Unit I Accounting Standards Part 1

Updates in Philippine Accounting and Financial Reporting Standards 1
“Not intended for publication. For classroom instruction purposes only”.

Updates in Philippine Accounting and

Financial Reporting Standards
A Learning Package for PrEE 3–
Updates in Financial Reporting Standards
by
Michael C. Diputado
And
Jose Rizal Memorial State University
All rights reserved. This book or any portion thereof

may not be reproduced or used in any manner
whatsoever without the express written permission of the
author except for the use of brief quotations in a book
review.
Page and Cover designed: Michael C. Diputado
ISBN ____________________________
First Edition. ______________________
Published by:
JOSE RIZAL MEMORIAL STATE UNIVERSITY
Gov. Guading Adaza St. Sta Cruz, Dapitan City, 7101

Tel. No. (065) 908-8294
jrmsumain.univpres@gmail.com

Course Introduction
The Updates in Philippine Accounting and Financial Reporting Standards is a

course for the Accountancy programs namely: Bachelor of Science in Accountancy
(BSA), Bachelor of Science in Management Accounting (BSMA), Bachelor of Science in
Internal Auditing (BSIA) and Bachelor of Science in Accounting Information System
(BSAIS). It aims to equip students the basic knowledge, skills and perspective that are
necessary in facing challenges in the business environment. Each unit is design to make
the readers familiar with the basic principles, functions, methods and standards that
accountants must follows in in preparing financial statements.
This course will offer variety of activities that will address the multiple intelligences and
diversity of students. Moreover, activities are provided to enhance students’ learning.
This course will utilize a flexible learning package which include course
introduction, course syllabus, learning guide, learning contract, summative assessments
are included that will provide to the students as to what the course is all about, the
course requirements, and what are the activities and assessments to be accomplished.
This learning package is distinct from other books because it has the following
major parts:
Course Introduction – It presents the vital information about the course.
Course Syllabus – This provides vital information on the course outcomes,
learning outcomes, activities, assessments, grading system and the course
requirements.
Learning Guide – This provides significant information as to the students’
schedules of submitting the output and the course requirements, feedback modality,
communication mechanism, and the contact information of the instructor/professor and
other authorities of the University/Campus.
Learning Contract – It is a document which contains the commitment of the
learners in accomplishing the activities which includes also the Data Privacy Act,
plagiarism rules, safety reminders, and parents’ support.
Summative Assessments – These are forms which include the summative
assessment plan, summative assessment instructions, and assessment rubrics.
Flexible Learning Module – This is the meat of the package that contains the
front contents, module content (learning outcomes, pretest, content, learning activities,
and assessments), and the back contents.
Moreover, the flexible learning module included in this FLS Package
composed of 4 units. Each unit offers a basketful of opportunities, activities, and
interactive and innovative strategies towards its end. It provides outcomes-based
education model being implemented in both basic and higher education institutes.
I hope that you will have a meaningful and fruitful learning in this course.
-The Author

Learning Guide
The key to successfully finish this material lies in your perseverance to sincerely
and honestly perform the learning activities and accomplish the assessments. This
flexible learning package is developed with the aim to aid your learning for this course.
Aside from meeting the content and performance standards of this course in performing
all the learning activities and assessments, you will be able to learn the skills and values
which are needed in achieving the future skills and the graduate attributes to become
globally competitive individuals.
Classroom Rules and Conduct
The following are the house rules which will help you to be on track and
successfully finish this course:
1. Schedule and manage your time to read and understand every component of this
learning package.
2. Study on how you can manage to perform all the learning activities in
consideration with your resources and accessibility to technology. Do not ask
questions that are already answered in the guide.
3. If you did not understand the readings and the other tasks, read again. If there
are still clarifications and questions, feel free to reach me through the contact
information indicated in this guide.
4. Do not procrastinate. As much as possible, follow the time table.
5. Read and understand the assessment and technology tools as indicated in the
directions in every assessment or activity.
6. Before the end of the midterms, you will be tasked to send back the material
trough the pigeon boxes in your department. For online learners, you will submit
your output and other tasks in the google classroom. While waiting for my
feedback of your accomplished module, you may continue on accomplishing the
tasks in the succeeding units that are scheduled for the finals.
7. Most importantly, you are the learner; thus, you do all the tasks in your own. You
may ask assistance and guidance from your parents, siblings or friends, but all
the activities shall be performed by you alone.
8. Course requirements must be submitted as to schedule.
9. Plagiarism is strictly prohibited. Be aware that plagiarism in this course would
include not only using another’s words, but another’s specific intellectual posts in
social media. Assignments must be done independently and without reference to
another student’s work. Any outside sources used in completing an assignment,
including internet references must be fully cited on any homework assignment or
exercise.
10. All students should feel free to talk to the instructor face-to-face or through media
during office hours.
11. Academic accommodations are available for students with special needs.
Students with special needs should schedule an appointment with the instructor
early in the semester to discuss any accommodations for this course.

Evaluation
To pass the course, you must observe the following:
1. Read the course module and answer the pretest, quizzes, self-
assessment activities.
2. Write your thoughts and suggestions in the comment boxes.
3. Perform all the learning activities.
4. Accomplish the assessments.
5. Submit the course requirements.
6. Perform Summative Assessment.
Technology Tools
In order to perform all the learning activities and accomplish the assessment, you
will need these software applications: word processing, presentation, publication, and
spreadsheet. These are applications that are available in our desktop or laptop that will
not require internet connection. All activities will be submitted through pigeon boxes. For
online learners, materials will be uploaded in google classroom.
Feedback Modality and Communication Mechanisms
Feedback system will be facilitated through text messaging. If you need to call,
send me a message first and wait for me to respond. Do not give my CP number to
anybody. I will not entertain messages or calls from numbers that are not registered. You
may send your clarifications and questions through the google classroom.
Grading Plan
The term grade is computed using the formula:
30% - Formative Assessment/Student Engagement

70% - Summative Assessment (Major output and requirements)
Midterm Grade = 100% of the Midterm Grade

Final Grade = 50% of the Midterm Grade + 50% of the Final Grade
Contact Information
Person/Office Email address CP number

Instructor michaeldiputado@jrmsu.edu.ph 09553020983
IMDO main.imd@jrmsu.edu.ph 09399168104
FLS
CBA
DSAS
Library
DRMMO

LEARNING AGREEMENT
By signing this learning agreement, I commit to the following terms and conditions of
Jose Rizal Memorial State University in the implementation of Flexible Learning
System. Specifically, I commit to observe the following:
1. That I must observe all guidelines of the state pertaining to the prevention of
COVID, specifically to stay home, to observe physical distancing and the use of
face masks when interacting with others.
2. That I shall prioritize my health and safety while I comply with all the necessary
learning activities and assessments needed in my enrolled courses.
3. That I will exhaust all means of complying the requirements at home or in a less
risky place and location that will not allow me to be exposed to other people.
4. That I have already read and understood all instructions pertaining to my
enrolled courses.
5. That I commit to do all the learning activities diligently, following deadlines and
the learning guide enabling me to deliver the course requirements.
6. That I commit to answer all forms of assessment in the learning package
honestly.
7. That I shall initiate in giving feedback to my instructor at least once every two
weeks.
8. That I shall not reproduce or publish any part of the learning package content
without the written consent of the University and the author/s.
9. That I shall not commit any form of plagiarism in all course requirements.
Conformed:
Name and signature of student Date signed
Name and signature of parent/guardian Date signed
Contact Number of Parent/Guardian
**Please email the signed copy of this learning agreement to your instructor as soon
as you have received the learning package.


Updates in Philippine Accounting and

Financial Reporting Standards
A Learning Package for PrEE 3–
Updates in Financial Reporting Standards
by
Michael C. Diputado
And
Jose Rizal Memorial State University
All rights reserved. This book or any portion thereof

may not be reproduced or used in any manner
whatsoever without the express written permission of the
author except for the use of brief quotations in a book
review.
Page and Cover designed: Michael C. Diputado
ISBN ____________________________
First Edition. ______________________
Published by:
Gov. Guading Adaza St. Sta Cruz, Dapitan City, 7101

Tel. No. (065) 908-8294
jrmsumain.univpres@gmail.com

Acknowledgment
I would like express my sincere thanks with a deep sense of gratitude and
respect to all those who provides me immense help and guidance throughout the
preparation of this humble piece of work especially to the people of my department the
College of Business and Accountancy (CBA) and the University President of JRMSU,
Dr. Daylinda Luz R. Laput for the golden opportunity to undertake such a great
challenging and innovative work.
To my family and friends, thank you for your undying love and support.
Above all, to God Almighty, thank you for guiding me throughout this work and
giving me fulfillment in this professional mission.
-The Author

PREFACE
The Updates in Philippine Accounting and Financial Reporting Standards (An

