Conceptual Framework and Accounting Standards (FAR2)

Hand out: PAS 1- Presentation of Financial Statements

Components of a Set of Financial Statements:

1. Statement of Financial Position 5. Statement of Cash Flows
2. Income Statement 6. Notes, comprising a summary of significant accounting
3. Statement of Comprehensive Income policies and other explanatory notes
4. Statement of Changes in Equity

Responsibility for Financial Statements

− The management of an entity has the primary responsibility for:
(1) preparation and presentation of financial statements (2) internal control over financial reporting
(3) going concern assessment (4) oversight over financial reporting process; and
(5) review and approval of financial statements

− The responsibilities are expressly stated in a document called Statement of Management’s Responsibility for Financial Statements,
which is attached to the financial statements as a cover letter. This document is signed by the entity’s:
(1) Chairman of the Board (or equivalent) (2) CEO (or equivalent) and (3) CFO, (or equivalent)

Objectives of Financial Statements:

Primary- To provide information about the financial position, financial performance and cash flows of an entity that is useful to provide to a
wide range of users in making economic decisions. (same in 2018 Framework)
Secondary- to show results of management’s stewardship over the entity’s resources.

General Features of Financial Statements

1. Fair Presentation and compliance with PFRS
Requirements an entity must follow to achieve fair presentation
a. To select and apply accounting policies in accordance with PFRS
b. To present information, including accounting policies, in a manner that provides relevant and faithfully represented financial
information.
c. To provide additional disclosures necessary for the users to understand the entity’s financial statements.
An entity cannot rectify inappropriate accounting policies either by disclosure of the accounting policies used or by notes or explanatory
information.
2. Going Concern- derives definition from Conceptual Framework
- Also known as continuity assumption
- Because of this, historical cost measurement base arises and thus, this becomes the foundation of cost principle.
- When upon assessment, it becomes evident that there are material uncertainties regarding the ability of the entity to continue as going
concern, those uncertainties shall be fully disclosed.
- If the financial statements are not prepared on a going concern assumption, such fact shall be disclosed together with the measurement
basis and the reason therefore.
3. Accrual Basis- same concepts are observed as compared to the Conceptual Framework.
4. Materiality and Aggregation
- Materiality dictates that an entity does not need to provide a specific disclosure required by PFRS if the information is not
material.
- Example of application of materiality is treating small expenditures as expense instead of treating as asset which will later be
depreciated.
- Another example is the common practice of entities of rounding amounts.
- Materiality is relativity in a sense that what is material for one entity may be immaterial for another.
Group Similar Items → After grouping, is the group material? No → Aggregate it with other immaterial groups
Yes↓
Report that group separately
Factors related to exercise of judgment in determining materiality:
a. Relative size of the item b. Nature of the item
5. Offsetting- same concepts are observed as compared to the Conceptual Framework.
6. Frequency of Reporting- FS shall be presented at least annually.
When an entity’s end of reporting period changes and FS are presented for a period longer or shorter than one year, an entity shall disclose:
a. The period covered by the FS c. The fact that amounts presented in the FS are not entirely
b. The reason for using a longer or shorter period comparable
7. Comparative Information- financial statements of the current period shall be presented with comparative figures of the financials
statements of the immediately preceding year.
Third Statement of Financial Position- this will be required when an entity executes any of the following:
a. Application of an accounting policy retrospectively.
b. Retrospective restatement of items in the financial statements.
c. Reclassification of items in the financial statements.
Under these circumstances, an entity shall present three statements of financial position as at:
Statement of Financial Position Date
a. End of current period As at December 31, 2017
b. End of previous period As at December 31, 2016
c. Beginning of earliest comparative period As at January 1, 2018
8. Consistency of Presentation- this has the same concept in Conceptual Framework.
- Consistency does not mean that no change in accounting can be made. If such change will result to information that is
faithfully represented and more relevant to the users of financial statements, then it should be made and thus, should provide
full disclosure of the change and the peso effect of the change.
- It is inappropriate for an entity to leave accounting policies unchanged when better and acceptable alternatives exist.
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 Conceptual Framework and Accounting Standards [FAR2] • COURSE FILE M02: PAS 1

A change in presentation and classification of items in the financial statements is allowed, either, when:
a. It is required by another Standard; or
b. A significant change in the nature of the operations of the entity will demonstrate a more appropriate revised presentation and
classification.

