CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING

International Accounting Standards Board’s Standard Setting Process

IASB Structure
1. Monitoring Board
 Links to trustees to public authorities (e.g. stock exchange)
 Provides oversight to the trustees
2. Trustees of the IFRS Foundation
 Responsible for the governance and oversight of the IASB
3. IASB
 Responsible for developing and approving Standards and Interpretations
 Issues IFRS, which includes all IFRS, all existing IAS, and all the interpretations
4. IFRS Interpretations Committee
 Issues interpretations for certain standards
 IFRIC reports to IASB, IASB reports to Trustees, and Trustees reports to the Monitoring Board
5. IFRS Advisory Council
 Sounding board for the IASB and the Trustees
6. ASAF
7. Project Consultative Groups
8. Standing Consultative Groups
9. Transition Resource Groups

IFRS Due Process (Has four subprocesses)

A. Agenda Consultation
o Thorough review and consultation to define international standards setting priorities and
develop a work plan according to IFRS.
o Determines which are the key areas in the IFRS that needs additional financial reporting
standards
B. Research Programme
o Some research work in order to determine if there is a real need for a standard setting
o “Do we change the standards? Or do we need to issue another standard?”
C. Standard Setting Programme
o In this step, all comments given by the public through the research programme will be
scrutinized and determine if there is a discussion paper already.
o For amendments of the standards, it is usually published through an Exposure Draft [tentative
paper]
o Two possible scenarios on the Exposure Draft
i. IASB would just include the necessary comments in the exposure draft, then release a
new standard
ii. If standards has significant comments, they may create another draft. Once finalized,
this standard is issued.
D. Maintenance Programme
o Determine the implementation problems, and if there is a need for an interpretation relating to
the standards.

Status of the Conceptual Framework

General: Generally accepted paradigm for a field of study or an issue

Specific: Basis for the development of new accounting standards and evaluation of existing ones
Specific: sets out agreed concepts that underlie financial reporting

* Conceptual Framework is not a Standard. Rather, it is the basis of developing NEW standards.
* If there is a conflict, Standards will prevail.
* Standards (e.g. IFRS, PFRS) are practical, while the Conceptual Framework is the ideal.
* Conceptual Framework has a practical value (not theoretical) especially if there is no specific IFRS that
covers that particular issue.
Purposes of Conceptual Framework
Stakeholder Purposes
IASB o Development and review of IFRS
o Harmonization of standards ; “Condorsement” of PFRS
FRSC o Developing national standards (PFRS)
o Philippines adapts PFRS from IFRS
FS Preparers o Application of IFRS
o Topics not dealt by IFRS
Auditors o Expressing audit opinion in fair presentation
Users o Interpreting the financial information
General Public o Work of IASB
o Standards formulation process

MODULE 1: Introduction to Financial Reporting

CHAPTER 1: Objective of Financial Reporting

[Objective of General-Purpose Financial Reporting]

o To provide useful information [for whom] about the reporting entity

o To provide useful information [to whom] to existing and potential investors, lenders and creditors
(collectively called risk-capital providers)
o [Why?] Because these providers will make decisions. These decisions will be based on the useful
information.

“The objective of GP-FR is the provide useful information about reporting entity to existing and potential
capital providers in order for them to make decisions.”

Users and Their Decisions

Users
Existing and Potential Investors
Existing and Potential Lenders and
Creditors
Decisions
- Buy, Sell, Hold Investments
- Voting of influencing decisions
- providing or settling the loan
and extending credit lines (e.g.
debt covenants)
Information
Returns such as dividends, market
price increases *can be seen in
SCI
Principal and Interest Repayments

Basis for Decisions

 Prospects of net cash inflow based on the current resources, claims and charges. *can be found in the
financial statements
 Management’s stewardship of resources based on effective and efficient management of resources.
*FS would indicate if management is an effective steward of resources based on the numbers, ratios
and disclosures.

CHAPTER 2: Qualitative Characteristics

What do we mean by useful information? What makes financial information useful?

Useful vs More Useful

 Useful talks about Fundamental Qualitative Characteristics (Faithful Representation & Relevance)
*fundamental characteristics sets the threshold for usefulness. If one is absent, it is not useful.
 More Useful talks about Enhancing Qualitative Characteristics (Verifiability, Comparability,
Understandability & Timeliness) *they only enhance something that is already present.
 Information must be useful first, before it becomes more useful.

FUNDAMENTAL CHARACTERISTICS
1. Relevance
 Making a difference in users’ decision
  Has predictive value (ability to predict the future) *future-oriented
 Has confirmatory value (provide feedback) *past-oriented
 Materiality (entity specific concept) *both quantitative and qualitative concept
Measurement Uncertainty and Relevance
 MU is more related to Faithful Representation
 Sometimes because of MU, there is a need to strike a balance between Faithful Rep
and Relevance
 Slightly less relevant but less MU = (/) Useful
 More relevant but higher MU = ( )
 Measurement Uncertainty does not prevent information from being useful. However, it
may increase or decrease the usefulness of the information.
2. Faithful Representation
 Present what it purports to present
 Completeness (words and numbers)
 Neutrality (not biased)
 Free from error (ideally)
 Neutrality is supported by exercise of prudence.
 PRUDENCE: exercise of caution when making judgments under conditions of uncertainty.
*Pagiging maingat.
 There should be no overstatement or understatement of assets, liabilities, income or
expenses.

ENHANCING CHARACTERISTICS
3. Comparability
 Like things look alike; different things look different (unless there are changes in the CF)
 Intercompany and intracompany (comparing to peers and to self)
4. Verifiability
 Knowledgeable, independent observers could reach consensus (not complete agreement) that
a depiction is a faithful representation
5. Understandability
 Classifying, characterizing and presenting information clearly and concisely makes it
understandable
 Complex phenomenon might not be understandable but omission will make the information
incomplete (Just because an item is complex, it does not mean we will not include it in the
disclosures) *there is tradeoff between understandability and completeness
 Reasonable knowledge of business and economic activities by users assumed; approach
information with diligence
6. Timeliness
 Having information available to decision-makers in time to be capable of influencing their
decisions

CHAPTER 3: Financial Statements and the Reporting Entity

Who is the Reporting Entity?
 An entity that is required, or chooses, to prepare financial statements
 Not necessarily a legal entity (ALL legal entities are reporting entities, but NOT ALL reporting entities
are legal entites)
 Could be a portion of an entity or comprise more than one entity
 A reporting entity does not comprise an arbitrary or incomplete collection of information

What are the Financial Statements?

 A particular form of financial reports that provide information about the reporting entity’s elements (A,
L, E)
 Consolidated FS: Parent + Subsidiary = Single Rep. Entity
 Unconsolidated FS: Parent only
 Combined FS: Two or more entities presented as single rep. entity BUT without Parent – Subsidiary
Relationship

CHAPTER 4: Elements of Financial Statements

ASSET
 A present economic resource controlled BY (not particularly owned) the entity as a result of past
events.
 ECONOMIC RESOURCE: a right that has potential to produce economic benefits.
 Includes tangible and intangible assets in the definition.
LIABILITY
 A present obligation of the entity to transfer an economic resource as a result of past events.
 An obligation is a duty or responsibility that the entity has no practical ability to avoid.

EQUITY
 Residual interest in asset after deducting liabities
 We can present them by classification.

UNIT OF ACCOUNT
 Right(s) or obligation(s) (or group), to which recognition criteria and measurement concepts are
applied.
 Chosen UoA must be relevant and faithfully represented (focus on substance of transactions and
events)

INCOME AND EXPENSES

 Income refers to increases in assets, or decreases in liability, that result in increases in equity, other
than those relating to contributions from holders of equity claims.
 Other Comprehensive Income (OCI) is included in the definition of Income and Expenses, as per the
Conceptual Framework. (CF does not lay out a separate definition of OCI)
 Expenses refers to decreases in assets, or increases in liability, that result in decrease in equity, other
than those relating to contributions from holders of equity claims.

CHAPTER 5: Recognition and Derecognition

Recognition
 Process of capturing for inclusion in the financial statements an item that meets the definition of an
element. *it is a act of including that account in the FS
 When do we recognize?
o When it is relevant to recognize
o When recognition faithfully represent the transaction
 Relevant Issues (Is recognition useful for management decisions?)
o We factor in the probability of economic benefits when we recognize this asset (Low
probability of economic benefit)
o We have to look at the uncertainty surrounding the existence of the asset particularly for
intangible assets
 Faithful Representation Issues
o Measurement Uncertainty
o Recognition Inconsistencies (Accounting Mismatch)
o Presentation and Disclosure
 Recognition is important because it depicts an entities’ financial position and financial performance.

Derecognition
 The removal of all or part of a recognized asset or liability from an entity’s financial position.
 Asset: loses control of part or all of the asset.
 Liability: no longer has a present obligation for all or part of liability
 When do we DErecognize?
o When it is relevant to derecognize
o When the derecognition faithfully represent the substance of the transaction

CHAPTER 6: Measurement

Two Measurement Bases *both acceptable

1. Historical Cost (ENTRY Price, however a static entry price)
 o PAST-oriented
o Does not factor in certain changes in situations from initial recognition to date of recording.
o Transaction Price or Amount (or part) to acquire an asset or that is received to incur a liability
o For ASSETS, historical cost, including transaction cost, to the extent of the unconsumed or
uncollected and recoverable. It includes interest accrued on any financing component. (ex.
PPE carried at Cost Model
o For LIABILITIES, historical consideration has yet owing in respect to goods and services
received, net of transaction cost. It is increased by any onerous provision. It also includes
interest accrued on any financing component. (ex. Long Term Debt carried at Amortized Cost)
o Amortized Cost is an application of Historical Cost
2. Current Value
o certain values existing at the date of reporting will be factored in in determining the
measurement.

Three Types of Current Value

a) Fair Value (PFRS 15)
o An EXIT price, the value that will be RECEIVED upon disposal of the asset or
settlement of liability
o A Fair Value is the price that will be received upon disposal of the asset or paid to
transfer a liability in an orderly transaction between market participants at
measurement date. It excludes any potential transaction cost.
b) Value in Use (asset) or Fulfilment Value (liability)
o Like an exit price, just like a fair value
o The amount of timing and uncertainty of future cashflow are taken into consideration.
Specifically, discounting.
o For an ASSET, VIU is the present value of the FCF from the continuing use of the asset
and of its disposal, net of transaction cost for the disposal.
o For a LIABILITY, Fulfillment Value is the present value of FCF that will arise in fulfilling
a liability INCLUDING transaction cost.
c) Current Cost
o An ENTRY price, it is a consideration to be given to acquire an equivalent asset at
measurement date PLUS transaction costs *amount that will be PAID
o Reflects the current age and condition of the asset
o For a LIABILITY, it is the consideration that would be RECEIVED to incur an equivalent
liability at measurement date MINUS transaction cost
Considerations to consider to determine appropriate base
 The characteristic of the asset/liability (variability of cash flow)
 The sensitivity of the value to market forces or other risks
 The contribution to future cash flows
 The nature of the business activity or entity’s business
 The Measurement Inconsistency – We factor this in when we ask the question, “at what amount”
 The Measurement Uncertainty – if its too high, Faithful Rep may be sacrificed.

