Overview of Accounting

Accounting is "the process of identifying, measuring, and communicating economic

information to permit informed judgments and decisions by users of the information." -
(American Association of Accountants)

Three important activities included in the definition of accounting

1. Identifying
2. Measuring
3. Communicating

IDENTIFYING
Identifying is the process of analyzing events and transactions to determine whether or
not they will be recognized.

 Recognition refers to the process of including the effects of an accountable

event in the statement of financial position or the statement of comprehensive
income through a journal entry.

Only accountable events are recognized (i.e., journalized). An accountable

event is one that affects the assets, liabilities, equity, income or expenses of an
entity. It is also known as economic activity, which is the subject matter of
accounting. Only economic activities are emphasized and recognized in accounts
Sociological and psychological matters are not recognized.

Non-accountable events are not recognized but disclosed only in the

notes, if they have accounting relevance. But disclosed only in the notes is not an
application of the recognition process. A non-accountable event that has an
accounting relevance may be recorded through a memorandum entry.

TYPES OF EVENTS OR TRANSACTIONS

1. External events -- are events that involve an entity and another external party.

TYPES OF EXTERNAL EVENTS

 i. Exchange (reciprocal transfer) — an event wherein there is a
reciprocal giving and receiving of economic resources or discharging of economic
obligations between an entity and an external party.
Examples: sale, purchase, payment of liabilities, receipt of notes receivable
in exchange for accounts receivable, and the like.

ii. Non-reciprocal transfer — is a "one way" transaction

in that the party giving something does not receive anything in return while the party
receiving does not give anything in exchange.
Examples: donations, gifts or charitable contributions, payment of taxes,
imposition of fines, theft' provision of capital by owners 1, distributions to owners,
and the like.

iii. External event other than transfer — an event that

involves changes in the economic resources or obligations of an entity caused by
an external party or external source but does not involve transfers of resources or
obligations.
Examples: changes in fair obsolescence, technological changes, vandalism
and the like.

2. Internal events -- are events that do not involve external party.

TYPES OF INTERNAL EVENTS

i. Production - the process by which resources are transformed into

finished goods.
Examples: conversion of raw materials into finished products,
production of farm products, and the like.

ii. Casualty — an unanticipated loss from disasters or other similar events.

Examples: loss from fire, flood, and other catastrophes.

MEASURING
Measuring involves assigning numbers, normally in monetary terms, to the
economic transactions and events. Several measurement bases are used in
accounting which include, but not limited to, historical cost, fair value, present value,
realizable value, current cost, and sometimes inflation adjusted costs. The most
commonly used is historical cost. This is usually combined with the other
measurement bases. Accordingly, financial statements are said to be prepared using
a mixture of costs and values. Costs include historical cost and current cost while
values include the other measurement bases.

VALUATION BY FACT OR OPINION

The use of estimates is essential in providing relevant information. Thus,
financial statements are said to be a mixture of fact and opinion. When measurement
is affected by estimates, the items measured are said to be valued by opinion.
Examples:
a. Estimates of uncollectible amounts of receivables.
b. Depreciation and amortization expenses, which are affected by estimates of
useful life and residual value.
c. Estimated liabilities, such as provisions.
d. Retained earnings, which is affected by various estimates of income and
expenses

When measurement is unaffected by estimates, the items measured are said

to be valued by fact. Examples:
a. Ordinary share capital valued at par value
b. Land stated at acquisition cost
c. Cash measured at face amount

COMMUNICATING
Communicating is the process of transforming economic data into useful
accounting information, such as financial statements and other accounting reports,
for dissemination to users. It also involves- interpreting the significance of the
processed information.
The communicating process of accounting involves three aspects:
1. Recording — refers to the process of systematically committing into writing
the identified and measured accountable events in the journal through journal
entries.
2. Classifying — involves the grouping of similar and interrelated items into their
respective classes through postings in the ledger.
3. Summarizing -- putting together or expressing in condensed form the
recorded and classified transactions and events. This includes the preparation
of financial statements and other accounting reports.
 Interpreting the processed information involves the computation of financial
statement ratios, some regulatory bodies, such as the Bangko SentraJ ng Pilipinas
(BSP), require certain financial ratios to be disclosed in the notes to financial
statements.