FLS Package for the Updates in Financial Reporting Standards is created to cater the
needs of the students especially we are in the amidst of pandemic which affect
everyone. The purpose of this package is to continue the academic journey of the
students despite the stumbling blocks of no face-to-face learning and the vulnerable net
connectivity of some areas. Moreover, to make things possible, a collective effort of both
the instructor and the students is needed to keep away from compromising education.
In order to cope up with today’s rapidly changing environment affecting the

practice of profession especially that we are in the modern era where technology is
being introduced in the workplace as a result, we need to update our knowledge
regarding the standards and interpretation of financial reporting, this package is
designed help the readers to equip them with the basic knowledge and skills that are
necessary when they enter the corporate world.
This package covers the standards set by the higher authority regarding the
preparation of financial statements. This will guide them what are the necessary
standards that they need to follow in order to prepare a financial statements for the and
communicate the accounting information to the user for decision making.
This package contains four units that features the essential concept, principles
that will help the readers to mold them with the skills that are significant to fully
understand the Philippine accounting standard as well as the financial reporting
standards
At the end of each unit, assignments are provided to help the reader to
strengthen not only their analytical skills but also their communication skills necessary
for successful careers in the near future.
Moreover, this package is intended for all Accountancy related programs namely:
Bachelor of Science in Accountancy (BSA), Bachelor of Science in Management
Accounting (BSMA), Bachelor of Science in Internal Auditing (BSIA) and Bachelor of
Science in Accounting Information System (BSAIS).
-The Author

Unit 1 – Accounting Standards Part 1
“Accounting is the process of identifying, measuring and communicating

economic information to permit informed judgement and decision by
users of the information.”
Learning Outcomes
At the end of the unit, you will be able
 Prepare financial statements in accordance with Philippine Financial Reporting

standards.
Pretest
Directions: Read the following sentences. Write the letter “T” if the statement is True
and “F” if the statement is False. Write your answer on the space before the number.
You may view this test at our google class.
__________1. An excess of equity over current assets is equal to liabilities.
__________2. The asset is cash or cash equivalent restricted to settle a liability for more
than twelve months after the reporting period is classify as current assets.
__________3. Assets are classified as noncurrent if the assets are reasonably expected
to be realize in cash or consume beyond the normal operating cycle.
__________4. LCNRV should always be equal to net realizable value.
__________5. Lower of cost and net realizable value gives the lowest valuation if
applied to individual item of inventory.
__________6. The amount of any writedown of inventory to net realizable value and all
losses of inventory should be recognized as operating expense in the period the
writedown or loss occurs.
__________7. Professional fee arising directly from the acquisition of property and
equipment are recognized as expense immediately.

__________8. Exchange has a commercial substance when the exchange result in the
difference in future cash flows.
__________9. The cost of abnormal amounts of wasted materials is not included in the
cost of self-constructed assets.
__________10. An asset is not depreciated even if the fair value exceeds carrying
amount.
Thank you for answering the test. Please see

the back content for the answer key or you may view
it in the google class.
The next section is the content of this unit. It

contains vital information. Please read the content.
Content
PAS 1 PRESENTATION OF FINANCIAL STATEMENTS

Financial statements
 The means by which the information accumulated and processed in financial
accounting is periodically communicated to the users.
 Are the need product or main output of the financial accounting process.
 Are structured financial representation of the financial position and financial
performance of an entity
General purpose financial statements
 An entity shall prepare and present general purpose financial statements in
accordance with the International Financial Reporting Standards.
 General purpose financial statements or simply referred to as financial
statements are those intended to meet the needs of users who are not in a
position to require the entity to prepare reports tailored to their particular
information needs.
 In other words, general purpose financial statements are directed to all common
users and not to specific users.
Objective of financial statements
The objective of general-purpose financial statements is to provide information about the
financial position, financial performance, and cash flows of an entity that is useful to a
wide range of users in making economic decisions. To meet that objective, financial
statements provide information about an entity's:

 assets
 liabilities
 equity
 income and expenses, including gains and losses
 contributions by and distributions to owners (in their capacity as owners)
 cash flows.
That information, along with other information in the notes, assists users of financial
statements in predicting the entity's future cash flows and, in particular, their timing and
certainty.
Components of financial statements
A complete set of financial statements includes:
a. a statement of financial position (balance sheet) at the end of the period
b. a statement of profit or loss and other comprehensive income for the period
(presented as a single statement, or by presenting the profit or loss section in a
separate statement of profit or loss, immediately followed by a statement
presenting comprehensive income beginning with profit or loss)
c. a statement of changes in equity for the period
d. a statement of cash flows for the period
e. notes, comprising a summary of significant accounting policies and other
explanatory notes
f. comparative information prescribed by the standard.
An entity may use titles for the statements other than those stated above. All financial
statements are required to be presented with equal prominence.
When an entity applies an accounting policy retrospectively or makes a retrospective
restatement of items in its financial statements, or when it reclassifies items in its
financial statements, it must also present a statement of financial position (balance
sheet) as at the beginning of the earliest comparative period.
Reports that are presented outside of the financial statements – including financial
reviews by management, environmental reports, and value-added statements – are
outside the scope of PFRSs.
Fair presentation and compliance with PFRSs
The financial statements must "present fairly" the financial position, financial
performance and cash flows of an entity. Fair presentation requires the faithful
representation of the effects of transactions, other events, and conditions in accordance
with the definitions and recognition criteria for assets, liabilities, income and expenses
set out in the Framework. The application of PFRSs, with additional disclosure when
necessary, is presumed to result in financial statements that achieve a fair presentation.
PAS 1 requires an entity whose financial statements comply with PFRSs to make an
explicit and unreserved statement of such compliance in the notes. Financial statements
cannot be described as complying with IFRSs unless they comply with all the

requirements of IFRSs (which includes International Financial Reporting Standards,

International Accounting Standards, IFRIC Interpretations and SIC Interpretations).
Inappropriate accounting policies are not rectified either by disclosure of the accounting
policies used or by notes or explanatory material.
PAS 1 acknowledges that, in extremely rare circumstances, management may conclude
that compliance with an PFRS requirement would be so misleading that it would conflict
with the objective of financial statements set out in the Framework. In such a case, the
entity is required to depart from the PFRS requirement, with detailed disclosure of the
nature, reasons, and impact of the departure.
Going concern
The Conceptual Framework notes that financial statements are normally prepared
assuming the entity is a going concern and will continue in operation for the foreseeable
future.
PAS 1 requires management to make an assessment of an entity's ability to continue as
a going concern. If management has significant concerns about the entity's ability to
continue as a going concern, the uncertainties must be disclosed. If management
concludes that the entity is not a going concern, the financial statements should not be
prepared on a going concern basis, in which case IAS 1 requires a series of disclosures.
Accrual basis of accounting
PAS 1 requires that an entity prepare its financial statements, except for cash flow
information, using the accrual basis of accounting.
Consistency of presentation
The presentation and classification of items in the financial statements shall be retained
from one period to the next unless a change is justified either by a change in
circumstances or a requirement of a new PFRS.
Materiality and aggregation
Information is material if omitting, misstating or obscuring it could reasonably be
expected to influence decisions that the primary users of general-purpose financial
statements make on the basis of those financial statements, which provide financial
information about a specific reporting entity.
Each material class of similar items must be presented separately in the financial
statements. Dissimilar items may be aggregated only if they are individually immaterial.
However, information should not be obscured by aggregating or by providing immaterial
information, materiality considerations apply to the all parts of the financial statements,
and even when a standard requires a specific disclosure, materiality considerations do
apply.
Offsetting

Assets and liabilities, and income and expenses, may not be offset unless required or
permitted by an PFRS.
Comparative information
PAS 1 requires that comparative information to be disclosed in respect of the previous
period for all amounts reported in the financial statements, both on the face of the
financial statements and in the notes, unless another Standard requires otherwise.
Comparative information is provided for narrative and descriptive where it is relevant to
understanding the financial statements of the current period.
An entity is required to present at least two of each of the following primary financial
statements:
 statement of financial position*
 statement of profit or loss and other comprehensive income
 separate statements of profit or loss (where presented)
 statement of cash flows
 statement of changes in equity
 related notes for each of the above items.
Note: *A third statement of financial position is required to be presented if the entity
retrospectively applies an accounting policy, restates items, or reclassifies items, and
those adjustments had a material effect on the information in the statement of financial
position at the beginning of the comparative period. Where comparative amounts are
changed or reclassified, various disclosures are required.
Structure and content of financial statements in general
PAS 1 requires an entity to clearly identify:
 the financial statements, which must be distinguished from other information in a
published document
 each financial statement and the notes to the financial statements.
In addition, the following information must be displayed prominently, and repeated as
necessary:
 the name of the reporting entity and any change in the name
 whether the financial statements are a group of entities or an individual entity
 information about the reporting period
 the presentation currency (as defined by PAS 21 The Effects of Changes in
Foreign Exchange Rates)
 the level of rounding used (e.g., thousands, millions).
Reporting period
There is a presumption that financial statements will be prepared at least annually. If the
annual reporting period changes and financial statements are prepared for a different
period, the entity must disclose the reason for the change and state that amounts are not
entirely comparable.

