NGAS – Corporate 109

FINANCIAL STATEMENTS

Session Overview

After taking the trial balance, adjusting and closing

appropriate accounts, the Accountant can already prepare the
financial statements. This session will cover the financial
statements prepared under the new government accounting
system.

Learning Objectives

At the end of the session, the participants will be able to:

 discuss the framework for the preparation and presentation of financial statements
(FS)
 identify the IAS applicable in the preparation of FS
 know the formats of the FS that should be prepared
 describe how they are prepared and tell their uses
 understand the financial reports for submission to COA by all GOCCs

FRAMEWORK FOR THE PREPARATION AND PRESENTATION OF

FINANCIAL STATEMENTS
This framework sets out the concepts that underlie the preparation and
presentation of financial statements for external users. The purpose of the
framework is to:
a. assist preparers of financial statements in applying Accounting Standards
Council(ASC) SFAS/IAS;
b. assist auditors in forming an opinion as to whether financial statements
conform with Philippine generally accepted accounting principles;
c. assist users of financial statements in interpreting the information
contained in financial statements prepared in conformity with Philippine
generally accepted accounting principle.
Scope
The framework deals with:
a. The objective of financial statements;
b. The qualitative characteristics that determine the usefulness of
information in financial statements;
c. The definition, recognition, and measurement of the elements from
which financial statements are constructed; and
d. Concepts of capital and capital maintenance.

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Objective of General Purpose Financial Statements

To provide information about the financial position, performance and cash flows
of an enterprise that is useful to a wide range of users in making financial
decisions

Qualitative Characteristics of Financial Statements

Qualitative characteristics are the attributes that make the information provided
in financial statements useful to users. These are as follows:

1. Understandability
2. Relevance
3. Materiality
4. Reliability
Faithful Representation
Substance over Form
Neutrality
Prudence (Conservatism)
Completeness
Comparability

Definition, Recognition, and Measurement of the Elements from which Financial

Statements Are Constructed

Elements of Financial Statements

1. Financial Position
a. Assets
b. Liabilities
c. Equity
2. Performance
a. Income, both Revenue and Gains
b. Expenses, both Operating expenses and
Losses

Recognition of Elements of Financial Statements

Recognition is the process of incorporating in the balance sheet or income

statement an item that meets the definition of an element and satisfies the
criteria for recognition. An item that meets the definition of an element should
be recognized if:

1. it is probable that any future economic benefit associated with the item will
flow to or from the enterprise; and
2. the item has a cost or value that can be measured with reliability.

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Measurements of the Elements of Financial Statements

Measurement is the process of determining the monetary amounts at

which the elements of the financial statements are to be recognized and carried in the
balance sheet and income statement.

Bases of Measurement:
1. Historical cost
2. Current cost
3. Realizable (settlement) value
4. Present value

Components of Financial Statements

As provided under IAS 1, the following are the components of Financial

Statements:

1. Statement of Income and Expenses

A statement of income and expenses is a formal statement showing the

performance of a corporation for a given period of time. It links the agency’s
beginning and ending balance sheets for a given accounting period. The performance
of a corporation is primarily measured in terms of the level of income earned by the
corporation through the effective and efficient utilization of its resources. It explains
the changes in the agency’s equity resulting from operations and economic activities
during the period.
It presents the two elements as follows:

1. Income - increases in economic benefits during the accounting

period in the form of inflows or enhancements of assets or decreases of liabilities
that result in increase in equity, other than those relating to contributions from
equity participants.

The definition of income encompasses both revenue and gains. Revenue

arises in the course of the ordinary activities of an enterprise and is referred to by
a variety of different names including sales, fees, interest, dividends, royalties and
rent.

Gains represent other items that meet the definition of income and may, or
may not, arise in the course of the ordinary activities of an enterprise.

2. Expenses - decreases in economic benefits during the accounting period in

the form of outflows or depletion of assets or incidences of liabilities that result in
decreases in equity, other than those relating to distribution to equity participants.