BASIC PURPOSE OF ACCOUNTING

The basic purpose of accounting is to provide information that is useful in
making economic decisions.
Various sources of information are used when making economic decisions
and the financial statements are only one of those sources. Other sources may
include current events, industry publications, internet resources, professional
advices, expert systems, etc.

Economic entities use accounting to record economic activities, process data,

and disseminate information intended to be useful in making economic decisions.
An economic entity is a separately identifiable combination of persons and
property that uses or controls economic resources to achieve certain goals or
objectives. An economic entity may either be a:

a. Not-for-profit entity — one that carries out some socially desirable needs of
the community or its members and whose activities are not directed towards
making profit; or
b. Business entity — one that operates primarily for profit.

Economic activities are activities that affect the economic resources (assets)
and obligations (liabilities), and consequently, the equity of an economic entity.
Economic activities include:

1. Production - the process of converting economic resources into

outputs of goods and services that are intended to have greater utility
than the required inputs.
2. Exchange - the process of trading resources or obligations for other
resources or obligations.
3. Consumption - the process of using the final output of the production
process.
4. Income distribution - the process of allocating rights to the use of
output among individuals and groups in society.
5. Savings - the process of setting aside rights to present consumption in
exchange for rights to future consumption.
 6. Investment - the process of using current inputs to increase the stock
of resources available for output as opposed to immediately
consumable output.

TYPES OF INFORMATION PROVIDED BY ACCOUNTING

1. Quantitative information — information expressed in numbers quantities, or

units.
2. Qualitative information — information expressed in words or descriptive form.
Qualitative information is found in the notes to financial statements as well as on
the face of the other financial statements.
3. Financial information — information expressed in money. Financial information
is also quantitative information because monetary amounts are normally
expressed in numbers.

TYPES OF ACCOUNTING INFORMATION CLASSIFIED AS TO USERS' NEEDS

1. General purpose accounting information - designed to meet the common

needs of most statement users. This information is provided under financial
accounting. General purpose information is governed by generally accepted
accounting principle (GAAP) represented by the Philippine Financial Reporting
Standards (PFRSs).
2. Special purpose accounting information - designed to meet the specific
needs of particular statement users. This information is provided by other types
of accounting other than financial accounting, e.g., managerial accounting, tax
basis accounting.

SOURCES OF INFORMATION IN FINANCIAL STATEMENTS

Information in the financial statements is not obtained exclusively from the entity's
accounting records. Some are obtained from external sources. For example, fair value
measurement* resolutions of uncertainties, future lease payments, and contractual
commitments are only a few of the informati011 presented in the financial statements
that are derived from external sources.

Accounting as science and art

 1. As a social science, accounting is a body of knowledge which has been
systematically gathered, classified and organized.
2. As a practical art, accounting requires the use of creative skills and judgment.

Accounting as an information system

Accounting identifies and measures economic activities, processes information into
financial reports, and communicates these reports to decision makers.

Accounting as a language of business

Accounting is often referred to as a "language of business" because it is fundamental to
the communication of financial information.

Creative and Critical thinking in accounting

The practice of accountancy requires the exercise of creative and critical thinking.

a. Creative thinking involves the use of imagination and insight to solve problems
by finding new relationships (ideas) among items of information. It is most
important in identifying alternative solutions
.
b. Critical thinking involves the logical analysis of issues, using inductive or
deductive reasoning to test new relationships to determine their effectiveness. It
is most important in evaluating alternative solutions.