1. Statement of financial position (balance sheet)

Current and non-current classification
An entity must normally present a classified statement of financial position, separating
current and non-current assets and liabilities, unless presentation based on liquidity
provides information that is reliable. In either case, if an asset (liability) category
combines amounts that will be received (settled) after 12 months with assets (liabilities)
that will be received (settled) within 12 months, note disclosure is required that
separates the longer-term amounts from the 12-month amounts.
Current assets Current liabilities

a. Expected to be realized in, or is intended a. Expected to be settled in the entity’s
for sale or consumption in the entity’s normal normal operating cycle
operating cycle b. Held primarily for trading
b. Held primarily for trading c. Due to be settled within 12 months
c. Expected to be realized within 12 months d. The entity does not have an
d. Cash or cash equivalents. unconditional right to defer settlement
of the liability for at least 12 months.
All other assets are required to be classified
as non-current. All other liabilities are required to be
classified as non-current.
Note: 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 would otherwise be due within 12 months.
If a liability has become payable on demand because an entity has breached an
undertaking under a long-term loan agreement on or before the reporting date, the
liability is current, even if the lender has agreed, after the reporting date and before the
authorization of the financial statements for issue, not to demand payment as a
consequence of the breach. However, the liability is classified as non-current if the
lender agreed by the reporting date to provide a period of grace ending at least 12
months after the end of the reporting period, within which the entity can rectify the
breach and during which the lender cannot demand immediate repayment. Settlement
by the issue of equity instruments does not impact classification.
Line items
The line items to be included on the face of the statement of financial position are:
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
f. biological assets
g. inventories
h. trade and other receivables
i. cash and cash equivalents

j. assets held for sale

k. trade and other payables
l. provisions
m. financial liabilities (excluding amounts shown under (k) and (l))
n. current tax liabilities and current tax assets, as defined in PAS 12
o. deferred tax liabilities and deferred tax assets, as defined in PAS 12
p. liabilities included in disposal groups
q. non-controlling interests, presented within equity
r. issued capital and reserves attributable to owners of the parent.
Note: Additional line items, headings and subtotals may be needed to fairly present the
entity's financial position. When an entity presents subtotals, those subtotals shall be
comprised of line items made up of amounts recognized and measured in accordance
with IFRS; be presented and labelled in a clear and understandable manner; be
consistent from period to period; and not be displayed with more prominence than the
required subtotals and totals. Further sub-classifications of line items presented are
made in the statement or in the notes, for example:
 classes of property, plant and equipment
 disaggregation of receivables
 disaggregation of inventories in accordance with PAS 2
 disaggregation of provisions into employee benefits and other items
 classes of equity and reserves.
Additional Information:
Regarding issued share capital and reserves, the following disclosures are required:
 numbers of shares authorized, issued and fully paid, and issued but not fully paid
 par value (or that shares do not have a par value)
 a reconciliation of the number of shares outstanding at the beginning and the end
of the period
 description of rights, preferences, and restrictions
 treasury shares, including shares held by subsidiaries and associates
 shares reserved for issuance under options and contracts
 a description of the nature and purpose of each reserve within equity.
Note: Additional disclosures are required in respect of entities without share capital and
where an entity has reclassified puttable financial instruments.
2. Statement of profit or loss and other comprehensive income

Concepts of profit or loss and comprehensive income
Profit or loss is defined as "the total of income less expenses, excluding the
components of other comprehensive income".
Other comprehensive income is defined as comprising "items of income and expense
(including reclassification adjustments) that are not recognized in profit or loss as
required or permitted by other IFRSs".

Total comprehensive income is defined as "the change in equity during a period

resulting from transactions and other events, other than those changes resulting from
transactions with owners in their capacity as owners".
All items of income and expense recognized in a period must be included in profit or loss
UNLESS a Standard or an Interpretation requires otherwise.
Choice in presentation and basic requirements
An entity has a choice of presenting:
 a single statement of profit or loss and other comprehensive income, with profit
or loss and other comprehensive income presented in two sections, or
 two statements:
o a separate statement of profit or loss
o a statement of comprehensive income, immediately following the
statement of profit or loss and beginning with profit or loss.
The statement(s) must present:
a. profit or loss
b. total other comprehensive income
c. comprehensive income for the period
d. an allocation of profit or loss and comprehensive income for the period
between non-controlling interests and owners of the parent.
Profit or loss section or statement

Line Items
PAS 1, paragraph 82, provides that as a minimum line item, must be presented in the
profit or loss section (or separate statement of profit or loss, if presented):
a. revenue
b. gains and losses from the derecognition of financial assets measured at
amortized cost
c. finance costs
d. share of the profit or loss of associates and joint ventures accounted for using
the equity method
e. certain gains or losses associated with the reclassification of financial assets
f. tax expense
g. a single amount for the total of discontinued items
Note: Expenses recognized in profit or loss should be analyzed either by nature (raw
materials, staffing costs, depreciation, etc.) or by function (cost of sales, selling,
administrative, etc.). If an entity categorizes by function, then additional information on
the nature of expenses – at a minimum depreciation, amortization and employee
benefits expense – must be disclosed.
Other comprehensive income section

The other comprehensive income section is required to present line items which are
classified by their nature, and grouped between those items that will or will not be
reclassified to profit and loss in subsequent periods.
An entity shall disclose reclassification adjustments relating to components of other

comprehensive income.
Note: When an entity presents subtotals, those subtotals shall be comprised of line
items made up of amounts recognized and measured in accordance with PFRS; be
presented and labelled in a clear and understandable manner; be consistent from period
to period; not be displayed with more prominence than the required subtotals and totals;
and reconciled with the subtotals or totals required in PFRS.
Other requirements
a. Additional line items may be needed to fairly present the entity's results of
operations.
b. Items cannot be presented as 'extraordinary items' in the financial statements
or in the notes.
c. Certain items must be disclosed separately either in the statement of
comprehensive income or in the notes, if material, including:
 write-downs of inventories to net realizable value or of property, plant and
equipment to recoverable amount, as well as reversals of such write-
downs
 restructurings of the activities of an entity and reversals of any provisions
for the costs of restructuring
 disposals of items of property, plant and equipment
 disposals of investments
 discontinuing operations
 litigation settlements
 other reversals of provisions
3. Statement of cash flows
4. Statement of changes in equity
PAS 1 requires an entity to present a separate statement of changes in equity. The

statement must show:
 total comprehensive income for the period, showing separately amounts

attributable to owners of the parent and to non-controlling interests
 the effects of any retrospective application of accounting policies or restatements
made in accordance with PAS 8, separately for each component of other
comprehensive income
 reconciliations between the carrying amounts at the beginning and the end of the
period for each component of equity, separately disclosing:
- profit or loss
- other comprehensive income*

- transactions with owners, showing separately contributions by and

distributions to owners and changes in ownership interests in subsidiaries
that do not result in a loss of control
Note: * An analysis of other comprehensive income by item is required to

be presented either in the statement or in the notes.
The following amounts may also be presented on the face of the statement of changes
in equity, or they may be presented in the notes:
- the amount of dividends recognized as distributions

- the related amount per share.
5. Notes to the financial statements

The notes must:
 present information about the basis of preparation of the financial statements
and the specific accounting policies used
 disclose any information required by IFRSs that is not presented elsewhere in
the financial statements and
 provide additional information that is not presented elsewhere in the financial
statements but is relevant to an understanding of any of them
Notes are presented in a systematic manner and cross-referenced from the face of the
financial statements to the relevant note.
It is suggests that the notes should normally be presented in the following order:*
 a statement of compliance with IFRSs

 a summary of significant accounting policies applied, including:
- the measurement basis (or bases) used in preparing the financial
statements
- the other accounting policies used that are relevant to an understanding
of the financial statements
 supporting information for items presented on the face of the statement of
financial position (balance sheet), statement(s) of profit or loss and other
comprehensive income, statement of changes in equity and statement of cash
flows, in the order in which each statement and each line item is presented
 other disclosures, including:
o contingent liabilities and unrecognized contractual commitments
o non-financial disclosures, such as the entity's financial risk management
objectives and policies
Other disclosures
 Judgments and key assumptions – An entity must disclose, in the summary
of significant accounting policies or other notes, the judgements, apart from
those involving estimations, that management has made in the process of
applying the entity's accounting policies that have the most significant effect
on the amounts recognized in the financial statements
Examples include management's judgements in determining:

 when substantially all the significant risks and rewards of ownership of

financial assets and lease assets are transferred to other entities
 whether, in substance, particular sales of goods are financing
arrangements and therefore do not give rise to revenue.
Note: An entity must also disclose, in the notes, information about the key
assumptions concerning the future, and other key sources of estimation
uncertainty at the end of the reporting period, that have a significant risk of
causing a material adjustment to the carrying amounts of assets and liabilities
within the next financial year. These disclosures do not involve disclosing
budgets or forecasts.
 Dividends – in addition to the distributions information in the statement of

changes in equity (see above), the following must be disclosed in the notes:
the amount of dividends proposed or declared before the financial statements
were authorized for issue but which were not recognized as a distribution to
owners during the period, and the related amount per share, and the amount
of any cumulative preference dividends not recognized.
 Capital disclosures –An entity discloses information about its objectives,

policies and processes for managing capital. To comply with this, the
disclosures include:
• qualitative information about the entity's objectives, policies and
processes for managing capital, including
o description of capital it manages
o nature of external capital requirements, if any
o how it is meeting its objectives
 quantitative data about what the entity regards as capital
 changes from one period to another
 whether the entity has complied with any external capital
requirements and
 if it has not complied, the consequences of such non-compliance.
 Puttable financial instruments – It requires the following additional disclosures

if an entity has a puttable instrument that is classified as an equity instrument:
 summary quantitative data about the amount classified as equity
 the entity's objectives, policies and processes for managing its
obligation to repurchase or redeem the instruments when required to
do so by the instrument holders, including any changes from the
previous period
 the expected cash outflow on redemption or repurchase of that class
of financial instruments
 information about how the expected cash outflow on redemption or
repurchase was determined.
 Other information – The following other note disclosures are required by PAS
1 if not disclosed elsewhere in information published with the financial
statements
 domicile and legal form of the entity
 country of incorporation

