.
Generally, the elements constituting shareholders’ equity with their equivalent
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

Notes to financial statements

- provide narrative description or disaggregation of items presented in
the financial statements and information about items that do not
qualify for recognition.
- Notes 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.
- In other words, these are used to report information that does not fit
into the body of the financial statements in order to enhance the
understandability of the financial statements.

The purpose of the notes to financial statements

- is "to provide the necessary disclosures required by Philippine
Financial Reporting Standards."

Forms of statement of financial position

In practice, there are two customary forms in presenting the statement of
financial position, namely:
Report form
- This form sets forth the three major sections in a downward
sequence of assets, liabilities and equity.
Account form
Line items in statement of financial position
PAS 1, paragraph 54, states that as a minimum, the face of the statement of
financial position shall include the following He items:
1. Cash and cash equivalents
2. Financial assets (other than 1, 3 and 6)
3. Trade and other receivables
4. Inventories
5. Property, plant and equipment
6. Investment in associates accounted for by the equity method
7. Intangible assets
8. Investment property
9. Biological assets
10. Total of assets classified as held for sale and assets included in
disposal group classified as held for sale
11. Trade and other payables
12. Current tax liability
13. Deferred tax asset and deferred tax liability
14. Provisions
15. Financial liabilities (other than 11 and 14)
16. Liabilities included in disposal group classified as held for sale
17. Noncontrolling interest
18. Share capital and reserves
In the Philippines, the common practice is to present current assets before
noncurrent assets, current liabilities before noncurrent liabilities, and equity
after liabilities. Other formats may be equally appropriate provided the
distinction is clear. This is in accordance with paragraph 7 of the Preface to
PAS 1.
PAS 1, paragraph 57
- provides that the standard does not prescribe the order or format in
which items are to be presented in the statement of financial
position.
Note that the format of the statement of financial position as illustrated in the
appendix to IAS 1 presents noncurrent assets before current assets, equity
before liabilities, and noncurrent liabilities before current liabilities. This may be
the practice in other jurisdiction, like the United Kingdom.
CHAPTER 9: PRESENTATION OF FINANCIAL
STATEMENTS - Statement of Comprehensive Income
PAS 1
INCOME STATEMENT
- is a formal statement showing the financial performance of an entity
for a given period of time.
The 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.
- It is also known as the results of operations of the entity.
The transaction approach
- It is the traditional preparation of the income statement in conformity
with accounting standards.
The income statement for a period
- presents the income, expenses, gains, losses and net income or
loss recognized during the period.
Information about financial performance
- is useful in predicting future performance and ability to generate
future cash flows.
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.
Accordingly, comprehensive income includes:
a. Components of profit or loss
b. Components of other comprehensive income
PROFIT OR LOSS
- it is the total of income less expenses, excluding the components of
other comprehensive income.
- In other words, this is the "bottom line" in the traditional income
statement.
An entity may use "net income” or "net loss" to describe profit or loss.
OTHER COMPREHENSIVE INCOME (OCI)
- comprises items of income and expenses including reclassification
adjustments that are not recognized in profit or loss as required or
permitted by Philippine Financial Reporting Standards.
The components of "other comprehensive income" include the following:
PRESENTATION OF OTHER COMPREHENSIVE INCOME
PAS 1, paragraph 82A, provides that the statement of comprehensive income
shall present line items for amounts of other comprehensive income during the
period classified by nature.
The line items for amounts of OCI shall be grouped as follows:
a. OCI that will be reclassified subsequently to profit or loss when
specific conditions are met.
b. OCI that will not be reclassified subsequently to profit or loss but to
retained earnings.
OCI THAT WILL BE RECLASSIFIED TO PROFIT OR LOSS
a. Unrealized gain or loss on debt investment measured at fair value
through other comprehensive income
b. Gain or loss from translating financial statements of a foreign
operation
c. Unrealized gain or loss on derivative contracts designated as cash
flow hedge
OCI THAT WILL BE RECLASSIFIED TO RETAINED EARNINGS
a. Unrealized gain or loss on equity investment measured at fair value
through other comprehensive income
The Application Guidance of PFRS 9, paragraph B5. 7.1, provides that such
unrealized gain or loss is reclassified to retained earnings upon disposal of the
investment.
b. Revaluation surplus during the year
The realization of the revaluation surplus is through retained earnings.
c. Remeasure merits of defined benefit plan, including actuarial gain or
loss.
The remeasurements are not reclassified subsequently but are permanently
excluded from profit or loss.
However, the remeasurements may be transferred within equity or retained
earnings.
d. Change in fair value attributable to credit risk of a financial liability
designated at fair value through profit or loss.
Such gain or loss from change in fair value attributable to credit risk of a
financial liability may be transferred within equity or retained earnings.
PRESENTATION OF COMPREHENSIVE INCOME
An entity has two 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