CHAPTER 7: Presentation and Disclosure

Statement of Profit or Loss

 SPL is the primary source of information about an entity’s financial performance
 P&L could be a section of a single statement of financial performance or a separate statement.
 The statement(s) of financial performance include(s) a total (subtotal) for profit or loss
 In principle, all income and expenses are classified and included in the SPL

Other Comprehensive Income (OCI)

 IASB may decide to exclude from SPL income and expenses arising from a change in current value of
an asset/liability and include those income and expenses in OCI
 Such decision would result in the SPL providing more relevant information or a more faithful
representation.
 Why would IASB exclude this?
 o Most of OCI items are UNREALIZED or not yet closed transactions (pertain to Fair Value
changes)
o To caution the users of FS from transactions concerning fair value changes
 OCI is the exemption rather than the rule.
 Income and Expense shall go to P&L, UNLESS there is categorical statement that goes to OCI.

Recycling
 If OCI income and expenses will lead to relevant and faithful representation, then recycling will be
allowed.
 Otherwise, no recycling will be allowed.
 “Can these items in OCI be transferred to Profit or Loss?”

CHAPTER 8: Capital and Capital Maintenance

Financial Concept Physical Concept

Definition NET assets Productive Capacity
Example Total shareholders’ equity of a retail Generation capacity of a powerplant
company
Maintenance (How do Profit is Net Assets Ending less Net Profit is PC End less PC Beg, less
we compute profit?) Assets Beg, less Contributions, Add contributions, add back distributions
back Distributions
Use Used when users are concerned with Used when users are concerned with
the maintenance of the purchasing the operating capacity and the current
power of their invested capital. value of accounting.
“MONEY”

SUPPLEMENTAL CHAPTER

Executory Contracts
 A contract that is EQUALLY UNPERFORMED or PARTIALLY UNPERFORMED. It establishes a single asset
or liability for the inseparable combined right and obligation to exchange economic resources.
 Would executory contracts give rise to assets or liabilities? YES, when these contracts become
onerous.
 Example:
o An entity earns revenue by providing repair services for a particular type of machinery.
o The entity provides the services under 5-year fixed-fee contracts.
o Customers pay service fees annually at the start of each year. The contracts are profitable.

Signing of the Contract Receipt of Fees

Nature of Obligation Combined obligation and right to Obligation to provide repairs during
Created exchange services for fees. *both period covered by fee.
unperformed, wala pang service and wala
pang bayaran.
Obligation to NONE. YES. *would give rise to asset or
Transfer Economic liability when contract become onerous.
Resource? Obligation is to exchange resources, and
exchanges is not unfavorable.

How do executory contracts work?

o If the terms of the contract are favorable – may lead to an ASSET.
o If the terms of the contract are unfavorable – may lead to a LIABILITY.

Measurement Clarifications
Other Comprehensive Income * has to types: can be recycled and cannot be recycled

OCI Components – NO RECYCLING

 o Revaluation in PPE
o Remeasurements on Net Defined Benefit Liability (Pensions)
o Fair Value Changes in FVOCI Equity Investments
o Fair Value Gain or Loss on financial liability due to changes in credit risk
o Fair Value Gain or Loss on hedging instruments in a cash flow hedge subject to basis adjustment
o Cost of hedging subject to basis adjustment

OCI Components – WITH RECYCLING

o FV Changes for Debt Investment at FVOCI
o Cash Flow Hedges
o Foreign Currency Translation, net of investment hedges of foreign operations
o Cost of hedging not subject to basis adjustment

MODULE 2: Statement of Financial Position

Introduction to Preparation and Presentation of Financial Statements

Fair Presentation and PFRS Compliance

Fair Presentation [PAS 1]

o The application of IFRS and PFRS with additional disclosures as necessary is presumed to result in a
financial statement that achieved a fair presentation.
o An entity complies with IFRS when: An entity whose FS comply with IFRS to make an explicit and
unreserved statement of such compliance to the Notes in the FS.
o Is there such thing as partial compliance to PFRS? NO. Either you comply with all relevant PFRS or
you don’t comply with PFRS at all.
o Inappropriate Accounting Policies are not rectified either by disclosure of accounting policies used or
by notes or explanatory material. If there is inappropriate use, it must be corrected using the rules or
process prescribed by PAS.
o Can one depart from IFRS? In extremely rare circumstances, organizations may conclude that
compliance with a specific PFRS would be so misleading that it would go against the objectives of FS in
the Conceptual Framework.

GOING CONCERN – entity’s ability to continue in the foreseeable future

Conceptual Framework identifies GC as the only underlying assumption in the preparation and presentation of
financial statements.

What if is client is a GC entity? No additional disclosures.

*entities with history of profitable operation are not required to perform a detailed GC analysis. It’s the
management who performs this analysis. It’s the auditor who will evaluate and challenge the going concern
assessment of management.

What if client is GC but with significant uncertainties? Requires disclosure of uncertainties plus plans to
address them. *the auditor must be able to challenge these plans. “Challenged closed calls”

What if client is no longer a GC entity? Disclose the fact that the client is not a GC entity anymore, the basis
and reasons for selection of particular basis and reason why it is no longer a GC entity.

ACCRUAL BASIS OF ACCOUNTING

Revenues – not when cash is received; revenues are satisfaction of performance obligation
Expenses – not when cash is paid; expenses are cause and effect, systematic and rational allocation,
immediate recognition
Materiality and Aggregation
 Materiality -> it is material if the non-disclosure, omission, alteration will definitely influence the
decision of the users.
 Once item is material, it must be presented separately
 Materiality is merely quantitative. FALSE. It is both qualitative and qualitative.
 Immaterial and of similar nature items may be aggregated. (ex. Prepaid expenses)
 Immaterial and dissimilar items, may be aggregated if they are individually immaterial. However,
information must not be erased by merely aggregated it.
 Materiality applies to all parts of FS taken as a WHOLE.

Example: Phuket Company

Accounts Payable 100,000
How much is the amount of Trade and other Payables that
Trade Notes Payable (12 mos) 10,000 should be presented? Which items are excluded?
Trade Notes Payable (14 mos) 10,000
Only 128,000. ITP and PFW are considered material since
Interest Payable 8,000 they are part of the required minimum line item per
Income Taxes Payable 5,000 IAS1.54. Trade items are considered current.
Provision for Warranties 2,000

Offsetting
 Is a process of deduction.
 As a rule, it is generally not allowed, unless required or permitted by an IFRS.
 It shall only be permitted when:
o If there is a legal or contractual right to offset
o The entity intents to settle net
o There are no legal or contractual prohibitions.
 Examples: Net Unrealizable Holding Gains and Losses (NUHGL) - FVOCI, Net Gain on Disposal,
Deferred taxes
 Allowance for Doubtful Accounts, Accumulated Depreciation and Accumulated Amortization is not
offsetting, but act of valuation. (the fact that we deduct it directly to the asset)

Example: Pattaya Company

How much is the amount of trade and other receivables that should
AR – Customer A 90,000 Dr be presented? What is the adjusting entry, if any?
AR – Customer B 25,000 Dr Only 115,000. The overpayment of 15,000 must be transferred to
AR – Customer C (15,000) Cr the appropriate liability account.

AJE:
A/R – Customer C 15,000
Unearned Revenue 15,000

Comparative Information and Frequency Reporting

IAS 1 requires that comparative information should be presented in respect to the (at least, prior year)
previous period for all amounts in the different FS, including the Notes to FS. IAS requires at least two FS:
Statement of Financial Position and Statement of Profit/Loss and OCI.
Exceptions:
1. If standards require otherwise.
2. If a regulator will require otherwise.

In the Philippines, listed companies’ comparative information is 2 years (Prior year 1 and Prior year 2)
IAS 1 requires at least two of each FS: Statement of Financial Position and Statement of Profit/Loss and OCI.
Exceptions: A third SFP is required to be presented if:
1. If the entity will have a retrospective application of the accounting policies (Retrospective Application)
2. There is a restatement, reclassification, or adjustment that has material effect in the SFP at the
beginning of the comparative period (Correction of error)

Reporting Period
 Generally, at least annually.
 Are you precluded from reporting for a longer or shorter period of time? No. as long as it discloses the
reasons and the facts, as well as state the amounts. (ex. Interim FS)
 What if there is a change in the annual reporting period? There is still a comparative period however,
there must be a note that the item/amounts are not entirely comparable.

Identification of Financial Statements

Requirements:
1. Name of the reporting entity
2. Individual or Group / Parent or Group
3. Period Covered
4. Presentation Currency
5. Level of Rounding

Statement of Financial Position – Requirements

1. Current or Non-current or by liquidity
2. Required line items, no matter how small or big the amount (asset/liability)

Statement of Comprehensive Income – Requirements

1. Single or Two Statements
2. Function or Nature of Expenses
3. OCI which can be reclassified and cannot be reclassified (with/without recycling)

Statement of Changes in Owner’s Equity – Requirements

1. Total Comprehensive Income
2. Effect of error correction and change in policy
3. Contributions and Distributions
4. Beginning, Transactions, Ending

Statement of Cash Flows – Requirements

1. Operating, Financing or Investing
2. Operating: Direct or Indirect Method
3. Interests and Dividends Paid and Received
4. Cash Equivalents

Notes to the Financial Statements

1. Corporate Information
2. Basis for Preparation (EURS)
3. Summary of Significant Accounting Policies
4. Significant Judgments, Estimates and Assumptions
5. Supporting Schedules

ACCOUNTING POLICY vs. ACCOUNTING STANDARD

Accounting Standards are more general (General Rules). Accounting Policy are the chosen options provided
by the PFRS that are being applied and practiced by the entity

JUDGMENT vs ESTIMATES AND ASSUMPTION

Judgments -> there are no monetary amounts, usually are qualitative.
Estimates and Assumption -> there are monetary amounts.

ACCOUNTING POLICY vs SUPPORTING SCHEDULES

Summary of Significant Accounting Policies -> “How to Account for a particular transaction?”
Supporting Schedule -> “What transactions happened?” “What happened during the year?”