 address of registered office or principal place of business

 description of the entity's operations and principal activities
 if it is part of a group, the name of its parent and the ultimate parent of
the group
 if it is a limited life entity, information regarding the length of the life.
PAS 7 STATEMENT OF CASH FLOWS
Objective
To require the presentation of information about the historical changes in cash and cash
equivalents of an entity by means of a statement of cash flows, which classifies cash
flows during the period according to operating, investing, and financing activities.
A statement of cash flows is a component of financial statements summarizing the

operating, investing and financing activities of an entity. In simple language, the
statement of cash flows provides information about the cash receipts and cash
payments of an entity during a period.
The primary purpose of a statement of cash flows is to provide relevant information

about cash receipts and cash payments of an entity during a period.
Cash and Cash Equivalents
The statement of cash flow is designed to provide information about the change in an
entity’s cash and cash equivalents.
Cash comprise cash on hand and demand deposit
Cash equivalents are short-term highly liquid investments that are readily convertible to
known amount of cash and which are subject to an insignificant risk of change in vale.
Pas 7, paragraph 7, provides that an investment normally qualifies as a cash equivalent
only when it has a short maturity of three months or less from date of acquisition
In other words, the investment must be acquired three months or less before the date of
maturity.
Examples of Cash Equivalents
a. three-months BSP treasury bill

b. three-year BSP treasury bill purchased three months before date of maturity
c. three-month time deposit
d. three-month money market instrument or commercial paper
reported in the statement of cash flows in

order to reconcile

cash and cash equivalents at the

beginning and the end of the
period. This amount is presented
separately from cash flows
from operating, investing and
financing activities and
includes the differences, if any, had those
cash flows been
reported at end of period exchange rates.
Cash flows from interest and dividends
received and paid
shall each be disclosed separately. Each
shall be classified in
a consistent manner from period to
period as either
operating, investing, or financing
activities.
Cash flows arising from taxes on income
shall be separately
disclosed and shall be classified as
cash flows from

operating activities unless they can be

specifically identified
with financing and investing activities.
The aggregate cash flows arising from
obtaining or losing
control of subsidiaries or other businesses
shall be presented
separately and classified as investing
activities.
Investing and financing transactions that
do not require the
use of cash or cash equivalents shall be
excluded from a
statement of cash flow. Such transactions
shall be disclosed
elsewhere in the financial statements in a
way that provides
all the relevant information about
these investing and
financing activities.
An entity shall disclose the components
of cash and cash
equivalents and shall present a

reconciliation of the amounts
in its statement of cash flow with
the equivalent items
reported in the statement of financial
position.
An entity shall disclose, together
with a commentary by
management, the amount of
significant cash and cash
equivalent balances held by the entity that
are not available
for use by the group
reported in the statement of cash flows in

order to reconcile
cash and cash equivalents at the
beginning and the end of the
period. This amount is presented
separately from cash flows
from operating, investing and
financing activities and
includes the differences, if any, had those

cash flows been
reported at end of period exchange rates.
Cash flows from interest and dividends
received and paid
shall each be disclosed separately. Each
shall be classified in
a consistent manner from period to
period as either
operating, investing, or financing
activities.
Cash flows arising from taxes on income
shall be separately
disclosed and shall be classified as
cash flows from
operating activities unless they can be
specifically identified
with financing and investing activities.
The aggregate cash flows arising from
obtaining or losing
control of subsidiaries or other businesses
shall be presented
separately and classified as investing

activities.
Investing and financing transactions that
do not require the
use of cash or cash equivalents shall be
excluded from a
statement of cash flow. Such transactions
shall be disclosed
elsewhere in the financial statements in a
way that provides
all the relevant information about
these investing and
An entity shall disclose the components
of cash and cash
equivalents and shall present a
reconciliation of the amounts
in its statement of cash flow with
the equivalent items
reported in the statement of financial
position.

An entity shall disclose, together

with a commentary by
management, the amount of
significant cash and cash
equivalent balances held by the entity that
are not available
for use by the group
Classification of cash flow
Cash flows are inflows and outflows of cash and cash equivalents. The statement of
cash flows shall report cash flows during the period classified as operating, investing and
 Operating activities
- are the cash flows derived primarily from the principal revenue
producing activities of the entity.
- generally, result from transactions and other events that enter into
the determination of net income or loss.
Examples of cash flows from operating activities are:
a. Cash receipts from sale of goods and rendering of services
b. Cash receipts from royalties, rental, fees, commissions and other
revenue
c. Cash payments to suppliers for goods and services
d. Cash payments for selling, administrative and other expenses
e. Cash receipts and cash payments of an insurance entity for
premiums and claims, annuities and other policy benefits
f. Cash payments or refunds of income taxes unless specifically
identified with financing and investing activities
g. Cash receipts and payments for securities held for trading
Note: PAS 7, paragraph 15, provides that cash flows arising from the
purchase and sale of dealing or trading securities are classified as
operating activities.
Similarly, cash advances and loans made by a financial institution are

usually classified as operating activities since they relate to the main
revenue producing activity of that entity.
 Investing activities

- are the cash flows derived from the acquisition and disposal of
long-term assets and other investments not included in cash
equivalent.
- As a simple guide, investing activities include cash flows from
transactions involving nonoperating assets.
Examples of cash flows from investing activities
a. Cash payments to acquire property, plant and equipment,

intangibles and other long-term assets
b. Cash receipts from sales of property, plant and equipment,
intangibles and other long-term assets
c. Cash payments to acquire equity or debt instruments of other
entities (current and long-term investments)
d. Cash receipts from sales of equity or debt instruments or other
entities
e. Cash advances and loans to other parties other than advances
and loans made by financial institution
f. Cash receipts from repayment of advances and loans made to
other parties
g. Cash payments for futures contract, forward contract, option
contract and swap contract
h. Cash receipts from futures contract, forward contract, option
contract and swap contract
 Financing activities
- are the cash flows derived from the equity capital and borrowings
of the entity.
- are the cash flows that result from transactions:
a. Between the entity and the owners - equity financing
b. Between the entity and the creditors - debt financing
- As a simple guide, financing activities include the cash flows from

transactions involving nontrade liabilities and equity of an entity.
Examples of cash flows from financing activities

a. Cash receipts from issuance of ordinary and preference shares
b. Cash payments to acquire treasury shares
c. Cash receipts from issuing debentures, loans, notes, bonds,
mortgages, and other short or long-term borrowings
d. Cash payments for amounts borrowed
e. Cash payments by a lessee tor the reduction of the outstanding
principal lease liability
Cash payments to settle such obligations as trade accounts and notes

payable, income tax payable, accrued expenses are operating activities,
not financing activities.

Noncash transactions
PAS 7, paragraph 43, provides that investing and financing transactions that do not
require use of cash or cash equivalent shall be excluded from the statement of cash
lows.
Noncash investing and financing transactions shall be disclosed elsewhere in the
financial statements either in the notes to financial statements or in a separate schedule
or in a way that provides all relevant information about these transactions.
The statement of cash flows is strictly a cash concept.
Accordingly, the following noncash transactions are disclosed separately:
a. Acquisition of asset by assuming directly related liability
b. Acquisition of asset by issuing share capital
c. Acquisition of asset by issuing bonds payable
d. Conversion of bonds payable into share capital
e. Conversion of preference shares into ordinary shares
Interest
PAS 7, paragraph 33, provides that interest paid and interest received shall be classified
as operating cash flows because such items enter into the determination of net income
or loss:
Alternatively, interest paid may be classified as financing cash flow because it is a cost
of obtaining financial resources.
Alternatively, interest received may be classified as investing cash flow because it is a
return on investment.
For a financial institution, interest paid and interest received are usually classified as
operating cash flows.
Dividends
PAS 7, paragraph 33, provides that dividend received shall be classified as operating
cash flow because it enters into the determination of net income.
Alternatively, dividend received may be classified as investing cash flow because it is a
return on investment.
PAS 7, paragraph 34, provides that dividend paid shall be classified as financing cash
flow because it is a cost of obtaining financial resources.
Alternatively, dividend paid may be classified as operating cash flow in order to assist
users to determine the ability of the entity to pay dividends out of operating cash flows.
Income taxes
PAS 7, paragraph 35, provides that cash flows arising from income taxes shall be
separately disclosed as cash flows from operating activities unless they can be
specifically identified investing and financing activities.