Creative skills and judgment are exercised in problem solving. The following are
the steps in problem solving:

1. Recognizing a problem
2. Identifying alternative solutions
3. Evaluating the alternatives
4. Selecting a solution from among the alternatives
5. Implementing the solution

ACCOUNTING CONCEPTS
Accounting concepts refer to principles upon which the process of
accounting is based. The term "accounting concepts" is used interchangeably with
the following terms:
  Accounting assumptions (Accounting postulates) are the fundamental
concepts or principles and basic notions that provide the foundation of the
accounting process.

 Accounting theory — is logical reasoning in the form of a set of broad principles

that (i) provide a general frame of reference by which accounting practice can be
evaluated and (ii) guide the development of new practices and procedures. It is
the organized set of concepts and related principles that explain and guide the
accountant's action in identifying, measuring, communicating accounting
information. Accounting theory comprises the Conceptual Framework and the
Philippine Financial Reporting Standards (PFRSs).

Most accounting concepts are derived from the Conceptual Framework and the
Philippine Financial Reporting Standards (PFRSs). However, some accounting
concepts are implicit, meaning they are not expressly stated in the Framework or.
PFRSs but are generally accepted because of their long-time use in the profession.

Examples of accounting concepts:

1. Double-entry system — each accountable event is recorded in two parts —
debit and credit.
2. Going concern assumption - the entity is assumed to carry on its operations for
an indefinite period of time. Meaning, the entity does not expect to end its
operations in the foreseeable future.

The measurement basis involving mixture of costs and values is appropriate only
when the entity is a going concern• If the entity is a liquidating concern, the appropriate
measurement basis is realizable value, i.e., estimated selling price less estimated costs
to sell for assets and expect settlement amount for liabilities.

3. Separate entity (Accounting entity / Business entity concept/ Entity

concept) -- the entity is viewed separately from its owners. Accordingly, the
personal transactions of the owners among themselves or with other entities are
not recorded in the entity's accounting records. This concept defines the area of
interest of the accountant.

4. Stable monetary unit (Monetary unit assumption)

(a) Assets, liabilities, equity, income and expenses are stated in terms of a
common unit* of measure, which is the peso in the Philippines; and
 (b) The purchasing power of the peso is regarded as stable or constant
and that its instability is insignificant and therefore ignored.

*To be useful, accounting information should be stated in a common

denominator. For example, amounts in foreign currencies should be translated
into pesos.

5. Time Period (Periodicity/ Accounting period) - the life of the entity is divided
into series of reporting periods. An accounting period is usually 12 months and
may either be a calendar year or a fiscal year period. A calendar year period
starts on January 1 and ends on December 31 of that same year. A fiscal year
period also covers 12 months but starts on a date other than January 1.

6. Materiality concept — information is material if its omission or misstatement

could influence economic decisions. Materiality is a matter of professional
judgment and is based on the size and nature of the item being judged.

7. Cost-benefit (Cost constraint/ Reasonable assurance) - the cost of

processing and communicating information should not exceed the benefits to be
derived from it.

8. Accrual Basis of accounting -- the effects of transactions and other events are
recognized when they occur and not as cash is received or paid) and they are
recorded in the accounting records and reported in the financial statements of
the periods to which they relate.
Under accrual basis, income is recognized when earned rather than
when cash is collected and expenses are recognized when incurred rather
than when cash is paid.

9. Historical cost concept (Cost principle) — the value of an asset is determined

on the basis of acquisition cost.
This concept is not always maintained. Some PFP& the departure from
this concept, such as what inventories are measured at net realizable value
(NRV) rather than at cost when. applying the "lower of cost and NRV"
measurement.