Selecting an Accounting Policy

 We look at transactions directly scoped in a standard or an interpretation (if mayroon sa standards or
interpretation, edi use that as a basis for your policy)
 If not scoped in a standard, PAS 8 recommends to use judgment of the management and look at the
definitions and conceptual framework and similar set of accounting standards following the standard
process of IASB.

Changes in Accounting Policies and Estimates

CHANGE IN ACCT POLICY (Retrospective)

o Happens when there is a new standard or interpretation (If yes, then, look for the Transition Provision.
If there is no TP, then it is a retrospective change)
o An entity may decide to change when it will result to a more relevant and reliable information (If the
change is voluntary or when it is the management who determines the change, it must be accounted
retrospectively UNLESS the existing standard tells you not to do so.
o General Rule: Restate the amounts from the earliest period presented.

CHANGE IN ACCT ESTIMATE (Prospective)

o Affects the period of change and future periods (if applicable)
o We do not restate the prior period numbers.

CORRECTION OF ERRORS
o Similar to change in accounting policy.
o We correct all error retrospectively.
o Restate comparative amounts for prior periods in which error occurred.
o Error occurred before that date: restate opening balances of assets, liabilities and equity for the
earliest period presented.
[ Correction of Error and Change in Acct Policy)
Example: Year is 2019, the date of the third balance sheet is January 1, 2018 (Beg) and December 31, 2018
(End)

As required by PAS 8, you have to determine the impact of the error or change to the financial statement line
items. The amounts presented are not the balances of these accounts, but are the increase/decrease in their
respective balances.

EVENTS AFTER THE REPORTING PERIOD

What are the events after reporting period?

o According to PAS 10 or IAS 10, Events, favorable or unfavorable, that occur between the end of the
reporting period and the date when the financial statements are authorized for issue.
Why are they important?
o These events will give rise to either:
o Adjustments to financial statements; or
o Additional disclosures
o However, some events do not necessitate to either of the two, because of immateriality.
o These two events will definitely affect the financial statements.
When are they adjusting?
o Adjusting Event -> are events occurring after the reporting date that provide evidence of
conditions that existed at the date of reporting period. *are measurement confirmations, rather than a
recognition confirmation.
o For instance, as of Dec 31, the accounts are already existed but only a reasonable estimate is used.
Then on Feb 1, there is an actual amount of that account. Then, it is an adjusting event.
o Examples: [These issues are existing as of reporting period]
 Bankruptcy of a customer that confirms a loss on trade receivables
  Sales of inventory that give evidence about their Net Realizable Value
 Discovery of fraud or errors that show the financial statements are incorrect
 Indications that going concern assumption is not appropriate
 Settlement of court cases that confirm a present obligation at the reporting date
 Receipt of an information that an asset was impaired at reporting date
o Adjusting events are accounted for. While non-adjusting events are disclosed.

What are Non-Adjusting Events?

o Are subsequent events occurring after the reporting date that do NOT provide evidence of conditions
that existed at the end of the reporting period.
o Ex. Effect of Covid-19 to certain accounts.
o However, they are so significant that omitting them in the financial statements would affect the
understanding of the users of the FS. *they are major events
o Examples: [These happened after the reporting period and before FS are authorized for issue]
 Major business combinations or disposal of a major subsidiary
 Major purchase or disposal of assets subsequently
 Classification of assets as held for sale or expropriation of major asset
 Destruction of a major production plant
 Announcement to discontinue operations
 Announcement of major restructuring
 Major ordinary share transactions
 Abnormally large changes in asset prices or foreign exchange rates
 Subsequent dividend payments *important
 Entering major commitments such as guarantees
 Commencing major litigation arising solely out of events that occurred after the reporting date
o Non-adjusting events should be disclosed

According to IAS 10 par. 8, we have to adjust financial statements for adjusting events.
According to IAS 10 par. 10, we do not adjust for non-adjusting events.

PREPARATION OF STATEMENT OF FINANCIAL POSITION

What are the basics features of the SFP?

a) General Contents: Resources (assets) and Claims (liabilities and equity)
b) Specific Contents: Refer to the minimum line items in PAS 1.
c) Date: “As of” or “As at”
d) Forms: Report, Account and Net Asset

Balance Sheet is the position financially of the entity as of December 31, 20-whatever.

In preparing the Balance Sheet, we assume that the Statement of Comprehensive Income and OCI are
already closed as of that moment. Any adjustments that will affect the SCI and OCI will go directly to the
Retained Earnings.

What are the steps in preparing the SFP?

1. Classify the Accounts (whether current/non-current, and the type of the account)
2. Adjust the Accounts
3. Compute Correct Balances
4. Compute the MINIMUM line items [General Rule/Assumption, during examinations]
Classification Issues

Current vs Non-Current *elimination method

ASSETS (NTOC)
Expected to be realized in the entity’s normal
operating cycle
Held primarily for the purpose of trading
Expected to be realized within one year or 12
months after the reporting period
Cash and Cash Equivalents (unless restricted)
LIABILITIES
Expected to be settled within the entity’s normal
operating cycle
Held for the purpose of trading
Due to be settled within 12 months
For which the entity does not have the right at the
end of the reporting period to defer settlement
beyond 12 months *

*Under IAS 1 Par. 73, when a long-term debt is expected to be refinanced under an existing loan facility and
the entity has the discretion to do so, the debt is classified as non-current even if the liability will otherwise
be due within 12 months.

If a liability has become payable on demand because an entity breached an undertaking loan agreement (ex.
Loan covenant), the liability is current. Even if the lender has agreed after the reporting period but before the
authorization of the FS not to demand payment, the breach..
 With waiver, which means even if there is a breach, the collection is not demandable. Then, ask
“when”. If waiver is issued at the end of the reporting period, the bank agrees not to collect from you,
it is non-current. However, if agreement came after, it would definitely be current. [Reckoning Date:
reporting period]
 Without a waiver, liability becomes payable and demandable, thus current.

MINIMUM LINE ITEMS

ASSETS
a) Property, plant and Equipment
b) Investment Property
c) Intangible Assets
 d) Financial Assets (EXCLUDING amounts shown under e, h and i)
e) Investments accounted for using the equity method – Inv in Assoc & Inv in Joint Venture
f) Biological assets
g) Inventories
h) Trade and other receivables
i) Cash and Cash Equivalents
j) Assets held for sale

Should I present as lump all my NCA as NCA at the SFP? No, it must be separated. Especially PPE and
investment property. As well as financial assets and investments accounted using equity method.

LIABILITIES AND EQUITY

a) Trade and Other Payables
b) Provisions
c) Financial Liabilities (EXCLUDING amounts shown under a and b)
d) Current tax liabilities and current tax assets, as defined in IAS 12
e) Deferred tax liabilities and deferred tax assets, as defined in IAS 12
f) Liabilities included in disposal groups
g) Non-controlling interests, presented within equity
h) Issued capital and reserves attributable to owners of the parent

No matter little or small, these minimum line items shall be presented separately, and cannot and should not
be aggregated as a rule.

MODULE 3: STATEMENT OF COMPREHENSIVE INCOME AND THE STATEMENT OF

PROFIT OR LOSS

Statement of Comprehensive Income and Statement of Profit or Loss

 Measures the performance of the entity
 Looking at the company’s ability to generate income coming from its operations and some other
income coming from incidentals.
 A crucial and critical one in the assessment of entity’s performance.

APPROACHES TO PROFIT MEASUREMENT

1. CAPITAL MAINTENANCE APPROACH [Economist’s View]
1. Financial Capital Maintenance -> increase/decrease in the net assets beginning and ending,
excluding transactions with owners (dividends, etc)
2. Physical Capital Maintenance -> capacity of the entity; uses current cost
i. If capacity is higher than what it was in the beginning, it shows that the capacity is
much higher

2. Transaction Approach [Accountant’s View]

 More detailed and there’s no limit as to information
 Required by PAS 1

ELEMENTS OF PERFORMANCE
a) Income
o Composed of revenues (normal operations) and gains (incidental operations)
o Gains are recognized when there is already actual income from the transaction
o Under revenue recognition, there is a separate standard, IFRS 15, that would guide in terms how
to recognize certain revenue.
b) Expenses
o Different ways to recognize expenses:
 i. Associating cause and effect – before recognizing income, expenses are incurred first (ex.
Cost of sales, direct operating expenses)
ii. Systematic and Rational allocation – systematically allocates the expense that is incurred
based on the benefit that will be getting from the particular expense (ex. Depreciation and
amortization)
iii. Immediate Recognition – assess particular item, wherein you will not get future benefit at
all, you have to write it off or impair it (ex. Impairment, write offs)

Revenue Recognition Principles under PFRS 15

FIVE-STEP PROCESS
1. Identifying contract with customers
2. Identifying the performance obligation
3. Determining transaction price
4. Allocation of the transaction price
5. Recognizing revenue

Total Comprehensive Income

Total Comprehensive Income is defined by PAS 1 as the change in equity during a period resulting from
transactions and other events, other than those changes from transactions with owners in their capacity as
owners

Profit or Loss is the total income less expenses, excluding the components of other comprehensive income

Other Comprehensive Income comprises items of income and expenses (including reclassification adjustments
like recycling issues) that are not recognized in profit or loss or permitted by other PFRSs.