Tax cash flows are often difficult to match to the originating underlying transaction, so
most of the time all tax cash flows are classified as arising from operating activities.
ACCOUNTING POLICIES, ESTIMATE AND ERRORSs PAS 8
Accounting policies are the specific principles, bases, conventions, rules and practices
applied by an entity in preparing and presenting financial statements.
A change in accounting estimate is an adjustment of the carrying amount of an asset
or liability, or related expense, resulting from reassessing the expected future benefits
and obligations associated with that asset or liability.
International Financial Reporting Standards are standards and interpretations
adopted by the International Accounting Standards Board (IASB). They comprise:
 International Financial Reporting Standards (IFRSs)
 International Accounting Standards (IASs)
 Interpretations developed by the International Financial Reporting Interpretations
Committee (IFRIC) or the former Standing Interpretations Committee (SIC) and
approved by the IASB.
Materiality
Information is material if omitting, misstating or obscuring it could reasonably be
expected to influence decisions that the primary users of general-purpose financial
statements make on the basis of those financial statements, which provide financial
information about a specific reporting entity.
Prior period errors
These are omissions from, and misstatements in, an entity's financial statements for one
or more prior periods arising from a failure to use, or misuse of, reliable information that
was available and could reasonably be expected to have been obtained and taken into
account in preparing those statements. Such errors result from mathematical mistakes,
mistakes in applying accounting policies, oversights or misinterpretations of facts, and
fraud.
Selection and application of accounting policies
PAS 8, paragraph 7, provides that when a Standard or an Interpretation specifically
applies to a transaction, other event or condition, the accounting policy or policies
applied to that item must be determined by applying the Standard or Interpretation and
considering any relevant Implementation Guidance issued by the IASB for the Standard
or Interpretation.
PPAS 8, paragraph 10 provides that in the absence of a Standard or an Interpretation
that specifically applies to a transaction, other event or condition, management must use
its judgement in developing and applying an accounting policy that results in information
that is relevant and reliable. the requirements and guidance in IASB standards and
interpretations dealing with similar and related issues; and

Paragraph 11 and 12 specify the following hierarchy of guidance which management

may use when selecting accounting policies in such circumstances:
a. the requirements and guidance in IASB standards and interpretations dealing
with similar and related issues; and
b. the definitions, recognition criteria and measurement concepts for assets,
liabilities, income and expenses in the Framework.
c. most recent pronouncements of other standard-setting bodies that use a similar
conceptual framework to develop accounting standards, other accounting
literature and accepted industry practices, to the extent that these do not conflict
with the sources in paragraph 11.
Consistency of accounting policies
PAS 8, paragraph 13, provides that an entity shall select and apply its accounting
policies consistently for similar transactions, other events and conditions, unless a
Standard or an Interpretation specifically requires or permits categorization of items for
which different policies may be appropriate. If a Standard or an Interpretation requires or
permits such categorization, an appropriate accounting policy shall be selected and
applied consistently to each category.
Changes in accounting policies
PAS 8, paragraph 14, provides that an entity is permitted to change an accounting policy
only if the change:
a. is required by a standard or interpretation; or
b. results in the financial statements providing reliable and more relevant
information about the effects of transactions, other events or conditions on the
entity's financial position, financial performance, or cash flows.
Note: Changes in accounting policies do not include applying an accounting policy to a
kind of transaction or event that did not occur previously or were immaterial.
If a change in accounting policy is required by a new IASB standard or interpretation, the
change is accounted for as required by that new pronouncement or, if the new
pronouncement does not include specific transition provisions, then the change in
accounting policy is applied retrospectively.
As provided by PAS 8 paragraph 22, retrospective application means adjusting the
opening balance of each affected component of equity for the earliest prior period
presented and the other comparative amounts disclosed for each prior period presented
as if the new accounting policy had always been applied.
However, PAS 8, paragraph 24,provides that if it is impracticable to determine either the
period-specific effects or the cumulative effect of the change for one or more prior
periods presented, the entity shall apply the new accounting policy to the carrying
amounts of assets and liabilities as at the beginning of the earliest period for which
retrospective application is practicable, which may be the current period, and shall make
a corresponding adjustment to the opening balance of each affected component of
equity for that period.

In addition, PAS 8, paragraph 25, also provide that, if it is impracticable to determine the
cumulative effect, at the beginning of the current period, of applying a new accounting
policy to all prior periods, the entity shall adjust the comparative information to apply the
new accounting policy prospectively from the earliest date practicable.
Disclosures relating to changes in accounting policies
PAS 8, paragraph 28, provides that disclosures relating to changes in accounting policy
caused by a new standard or interpretation include:
 the title of the standard or interpretation causing the change
 the nature of the change in accounting policy
 a description of the transitional provisions, including those that might have an
effect on future periods
 for the current period and each prior period presented, to the extent practicable,
the amount of the adjustment:
- for each financial statement line item affected, and
- for basic and diluted earnings per share (only if the entity is applying PAS
33)
 the amount of the adjustment relating to periods before those presented, to the
extent practicable
 if retrospective application is impracticable, an explanation and description of
how the change in accounting policy was applied.
Note: Financial statements of subsequent periods need not repeat these disclosures.
PAS 8, paragraph 29 also provide disclosures relating to voluntary changes in
accounting policy include:
 the nature of the change in accounting policy
 the reasons why applying the new accounting policy provides reliable and more
relevant information
 for the current period and each prior period presented, to the extent practicable,
the amount of the adjustment:
33)
a. the amount of the adjustment relating to periods before those presented, to the
extent practicable if retrospective application is impracticable, an explanation and
description of how the change in accounting policy was applied.
Additional information, PAS 8, paragraph 30, provides that if an entity has not applied a
new standard or interpretation that has been issued but is not yet effective, the entity
must disclose that fact and any and known or reasonably estimable information relevant
to assessing the possible impact that the new pronouncement will have in the year it is
applied.
Changes in accounting estimates

PAS 8, paragraph 36, provides that the effect of a change in an accounting estimate
shall be recognized prospectively by including it in profit or loss in:
a. the period of the change, if the change affects that period only, or
b. the period of the change and future periods, if the change affects both.
However, to the extent that a change in an accounting estimate gives rise to changes in
assets and liabilities, or relates to an item of equity, it is recognized by adjusting the
carrying amount of the related asset, liability, or equity item in the period of the change.
Disclosures relating to changes in accounting estimates
Disclose:
 the nature and amount of a change in an accounting estimate that has an effect
in the current period or is expected to have an effect in future periods
 if the amount of the effect in future periods is not disclosed because estimating it
is impracticable, an entity shall disclose that fact.
Errors
The general principle in PAS 8 is that an entity must correct all 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.
However, if it is impracticable to determine the period-specific effects of an error on
comparative information for one or more prior periods presented, the entity must restate
the opening balances of assets, liabilities, and equity for the earliest period for which
retrospective restatement is practicable (which may be the current period).
Further, if it is impracticable to determine the cumulative effect, at the beginning of the
current period, of an error on all prior periods, the entity must restate the comparative
information to correct the error prospectively from the earliest date practicable.
Disclosures relating to prior period errors
Disclosures relating to prior period errors include:
 the nature of the prior period error
 for each prior period presented, to the extent practicable, the amount of the
correction:
33)

 the amount of the correction at the beginning of the earliest prior period
presented
 if retrospective restatement is impracticable, an explanation and description of
how the error has been corrected.
EVENTS AFTER THE REPORTING PERIOD PAS 10
PAS 10, paragraph 3, defines events after the reporting period as those events,
whether favorable or unfavorable, that occur between the end of reporting period and the
date on which the financial statements are authorized for issue. Events atter the
reporting period are also known as subsequent events. Such events may require either
adjustment or disclosure.
Types of events after the reporting period
a. Adjusting events after the reporting period are those that provide evidence of
conditions that exist at the end of reporting period.
b. Nonadjusting events after reporting period are those that are indicative of
conditions that arise after the end of reporting period.
It is appropriate to adjust the financial statements for all events that offer clarity
concerning the conditions that existed at the end of reporting period and that occur prior
to the date the financial statements are authorized for issue.
Accordingly, an entity must adjust the amounts recognized in the financial statements for
adjusting events that provide evidence of conditions- that existed at the end of reporting
period.
However, an entity does not recognize events after the reporting period that relate to
conditions that only arose after the reporting period. The entity is required only to
disclose significant nonadjusting evens.
Examples of adjusting events
Examples of adjusting events after the reporting period which require the entity to adjust
the financial statements are
 Settlement after the reporting period of a court case because it confirms that the
entity already had a present obligation at the end of reporting period.
 Bankruptcy of a customer which occurs after the reporting period.
 Sale of inventories after the reporting period may give evidence about the net
realizable value at reporting date.
 The determination after the reporting period of the cost of asset purchased or the
proceeds from asset sold before the end of reporting period.
 The determination after the reporting period of the profit sharing or bonus
payment if the entity has the present obligation at the end of reporting period to
make such payment.
 The discovery or fraud or errors that show the financial statements were
incorrect.

Examples of nonadjusting events

 Business combination after the reporting period
 Plan to discontinue an operation
 Major purchase and disposal of asset or expropriation of major asset by
government
 Destruction of a major production plant by a fire atter the reporting period
 Major ordinary share transactions and potential ordinary share transactions after
the reporting period
 Announcing or commencing the implementation of a major restructuring
 Abnormally large changes after the reporting period in asset prices or foreign
exchange rates
 Entering into significant commitments or contingent liabilities, for example, by
issuing guarantees
 Commencing major litigation arising solely from events that occurred after the
reporting period
 Change in tax rate enacted or announced after the end of reporting period that
has a significant effect on current and deferred tax asset and liability
Financial statements authorized for issue
Financial statements are authorized for issue when the board of directors reviews
the financial statements and authorizes them issue.
Some cases, an entity is required to submit the financial statements to the
shareholders for approval atter the financial statements have been issued. In such
cases, the financial statements are authorized for issue on the date of issue by the
board of directors and not on the date when shareholders approve the financial
statements.
RELATED PARTY DISCLOSURES PAS 24
Objective
The objective of PAS 24 is to ensure that an entity's financial statements contain the
disclosures necessary to draw attention to the possibility that its financial position and
profit or loss may have been affected by the existence of related parties and by
transactions and outstanding balances with such parties.
Who are related parties?
PAS 24, paragraph 8 provides that a related party is a person or entity that is related to
the entity that is preparing its financial statements (referred to as the 'reporting entity')
a. A person or a close member of that person's family is related to a reporting entity
if that person:
I. has control or joint control over the reporting entity;
II. has significant influence over the reporting entity; or
III. is a member of the key management personnel of the reporting entity or of
a parent of the reporting entity.
b. An entity is related to a reporting entity if any of the following conditions applies:

I. The entity and the reporting entity are members of the same group (which
means that each parent, subsidiary and fellow subsidiary is related to the
others).
II. One entity is an associate or joint venture of the other entity (or an
associate or joint venture of a member of a group of which the other entity
is a member).
III. Both entities are joint ventures of the same third party.
IV. One entity is a joint venture of a third entity and the other entity is an
associate of the third entity.
V. The entity is a post-employment defined benefit plan for the benefit of
employees of either the reporting entity or an entity related to the reporting
entity. If the reporting entity is itself such a plan, the sponsoring employers
are also related to the reporting entity.
VI. The entity is controlled or jointly controlled by a person identified in (a).
VII. A person identified in (a)(i) has significant influence over the entity or is a
member of the key management personnel of the entity (or of a parent of
the entity).
VIII. The entity, or any member of a group of which it is a part, provides key
management personnel services to the reporting entity or to the parent of
the reporting entity.
Control is the power over the investee or the power to govern the financial and
operating policies of an entity so as to obtain benefits.
Control is ownership directly or indirectly through subsidiaries of more than half of the
voting power of an entity.
Significant influence is the power to participate in the financial and operating policy
decision of an entity, but not control of those policies Significant influence may be gained
by share ownership of 20% or more.
If an investor holds, directly or indirectly through subsidiaries, 20% or more of the
voting power of the investee, it is presumed that the investor has significant influence,
unless it can be clearly demonstrated that this is not the case.
Beyond the mere 20% threshold of ownership, the existence of significant influence is
usually evidenced by the following tactors:
a. Representation in the board of directors
b. Participation in policy making process
c. Material transactions between the investor and the investee
d. Interchange of managerial personnel
e. Provision of essential technical information
Joint control is the contractually agreed sharing of control over an economic activity.
Examples of related parties
a. Affiliates - meaning the parent, the subsidiary and fellow subsidiaries
b. Associate meaning the entities over which one party exercises significant
influence

The term "associate" includes the subsidiary or subsidiaries of the associate.

c. Venturer in a joint venture
A Joint venture includes the subsidiary or subsidiaries of the joint venture.
d. Key management personnel are those persons having authority and
responsibility for planning, directing and controlling the activities of the entity,
directly or indirectly, including any executive director or nonexecutive director.
e. Close family members of an individual are those family members who may be
expected to influence or be influenced by that individual in their dealings with the
entity.
Close family members of an individual include:
 The individual's spouse and children
 Children of the individual's spouse
 Dependents of the individual or the individual's spouse.
f. Individuals owning directly or indirectly an interest in the voting power or the
reporting entity that gives the significant influence over the entity, and close
family members of such individuals.
g. Postemployment benefit plan for the benefit of employee
PAS 24, paragraph 11, provides the following are deemed not to be related:
 two entities simply because they have a director or key manager in common
 two venturers who share joint control over a joint venture
 providers of finance, trade unions, public utilities, and departments and agencies
of a government that does not control, jointly control or significantly influence the
reporting entity, simply by virtue of their normal dealings with an entity (even
though they may affect the freedom of action of an entity or participate in its
decision-making process)
 a single customer, supplier, franchiser, distributor, or general agent with whom
an entity transacts a significant volume of business merely by virtue of the
resulting economic dependence
Examples of related party transaction
A related party transaction is a transfer of resources or obligations between related
parties, regardless of whether a price is charged.
PAS 24, paragraph 20, provides the following examples of related party transaction:
a. Purchase and sale of goods
b. Purchase and sale of property and other asset
c. Rendering or receiving services
d. Leases
e. Transfer of research and development
f. License agreement
g. Finance arrangements, including loans and equity contributions in cash or in kind
h. Guarantee and collateral
i. Settlement of liabilities on behalf of the entity or by the entity on behalf of another
party.
Related party disclosures

PAS 24, paragraph 12, requires disclosure of related party relationships where control
exists irrespective of whether there have been transactions between the related parties.
In other words, relationships between parents and subsidiaries shall be disclosed
regardless of whether there have been transactions between those related parties. An
entity shall disclose the name or the entity’s parent and if different, the ultimate
controlling party.
If neither the entity's parent nor the ultimate controlling party produces financial
statements available for public use, the name the next most senior parent that does so
shall also be disclosed.
Disclosures of related party transaction
PAS 24, paragraph 17, provides that if there have been transactions between related
parties, an entity shall disclose the nature of the related party relationship as well as
information about the transactions and outstanding balances necessary for an
understanding of the financial statements.
As a minimum, the disclosures of related party transaction shall include:
a. The amount of the transaction.
b. The amount of outstanding balance, terms and conditions, whether secured or
unsecured, and nature of consideration to be provided in settlement.
c. The allowance for doubtful accounts related to the outstanding balance.
d. The doubtful accounts expense recognized during the period in respect of
amount due from related parties.
Key management personnel compensation
Key management personnel are those persons having authority and responsibility for
planning, directing, and controlling the activities of the entity, directly or indirectly,
including any directors (whether executive or otherwise) of the entity.
PAS 24, paragraph 66, provides that an entity shall disclose key management personnel
compensation in total and or each of the following categories:
a. Short- term employee benefits
b. Postemployment benefits, for example, retirement pensions
c. Other long-term benefits
d. Termination benefits
e. Share based payment transactions, for example, share options
Note: If an entity obtains key management personnel services from a management
entity, the entity is not required to disclose the compensation paid or payable by the
management entity to the management entity’s employees or directors. Instead, the
entity discloses the amounts incurred by the entity for the provision of key management
personnel services that are provided by the separate management entity.
Related party disclosures not required

PAS 24, paragraph 3, requires disclosure of related party transactions and outstanding
balances in the separate financial statements of a parent, subsidiary, associate or
venturer.
However, Paragraph 4 provides that intragroup related party transactions and
outstanding balances are eliminated in the preparation of consolidated financial
statements of the group.
INVENTORIES PAS 2
Objective
The objective of PAS 2 is to prescribe the accounting treatment for inventories. It
provides guidance for determining the cost of inventories and for subsequently
recognizing an expense, including any write-down to net realizable value. It also
provides guidance on the cost formulas that are used to assign costs to inventories.
Inventories are assets held for sale in the ordinary course of business, in the process of
production for such sale or in the form of materials or supplies to be consumed in the
production process or n the rendering of services.
Inventories encompass goods purchased and held for resale, for example:
a. Merchandise purchased by a retailer and held for resale
b. Land and other property held for resale by a subdivision entity and real estate
developer.
Inventories also encompass finished goods produced, goods in process and materials
and supplies awaiting use in the in production process.
Classes of inventories
Inventories are broadly classified into two, namely:
a. trading concern is one that buys and sells goods in the same form purchased.
The term "merchandise inventory” is generally applied to goods held by a trading
concern.
b. manufacturing concern is one that buys goods which are altered or converted
into another form before they are made available for sale.
The inventories of a manufacturing concern are:

 Finished goods
 Goods in process
 Raw materials
 Factory or manufacturing supplies
Measurement of inventories
Cost of inventory should include all:
a. costs of purchase (including taxes, transport, and handling) net of trade
discounts received
b. costs of conversion (including fixed and variable manufacturing overheads) and

c. other costs incurred in bringing the inventories to their present location and
condition
Cost of purchase
The cost of purchase of inventories comprises the following:
 the purchase price,
 import duties and irrecoverable taxes,
 freight,
 handling and other costs directly attributable to the acquisition of finished goods,
materials and services.
Note: Trade discounts, rebates and other similar items are deducted in determining the
cost of purchase.
Cost of conversion
The cost of conversion of inventories includes:
a. cost directly related to the units of production such as direct labor.
b. It also includes a systematic allocation of fixed and variable production overhead
that is incurred in converting materials into finished goods.
Fixed production overhead is the indirect cost of production that remains

relatively constant regardless of the volume of production. Examples are
depreciation and maintenance of factory building equipment, and the cost or
factory management and administration.
Variable production overhead is the indirect cost of production arises directly

with the volume of production. Examples are indirect labor and indirect materials.
Other cost
Other cost is included in the cost of inventories only to the extent that it is incurred in
bringing the inventories to their present location and condition. For example, it may be
appropriate to include the cost of designing product for specific customer in the cost of
inventories
However, the following costs are excluded from the cost of inventories and recognized
as expenses in the period when incurred:
a. Abnormal amounts of wasted materials, labor and other production costs.
b. Storage costs, unless necessary in the production process prior to a further
production stage. Thus, storage costs on goods in process are capitalized but
storage costs on finished goods are expensed.
c. Administrative overheads
d. Distribution or selling costs
Cost of inventories or a service provider

The cost of inventories of a service provider consists primarily of the labor and Other
costs of personnel directly engaged in providing the service, including supervisory
personnel and attributable overhead.
Note: Labor and other costs relating to sales and general administrative personnel
are not included but are recognize as expenses in the period in which they incurred.
Whose inventory is it?
Goods in transit
 Shipping terms determine when title to goods passes to the purchaser.
a. FOB (free on board) shipping point—title passes to the buyer with the
loading of goods at the point of shipment.
b. FOB destination—legal title does not pass until the goods are received by
the buyer.
Note:
 Goods shipped FOB shipping point belong to the buyer while they are in transit
and should normally be included in the buyer’s inventory while in transit.
 Goods shipped FOB destination belong to the seller while in transit and are
normally included in the seller’s inventory.
Goods on consignment
 Goods held by the dealer (consignee) for which title is held by the
shipper(consignor).
 Consigned goods are included in the inventory of the consignor.
Cost formulas
PAS 2, paragraph 25, expressly provides that the cost on inventories shall be
determined by using either
a. First in, First out
b. Weighted average
The standard does not permit anymore the use of the last in, first out (LIF0) as an
alternative formula in measuring cost of inventories.
First in, First out (FIFO)
The FIFO method assumes that "the goods first purchased are first sold” and
consequently the goods remaining in the inventory at the end of the period are those
most recently purchased or produced. In other words, the FIFO is in accordance with the
ordinary merchandising procedure that the goods are sold in the order they are
purchased.
The rule is "first come, first sold".
The inventory is thus expressed in terms of recent or new prices while the cost of goods
sold is representative of earlier or old prices. This method favors the statement of
financial position in that the inventory is stated at current replacement cost.