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The definition of expenses encompasses losses as well as those expenses that

arise in the course of the ordinary activities of the enterprise. Expenses include the
following:

1. Cost of sales
2. Distribution or Selling Expenses
3. Administrative expenses
4. Other operating expenses
5. Income tax expense

Extraordinary Items

Extraordinary items are income and expenses that arise from events or
transactions that are clearly distinct from the ordinary activities of the corporation and
therefore are not expected to recur frequently or regularly.
Examples:
1. Expropriation or condemnation of assets;
2. Casualty loss from earthquake, typhoon, flood, fire and other natural
disasters;
3. Destruction of large quantity of inventory due to government ban or
prohibition; and
4. Early extinguishment of long-term debt

Please refer to Annex G-1, G-2 and G-3 for the suggested formats for the
detailed and the condensed statement of income and expenses.

2. Balance Sheet

A balance sheet is a formal statement showing the financial position of a

corporation as of a particular date. It presents the three elements of financial position,
namely:

a. Assets - resources controlled by the enterprise as a result of past transactions

and events and from which future economic benefits are expected to flow to the
enterprise;

b. Liabilities - present obligations of an enterprise arising from past transactions

or events, the settlement of which is expected to result in an outflow from the
enterprise of resources embodying economic activities; and

c. Equity - the residual interest in the assets of a corporation after deducting all
its liabilities.
The elements of equity are:

1. Capital Stock - amount fixed in the articles of incorporation to be subscribed

and paid in or secured to be paid in by the stockholders of the corporation,
either in money or property or services;

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2. Subscribed Capital Stock - portion of the authorized capital stock that has
been subscribed but not yet fully paid and therefore still unissued;

3. Additional Paid- in Capital - amounts received for issuance in excess of the

par or stated value of capital stock and amounts received from other
transactions involving the entity’s stock;

4. Retained Earnings - a corporation’s accumulated profits (losses) less any

distributions that have been made therefrom. However, based on provisions
contained in the IAS, other adjustments are also made to the amount of
retained earnings. IAS 8 requires the following to be shown as adjustments
to retained earnings:

a. Under the benchmark treatment, correction of fundamental errors that

relate to prior periods should be reported by adjusting the opening balance of
retained earnings; and

b. Under the benchmark treatment, the resulting adjustment from a change

in accounting policy that is to be applied retrospectively should be reported
as an adjustment to the opening balance of retained earnings.

5. Revaluation Increment in Property - excess of sound value over the net book
value of the asset.

6. Treasury Stock - corporation’s own stock that has been issued and then
reacquired but not cancelled.

Presentation and Disclosure Requirements under IAS

IAS 1 sets forth requirements for disclosures about the

details of share capital for corporations and the various
capital accounts as follows:

1. The number or amount of shares authorized, issued and

outstanding.
2. Shares reserved for future issuance under options and sales contracts, including
the terms and amounts.
3. Capital paid in excess of par value
4. Revaluation reserve
5. Reserves
6. Retained earnings

Please refer to Annex G-4 and G-5 for the formats of the detailed and condensed
Balance Sheet

3. Cash Flow Statement

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Cash flows consist of inflows and outflows of 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 amounts of cash and subject to an insignificant risk of changes in value.

The basic purpose of the CFS is to provide relevant information about the agency’s
inflows and outflows of cash during the year. It is so designed to show the changes in
cash and cash equivalents for the year

CFS Preparation Method

Under the NGAS, CFS shall be prepared under the direct method. This method shows
the items affecting cash flow and the magnitude of those cash flows. Cash received
from, and cash paid to, specific sources are presented. Entities using the direct method
are required to report the following major classes of gross cash receipts and gross cash
payments:

1. Cash collected from customers

2. Interest and dividends received
3. Cash paid to employees and other suppliers
4. Interest paid
5. Income taxes paid
6. Other operating cash receipts and payments

The following items shall be reported in the CFS:

1. Cash flows from operating activities
2. Cash flows from investing activities
3. Cash flows from financing activities
4. Effect of foreign exchange rate changes, if any
5. Net increase (decrease) in cash during the period

Cash flows from operating activities

Operating activities are the principal revenue producing activities of the enterprise,
and any other activities that are not investing or financing activities. The classification
of cash flows by major transaction shall be indicated in the statement.