Other Comprehensive Income (OCI) Components

a) Changes in revaluation surplus – using Revaluation Model in PPE
b) Actuarial gains and losses on defined benefit plans – under PAS 19, Employee Benefits
c) Gains and losses from translation of FS of foreign operations (translation adjustments in FS)
d) Unrealized gains and losses during the period from investments in equity investments measured at
FVOCI (basically financial assets at FVOCI, which means it also includes debt instruments at FVOCI)
e) The effective portion of gains and losses on hedging instruments in a cash flow hedge

Items NOT for recycling to P/L

o Revaluation surplus
o Unrealized gains/losses on equity investments through OCI
o Actuarial gains and losses on defined benefit plans

PRESENTATION
 Single Statement of Comprehensive Income; or
 Two Statements (an Income Statement) and a Statement of Comprehensive Income

Information required on the Face of Statement of Profit or Loss / MINIMUM LINE ITEMS
a) Revenue;
b) Gains and losses from derecognition of financial assets measured at Amortized Cost;
c) Finance Costs or Expenses;
d) Share of the profit or loss of associates and joint ventures accounted for using the equity method;
e) Any difference between Fair Value and the previous carrying amount at the date of reclassification
when a financial asset is reclassified to be measured at Fair Value;
f) Tax expense;
g) A single amount comprising the total of:
a. The post-tax profit or loss of discontinued operations; and *
b. The post-tax gain or loss recognized on the measurement to fair value less cost to sell or on
disposal of the assets or disposal group(s) constituting the discontinued operations;
 h) Profit or Loss;
i) Each component of Other Comprehensive Income (OCI) classified by nature; **
j) Share of OCI of associates and joint ventures accounted for using the equity method;
k) Each component of OCI classified by nature (other than “I” above)
l) Total comprehensive income

Other Items of Separate Disclosures *if amounts are not that material
1. Write downs of inventory to Net Realizable Value (NRV)
2. Restructuring activities
3. Disposals of items of PPE
4. Litigation settlements
5. Other provision reversals including the nature of those reversals

*Discontinued Operations
 Arises when there is a disposal group or discontinuing particular segment of the business, the assets
and liabilities on that particular segment
 Discontinuing certain operations in the business, and once it has been discontinued, it has to be shown
separately from continuing operations
 If at the reporting period and it has not yet been disposed, it has to be remeasured (NCAHFS)
 Discontinued Operations is a component of an entity that either has been disposed of or is classified as
held for sale. It is classified as part of a disposal group when:
o It represents a separate major line of business or geographical area of operations;
o It is a part of a single coordinated plan to dispose of a separate major line of business or
geographical area of operations; or
o It is a subsidiary acquired exclusively with a view to resale
 A component is classified as Held for Sale when:
o Its carrying amount will be recovered through sale transaction
o Assets are for immediate sale and sale must be highly probable
o Active selling initiatives has already being done by the entity

** Profit or Loss: Each item of comprehensive income, classified by nature

 Changes in revaluation surplus
 Actuarial gains and losses on defined benefit plans when the enterprise exercises its option to
recognize these gains and losses outside of P&L
 Exchange differences from translating functional currencies into presentation currency (foreign
operations)
 Gains and losses on remeasuring available-for-sale financial assets in accordance with IAS 39,
Financial Instruments: Recognition and Measurement
 The effective portion of gains and losses on hedging instruments in a cash flow hedge under IAS 39 or
IFRS 9 Financial Instruments
 Gains and losses on remeasuring an investment in equity investments where the entity has elected to
present them in other comprehensive income (OCI) in accordance with IFRS 9
 The effects of changes in the credit risk of a financial liability designated at fair value through profit or
loss (FVPL) under IFRS 9.
 Share of other comprehensive income of associates and joint ventures accounted for using the equity
method
 Reclassification adjustments, unless the components of comprehensive income are shown after any
related reclassification adjustments; and
 Total comprehensive income

Reclassification Adjustments or Recycling

 There are OCI items that can be recycled to P&L
 Reclassification adjustments are items recognized in profit or loss which were previously recognized in
OCI (recycling)
 Examples: the disposal of foreign operations, hedged forecast transactions affecting profit or loss

Presentation of Expenses
TWO WAYS:
  Function of Expense method – wherein we separately disclose classified as to the function; when
function of expense classification is used, information on the nature of expenses is a required
additional disclosure; usually used by businesses
 Nature of Expense method – not properly classified; nature of expense in predicting future cash flows;
picturing out how much really is the cost of sale is difficult when using this method;
 When using the Function of Expense method, it still cannot get away with the Nature of Expense
method because it still requires that the nature to be disclosed.

Presentation of Discontinued Operations

1. Post-tax profit or loss of the discontinued operations; and
2. Post-tax gain or loss recognized on the measurement to fair value less cost to sell or on the disposal
of the asses or disposal groups
If the unit has been disposed of:
 After-tax profit/loss of operations of unit
 After-tax profit/loss of asset disposal
If the unit has not been disposed of:
 After-tax profit/loss of operations of unit
 After-tax loss due to measurement (lower of Carrying Amount vs Fair Value less Cost to Sell)

STATEMENT OF CHANGES IN EQUITY

 Total Comprehensive Income for the period (comprising P&L and OCI) showing separately the total
amounts attributable to owner of the parent and to NCI;
 For each component of equity, the effects of retrospective application or retrospective restatement
recognized in accordance with PAS 8
 For each component of equity, a reconciliation between the carrying amount at the beginning and the
end of the reporting period separately disclosing changes resulting from:
o P&L
o OCI
o Transactions with owners in their capacity as owners, showing separately contributions by and
distributions to owners and changes in ownership interests in subsidiaries that do not result to
loss of control
 The reconciliation in OCI must show each item of OCI, although details may be shown in the notes.
 The amount of dividends and the amounts of dividends per share should be shown either on the face
of the statement or in the notes
 Components of equity include:
o Each class of contributed equity (capital stock, share premium, treasury shares, etc)
o Accumulated balance of each class of OCI
o Retained Earnings (appropriated and unappropriated RE shall be presented separately)

ACCOUNTING POLICIES
 Specific principles, bases, conventions, rules and practices applied by an entity in preparing and
presenting financial statements
 General Rule: When you change accounting policy, you change it retrospectively
 In the absence of a Standard or an Interpretation that specifically applies to a transaction, other event
or condition, management use judgment in developing and applying an accounting policy that results
in information that is:
o Relevant to the economic decision-making needs of users; and
o Reliable
 In applying its judgment in selecting from different accounting methods to form part of the accounting
policies, management of an enterprise shall consider the following sources in descending order:
o The requirements and guidance in Standards and Interpretations dealing with similar or
related issues; and
o The definitions, recognition criteria and measurement concepts for assets, liabilities, income
and expenses in the Conceptual Framework.
 Management may also consider most recent pronouncements of other standard setting bodies that use
similar conceptual framework, other accounting literature and accepted industry practices.
 Two Classifications: involuntary change or voluntary change
 1. Involuntary Change in Accounting Policy
 Result of a change in a standard or new standard or new amendment to the standard which
IASB is implementing. There is no choice but to follow it since it is required by an IFRS
 There are some translational provisions, it doesn’t mean you have to apply full retrospective
adjustments.
2. Voluntary Change in Accounting Policy
 The entity or the management changes its accounting policy mainly because it would give
them more relevant and reliable information about the effects of transactions, other events or
conditions on the entity’s financial position, financial performance or cash flows.
 There is no translational provision that can be used. Automatically, it should be affected
retrospectively.
 There has to be done an adjustment to the prior years. When you do prior period adjustments,
the effect will be in equity (RE) portion. The RE balance should be restated at the beginning of
the earliest comparative period.
 The adjustments to beginning balances should be disclosed in the face of the FS to be able to
arrive in the restated beginning balances and effect the usual movements

Change in Accounting Policy

IAS 8 addresses changes in accounting policy from 3 sources:
a) The initial application (including early application) of an IFRS containing specific translational
provisions; or
b) The initial application of an IFRS which does not contain specific translational provisions (retrospective
a application)
c) Voluntary changes in accounting policy (retrospective application)

Retrospective Application -> means restating comparative figures for the prior periods presented as if the
new accounting policy has always been applied
Cumulative Effect of the Change: adjustment to beginning RE or another component of equity of the earliest
comparative period.
Retrospective Application is impracticable when an entity cannot apply it after making every reasonable effort
to do so. It is impracticable to apply a change in accounting policy retrospectively if:
a) The effects of the retrospective application or retrospective restatement are not determinable; (it
cannot be quantified)
b) The retrospective application or retrospective restatement requires assumptions about what
management’s intent would have been in that period
c) The retrospective application or retrospective restatement requires significant estimates of amounts
and it is impossible to distinguish objectively information about those estimates that:
 Provides evidence of circumstances that existed on the date(s) as at which those amounts are
to be recognized, measured or disclosed; and
 Would have been available when the financial statements for that prior period were authorized
for issue.
*Management has to justify that it is really impracticable.

The standard clarifies that the following are not changes in accounting policy:
A. The application of an accounting policy for transactions, other events or conditions that differ in
substance from those previously occurring; and
B. The application of new accounting policy for transactions, other events or conditions that did not occur
previously or were immaterial

Required disclosures for changes in accounting policy

a) If due to new accounting standard, the new accounting standard would even publish the required
disclosures
b) If voluntary change of accounting policy, a reconciliation of the impact of the change, management
shall disclose the nature of the change and the reason why there is a change (as a separate note
disclosure)

CHANGE IN ACCOUNTING ESTIMATES

The making of estimates is a fundamental feature of financial reporting uncertainties inherent in business
activities.

It does not entail any retrospective adjustment. Rather, it is only applied prospectively

Examples are:
 Bad debts
 Inventory obsolescence
 Fair value of financial assets or financial liabilities
 Useful lives or expected pattern of consumption of the future economic benefits of depreciable assets
 Warranty obligations

Changes in accounting estimates are accounted for prospectively.

a) Adjust the carrying amount of an asset, liability or item of equity in the statement of financial position
in the period of change; and
b) Recognize the change in accounting estimates in profit or loss in
 The period of change, if the change affects that period only; or
 The period of the change and future periods, if change affects both

PRIOR PERIOD ERRORS

Prior Period Errors are omissions from, and misstatements in an entity’s financial statements for one or more
prior periods arising for a failure to use, or misuse of reliable information that:
 Was available when financial statements for those periods were authorized for issue; and
 Could reasonably be expected to have been obtained and taken into account in the preparation and
presentation of those financial statements.

It is done prospectively until such it affects the retrospective amounts. Same treatment as to Change in
Accounting Policy.

IAS 8 states that financial statements do not comply with IFRS if they contain errors that are:
a) Material or
b) Immaterial but are made intentionally to achieve a particular presentation of an entity’s financial
position, financial performance or cash flows
* Both must be adjusted accordingly.

An entity shall correct material prior period errors retrospectively in the first set of financial statements
authorized for issue after their discovery by:
a) Restating the comparative amounts for the prior period(s) presented in which the error occurred; or
b) If the error occurred before the earliest prior period presented, restating the opening balances of
assets, liabilities and equity for the earliest prior period presented.

Other than the restatement of the balances, the entity shall disclose:
1. Nature of error
2. The amount of correction (a) for each FS affected, show the impact to each FS, and correct the Basic
Earnings per Share (BEPS) or Diluted Earnings per Share (DEPS) *BEPS and DEPS are required for
public and listed entities
3. Amount of correction to the earliest period presented
4. If retrospective is impracticable, the circumstances that lead to the condition and a description of how
and from when the error has been corrected.
 MODULE 4: STATEMENT OF CASH FLOWS

Statement of Cash Flows

 It is a component of financial statements summarizing the operating, investing and financing activities
of an entity.
 In simple language, it provides information about the cash receipts and cash payments of an entity
during a period *STRICTLY, cash concept. Only transactions relating to cash are included in this
statement.
 IAS 7 provides that an entity shall prepare statement of cash flows and shall present it as an integral
part of its financial statements for each period for which financial statements are presented.
 Users are interested in how entity generates and uses cash and cash equivalents, regardless of the
nature of the business of an entity.
 Entities need cash for their operations and to pay their obligations and as well as in providing returns
to their investors.