The objection to the method is that there is improper matching of cost against revenue
because the goods sold are stated at earlier or older prices resulting in understatement
of cost of goods sold. Accordingly, in a period of inflation or rising prices, the FIFO
method would result to the highest net income. However, in a period of deflation or
declining prices, the FIFO method would result to the lowest net income.
Weighted average
The cost of the beginning inventory plus the total cost of purchases during the period is
divided by the total units purchased plus those in the beginning inventory to get a
weighted average unit cost. Such weighted average unit cost is then multiplied by the
units on hand to derive the inventory value. In other words, the average unit cost is
computed by dividing the total cost of goods available for sale by the total number of
units available for sale.
The argument for the weighted average method is that it is relatively easy to apply,
especially with computers. Moreover, the weighted average method produces inventory
valuation that approximates current value if there is a rapid turnover of inventory. The
argument against the weighted average method is that there may be a considerable lag
between the current cost and inventory valuation since the average unit cost involves
early purchases.
Last in, First out (LIFO)
The LIFO method assumes that the goods last purchased are first sold and
consequently the goods remaining in the inventory at the end of the period are those first
purchased or produced. The inventory is thus expressed in terms of earlier or old prices
and the cost of goods sold is representative of recent or new prices. The LIFO favors the
income statement because there is matching of current cost against current revenue, the
cost of goods sold being expressed in terms of current or recent cost.
The objection of the LIFO is that the inventory is stated at earlier or older prices and
therefore there may be a significant lag between inventory valuation and current
replacement cost. Actually, in a period of rising prices, the LIFO method would result to
the lowest net income. In a period of declining prices, the LIFO method would result to
the highest net income.
Specific identification
It means that specific costs are attributed to identified items of inventory. The cost of the
inventory is determined by simply multiplying the units on hand by the actual unit cost.
PAS 2, paragraph 23, provides that this method is appropriate for inventories that are
segregated for a specific project and inventories that are not ordinarily interchangeable.
Measurement of inventory
PAS 2, paragraph 9, provides that inventories shall be measured at the lower of cost and
net realizable value. The cost of inventory is determined using either FlFO cost or
average cost. The measurement of inventory at the lower of cost and net realizable
value is known as LCNRV.

Net realizable value or NRV is the estimated selling price in the ordinary course of
business less the estimated cost of completion and the estimated cost of disposal. The
cost of inventories may not be recoverable under the following circumstances:
a. The inventories are damaged.
b. The inventories have become wholly or partially obsolete.
c. The selling prices have declined.
d. The estimated cost of completion or the estimated cost of disposal has
increased.
Note: Inventories are usually written down to net realizable value on an item by item or
individual basis.
Accounting for inventory writedown
If the cost is lower than net realizable value, there is no accounting problem because the
inventory is stated at cost and the increase in value is not recognized. If the net
realizable value is lower than cost, the inventory is measure at net realizable value. In
this case, the problem is the proper treatment of the writedown of the inventory to net
realizable value. The writedown of inventory to net realizable value is accounted for
using the allowance method.
Allowance method
The inventory is recorded at cost and any loss on inventory writedown is accounted for
separately. This method is also known as loss method because a loss account "loss on
inventory writedown is debited and a valuation account "allowance for inventory
writedown" is credited. In subsequent years, this allowance account is adjusted upward
or downward depending on the difference between the cost and net realizable value of
the inventory at year-end. If the required allowance increases, an additional loss is
recognized. If the required allowance decreases, a gain on reversal of inventory
writedown is recorded.
Note: However, the gain is limited only to the extent of the allowance balance.
The allowance method is used in order that the effects of writedown and reversal of
writedown can be clearly identified. As a matter of fact, PAS 2, paragraph 36, requires
disclosure of the amount of any inventory writedown and the amount of any reversal of
inventory writedown.
Required disclosures:
 accounting policy for inventories
 carrying amount, generally classified as merchandise, supplies, materials, work
in progress, and finished goods. The classifications depend on what is
appropriate for the entity
 carrying amount of any inventories carried at fair value less costs to sell
 amount of any write-down of inventories recognized as an expense in the period
 amount of any reversal of a write-down to NRV and the circumstances that led to
such reversal
 carrying amount of inventories pledged as security for liabilities

 cost of inventories recognized as expense (cost of goods sold).

PROPERTY, PLANT AND EQUIPMENT PAS 16
Objective
The objective of PAS 16 is to prescribe the accounting treatment for property, plant, and
equipment. The principal issues are the recognition of assets, the determination of their
carrying amounts, and the depreciation charges and impairment losses to be recognized
in relation to them.
Property, plant and equipment are tangible assets that are held or use in production or
supply of goods or services, for rental to others, or for administrative purposes, and are
expected to be used during more than one period.
Recognition
Items of property, plant, and equipment should be recognized as assets when it is
probable that:
a. it is probable that the future economic benefits associated with the asset will flow
to the entity, and
b. the cost of the asset can be measured reliably.
Initial Measurement
An item of property, plant and equipment that qualifies for recognition as an asset shall
be measured at cost. Cost is the amount of cash or cash equivalent paid and the fair
value of the other consideration when to acquire an asset at the time of acquisition or
construction.
Elements of cost
The cost of an item of property, plant and equipment comprises:
a. Purchase price, including import duties and nonrefundable purchase taxes, after
deducting trade discounts and rebates
b. Cost directly attributable to bringing the asset to the location and condition
necessary for it to be capable of operating in the manner intended by
management.
c. Initial estimate of the cost of dismantling and removing the item and restoring the
site on which it is located for which an entity has a present obligation.
Directly attributable costs
Examples of directly attributable costs that qualify for recognition include:
a. Cost of employee benefit arising directly from the construction or acquisition of
the item of property, plant and equipment.
b. Cost of site preparation
c. Initial delivery and handling cost
d. Installation and assembly cost
e. Professional fee

f. Costs of testing whether the asset is functioning properly.

Costs not qualifying for recognition
Examples of costs that are expensed rather than recognized as element of cost of
property, plant and equipment are:
a. Cost of opening a new facility
b. Cost of introducing a new product or service, including cost of advertising and
promotion
c. Cost of conducting business in a new location or with a new class of customer,
including cost of staff training
d. Administration and other general overhead cost
e. Cost incurred while an item capable of operating in the manner intended by
management has yet to be brought into use or is operated at less than full
capacity
f. Initial operating loss
g. Cost of relocating or reorganizing part or all of an entity's operations
Measurement subsequent to initial recognition
After initial recognition, an entity shall choose either the cost model or the revaluation
model as the accounting policy for property, plant and equipment.
 Cost model means that property, plant and equipment are carried at cost less
any accumulated depreciation and any accumulated impairment loss.
 Revaluation model means that property, plant and equipment are carried at
revalued carrying amount.
Note: The revalued carrying amount is the fair value at the date of revaluation
less any subsequent accumulated depreciation and subsequent accumulated
impairment loss.
The entity shall apply such accounting policy to an entire class of property, plant and
equipment.
Acquisition
 Cash basis – The cost of an item of property, plant and equipment is the cash
price equivalent at the recognition date.
Note: The cost of asset acquired on a cash basis simply includes the cash paid
plus directly attributable costs such as freight, installation cost and other cost
necessary in bringing the asset to the location and condition for the intended use.
 On account - When an asset is acquired on account subject to a cash discount,

the cost of the asset is equal to the invoice price minus the discount,
regardless of whether the discount is taken or not.
Note: Cash discounts are generally considered as reduction of cost and not as
income.