1. Unrealized gain or loss on equity investment measured at fair value - This is the combined statement showing the components of profit or
through other comprehensive income loss and components of profit or loss and components of other
comprehensive income in a singles statement.
2. Unrealized gain or loss on debt investment measured at fair value
through other comprehensive income. - The revised conceptual framework calls this single statement as of
financial performance
3. Gain or loss from translation of the financial statements of a foreign
operation SOURCES OF INCOME
4. Revaluation surplus during the year. a. Sales of merchandise to customers
5. Unrealized gain or loss from derivative contract designated as cash - The income from sales shall include all sales to customers during
flow hedge the period.
6. "Remeasurements” of defined benefit plan, including actuarial gain - Sales returns, allowances and discounts shall be deducted from
or loss. gross sales to arrive at net sales.
7. Change in fair value attributable to credit risk of a financial liability b. Rendering of services
designated at fair value through profit or loss.
- Income from rendering of services, among others, includes
professional fees, media advertising commissions, insurance
 agency commissions, admission fees for artistic performance and j. Amortization of intangible assets
tuition fees.
c. Use of entity resources Other expenses
- This income category includes interest, rent, royalty and dividend
- are those expenses which are not directly related to the selling and
income.
administrative function.
d. Disposal of resources other than products
Examples include:
- Examples include gain on sale of investments, gain sale of property,
plant and equipment and gain on sale intangible assets.
a. Loss on sale of trading investments
b. Loss on disposal of property, plant and equipment
COMPONENTS OF EXPENSE c. Loss on sale of noncurrent investment
d.Casualty loss - flood, earthquake, fire
a. Cost of goods sold or cost of sales

b. Distribution costs or selling expenses NO MORE EXTRAORDINARY ITEMS

- Pas 1, paragraph 87，specifically mandates that an entity shall not
c. Administrative expenses present any items of income and expense as extraordinary either on
the face of the income 'statement or statement of comprehensive
d. Other expenses income or in the notes.
e. Income tax expense
Line items
PAS 1, paragraph 82, provides that as a minimum, the income statement and
statement of comprehensive income shall include the following line items:
a. Revenue
b. Gain and loss, from the 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 amortized
cost to fair value profit or loss
f. Gain or loss on the reclassification of financial asset from fair value
other comprehensive income to fair value profit or loss.
g. Income tax expense
h. A single amount comprising discontinued operations
i. Profit or loss for the period
j. Total other comprehensive income
k. Comprehensive income for the period being the total of profit or loss
and other comprehensive income.
The following items shall be disclosed on the face of the income statement and
statement of comprehensive income:
a. Profit or loss for the period attributable to noncontrolling interest and
owners of the parent
b. Total comprehensive income for the period attributable to
CLASSIFICATIONS OF EXPENSES noncontrolling interest and owners of the parent.

Distribution costs Forms of income statement

PAS 1, paragraph 99, provides that an entity shall present an analysis of
- constitute costs which are directly related to selling, advertising and
delivery of goods to customers. expenses recognized in profit or loss using a classification based on either the
function of expenses or their nature within the entity, whichever provides
Distribution costs ordinarily include: information that is reliable and more relevant.

a. Salesmen's salaries The income statement may be presented in two ways:

b. Salesmen's commissions
c. Traveling and marketing expenses 1. Functional presentation
d. Advertising and publicity - This form classifies expenses according to their function as part of
e. Freight out cost of goods sold, distribution costs, administrative expenses and
f. Depreciation of delivery equipment and store equipment other expenses.
- It is also known as the cost of goods sold method
Administrative expenses - An entity classifying expenses by function shall disclose additional
information on the nature of expenses, including depreciation,
- constitute cost of administering the business. amortization and employee benefit costs.