Significance of Statement of Cash Flows

- To provide relevant information about cash receipts and cash payments of an entity during a period.
- It provides information that enables users to evaluate the charges in net assets of an entity, its financial
structure, liquidity and solvency
- Cash flow information is useful in assessing the ability of the entity to generate cash and cash equivalents.
- It also enhances the comparability of operating performance by different entities.

*Statement of Cash flow is as relevant as the other components of the Financial Statements for users to come
up with sound economic judgments.
The SCF is designed to provide information about the change in an entity’s cash and cash equivalents.

Cash and Cash Equivalents

 CASH includes currency, coins and amounts on deposit in bank checking accounts or savings account;
an item acceptable for deposit at face value by a bank or other financial institutions. In a limited
sense, it includes currency and coins and demand credit instruments that are unrestricted and are
immediately available for use in current operations. (ex. Cash in banks – Savings and Current,
Checking, Cash on Hands, Checks received from customers, Travelers/Managers Check, Cash or
Working Funds)
 CASH EQUIVALENTS are short-term, highly liquid investment assets that are readily convertible into a
known cash amount or sufficiently close to their maturity date (usually within 90 days from date of
acquisition) so that the market value is not sensitive to interest rate changes (ex. 3-month Treasury
Bills, 3-month Time Deposit/Money Market/Commercial Paper)
o What is important is the Purchase Date wherein it should be purchased within 3 months before
maturity)
o Equity Securities cannot qualify as Cash Equivalents because shares do not have maturity
date. However, Preference shares with specified redemption date and acquired 3 months
before redemption date can qualify as CE.

The components of C&CE shall disclose Cash and Cash Equivalents and shall present a reconciliation of
amounts in the SCF with equivalent items presented in the SFP. It is also necessary to disclose the accounting
policy used in deciding which items are included in C&CE.

Classification of Cash Flows

Cash Flows are classified into activities as:
1. Operating Activities
2. Investing Activities
3. Financing Activities

OPERATING ACTIVITIES
 Are the cash flows derived primarily from the principal revenue producing activities of the entity
 Results from transactions and events that enter into determination of net income/loss
 Ex. Cash Receipts from Sale of Goods or Rendering Services, Cash Receipts from Rental, Cash
Payments to Suppliers, etc.

INVESTING ACTIVITIES
 Are cash flows derived from the acquisition and disposal of long-term assets and other investments
not included in cash equivalents.
 Include transactions involving non-operating assets
 Ex. Cash payments to acquire PPE or intangibles, Cash receipts from sales of PPE, etc.

FINANCING ACTIVITIES
 Are cash flows derived from the equity capital and borrowings of the entity
 Result from transactions between the entity and its owners (equity financing), and entity to its
creditors (debt financing)
 Include transactions involving non-trade liabilities and equity of an entity
 Ex. Cash proceeds from issuing shares, Cash payments to owners, etc.
 Note that cash payments to settle such obligations are Trade Accounts, Notes Payables, Tax Payables
and Accrued Expenses are OPERATING ACTIVITIES and not financing activities

Non-cash transactions that do not require the use of C&CE shall be excluded from the Statement of Cash
Flows. Such transactions shall be disclosed elsewhere – either in the Notes to the FS or to another schedule.
Treatment of Interest, Dividends and Income Taxes in the SC

Interest
o IAS 7 provides that interest paid and interest received shall be classified as operating cash flows
because they enter into the determination of net income or loss.
o Alternatively, interest paid may be classified as financing cash flow because it is a cost of obtaining
financial resources. Interest received may be classified as investing cash flow because it is a return on
investment. (ex. Interest received on a debt investment or bonds – done by the entity to raise capital,
there is an interest in that)
o For instance a company is a bank or finance company, interest received as payments of interest from
depositors or *******
Dividends
o IAS 7 provides that dividend received shall be classified as operating cash flow because it enters into
the determination of net income.
o Alternatively, dividend received may be classified as investing cash flow because it is a return on
investment. (ex. If entity has equity investments in the form of FVPL or FVOCI, in that instance, the
dividend received is considered as investing activity)

PAS 7 – STATEMENT OF CASH FLOWS

Ms. Jaucian

Terminologies
 Cash, found in the SFP, consists of Cash and Cash Equivalents. Cash comprises cash on hand/bank,
and demand deposits
 Cash equivalents are short-term, highly liquid investments that are readily convertible to known
amounts of cash and which are subject to insignificant risk of changes in values. *for it to be qualified
as CE, the term of the investment would be three months. (NOT the remaining three months)
 Cash flows are inflows and outflows of cash and cash equivalents
 Operating activities are the principal revenue-producing activities of the entity and other activities that
are not investing or financing activities
 Investing activities are the acquisition and disposal of long-term assets and other investments not
included in cash equivalents
 Financing activities are activities that result in changes in the size and composition of the contributed
equity and borrowings of the entity

OBJECTIVE OF PSA 7
 The objective of PAS 7 is to require entities to provide information about historical changes in cash
and cash equivalents in a statement w/c classifies cash flows during the period from operating,
investing, and financing activities.
 The standard aims to give users of FS a basis to evaluate the entity’s ability to generate cash and cash
equivalents and its needs to utilize those cash flows.
  Critical: Net Cash from Operations. If may negative NCFO, it means that hindi na kaya ng cash flow
from operations to sustain your working capital, and prolonged negative NCFO is not a good sign.
(Kasi kaya ka nagppositive Cash is because umuutang ka, but how can you pay that if you do not
have a positive NCFO, wala ka ring pambayad)

Classifications in Statement of Cash Flows

The statement of cash flows reports inflows and outflows of cash and cash equivalents during the period
classified under:
 Operating activities
 Investing activities; and
 Financing activities

OPERATING ACTIVITIES
- Examples include:
 Cash receipts from the sale of goods and the rendering of services;
 Cash receipts from royalties, fees, commissions, and other revenue
 Cash payments to suppliers for goods and services
 Cash payments to and on behalf of employees
 Cash receipts and cash payments of an insurance entity for premiums and claims, annuities
and other policy benefits;
 Cash payments or refunds of income taxes unless they can be specifically identified with
financing and investing activities; and
 Cash receipts and payments from contracts held for dealing or trading purposes
- Two Methods: Direct and Indirect Method
- Direct Method
 Major classes of gross cash receipts and gross cash payments are disclosed.
 PAS 7 encourages entities to use the direct method because it provides information which may
be useful in estimating future cash flows and which is not available under the indirect method
*in this method, we can see the seasonality of your spend if done in a monthly basis, it is
more of seeing how to manage cash in and cash out
 Refer to the discussion in Chapter 5 for the computations in arriving at the amount of cash
receipts and cash disbursements
- Indirect Method
 Both direct and indirect method of presenting net cash flow from operating activities should
arrive at the same amount.
 When using the indirect method, the most common approach adjusts reported profit or loss
for the effects of:
 Changes in inventories and operating receivables and payables during the period;
 Non-cash items such as depreciation, AFBD, provisions, deferred taxes, unrealized
foreign currency gains and losses, and undistributed profits of associates; and
 All other items for which the cash effects are investing or financing cash flows
*Please refer to Chapter 5 on the common adjustments to profit before tax

INVESTING ACTIVITIES
- Cash flows arising from investing activities include:
 Payments to acquire, and receipts from the sale of PPE, intangibles and other long-term assets
(including payments and receipts relating to capitalized development costs and self-
constructed PPE);
 Payments to acquire, and receipts from the sale of equity or debt instruments of other entities
and interests in jointly controlled entities (other than payments and receipts for those
instruments considered to be cash equivalents or those held for dealing or trading purposes);
 Advances and loans made to, and repaid by, other parties (other than advances and loans
made by a financial institution); and
  Payments for, and receipts from, derivatives or hedging instruments such as futures contracts,
forward contracts, option contracts and swap contracts, except when the contracts are held for
dealing or trading purposes, or the cash flows are classified as financing activities

FINANCING ACTIVITIES
- Cash flows arising from financing activities include:
 Proceeds from issuing shares or other equity instruments;
 Payments to owners to acquire or redeem the entity’s shares;
 Proceeds from issuing, and outflows to repay debenture, loans, notes, bonds, mortgages and
other short or long-term borrowings; and
 Payments by a lessee for the reduction of the outstanding liability relating to a lease.

Interests and Dividends

o An entity is required to disclose separately cash flows from interest and dividends received and paid,
and their classification as either operating, investing or financing activities should be applied in a
consistent manner from period to period. *you may classify it where you want it, the thing is it should
be applied consistently. If prior year, operating, it is still operating for the next few years.
o Interest paid may be classified under either operating or financing activities; and
o Interest received and dividends received may be included in either operating or investing cash flows.

Taxes on income
 Cash flows arising from taxes on income should be separately disclosed within operating cash flows
unless they can be specifically identified with investing or financing activities.

Foreign currency cash flows

 Should be translated by applying to the foreign currency amount the exchange rate between the
reporting currency and the foreign currency at the date of the cash flows

Non-cash transactions
 Non-cash transactions, if material, should be disclosed elsewhere in the financial statements

MODULE 5: Cash to Accrual Accounting and Single-Entry System

DISTINCTIONS BETWEEN CASH BASIS AND ACCRUAL BASIS OF ACCOUNTING

Cash Basis Accrual Basis
 Revenue is recognized when cash is received  Revenues are recognized when earned and
and expenses are recognized when cash is expenses are recognized when incurred,
paid *this approach does not recognize irrespective of when cash is received or paid
Accounts Receivable/Payable, Accured *Essence of this basis is the recognitioin of
Income/Expense, Deferred Income or Accounts Receivable/Payable, Accured
Prepaid Expenses Income/Expense, Deferred Income or
 Cash basis of accounting does not require Prepaid Expenses
adjustments at the end of the reporting  Adjustments are necessary at the end of the
period, thus creating mismatching of period to update certain assets, liabilities
revenues and expenses and revenues and expenses
 Small businesses who does not avail  IAS 1 prescribes the adoption of accrual
services of an accountant usually uses this basis of accounting in the presentation of
basis enterprise’s financial statements
  Applies both recognition principle and
expense recognition principle based on the
recognition criteria described in the
Conceptual Framework for Financial
Reporting