10. Concept of Articulation — all of the components of a complete set of financial

statements are interrelated. The preparation of a worksheet (and the eventual
completion of the financial statements) recognizes that the financial statements
are fundamentally interrelated and interact with each other. Accordingly, when
 users use the financial statements making decisions, they need to use each
financial statement conjunction with the other financial statements.
For example, when evaluating an entity's ability generate future cash
flows, all the financial statements should be used and not only the statement of
cash flows.
 Receivables and payables in the statement of financial position provide
information on expected cash receipts cash disbursements in future
periods.
 Income and expenses in the statement of profit or loss other
comprehensive income provide information on entity's ability to generate
cash flows from its operations.
 Information on issued and of changes in equity provides of equity
financing.
 Information on historical equivalents in the statement of future sources
and uses of funds. The notes to financial statements the quality of
earnings, e.g., are realized or unrealized or nonrecurring.

11. Full disclosure principle — this nature and amount of information statements
reflect a series of judgmental offs strive for:
a. sufficient detail to disclose matters to users, yet
b. sufficient condensation to understandable, keeping in mind and using it.

12. Consistency concept — the financial on the basis of accounting consistently

from one period to accounting policies are made only when by the PFRSs or
when the change results reliable information. Changes in disclosed in the
notes.

13. Matching (association of cause and effects) - costs are recognized as

expenses when the related revenue is recognized.

14. Entity Theory- The accounting objective is geared towards proper income
determination. Proper matching of costs against revenues is the ultimate end.
This theory emphasizes income statement and is exemplified by the equation
"Assets Liabilities + Capital."

15. Proprietary theory - the accounting objective is geared towards the proper
valuation of assets. This theory emphasizes the importance of the balance
sheet and is exemplified by the equation "Assets — Liabilities = Capital."
 16. Residual equity theory — this theory is applicable when there are two classes
of shares issued, i.e., ordinary and preferred. The equation is "Assets —
Liabilities — Preferred Shareholders' Equity = Ordinary Shareholders'
Equity." This theory is applied in the computation of book value per share and
return on equity.

17. Fund theory — the accounting objective is neither proper income

determination nor proper valuation of assets but the custody and administration
of funds. The objective is directed towards cash flows, exemplified by the
formula "cash inflows minus cash outflows equals fund." This concept is used in
government accounting and fiduciary accounting.

18. Realization — the process of converting non-cash assets into cash or claims
for cash. It is also the concept that deals with revenue recognition.
For example, realization occurs when goods are sold for cash or in
exchange for accounts receivable or notes receivable. The goods are non-cash
assets and they are converted into cash or, in the case of the receivables, claims
for cash.

19. Prudence (Conservatism) - is the use of caution when making estimates under
conditions of uncertainty, such that assets or income are not overstated and
liabilities or expenses are not understated. In other words, when exercising
prudence one which has the least effect on equity is chosen.
However, the exercise of prudence does not allow the deliberate
understatement of assets or overstatement of liabilities in order to create hidden
reserves because the financial statements would not be faithfully represented.
An example of a hidden reserve is the "cookie jar reserve." It is a form of
fraudulent reporting wherein during periods of high profits, liabilities are
overstated through excessive provisions of expenses or non-recognition of
income. In Subsequent periods, when the entity's financial performance is poor,
the "cookie jar reserve" is reversed to income in order to report high profits.
Management engages in such fraud because of various reasons, which may
include smoothing earnings in order to secure bonuses over time, defer profits to
the periods when they are evaluated for promotion or for election as members of
the board of directors, or to show profits when other entities belonging to the
same industry show declining financial performance.

Expense recognition principles

 20. Matching concept (Direct association of costs and revenues) — costs that
are directly related to the earning of revenue are recognized as expenses in the
same period the related revenue is recognized.
For example, the cost of inventory is initially recognized as asset and
recognized as expense (i.e., cost of sales) when the inventory is sold. Other
examples include freight-out and sales commissions; these are expensed in the
period the related sales are recognized.

21. Systematic and rational allocation — costs that are not directly related to the
earning of revenue are initially recognized as assets and recognized as
expenses over the periods their economic benefits are consumed, using some
method of allocation.
For example, the cost of equipment is initially recognized as asset and
subsequently recognized as depreciation expense over the periods the
equipment is used. Other examples include amortization, expensing of
prepayments and effective interest method of allocation.