Cash inflows from operating activities include the cash received from the following
transactions, among others:
 Receipt of subsidies from the National Government
 Payment of customers
 Sale of goods and rendering of services
 Collection of receivables
 Liquidated damages charged the contractor for delayed
prosecution of the project
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 Receipt of donations from private enterprises

 Receipt of royalties, fees, commission
 Receipt of interests from deposits
 Receipt of dividends from investments
 Refunds of deposits
 Refund of excess payments

Cash outflows from operating activities include cash paid for the following
transactions, among others:
 Purchase of supplies and materials
 Accounts payable
 Pre-payments made
 Claim for damages
 Interest expense
 Taxes, duties and fines.
 Salaries and wages
 Remittance of taxes withheld to BIR
 Remittances of amount due the GSIS, PAG-IBIG and
PHILHEALTH
 Retirement benefits
 Terminal leave

Cash flows from investing activities

Investing activities are the acquisition and disposal of long-term assets and other
investments not included in cash equivalents.

Cash inflows from investing activities include the cash received from the following
transactions:
 Disposal/Sale of property, plant and equipment
 Disposal/Sale of investment securities
 Redemption of long term investments or repayment of long term loans
 Dividends

Cash outflows from investing activities include the cash paid for the following
transactions:

 Acquisition/Purchase of property, plant and equipment

 Acquisition/Purchase of investment securities
 Acquisition of other assets such as patents or other intangible assets
 Dividends

Cash flows from financing activities

Financing activities are activities that result in changes in the size and composition of
the equity capital and borrowings of the enterprise.

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Cash inflows from financing activities include the cash received from the
following transactions:

 Issuance of share capital

 Issuance of marketable securities

Cash outflows from financing activities include the cash paid for the following
transactions

 Repayment of long-term debt

 Reduction of notes payable

Particular cash flows

1. Extraordinary items

The related cash flows should be separately disclosed and classified as

appropriate as operating, investing or financing.

2. Interest and dividends received and paid

Each category should be separately disclosed, and classified as operating,

investing or financing.

3. Taxes on income. Should be separately disclosed, and classified as operating,

unless linked to investing or financing items.

Net increase/decrease of cash during the period

The report shall show the beginning cash balance, the ending cash balance and the
increase/decrease in cash during a particular period.

Non-cash investing and financing activities

These are the investing and financing activities, which involve an exchange of value
other than cash. These should be disclosed in the footnotes to financial statements
(“elsewhere” is how the standard –IAS 7 actually identifies this).

Please refer to Annex G-6 for the format of the cash flow statement.

4. Statement of Changes in Equity

The statement of changes in equity is now a required basic statement that shows the
movements in the elements or components of stockholders’ equity. This statement
should present:

1. An enterprise’s total recognized gain or losses for the period, including those
that are recognized directly in equity; and
2. Other changes in the equity accounts, along with a reconciliation of beginning
and ending balances in each of the components of equity.
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Please refer to Annex G-8 for the format of the statement.

5. Accounting Policies and Explanatory Notes

The accounting policies and notes to financial statements are used to report
information that do not fit into the body of the statements in order to enhance the
understandability of the statements.
These are usually presented in the following order:
1. The domicile and legal form of the enterprise, its country of incorporation and
the principal place of business;
2. A description of the nature of the enterprise’s operations and its principal
activities;
3. Statement of compliance with IFRS/IAS;
4. Statement of measurement basis and accounting policies applied;
5. Supporting information or computation for line items presented and
aggregated in the financial statements: and,
6. Other disclosures, such as commitments, contingencies, and other financial
and non-financial disclosures.

Examples of accounting policies and explanatory notes are shown in annex G-8.