CONVERSION FROM CASH BASIS TO ACCRUAL BASIS


Cash Receipts from Customers
Cash Paid for Purchases
Cash Paid for Insurance
Cash Paid for Wages
Cash Received for Rent
+ Accounts/Notes Receivable, End
+ Sales Returns, Discounts and Allowances = GROSS SALES
+ Accounts/Notes written off as worthless under Accrual Basis
- Accounts/Notes Receivable, Beg
*deducted because this items pertain to
preceding year, and constitute sales of prior
year and that, they might have been
collected by the current year or some may be
subject of R&A&D.
+ Customers Advances, Beg *added because
the presumption is that, the earning process
is within the current period
- Customers Advances, End *deducted
because there is no income yet to be
recognized
+ Accounts/Notes Payable, End *added
because it implies that there has been new = NET PURCHASES
purchases on account
+ Purchase Returns, Allowances and
Discounts
- Accounts/Notes Payable, Beg *deducted
because this items pertain to preceding year,
and constitute sales of prior year and that,
they might have been collected by the
current year or some may be subject of
R&A&D.
+ Inventory, Beg = COST OF GOODS
- Inventory End SOLD
+ Prepaid Insurance, Beg *it is the prepaid
insurance end of the preceding year which is = INSURANCE
presumed to be expensed during the current EXPENSE
period
- Prepaid Insurance, End *deducted because
this is the unused portion of the prepayments
made during the period, treated as an asset
therefore, it has to be deducted
+ Wages Payable, End *incurred but not yet
paid during the reporting period (dr wages = WAGES EXPENSE
expense, cr accrued wages/wages payable)
- Wages Payable, Beg *recorded as expense
already under the accrual basis, the
payability is presumed to be in the current
period, therefore it has to be deducted
+ Unearned Rent, Beg *under accrual basis,
this is added because the earning process is = RENT REVENUE
within the current period
- Unearned Rent, End *under cash basis, this
has been recognized as income since advance
payments have been received however,
under accrual, this is deducted because there
is no income yet during the current period
- Accrued Rent, Beg *deducted under accrual
basis because this has been reported already
as income from prior period, its collectability
is within the current period only
+ Accrued Rent, End *this has to be reported
 as income, therefore added (dr accrued
rent/rent receivable, cr rent income)
+ Interest Receivable, End *added because
Cash Received for Interest it has been earned already = INTEREST
- Interest Receivable, Beg *deducted REVENUE
because this has been accrued as income
already in the prior period. Under cash basis,
included as income because the collectability
took place during the current period. Under
accrual, it is considered as deduction
+ Amortization of discount of debt
securities investments (OCI and AC)
- Amortization of premium on debt
securities investment (OCI and AC)
*under cash basis, the nominal interest
received periodically is the interest income
supposedly to be reported. It ignores the
effects of amortization of discounts and
premiums. Under accrual basis, the interest
income is the effective interest, which
includes amortizations of premiums and
discount. Therefore, amortization of discounts
is added, while amortization of premium is
deducted
+ Income Tax Payable, End *this is the
Cash Paid for Income Tax unpaid taxes in the end, therefore it is added = INCOME TAX
under accrual basis EXPENSE
- Income Tax Payable, Beg *under accrual
basis, this has been reported as expense in
the prior period. Only that, its payment is
presumed to be in the current period
+ Deferred Tax Asset, Beg *original entry is
dr DTA then cr income tax benefit/expense,
thus income tax expense has been
decreased. The DTA at the end becomes the
DTA beg for the current period and is
expected to be reversed in the following
period the reversal increase the ITE,
therefore added.
- Deferred Tax Asset, End *under accrual, it
has to be deducted
+ Deferred Tax Liability, End *added
following the accrual basis. Original entry is
dr income tax expense and cr DTL. Under
accrual basis, DTL end is added
- Deferred Tax Liability, Beg *Presumed
that it reverses following period. Therefore
the reversal is recorded as dr DTL and cr
income tax expense. Under accrual, the DTL
Beg is deducted.

SINGLE-ENTRY ACCOUNTING SYSTEM

 Is any set of procedures that does not provide for a debit-credit analysis *does not analyze effects of
transactions into debits and credits. Usually, records contain only items pertaining to Cash, A/R and
A/P, PPE and Taxes Paid
 It is adopted by organizations whose activities are few and simple, so that they do not employ the
services of a bookkeeper.
  The books of accounts kept under single-entry vary widely depending on the specific needs of the
organization and persons maintaining the system.
 A typical set of books consists of the following records: Daybook or General Journal; Cash Book and
Creditor’s Ledger.
 It is commonly called a system with incomplete records
 To comply with requirements of GAAP, records kept under the Cash basis and single-entry system are
to converted at reporting dates, so that the financial statements are reported under the accrual basis
of accounting

Statement of Financial Position from Incomplete Records

Sources of Information to Prepare SFP under Single-entry System

Account Source/s
Cash Cash on hand (as counted) and cash records reconciled with bank
statements
Accounts Receivable Unpaid sales invoices; confirmation from customers
Inventory Physical count and inventory purchase invoices
Prepaid expenses other than Documents, records, or memoranda on file and verification by outside
unused supplies parties
Supplies Physical count and reference to purchase orders
Property, Plant and Official receipts, deeds, cancelled checks, physical observation
Equipment
Accumulated Depreciation Determined from plant assets amount
Accounts Payable Records, documents, and confirmation from creditors
Accrued Expenses and Other Reference to supporting documents, independent evidence and
Liabilities confirmation from outside parties
Equity Total assets less total liabilities

Computation of Profit from Single-Entry Records

PROBLEM 1: The incomplete records of Brian Company showed the following information
 End of Year Beg of Year
Cash 108,000 60,000
Accounts Receivable 181,000 120,000
Prepaid Rent 20,000 35,000
Furnitures and Fixtures (net) 300,000 270,000
Accounts Payable 112,000 94,000
Accrued Salaries 26,000

Rain, the owner, made additional investment of 70,000 and withdrew cash of 120,000 during the year.
REQUIRED: Compute the profit or loss for the year.

Solution:
Capital, End
Assets 609,000
Liabilities 138,000 471,000
Capital, Beg
Assets 485,000
Liabilities 94,000 391,000
Increase in Capital 80,000
Additional investments (70,000)
Withdrawals 120,000
PROFIT 130,000

PROBLEM 2: For each of the following independent items, make the required calculations

A. Prepaid Insurance, End 13,480

Insurance Expense 38,900
Insurance premiums paid 48,200

What is the prepaid insurance, beginning? 38,900 + 13,480 – 48,200 = 4,180

B. Cash, Beg 700,000

Cash, End 980,000
Total Cash Disbursed 1,160,000
All cash receips were from customers
Accounts Receivable, Beg 1,200,000
Accounts Receivable, End 1,660,000
Accounts written off 30,000

What is the total Sales Revenue during the period?

1,660,000 + 980,000 – 700,000 = 1,440,000 collections;
1,440,000 + 1,660,000 + 30,000 – 1,200,000 = 1,930,000

C. Equipment (net), Beg 200,000

Cost of Equipment acquired 80,000
Equipment (net), End 206,000
Equipment with original cost of 40,000 was sold 36,000
at a loss of 4,000 during the period

What is the depreciation expense for the period?

210,000 + 80,000 – 40,000 – 206,000 = 44,000

D. Rent collected in advance, Beg 80,000

Rent collected in advance, End 100,000
 Rent earned but not yet collected, Beg 54,000
Rent earned but not yet collected, End 30,000
Rent earned during the period 440,000

How much is the total collections of rent? [Accrual to Cash Basis]

440,000 – 80,000 + 100,000 + 54,000 – 30,000 = 484,000

PROBLEM 3: The following data were taken from the incomplete accounting records maintained by Grain
Company, a sole proprietorship.

Other Information:
a) Sales returns during the year were 21,000. Bad Debts written off directly against accounts receivable
were 10,800.
b) Purchase returns during the year amounted to 13,000. Goods received from supplier on account on
December 20, 2020 costing 8,000 were not recorded by the company until January 2021.
c) The only change in the equipment is the purchase of new computer on June 30, 2020. Depreciation
charges are credited to the long-lived assets account from the month following the purchase.

REQUIRED: Determine the profit for 2020 by the analysis of change in capital.
Prepare the profit or loss section of the Statement of Comprehensive Income for Grain
Company for the year ended December 31, 2020. Show detailed computation for sales
purchases and operating expenses.

Profit/Loss for 2020

Capital, End
A 352,000
L 123,500 229,300
Capital, Beg
A 293,200
 L 117,800 175,400
Increase in Capital 53,900
Withdrawals 20,000
PROFIT 73,900

Schedule 1 – Sales
Receipts from Customers 697,500
AR, Beg (59,400)
AR, End 76,100
Accounts written off 10,800
Sales Returns 21,000
GROSS SALEs 746,000

Schedule 2 – Purchases
Payments to Trade Creditors 536,600
AP, Beg (63,300)
AP, End 69,900
Unrecorded Purchases 8,000
Purchase returns 13,000
GROSS PURCHASES 564,200

Schedule 3 – Operating Expenses

Bad Debts Expense 10,800
Depreciation Expense 9,500
(85,000+ 20,000 – 95,500)
Other OPEX:
Payments for operating expenses 94,100
Prepaid Expenses, Beg 6,000
Prepaid Expenses, End (7,500)
Accrued Expenses, Beg (4,500)
Accrued Expenses, End 5,600 93,700

TOTAL OPEX 114,000

 MODULE 6: EARNINGS PER SHARE

Introduction to Earnings Per Share (IAS 33)

 Earnings Per Share is a number that talks about the entitlement of one share to the earnings of the
entity.
 It is one of the most powerful financial information especially when we talk about Share Price.
 Two types: Basic Earnings Per Share (BEPS) and Diluted Earnings Per Share (DEPS)
 Who is required to present the EPS figure?
o Publicly listed companies including those in the process of issuing securities to the public
o Those non-listed company decides to present EPS, that entity is covered by the rules and
principles by IAS 33
 Special Cases: When both the parent and conso are reported in one, EPS figure is only required for the
consolidated financial statements
 Basic Earnings Per Share and Diluted Earnings Per Share must be disclosed for the discontinued
operations either on the face of the SCI/SPL or in the notes

How is EPS presented? Both basic and diluted EPS must be presented in the face of the SCI with equal
prominence

What is the difference between BEPS and DEPS?