- It originally includes all operating expenses not related to selling and 2. Natural presentation
cost of goods sold. - It is referred to as the nature of expense method.
- Under this form, expenses are aggregated according to their nature
Examples include: and not allocated among the various functions within the entity.
- In other words, the expenses are no longer classified as cost of
a. Doubtful accounts
b. Office salaries goods sold, distribution costs, administrative expenses and other
c. Expenses of general executives expenses.
d. Expenses of general accounting and credit department
e. Office supplies used The expenses which are of the same nature are grouped or aggregated and
f. Certain taxes presented as one item.
g. Contribution
h. Professional fees For example, depreciation, purchases of raw materials, transport costs,
i. Depreciation of office building and office equipment employee benefit costs and advertising costs are presented separately.
Which form of income statement?
- PAS 1 does not prescribe any format.

- 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.

Statement of Comprehensive Income

- As stated earlier, in addition to the income statement, a statement of
comprehensive income is also prepared in order to show the total
comprehensive income.
- it starts with the profit or loss as shown in the income statement plus
or minus the components of other comprehensive

The purpose of Statement of Comprehensive Income

- is to provide a more comprehensive information on financial
performance measured more broadly than the income as
traditionally computed.

Illustration of Statement and Comprehensive Income:

Statement of Retained Earnings

Comprehensive Income
- for a period includes the net income or loss for the period plus or
minus the components of other comprehensive income.
However, the comprehensive income of P1,600,000 is not carried to retained
earnings.
Only the net income of P1,550,000 is included in the determination of retained
earnings unappropriated.
- It shows the changes affecting directly the retained earnings of an
entity and relates the income statement to the statement of financial
position.
The important data affecting the retained earnings that should be clearly
disclosed in the statement of retained earnings are:
a. Profit or loss for the period
b. Prior period errors
c. Dividends declared and paid to shareholders
d. Effect of change in accounting policy
e. Appropriation of retained earnings

The net other comprehensive income of P50,000 is carried to ”reserves" or

shown separately in the statement of changes in equity.

Single Statement of Comprehensive Income

- Another option in presenting the components of profit or loss and

components of other comprehensive income is to prepare a single
statement of comprehensive income.

- It is the combined income statement and statement of

comprehensive income.

Using the preceding data, the single statement of comprehensive income

following the "functional presentation may appear as follows:
Statement of changes in equity
- is a basic statement that shows the movements in the
elements or components of the shareholders’ equity.

The statement of retained earnings

- is no longer a required basic statement but it is a part of
the statement of changes in equity.

An entity shall present a statement of changes in equity showing the

following:
1. Comprehensive income for the period.
2. For each component of equity, the effects of changes in
accounting policies and corrections of errors.
3. For each component of equity, a reconciliation between
the carrying amount at the beginning and end of the
period, separately disclosing changes from:
a. Profit or loss
b. Each item of other comprehensive income
c. Transactions with owners in their capacity as owners
showing separately contributions by and
distributions to owners.