22. Immediate recognition --- costs that do not meet the definition of an asset, of
ceases to meet the definition of an asset, are expensed immediately. Examples
include casualty losses and impairment losses.

COMMON BRANCHES OF ACCOUNTING

1. Financial accounting — is the branch of accounting that focuses on general

purpose financial statements.

 General purpose financial statements are those statements that cater

to the common needs of external users, primarily the potential and
existing investors, and lenders and other creditors. External users are
those who are not involved in managing the entity.

 Financial accounting is governed by the Philippine Financial Standards

(PFRSs).

Financial accounting vs. Financial reporting

The term "financial accounting" is often used interchangeably with the term
'financial reporting." Although, both financial accounting and financial reporting focus
on general purpose financial statements, the latter endeavors to promote principles that
are also useful in "other financial reporting."
 "Other financial reporting" comprises information provided outside the financial
statements that assists in the interpretation of a complete set of financial statements or
improves users' ability to make efficient economic decisions

Financial statements vs. Financial report

 Financial statements are the structured representation of an entity's
financial position and results of its operations• They are the end product of
the accounting process and the means by which information gathered and
processes are periodically communicated to users process and the means
by which information gathered and processes are periodically
communicated to users.

 A financial report includes the financial statements plus other information

provided outside the financial statements that assists in the interpretation
of a complete set of financial statements or improves users' ability to make
efficient economic decisions.

Financial reporting is the provision of financial information about an entity that is useful
to external users, primarily the investors, lenders, and other creditors, in making
investment and credit decisions.

Primary objective of financial reporting

To provide information about an entity's economic resources, claims to those resources,
and changes in those resources.

Secondary objective of financial reporting

To provide information useful in assessing the entity's management stewardship (i.e.,
how efficiently and effectively the entity's management has discharged its
responsibilities to use the entity's economic resources).

2. Management accounting – refers to the communication of information for use

by internal management. An offshoot of management accounting is
“management advisory services” which includes services to clients on matters of
accounting, finance, business organization procedures, product costs, many
other phases of business conduct and operations.

3. Cost accounting – is the systematic recording and analysis of the costs of

materials, labor, and overhead incident to production.
 4. Auditing – is the process of evaluating the certain assertions with established
criteria and opinion thereon.

5. Tax accounting – the preparation of tax returns and rendering of tax advice,
such as the determination of the tax consequences of certain proposed business
endeavors.

6. Government accounting – refers to the accounting for the government and its
instrumentalities, placing emphasis on the custody of public funds, the purposes
for which those funds are committed, and the responsibility and accountability of
the individuals entrusted with those funds.

7. Fiduciary accounting – refers to the handling of accounts managed by a person

entrusted with the custody and management of property for the benefit of
another.

8. Estate accounting – refers to the handling of accounts for fiduciaries who wind
up the affairs of a deceased person.

9. Social accounting (social and environmental accounting or social

responsibility reporting) – the process of communicating the social and
environmental effects of an entity’s economic actions to the society.

10. Institutional accounting - the accounting for non-profit entities other than the
government.

11. Accounting systems - the installation of accounting procedures for the

accumulation of financial data and designing of accounting forms to be used in
data gathering.

12. Accounting research - pertains to the careful analysis of economic events and
other variables to understand their impact on decisions. Accounting research
includes a broad range of topics, which may be related to one or more of the
other branches of accounting, the economy as a whole, or the market
environment.

BOOKKEEPING AND ACCOUNTING

 Bookkeeping refers to the process of recording the accounts or transactions of
an entity. Bookkeeping normally ends with the preparation of the trial balance. Unlike
accounting, bookkeeping does not require the interpretation of the significance of the
processed information.