 BEPS only account for actual ordinary share transactions (ex. Share transactions for the year, actual
issuances, actual reacquisitions and other related share transactions)
 Danger of BEPS: It discounts the possibility for potential ordinary share transactions. Th
 Dilution is a reduction in EPS. *For example, your BEPS is 10, your DEPS shall be lower by 10.
 DEPS, on the other hand, accounts for “what if” transactions
 Why do we factor in DEPS? To caution the users that there are potential ordinary shares that might
affect (decrease) EPS (ex. Convertible bonds)
 The goal of DEPS is to present a more conservative EPS through a lower DEPS or higher DLPS
compared to BEPS and BLPS, respectively.
Example: BEPS is 1. Computed DEPS is 1.10. How much is your DEPS? It is presented as 1. [DEPS is
the same as BEPS] Reason: The computed DEPS will not factor in caution that we want to give to our
users.
BEPS Computation
 The earnings numerators used for the calculation FORMULA:
should be after deducting all expenses, including PROFIT
taxes, minority interests, and preference dividends WANOSO
 The denominator is calculated by adjusting the shares (Weighted Average Number Of Shares
in issue at the beginning of the period by the number Outstanding)
of shares bought back or issues during the period,  Profit is not a number at a point in
multiplied by a time-weighting factor. time, rather FOR a period of time
 Contingently issuable shares are included in the basic  WANOSO vs NOSO -> NOSO is at
EPS denominator when the contingency has been met. point in time. So, to align the
numbers, we use WANOSO.

Example: Jan 1, company has 10,000 shares from last year. On July 1, the company issued additional shares
of 2,000. How much is NOSO and WANOSO?
 NOSO is 12,000 [as at the end of the year] – we cannot use against Profit because profit is
for the year.
 WANOSO is computed as:
10,000 x 12/12 = 10,000 [Outstanding for 12 months]
2,000 x 6/12 = 1,000 [Outstanding for 6 months]
WANOSO 11,000
DEPS Computation
 Diluted EPS is calculated by adjusting the earnings and the number of shares for the effects of dilutive
options and other dilutive potential ordinary shares.
 First compute BEPS, then we adjust the numbers for the potential OS.

How is EPS presented?

BONUS SHARES

 What a company does with its accumulated earnings, or when its share price goes up? Often, is issues
something called Bonus shares to its shareholders
 Bonus shares are additional shares given to the current shareholders without additional cost, based
upon the number of shares that a shareholder owns.
 These are the company’s accumulated earnings which are not given in the form of dividends, but are
converted into free shares.
  Example: If an investor holds 200 shares of a company which declares 4:1 bonus, for every share, he
gets 4 shares for free. Cumulatively he gets 800 shares for free and his total holding will increase to
1000 shares [200 Hold + 800 Free BS = 1000 shares

How would bonus issues affect EPS computation?

They will affect the lines before the bonus issue issuance (retrospective). For example, if a bonus
issue for 20% was issued on December 1, 202X, all lines in your EPS computation PRIOR to
December 1, 202x will be multiplied by 1.2, including the prior year.

MODULE 7: INTERIM REPORTING (IAS 34)

Interim Period
 A period shorter than a full year (ex. Quarters, monthly, semesters)
 Most common in the Philippines is Quarterly

Interim Financial Statements

 Is a FS that contains information about the interim periods and that financial statements can either be
a complete or condensed set of financial statements
 Condensed Set of FS: some requirements and disclosures might be omitted in these set of FS
 Complete Set of FS: in full compliance to PFRS

Matters Left to Judgment of Regulators (IAS 34 recognizes these matters are usually regulatory)
- Who should prepare interim financial report
- Time period and Frequency
- Reportorial deadlines
For Publicly Listed Entities, according to Standards, are encouraged to report after first half of the year (if
calendar year, June 30), not later than 60 days after [June 30]

Local Context (SEC Form 17-Q SRC Rule 17 (2) (b)

 Time covered: Quarterly
 Filing: 45 calendar days after the end of each of the first three fiscal quarters of each fiscal year
o No report is need to be filed for the fourth quarter of any fiscal year because entities are
required to report annual financial statements. *so parang same lang, though different
contents but redundant na because most likely your fourth quarter report would be the annual
report.
MINIMUM CONTENTS

If Condensed, the minimum requirements are:

- Each of the headings and subtotals of the recent annual financial statements and the selected
explanatory notes required by IAS 34
- The face of the financial statements should look similar because all the headings and subtotals must
be included and the selected notes.
- Entity may present additional line item if omission of such line item would make the FS misleading or
if omission is material.
- Inclusions: Condensed Statement of Financial Position (SFP), Statement of Comprehensive Income
(1 statement or 2 statement), Statement of Changes in Equity, Statement of Cash Flows, Selected
Explanatory Notes

If Complete set, entity must disclose everything that’s applicable. It’s like preparing the full financial
statements but for 3 months only. It is prepared in full compliance with PFRS.

Period Covered

Example: Assume we are talking about Calendar Quarter 2 of 20X9,

NOTE DISCLOSURE
 The explanatory notes required are designed to provide an explanation of events and transactions that
are significant to an understanding of the changes in financial position and performance of the entity
since the last annual reporting date.
 IAS 34 states a presumption that anyone who reads an entity’s interim report will also have access to
its most recent annual report. Consequently, IAS 34 avoids repeating annual disclosures in interim
condensed reports.
 If the annual financial statements are consolidated, then the interim financial report should be
consolidated as well, for consistency.

Examples of events and transactions for which disclosures are required if they are significant [IAS 34, 15A-
15B]
o Write down of inventories (Estimates)
o Recognition of reversal of an impairment loss (Estimates)
o Reversal of provision of costs of restructuring (Estimates)
o Acquisitions and disposals of PPE (Investing Transactions)
o Commitments for the purchase of PPE (Investing Transactions)
o Litigation settlements (Estimates)
o Corrections of prior period errors (Estimates)
o Changes in business or economic circumstances affecting the fair value of financial assets and
liabilities (Environmental)
o Unremedied loan defaults and breaches of loan agreements (Loan Covenant Violation)
o Transfers between levels of the ‘fair value hierarchy’ or changes in the classification of financial assets
(Fair Value Transfer)
o Changes in contingent liabilities and contingent assets (Estimates)

Examples of other disclosures required [IAS 34, 16A]

o Changes in accounting policies
o Explanation of any seasonality or cyclicality of interim operations
o Unusual items affecting assets, liabilities, equity, net income or cash flows
o Changes in estimates
o Issues, repurchases and repayment of debt and equity securities (Financing)
o Dividends paid (Financing)
o Particular segment information (where IFRS 8 Operating Segments applies to the entity)
o Events after the end of the reporting period
o Changes in the composition of the entity, such as business combinations, obtaining or losing control of
subsidiaries, restructuring and discontinued operations
o Disclosures about the fair value of financial instruments

General Rule: The same accounting policy should be applied to interim financial reporting as applied to
annual financial statements.

Except, if there are changes after the most recent annual financial statements. These changes must be
reflected to the next annual financial statements
MEASUREMENT
 REVENUES that are received seasonally, cyclically or occasionally within a financial year should not be
anticipated or deferred as of the interim date, if such anticipation and deferral would not be
appropriate at the end of the financial year.
 COSTS that are incurred unevenly during a financial year should be anticipated or deferred for interim
reporting purposes, if and only if, it is also appropriate to anticipate or defer that type of cost at the
end of the financial year.

Sample of Statement of Compliance

As condensed interim financial reports do not include all of the disclosures required by IAS 1 Presentation of
Financial Statements and other PFRS, they do not meet this requirement. They are, therefore, more
appropriate described as having been prepared ‘in accordance with IAS 34 Interim Financial Reporting’
rather than ‘in accordance with IFRSs’

Condensed Interim Reports: Entity should consider Compliance with Standards at two levels:
- Compliance with all measurement and presentations rules contained in the Standards and Interpretations [if
you opt to present a specific disclosure (ex. you deem to believe that reporting financial instruments is
significant) then you may do so. *You would have not complied, had you followed IAS 34 fully. If you have
the option not to comply, but you chose to comply
- Compliance with Disclosure Requirements with IAS 34 for condensed interim financial statements

MODULE 6.1: OPERATING SEGMENTS (IFRS 8)

Objective of IFRS 8
 Expressed as a “core principle”, being an entity shall disclose information to enable users of its FS to
evaluate the nature and financial effects of the business activities in which it engages and the
economic environment in which it operates. *The focus is how these segments are being monitored in
the entity. One of the requirements before you can identify an operating segment, it should be
reported to the Chief Operating Decision Maker (CODM)

Scope of IFRS 9
Applies to both separate or individual FS and the consolidated FS of a group with a parent:
- Whose debt or equity instruments are traded in a public market; or
- That files, or is in the process of filing, its (consolidated) FS with a securities commission or other regulatory
organization for the purpose of issuing any class of instruments in a public market (public offerings)
** When both separate and consolidated FS are presented in a single financial report, segment information
needs to be presented only on the basis of the consolidated FS.
** Those entities who does not a publicly listed entity or participates in public offerings may opt to report
operating segments in the FS, even though they are not required. But, once an entity is publicly listed and
participates in public market, they are required.

OPERATING SEGMENT is a component of an entity:

 That engages in business activities from which it may earn revenue and incur expenses (including
revenues and expenses relating to transactions with other components of the same entity)
*intracompany transactions within the segment
 Whose operating results are reviewed regularly by the entity’s chief operating decision maker to make
decisions about resources to be allocated to the segment and asses its performance and
  For which discrete financial information is available
* The entity has to disclose to the financial statements on the way they segmentized their operations

CHIEF OPERATING DECISION MAKER (CODM)

o The function of allocating resources to and assessing the performance of the operating segments of an
entity
o This is not necessarily a manager with a specific title but it can be an entity’s CEO, COO, a group of
executive directors or others.