Each component of a set of financial statement shall prominently displayed the following:
a. Name of the component (SFP, SCI, SCE, SCF, Notes)
b. Name of the reporting entity
c. Whether the financial statements cover the individual entity or a group of entities.
d. End of the reporting period, or the period covered by the financial statements or notes.
e. Presentation currency
f. Level of rounding used in the amounts in the financial statements.

Forms of Statement of Financial Position

• Report Form
• Account Form

Ways of presentation of statement of financial position

1. Classified- shows distinctions between current and non- current assets and liabilities.
2. Unclassified- shows no distinction between current and non- current items; based on liquidity

Classification of Assets
• Current Assets- continuously circulating as working capital
Guide in classifying asset as current asset:
Is it a cash or cash → Is it for the purpose → Is it realizable → Is it realizable within 12 months → Classify as
equivalent? N of trading? N within NOC? N after reporting period? N non-current
Y↓ Y↓ Y↓ Y↓
Classify as current Classify as current Classify as current Classify as current
• Non- current Assets- used in long- term operations
- All other assets not classified as current are non-current.
Classification of Liabilities
• Current Liabilities
Guide in classifying liability as current liability:
Is it for the Is it to be Is it due to be settled Does the company have unconditional
→ → → → Classify as
purpose of settled within within 12 months after right to defer settlement for at least 12
N N Y Y non-current
trading? NOC? reporting period? months after reporting period?
Y↓ Y↓ N↓ N↓
Classify as Classify as
Classify as non-current Classify as current
current current
• Non-current Liabilities
- All liabilities not classified as current are classified as non-current.

Equity- the residual interest in the assets of the entity after deducting all of its liabilities; aka net assets.
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- in capital Share premium
Retained earnings (deficit) Accumulated profits (losses)
Retained earnings appropriated Appropriation reserve
Revaluation surplus Revaluation reserve
Treasury stock Treasury share
Line Items in Statement of Financial Position:
1. Cash and cash equivalents 10. Total of assets classified as held for sale and assets included in
2. Financial assets (other than 1, 3 and 6) disposal group classified as held for sale
3. Trade and other receivables 11. Trade and other payables
4. Inventories 12. Current tax liability
5. Property, plant and equipment 13. Deferred tax asset and deferred tax liability
6. Investment in associates accounted for by the equity method 14. Provisions
7. Intangible assets 15. Financial liabilities (other than 11 and 14)
8. Investment property 16. Liabilities included in disposal group classified as held for sale
9. Biological assets 17. Non-controlling interest
18. Share capital and reserves

Statement of Comprehensive Income- its purpose is to provide a more comprehensive information on financial performance measured more
broadly than the income as traditionally computed.
Comprehensive Income- change in equity during a period resulting from transactions and other events, other than changes resulting from
transactions with owner in their capacity as owners.

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 Conceptual Framework and Accounting Standards [FAR2] • COURSE FILE M02: PAS 1
Components of Comprehensive Income
a. Profit or loss
b. 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 PFRS.

Components of OCI
1. Unrealized gain or loss on equity investment measured at fair value thru OCI
2. Unrealized gain or loss on debt investment measured at fair value thru OCI*
3. Gain or loss from translation of the FS of a foreign operation*
4. Revaluation surplus during the year
5. Unrealized gain or loss from derivative contracts designated as cash flow hedge*
6. Remeasurements of defined benefit plan, including actual gain or loss
7. Change in fair value attributable to credit risk of a financial liability designated at fair value thru profit or loss.
*reclassified subsequently to profit or loss

Presentation of Comprehensive Income

1. Two statements 2. Single Statement of Comprehensive Income

Sources of Income
a. Sales of merchandise to customers
b. Rendering of services
c. Use of entity resources- interest, rent, royalty and dividend income
d. Disposal of resources other than products- gain on sale of investments, PPE or intangible assets

Components of Expenses
a. Cost of goods sold or cost of sales d. Other expenses
b. Distribution costs or selling expenses e. Income tax expense
c. Administrative expenses

Line Items of Statement of Comprehensive Income

1. Revenue
2. Gain and loss from de-recognition of financial asset measured at amortized cost as required by PFRS 9
3. Finance cost
4. Share in income or loss of associate and joint venture accounted for using the equity method
5. Income tax expense
6. A single amount comprising discontinued operations
7. Profit or loss for the period
8. Total other comprehensive income
9. Comprehensive income for the period being the total of profit or loss and other comprehensive income

Forms of Income Statement

a. Functional presentation- classifies expenses according to their function (the usual I/S). an entity classifying expenses by function shall
disclose additional info on the nature of expenses, including depreciation, amortization and employee benefits costs.
b. Natural presentation- expenses are aggregated according to their nature and not allocated among various functions within the entity.

