PRESENTATION AND DISCLOSURE

The presentation and disclosure can be an effective communication tool about the
information in financial statements.

A reporting entity communicates information about its assets, liabilities, equity, income
and expenses by presenting and disclosing information in the financial statements.

Effective communication of information in financial statements makes the information

more relevant and contributes to a faithful representation of an entity's assets
liabilities, income and expenses.

Effective communication of information in financial statements also enhances the

understandability and comparability of information in the financial statements.

Effective communication in financial statements is supported by not duplicating

information in different •parts of the financial statements.
Duplication is usually unnecessary and can make financial statements less understandable.

Classification
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 can obscure relevant
information, reduce understandability and comparability and may not provide a faithful
representation of financial information.

For example, it could be appropriate to classify an asset or a liability into current and
noncurrent.

It may be necessary to classify components of equity separately if such components are

subject to legal, regulatory and other requirements.

Thus, ordinary share capital, preference share capital, share premium and retained
earnings should be disclosed separately,

Classification of income and expenses

Income and expenses are classified as components of profit loss and components of other
comprehensive Income.

The Revised Conceptual Framework has introduced the term statement of financial
performance to refer to the statement of profit or loss together with the statement
presenting other comprehensive income,
The statement of profit or loss is the primary Source of information about an entity's
financial performance for the reporting period.

All income and expenses should be appropriately classified and included in the statement
of profit or loss.

However, there are certain items of income and expenses that are presented outside of
profit or loss but included in other comprehensive income.

The components of other comprehensive income are subsequently recycled or reclassified

to profit or loss or retained earnings.

Aggregation

Aggregation is the adding together of assets, liabilities, equity, income and expenses that
have similar or shared characteristics and are included in the same classification.

Aggregation makes information more useful by summarizing a large volume of detail.

However, aggregation may conceal some of the detail. Hence, a balance should be made so
that relevant information is not obscured either by a large amount of insignificant detail
or by excessive aggregation. Typically, the statement of financial position and the
statement of financial performance provide summarized or condensed information.

More detailed information is provided in the notes to financial statements.

CAPITAL MAINTENANCE
The financial performance of an entity is determined using two approaches, namely
transaction approach and capital maintenance approach.

The transaction approach is the traditional preparation of an income statement.

The capital maintenance approach means that net income occurs only after the capital
used from the beginning of the period is maintained.

In other words, 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.

Shareholders invest in entity to earn a return on capital or an amount in excess of their

original investment.

Return of capital is an erosion of the capital invested in the entity.

The Conceptual Framework considered two concepts of capital maintenance or well-
offness, namely financial capital and physical capital.

Financial capital
Under a financial capital concept, such as invested money or invested purchasing power,
capital is synonymous with net assets or equity of the entity.

Financial capital is the monetary amount of the net assets contributed by shareholders
and the amount of the increase in net assets resulting from earnings retained by the
entity.

Financial capital is the traditional concept based on historical cost and adopted by most
entities.

Net income under financial capital

Under the financial capital concept, net income occurs "when the nominal amount of the
net assets at the end of the year exceeds the nominal amount of the net assets at the
beginning of the period, after excluding distributions to and contributions by owners
during the period.”

Illustration
The following assets, liabilities and other financial data pertain to the current year:

January 1 December 31
Total assets 1,500,000 2,500,000
Total liabilities 1,000,000 1,200,000
Additional investments during the year 400,000
Dividend paid during the year 300,000

Computation of net income

Net assets – December 31 1,300,000

Add: Dividends paid 300,000
Total 1,600,000 Note that the
Less: Net assets – January 1 500,000 amount of net
Additional investments 400,000 900.000 assets is "the
Net income 700,000 excess of total
assets over the
total liabilities"
This is the reason this approach is also known as the net assets approach.
Physical capital
Physical capital is the quantitative measure of the physical capacity to produce goods and
services.
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. This concept
requires that productive assets be measured at current cost, rather than historical cost.
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. Accordingly, physical capital is equal to the net assets of the
entity expressed in terms of current cost.

The 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
800,000
1
Additional investments 400,000 1.200.000
Net income 400,000