REPORTING ACCOUNTING CHANGES

IAS 8 describes three ways of reporting accounting changes and the type of change
for which each should be used. These are:
1. Retrospectively - Retrospective treatment requires an adjustment to all current
and prior period financial statements for the effect of the accounting change.
Prior period financial statements presented currently are to be restated on a
basis consistent with the newly adopted principle

2. Currently - Current treatment requires reporting the cumulative effect of the

accounting change in the current year’s income statement as a special item.
Prior period financial statements are not restated.

3. Prospectively - Prospective treatment of accounting changes require no

restatement of prior financial statements and no computing or reporting of the
accounting changes cumulative effect in the current period’s income statement.

CORRECTION OF FUNDAMENTAL ERRORS

Fundamental errors are errors discovered in the current period that are of such
significance that the financial statements of one or more prior periods can no longer be
considered to have been reliable at the date of their issue.

As outlined under IAS 8, there are two methods of accounting for the correction of the
fundamental errors, namely:

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1. fundamental errors are to be treated as prior period adjustments, that is, the
amount of the correction, net of the tax effect, if any, should be reported as an
adjustment
to the opening balance of the retained earnings (benchmark treatment); and

2. the amount of the correction of the fundamental errors should be included in the
determination of net profit or loss for the current period.

EVENTS AFTER BALANCE SHEET DATE

These are events that occur after an enterprise’s accounting year-end (also referred to
as Balance Sheet date) and the date it is authorized for issue that would necessitate
either adjusting the financial statements and disclosure.

There are two kinds of events after the balance sheet date:
1. Adjusting events after the balance sheet - An enterprise should adjust the
amounts recognized in its financial statements to reflect adjusting events after
the balance sheet date.

The following are examples of adjusting events after the balance sheet date that
require an enterprise to adjust
the amounts recognized in its financial statements or to recognize items that
were not previously recognized:

a. the resolution after the balance sheet date of a court case which, because it
confirms that an enterprise already had a present obligation at the balance
sheet date, requires the enterprise to adjust a provision already recognized;
b. the receipt of information after the balance sheet date indicating that an
asset was impaired at the balance sheet date, or that the amount of a
previously recognized impairment loss for that asset needs to be adjusted;
and
c. the discovery of fraud or errors that show that the financial statements
were incorrect.

2. Non-Adjusting Events after the Balance Sheet

An enterprise should not adjust the amounts recognized in its financial statements
to reflect non-adjusting events after the balance sheet date.

An example of non-adjusting event after the balance sheet date is a decline in

market value of investments between the balance sheet date and the date when
the financial statements are authorized for issue.

Submission of Financial Statements and Other Reports

GOCCs Central Office and their Subsidiaries are required to submit on or before
February 14 of each year the advance copies of the following year-end consolidated
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financial reports and trial balances to the Government Accounting and Financial
Management Information System (GAFMIS), Commission on Audit:

1. Pre-closing Trial Balance

2. Post-closing Trial Balance including copy of JEV for Closing Journal Entries
3. Statement of Income and Expenses (in detailed form)
4. Balance Sheet (in detailed form)
5. Statement of Changes in Equity
6. Cash Flow Statement (Direct Method)
7. Accounting Policies and Explanatory Notes
8. Roster of Membership in the Governing Board
9. Report on Salaries and Allowances Received by Principal Officers and
Members of the Governing Board
10. Breakdown of Foreign Loans
11. Schedule of Subsidies Received from the National Government and Other
GOCCs
12. Summary of Discretionary, Representation, Extraordinary, Promotional,
Confidential and Consultancy Expenses
13. Schedule of Taxes Paid
14. Schedule of Dividends Paid

Summary

In this session, we learned that the Accountant shall prepare the following financial
statements: The Statement of Income and Expenses, Balance Sheet, Cash Flow
Statement (direct method), Statement of Changes in Equity and Accounting Policies
and Explanatory Notes using the prescribed format. We also learned the pertinent
International Accounting Standard (IAS). We also understood the formats of the FS as
well as the reports required to be submitted to COA.

Session 6.0 PROFESSIONAL DEVELOPMENT CENTER

December, 2004 COMMISSION ON AUDIT
Commonwealth Avenue, Quezon City