SEGMENT MANAGER
o For each segment, there can be a segment manager who directly reports to the CODM
o The function of being directly accountable to maintaining regular contact with the CODM to discuss
operating activities, financial results, forecasts or plans for the segment

REPORTABLE SEGMENT
 An operating segment or a group of two or more operating segments determined to be eligible for
aggregation in accordance with IFRS 8.12 (Aggregation Criteria) and which exceeds the quantitative
thresholds in IFRS 8.13.
 AGGREGATION CRITERIA: Consistent with the core principles of IFRS 8, have similar economic
characteristics and are similar in each of the following:
o Nature of products and services
o Nature of the production processes
o Type or class of customer for their products and services
o Methods used to distribute their products or provide their services
o If applicable, the nature of the regulatory environment, for example, banking, insurance and
public utilities

Quantitative Thresholds
 Its reported revenue from both external customers and intersegment sales or transfers, is 10% or
more of the combined revenue, internal and external, of all operating segments; OR
 Reported profit or loss is in absolute terms, 10% or more of the greater of, in absolute amount:
o The combined profit of all operating segments that did not report a loss; and
o The combined reported loss of all operating segments that reported a loss; OR
o The basis is WHICHEVER IS HIGHER. Kung lahat ng combined profit mo is higher than the
combined reported loss, yung combined profit mo ang kukunin mo ang 10% then iccompare
mo sa P/L ng particular segment mo. Same with loss.
 Its assets are 10% or more of the combined assets of all operating segments.
 A segment is a reportable segment if one of the quantitative thresholds are met. If none of the three
thresholds are met, then the segment is not a reportable segment. *Dapat meron kahit isa.
 If the identified reportable segments do not account for 75% of the entity’s revenue, report additional
segment if external revenue of all segments is less than 75% of the entity’s revenue. Then aggregate
remaining segments into all other segments category.
 If the identified reportable segments account for 75% of the entity’s revenue, aggregate remaining
segments into All Other Segments category
 Kapag ina-aggregate mo na lahat ng reportable segments mo, dapat the aggregate amount is 75% of
the entity’s revenue. If that’s the case, aggregate the remaining as All Other Segments.
 Kapag hindi umabot sa 75%, you have to add another segment. And then, whatever is left, that is the
All Other Segments category.
 MODULE 7:
FINANCIAL REPORTING FOR SMALL AND MEDIUM-SIZED ENTITIES AND SMALL ENTITIES

Small and Medium-Sized Entities

As defined by the IFRS for Small and Medium Sized Entities, small and medium-sized entities are those that:
 Do not have public accountability; and
 Publish general purpose financial statements for external users

An entity has public accountability if:

a) Its debt or equity instruments are traded in a public market, or
b) It is in the process of issuing such instruments for trading in a public market, or
c) It holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses
*Fiduciary Capacity -> applies to a person serving to handle money and property to benefit another
party (ex. Attorney, broker or guardian)

Philippine Adoption of PFRS for SMEs and PFRS for Small Entities
The Philippine Securities and Exchange Commission adopted a definition of “small and medium sized entities”
that includes size criterion:
 Total ASSETS  P 3,000,000 to 350,000,000
 Total LIABILITIES  3,000,000 to 250,000,000

 Not required to file FS under SRC Rule No. 68.1;

 Not in the process of listing;
 Not a holder of secondary licenses *;
 It is not a public entity
 *Secondary Licenses – would include banks, investment houses, finance companies, insurance
companies, securities brokers/dealers, mutual funds, and pre-need companies

Exception to Apply PFRS for SMEs (8)

1. SME is a subsidiary of a parent company reporting under Full-PFRS *for the purpose of consolidation
2. An SME is a subsidiary of a foreign parent company which will move towards F-PFRS *for the purpose
of consolidation
3. An SME, either a significant joint venture/associate, is part of a group that is reporting under full PFRS
4. An SME is a branch or office or regional operating headquarter of a foreign company reporting under
full PFRS
5. An SME is a subsidiary that is mandated to report under full PFRS
6. An SME has a projection that will breach the threshold of being an SME
7. An SME has a plan to do initial public offering
8. An SME has been preparing FS under full PFRS and has decided to liquidate

SMALL ENTITIES are those that meet the following criteria:

 Total ASSETS  P 3,000,000 to 100,000,000
 Total LIABILITIES  3,000,000 to 100,000,000
 Not required to file Fs under Part II (Large Entities and Public Interest Entities) of SRC Rule 68;
 Not in the process of filing their FS for the purpose of issuing any class of instruments in public
market;
 Not holders of secondary licenses issued by regulatory agencies

MICRO ENTITIES are those that meet the following criteria:

 Total ASSETS  less than P 3,000,000
 Total LIABILITIES  less than P 3,000,000
 Not required to file Fs under Part II (Large Entities and Public Interest Entities) of SRC Rule 68;
 Not in the process of filing their FS for the purpose of issuing any class of instruments in public
market;
 Not holders of secondary licenses issued by regulatory agencies

Exception to Apply PFRS for SEs (6)

1. SE is a subsidiary of a parent reporting under full PFRS
2. SE is a subsidiary of a foreign company moving towards full PFRS
3. SE is a JV or associate / part of a group reporting under F-PFRS
4. SE is a branch office/ROH of a foreign company under F-PFRS
5. SE has a projection to breach the threshold of being an SE
6. SE has been preparing under F-PFRS has decided to liquidate

SEC Financial Reporting Frameworks

Entity Size Criteria Framework
Large and/or publicly Total Assets 350M and above FULL PFRS
accountable Total Liabilities 250M and above
Medium Total Assets 100M to 350M PFRS for SMEs
Total Liabilities 100M to 250M
Small Total Assets 3M to 100M PFRS for SEs
Total Liabilities 3M to 100M
Micro Total Assets Less than 3M PFRS for SEs or
Total Liabilities Less than 3M Income Tax Basis

Differences of PFRS for SMEs and PFRS for Small Entities from Full PFRS

Item/Element PFRS for SMEs PFRS for Small Entities

Qualitative Qualitative Characteristics: Basic Features:
characteristics of
information Understandability Fair presentation
presented and basic Relevance Compliance with PFRS for SEs
features Materiality Going concern
Substance over form Frequency of reporting
Prudence Consistency of presentation
Completeness Comparative information
Comparability Materiality and aggregation
Timeliness
Balance bet benefit and cost
Undue cost of effort
Accrual Basis Applied Applied
Formulation of Based on: Based on:
accounting policies - PFRS for SMEs - PFRS for SEs
- Pervasive recognition and No additional guidelines provided, as
measurement bases logic suggests that Small Entities’
- Requirement of PFRS for those with transactions are simple and
no provision in the PFRS for SMEs addressed in the PFRS for SEs.
Complete set of FS Same as in full PFRS, except when an Same as in PFRS for SME.
entity makes retrospective In as much as no other
adjustments due to change in comprehensive income is presented
accounting policy or correction of for a small entity, an income
prior period, there is no additional statement is prepared instead of the
requirement to present a SFP at the SCI.
beginning of the prior period.
Allowed to present a combined SCI
and RE.
Minimum line items Same as in full PFRS, except when There are no prescribed minimum
in the SFP there are no requirements for line items, but suggests presentation
separate line presentation of the of major accounts either on the face
following: of the SFP or in the notes
- Assets classified as held for sale
-Liabilities relating to disposal groups
classified as held for sale
- Investment in associates and joint
ventures
Minimum line items Same as in full PFRs, except that There are no prescribed minimum
in the SCI or impairment loss is not required to be line items
Income Statement presented separately
Statement of Same as in full PFRS, but does not There are no specific guidelines
Changes in Equity provide option for presentation of
dividends
Changes in Same as in full PFRS There is no requirement for
accounting policies restatement of comparative figures
Correction of Prior Same as in full PFRs but does not There is no requirement for
Period Errors require a restatement SFP as at the restatement of comparative prior
beginning of the prior year period. The cumulative amount is
shown as adjustments to the
beginning balance of equity of the
current period. The balances of the
assets and liabilities of the current
period are adjusted.
Earnings per Share Not required Not required
presentation
Notes to FS Same as in full PFRs except Same as in full PFRS except for:
sensitivity analysis is not required - Sensitivity analysis
- Key sources of judgments
- Key sources of estimation
 uncertainty
Disclosure Substantially reduced as compared to Substantially reduced as compared to
Requirements full PFRS full PFRS
Inventories Same as in Full PFRS Same as in full PFRs except
inventories are subsequently
measured at the lower of cost or
market value
Investment in Use either the equity model or Same as in PFRS for SMEs except
Associates - The cost model for investment with small entities can choose freely
no published price quotations and between the cost model and the fair
measurement at fair value is value model
impracticable and
- The FV model for investments with
published price
Dividends are reported as income
without regard to the source of
dividends
Investment in Same as investment in associates No such account is used, as an entity
jointly controlled with investments in jointly controlled
entities entities may not qualify as small
entities
Basic equity Instruments with published price Cost – initial measurement
instruments quotation -designated at FV
Reporting date – lower of cost or FV,
Instruments without published price with impairment taken to P/L
quotation – measured at cost (subj to
impairment)
Debt instruments Initially recognized at transaction Same as in PFRS for SMEs
price and subsequently amortized
using EIR

Investment Same as in full PFRS Same as in full PFRS for SMEs

Property IP held at operating lease – initially
measured at the lower between FV
and PV of minimum lease payments

IP whose FV can be determined Same as in full PFRS for SMEs,

without undue cost/effort – except the requirement of disclosure
subsequently measured at FV of FV under the cost model

All others shall be measured at the

cost model
Research and Expensed as incurred Same as in PFRS for SMEs
development costs
Intangible assets Amortized based on management Same as in PFRS for SMEs
whose estimated estimate not to exceed 10 years
useful life cannot be
determined reliably
Income tax Same as in full PFRS Choice between accrual of:
- Current tax only
- Current tax and deferred income
tax

When (b) is opted, both the current

and deferred taxes are recognized in
profit or loss
Leases Finance Lease – if substantially Account for all leases as operating
transfers the risks and rewards of leases
 ownership to the lessee; otherwise,
record as operating lease
Borrowing costs Recorded as expenses Same as in PFRS for SMEs
Employee Benefits Same as in full PFRS except that use All employee benefits costs are taken
of projected unit credit method to P/L unless it forms part of an asset
(PUCM), may be waived if entity is
not able to use it without undue
cost/effort

Options may be exercised to treat

actuarial gains and losses in:
- Profit or Loss; or
- Partly in P/L and partly in OCI
Disclosure Substantially reduced Substantially reduced
Requirements

SAMPLE PROBLEM #1
The following pretax amounts pertain to Brook Corporation for the year ended Dec 31, 2021 (amounts in
thousands). The income tax rate is 30%
Sales 400,000 Correction of prior period error 16,000 Cr
Operating Expenses 84,000 Discontinued Operations (before tax) 40,000 Cr
Other income 40,000 Cumulative effect of change in policy 24,000 Dr
Interest Expense 40,000 Rem 01/01/21 (not yet restated) 1,600,000
Cost of Goods Sold 280,000 Dividends Declared 12,000
Required:
a) Prepare a combined statement of income and retained earnings for Brook Corporation, a non-publicly
accountable entity, which appropriately applies the PFRS for SMEs. Assume comparative FS have been
correctly restated.

b) What is the effect on asset, liability and equity balances on both 2020 comparative prior period and
current period (2021) financial statements?

The assets, liabilities and equity for the comparative prior period presented (2020, which is not shown
above) will have to be restated to give effect to the new accounting policy adopted by the company in
2021 and for correction of prior period errors, as if the new accounting policy had been in effect since
then and that the errors were never committed
c) Prepare an income statement and statement of changes in equity. Will there be a difference in the
presentation of financial statements (with comparative information) had the entity been classified as
small entity rather than medium sized entity? Explain.