 On installment - When payment for item of property, plant and equipment is

deterred beyond normal credit terms, the cost is the cash price equivalent. In
other words, if an asset is offered at a cash price and at an installment price and
is purchased at the installment price, the asset shall be recorded at the cash
price
Note: The excess of the installment price over the cash price is treated as an
interest to be amortized over the credit period.
 Issuance of share capital
Philippine GAAP provides that if shares are issued for consideration other than
actual cash, the proceeds shall be measured by the fair value of the
consideration received.
Accordingly, where a property is acquired through the issuance of share capital,

the property shall be measured at amount equal to the following in the order of
priority:
a. Fair value of the property received
b. Fair value of the share capital
c. Fair value or stated value of the share capital
 Issuance of bonds payable
PFRS 9, paragraph 5.1.1, provides the asset acquired by issuing bonds payable
is measured in the following order
a. Pair value of bonds payable
b. Fair value of asset received
c. Face amount of bonds payable
 Exchange
PAS 16, paragraph 24, provides that the cost of an item of property, plant and
equipment acquired in exchange for a nonmonetary asset or a combination of
monetary and nonmonetary asset is measured at fair value plus any cash
payment. However, the exchange is recognized at carrying amount if the
exchange transaction lacks commercial substance .
Commercial substance is a new notion and is defined as the event or

transaction causing the cash flows of the entity to change significantly by reason
of the exchange. An exchange transaction has commercial substance when the
cash flows of the asset received differ significantly from the cash flows of the
asset transferred.
 Construction

The cost of self-constructed asset is determined using the same principles as for
an acquired asset. The cost of self-constructed property, plant and equipment
includes:
 Direct cost of materials
 Direct cost or labor
 Indirect cost and incremental overhead specifically identifiable or
traceable to the construction.
PAS 16, paragraph 22, provides that the cost of abnormal amount of wasted material,
labor or overhead incurred in the production of self-constructed assets is not included in
the cost of the asset
Derecognition
Derecognition means that the cost of the property, plant and equipment together with the
related accumulated depreciation shall be removed from the statement of financial
position. PAS 16, paragraph 67, provides that the carrying amount of an item of
property, plant and equipment shall be derecognized on disposal or when no future
economic benefits are expected from the use or disposal.
The gain or loss from the derecognition of an item of property, plant and equipment shall
be included in profit or loss. Gains shall not be included in revenue but treated as other
income. The gain or loss arising from the derecognition of an item of property, plant and
equipment shall be determined as the difference between the net disposal proceeds
and the carrying amount of the item.
Fully depreciated property
A property is said to be fully depreciated when the carrying amount is equal to zero, or
the carrying amount is equal to the residual value. In such a case, the asset account and
the related accumulated depreciation account are closed and the residual value is set up
in a separate account. However, it is not uncommon for an entity to continue to use an
asset after it has been fully depreciated. The cost of fully depreciated asset remaining in
service and the related accumulated depreciation ordinarily shall not be removed from
the accounts. However, entities are encouraged but not required to disclose fully
depreciated property.
Concept of Depreciation
Depreciation is defined as the systematic allocation of the depreciable amount of an
asset over the useful life. Depreciation is not so much a matter of valuation. Depreciation
is a matter of cost allocation in recognition of the exhaustion of the useful life of an item
of property, plant and equipment. The objective of depreciation is to have each period
benefiting from the use of the asset bear an equitable share of the asset cost.
Depreciation in the financial statements
Depreciation is an expense. Depreciation may be a part of the cost of goods
manufactured or an operating expense. The depreciation charge for each period shall be
recognized as expense unless it is included in the carrying amount of another asset.
Depreciation period

The depreciable amount of an asset shall be allocated on a systematic basis over the
useful life. Depreciation of an asset begins when it is available for use, meaning, when
the asset is in the location and condition necessary for the intended use by
management. Depreciation ceases when the asset is derecognized. Therefore,
depreciation does not cease when the asset becomes idle temporarily. Temporary idle
activity does not preclude as future economic benefits are consumed not only through
usage but also through wear and tear and obsolesces.
Factors of depreciation
In order to properly compute the amount of depreciation, three factors are necessary,
namely depreciable amount, residual value and useful life
Depreciable amount
Depreciable amount is the cost of an asset or other amount substituted tor cost, less the
residual value. Each part of an item of property, plant and equipment with a cost that is
significant in relation to the total cost of the item shall be depreciated separately. For
example, it may be appropriate to depreciate separately the airframe, engines, fittings
(seats and floor coverings) and tires of an aircraft. The entity also depreciates separately
the remainder of the item and the remainder consists of the parts of the item that are
individually not significant.
Residual value
Residual value is the estimated net amount currently obtainable if the asset is at the end
of the useful life. The residual value of an asset shall be re viewed at least at each
financial year-end and if expectation differs from previous estimate, the change shall be
accounting for as a change in an accounting estimate. The residual value of an asset
may increase to an amount equal or greater than the carrying amount. If it does, the
depreciation charge is zero unless and until the residual value subsequently decreases
to an amount below the carrying amount. Depreciation is recognized even if the fair
value of the asset exceeds the carrying amount as long as the residual value does not
exceed the carrying amount.
Useful life
Useful life is either the period over which an asset is expected to be available for use by
the entity, or the number or production or similar units expected to be obtained from the
asset by the entity.
Factors in determining useful life
a. Expected usage of the asset - Usage is assessed by reference to the asset's
expected capacity or physical output.
b. Expected physical wear and tear-This depends on the operational factors such
as the number of shifts the asset 1s used, the repair and maintenance program,
and the care and maintenance of the asset while idle.
c. Technical or commercial obsolescence- This arises from changes or
improvements in production, or change in the market demand for the product
output of the asset.

d. Legal limits for the use of the asset, such as the expiry date of the related lease.
Depreciation method
The depreciation method shall reflect the pattern in which the future economic benefits
from the asset are expected to be consumed by the entity. The depreciation method
shall be reviewed at least at every year-end. If there has been a significant change in
the expected pattern of economic benefits, the method shall be changed to reflect the
changed pattern. Such change shall be accounted for as a change in accounting
estimate. A variety of depreciable methods can be used. Depreciation methods include
straight line, production method and diminishing balance method.
 Straight line method
Under the straight line method, the annual depreciation charge calculated by
allocating the depreciable amount equally over the number of years of useful
life. In other words, straight line depreciation is á constant charge over the
useful life of the asset. The straight-line method is adopted when the principal
cause of depreciation is passage of time. The straight line approach considers
depreciation as a function of time rather than as a function of usage.
 Production method
The production or output method assumes that depreciation is more a function

of use rather than passage of time. The useful life of the asset is considered in
terms of the output it produces or the number of hours it works. Thus,
depreciation is related to the estimated production capability of the asset and is
expressed in a rate per unit of output or per hour of use. The production method
is adopted if the principal cause of depreciation is usage.
 Diminishing balance or accelerated methods
The diminishing balance or accelerated methods provide higher depreciation in

the earlier years and lower depreciation in the later years of the useful life of the
asset. Thus, these methods result in a decreasing depreciation charge over the
useful life. The accelerated depreciation is on the philosophy that new sets are
generally capable of producing more revenue in the earlier years than in the
later years. The accelerated methods include sum of years' digits method and
double declining balance methods.

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Updates in Philippine Accounting and Financial Reporting Standards 1

“Not intended for publication. For classroom instruction purposes only”.

Updates in Philippine Accounting and

Jose Rizal Memorial State University

All rights reserved. This book or any portion thereof

Page and Cover designed: Michael C. Diputado

First Edition. ______________________

JOSE RIZAL MEMORIAL STATE UNIVERSITY

Gov. Guading Adaza St. Sta Cruz, Dapitan City, 7101

“Not intended for publication. For classroom instruction purposes only”.

The Updates in Philippine Accounting and Financial Reporting Standards is a

“Not intended for publication. For classroom instruction purposes only”.

“Not intended for publication. For classroom instruction purposes only”.

To pass the course, you must observe the following:

Feedback Modality and Communication Mechanisms

The term grade is computed using the formula:

30% - Formative Assessment/Student Engagement

Midterm Grade = 100% of the Midterm Grade

Person/Office Email address CP number

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JOSE RIZAL MEMORIAL STATE UNIVERSITY

Name and signature of student Date signed

Name and signature of parent/guardian Date signed

Contact Number of Parent/Guardian

“Not intended for publication. For classroom instruction purposes only”.

“Not intended for publication. For classroom instruction purposes only”.

Updates in Philippine Accounting and

Jose Rizal Memorial State University

All rights reserved. This book or any portion thereof

Page and Cover designed: Michael C. Diputado

First Edition. ______________________

JOSE RIZAL MEMORIAL STATE UNIVERSITY

Gov. Guading Adaza St. Sta Cruz, Dapitan City, 7101

“Not intended for publication. For classroom instruction purposes only”.

“Not intended for publication. For classroom instruction purposes only”.

The Updates in Philippine Accounting and Financial Reporting Standards (An

In order to cope up with today’s rapidly changing environment affecting the

“Not intended for publication. For classroom instruction purposes only”.

Unit 1 – Accounting Standards Part 1

“Accounting is the process of identifying, measuring and communicating

At the end of the unit, you will be able

 Prepare financial statements in accordance with Philippine Financial Reporting

__________1. An excess of equity over current assets is equal to liabilities.

__________4. LCNRV should always be equal to net realizable value.

“Not intended for publication. For classroom instruction purposes only”.

Thank you for answering the test. Please see

The next section is the content of this unit. It

PAS 1 PRESENTATION OF FINANCIAL STATEMENTS

“Not intended for publication. For classroom instruction purposes only”.

“Not intended for publication. For classroom instruction purposes only”.

requirements of IFRSs (which includes International Financial Reporting Standards,

“Not intended for publication. For classroom instruction purposes only”.

“Not intended for publication. For classroom instruction purposes only”.

1. Statement of financial position (balance sheet)

Current assets Current liabilities

“Not intended for publication. For classroom instruction purposes only”.

j. assets held for sale

2. Statement of profit or loss and other comprehensive income

“Not intended for publication. For classroom instruction purposes only”.

Total comprehensive income is defined as "the change in equity during a period

Profit or loss section or statement

“Not intended for publication. For classroom instruction purposes only”.

An entity shall disclose reclassification adjustments relating to components of other