The preparation and a more detailed discussion of the statement of

financial position, income statement, statement of comprehensive income and
statement of changes in equity are taken up exhaustively in Intermediate
Accounting Volume Three.
CHAPTER 10: STATEMENT OF CASH FLOWS
PAS 1
STATEMENT OF CASH FLOW
- is a component of financial statements summarizing the operating,
investing and financing activities of an entity.
- In simple language, provides information about the cash receipts
and cash payments of an entity during a period.
An entity shall prepare a statement of cash flows and present it as an integral
part of financial statements for each period for which financial statements are
presented
The primary purpose of a statement of cash flows
- is to provide relevant information about cash receipts and cash
Payments of an entity during a period
CASH AND CASH EQUIVALENTS
- The statement of cash flows is designed to provide information
about the change in an entity's cash and cash equivalents.
Cash comprises cash on hand and demand deposits.
Cash equivalents
- are 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.
PAS 7, paragraph 7, provides that an investment normally qualifies as a cash
equivalent only when it has a short maturity of three months or less from date
of acquisition.
In other words, the investment must be acquired three months or less before
the date of maturity.
Examples of cash equivalents
a. Three-month BSP treasury bill
b. Three-year BSP treasury bill purchased three months before date of
maturity
c. Three-month time deposit
d. Three-month money market instrument or commercial paper
CLASSIFICATION OF CASH FLOWS
Cash flows
- are inflows and outflows of cash and cash equivalents
The statement of cash flows shall report cash flows during the period classified
as operating, investing and financing
1. OPERATING ACTIVITIES
- are the cash flows derived primarily from the principal revenue
producing activities of the entity.
- In other words, operating activities generally result from transactions
and other events that enter into the determination of net income or
loss.
Examples of cash flows from operating activities are:
a. Cash receipts from sale of goods and rendering of services
b. Cash receipts from royalties, rental, fees, commissions and other
revenue
c. Cash payments to suppliers for goods and services
d. Cash payments for selling, administrative and other expenses
e. Cash receipts and cash payments of an insurance entity for
premiums and claims, annuities and other policy benefits
f. Cash payments or refunds of income taxes unless specifically
identified with financing and investing activities
g. Cash receipts and payments for securities held for trading
TRADING SECURITIES
PAS 7, paragraph 15, provides that cash flows arising from the purchase and
sale of dealing or trading securities are classified as operating activities.
Similarly, cash advances and loans made by a financial institution are usually
classified as operating activities since they relate to the main revenue
producing activity of that entity.
2. INVESTING ACTIVITIES
- are the cash flows derived from the acquisition and disposal of long-
term assets and other investment not included in cash equivalent.
- it includes cash flows from transactions involving nonoperating
assets.
Examples of cash flows from investing activities:
a. Cash payments to acquire property, plant and equipment intangibles
and other long-term assets
b. Cash receipts from sales of property, plant and equipment，
intangibles and other long-term assets
c. Cash payments to acquire equity or debt instruments of other
entities (current and long-term investments)
d. Cash receipts from sales of equity or debt instruments of other
entities
e. Cash advances and loans to other parties other than advances and
loans made by financial institution
f. Cash receipts from repayment of advances and loans made to other
parties
g. Cash payments for futures contract, forward contract，option
contract and swap contract
h. Cash receipts from futures contract, forward contract, option
contract and swap contract
3. FINANCING ACTIVITIES
- are the cash flows derived from the equity capital and borrowings of
the entity.
In other words, financing activities are the cash flows that result from
transactions:
a. Between the entity and the owners - equity financing
b. Between the entity and the creditors — debt financing
Financing activities include the cash flows from transactions involving nontrade
liabilities and equity of an entity.
Examples of cash flows from financing activities:
a. Cash receipts from issuance of ordinary and preference shares
b. Cash payments to acquire treasury shares
c. Cash receipts from issuing debentures, loans, notes, bonds,
mortgages, and other short or long term borrowings
d. Cash payments for amounts borrowed
e. Cash payments by a lessee for the reduction of the outstanding
principal lease liability
Cash payments to settle such obligations as trade accounts and notes
payable, income tax payable, accrued expenses are operating activities, not
financing activities.
NONCASH TRANSACTIONS
Pas 7, paragraph 43, provides that investing and financing
transaction that do not require use of cash and or cash equivalents shall be
excluded from the statement of cash flows.
Noncash investing and financing transactions
- shall be disclosed elsewhere in the financial statements either in the
notes to financial statements or in a separate schedule or in a way
that provides all relevant information about these transactions.
The statement of cash flows is strictly a cash concept.
Accordingly, the following the following noncash transactions are disclosed
separately:
a. Acquisition of asset by assuming directly related liability
b. Acquisition of asset by issuing share capital
c. Acquisition of asset by issuing bonds payable
d. Conversion of bonds payable into share capital
e. Conversion of preference shares into ordinary shares
INTEREST
PAS 7, paragraph 33, provides that interest paid and interest
received shall be classified as operating cash flows because such items enter
into the determination of net income or loss.
Alternatively, interest paid may be classified as financing cash flow because it
is a cost of obtaining financial resources
.
Alternatively, interest received may be classified as investing cash flow
because it is a return on investment.
For a financial institution, interest paid and interest received are usually
classified as operating cash flows.

DIVIDENDS

Pas 7, paragraph 33, provides that dividend received shall be

classified as operating cash flow because it enters into the determination of
net income.

Alternatively, dividend received may be classified as investing cash flow

because it is a return on investment.

Pas 7, paragraph 34, provides that dividend paid shall be classified

as financing cash flow because it is a cost of obtaining financial resources.

Alternatively, dividend paid may be classified as operating cash flow in order to

assist users to determine the ability of the entity to pay dividends out of
operating cash flows.

INCOME TAXES

PAS 7, paragraph 35, provides that cash flows arising from income
taxes shall be separately disclosed as cash flows from operating activities
unless they can be specifically identified with investing and financing activities.

Tax cash flows

- are often difficult to match to the originating underlying transaction,
so most of the time all tax cash flows are classified as arising from
operating activities.

Cash receipts
- are cash provided and therefore increase cash and cash
equivalents.

Cash payments
- are cash used and therefore decrease cash and cash equivalents

The preparation of statement of cash flows is discussed extensively in

Intermediate Accounting Volume Three.