Functional Presentation Natural Presentation

Revenue xx Revenue xx
Cost of Sales (xx) Other Income xx
Gross Profit xx Investment Income xx
Other Income xx Total Income xx
Investment Income xx xx Expenses
Total Income xx Decrease in Inventory xx
Expenses: Net Purchases xx
Distribution Costs/ Selling Expenses xx Employee Benefit Costs xx
Administrative Expenses xx Sales Commission xx
Other Expenses xx (xx) Advertising xx
Operating Income/ EBIT xx Supplies Expense xx
Finance Cost/ Interest Expense (xx) Delivery Expense xx
Income Before Taxes xx Taxes and Licenses xx
Income Tax Expense (xx) Doubtful Accounts xx
Income from Continuing Operations (ICO) xx Other Expenses xx (xx)
Discontinued Operations xx Operating Income/ EBIT xx
Profit/ Loss or Net Income xx Finance Costs (xx)
Other Comprehensive Income (OCI): Income before Taxes xx
OCI that will not be Reclassified xx Income Tax Expense (xx)
OCI that will be Reclassified xx xx ICO xx
Comprehensive Income xx Discontinued Operations xx
Profit/ Loss or Net Income xx
OCI:
OCI that will not be Reclassified xx
OCI that will be Reclassified xx xx
Comprehensive Income xx
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 Conceptual Framework and Accounting Standards [FAR2] • COURSE FILE M02: PAS 1

Statement of Changes in Equity- basic statement that shows the movements in the elements or components of the shareholders’ equity.

As to Source Presentation (problem silent) Alternative Presentation

Transactions
SC SP OCI RE-A RE-U Total SC Reserves RE Total
Beginning Balance xx xx xx* xx xx xx xx xx xx xx
Change in Accounting
Policy xx* xx* xx* xx*
Correction of Errors xx* xx* xx* xx*
Total xx xx xx* xx xx xx xx xx xx xx
Issuance of shares xx xx xx xx xx xx
Dividend Declaration (xx) (xx) (xx) (xx)
CI:
- Profit/ Loss xx* xx* xx* xx*
- OCI xx* xx* xx* xx*
OCI reclassification xx* xx* xx* xx*
RE Appropriation xx (xx) xx (xx)
Total xx xx xx* xx xx* xx xx xx xx* xx
Re- acquisition of
shares/ Treasury Shares (xx) (xx)
Total xx xx xx* xx xx xx xx xx xx xx
*can be positive or negative

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. The purpose of the Notes to FS is to provide the necessary disclosures required by PFRS.

Components of Notes to Financial Statements:

1. Brief description of the company
a. Name
b. Domicile
c. Legal form
d. Country of incorporation
e. Description of nature of entity’s operations
f. Principal activities
g. Name of parent, if applicable
2. Statement of compliance with PFRS- this states that the entity shall make an explicit and unreserved statement of such compliance in
the notes. This should mean compliance with all requirements of each applicable Standard.
3. Summary of significant accounting polices used

Accounting Policy- specific principles, methods, practices, rules, bases and conventions adopted by an entity in preparing and
presenting financial statements.

This section includes all of the following:

A. The measurement basis used in preparing the financial statements.
B. The accounting policies used that are relevant to an understanding of the financial statements.
C. The judgments that management has made in the process of applying accounting policies and that have a significant effect on the
amounts recognized in the financial statements. (aka disclosure of judgment)
D. Assumptions the entity makes about the future, and other major sources of uncertainty.

4. Supporting information or computation for line items presented in the financial statements
5. Other disclosures, such contingent liabilities, unrecognized contractual commitment
6. Other disclosures, such contingent liabilities, unrecognized contractual commitments and non-financial disclosures.

-END OF HANDOUT-
"Being a hero doesn't mean you're invincible. It just means that you're brave enough to stand
up and do what's needed."
-Piper McClean, Character in Rick Riordan's Book "The Mark of Athena"

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