ACCOUNTANCY
Accountancy refers to the profession or practice of accounting. The practice of
accounting can be broadly classified into two - (1) Public practice and (2) Private
practice. Public practice does not involve an employer-employee relationship while
private practice involves an employer-employee relationship, meaning the accountant is
an employee.

FOUR SECTORS IN THE PRACTICE OF ACCOUNTANCY

Under R.A. 9298 also known as the "Philippine Accountancy Act of 2004," the
practice of accounting is sub-classified into the following:

1. Practice of Public Accountancy - involves the rendering of audit or accounting

related services to more than one client on a fee basis.

2. Practice in Commerce and Industry – refers to employment in the private

sector in a position which involves decision making requiring professional
knowledge in the science of accounting and such position requires that the
holder thereof must be a certified public accountant.

3. Practice in Education/Academe- employment in educational institution which

involves teaching of accounting, auditing, management advisory services,
finance, business law, taxation, and other technically related subjects.

4. Practice in the Government – employment or appointment to a position in an

accounting professional group in the government or in a government-owned
and/or controlled corporation, including those performing proprietary functions,
where decision making requires professional knowledge in the science of
accounting, or where civil service eligibility as a certified public accountant is a
prerequisite.

Accountants practicing under numbers 2 to 4 above are considered in

private practice.
ACCOUNTING STANDARDS

The Philippine Financial Reporting Standards (PFRSs) represent the generally

accepted accounting principles (GAAP) in the Philippines.

The PFRSS are Standards and Interpretations adopted by the Financial

Reporting Standards Council (FRSC). They comprise:

a. Philippine Financial Reporting Standards (PFRSs);

b. Philippine Accounting Standards (PASS); and
c. Interpretations

PFRSS are accompanied by guidance to assist entities in applying their

requirements. A guidance states whether it is an integral part of the PFRS. A guidance
that is an integral part of the PFRS is mandatory.

The need for reporting standards

For financial statements to be useful, they should be prepared using reporting

standards that are generally acceptable. Otherwise, each entity would have to develop
its own standards. If that is the case, every entity may just present any asset or income
it wants and omit any liability or expense it does not want. Financial statements would
not be comparable, the risk of fraudulent reporting is heightened, and economic
decisions based on these financial statements would be grossly incorrect. For this
reason, entities should follow a uniform set of reporting standards when preparing and
presenting financial statements.

The term “generally acceptable” means that either:

1. The standard has been established by an authoritative accounting rulemaking

body, e.g., the PFRSS adopted by the FRSC; or

2. The principle has gained general acceptance due to practice over time and has
been proven to be most useful, e.g., double entry recording and other implicit
concepts.
 The process of establishing financial accounting standards is a democratic
process in that a majority of practicing accountants must agree with a standard before it
becomes implemented.

Hierarchy of Reporting Standards

When selecting its accounting policies, an entity considers the following in descending
order:

1. Philippine Financial Reporting Standards (PFRSs)

2. In the absence of a PFRS that specifically applies to a transaction or event,
management shall use its judgment in developing and applying an accounting
policy that results in information that is relevant and reliable.

In making the judgment,

1. Management shall refer to, and consider the applicability Of, the following
sources in descending order:

a. The requirements in PFRSS dealing with similar and related issues;

b. The Conceptual Framework.

2. Management may also consider the following:

a. Pronouncements of other standard-setting bodies

b. Accounting literature and accepted industry practices
(PAS 8.7-12)

o The term “shall” as used in the PFRSs means ‘must’ or it is required, while
the term “may” means it is optional or ‘may or may not.

Although the selection of appropriate accounting policies is the

responsibility of the entity’s management, the proper application of accounting
principles is most dependent upon the professional judgment of the accountant.

Accounting standard setting bodies and other relevant Organizations

 1. Financial Reporting Standards Council (FRSC) – is the official
accounting standard setting body in the Philippines created under the
Philippine Accountancy Act of 2004 (R.A. No. 9298).
The FRSC is composed of fifteen (15) individuals – a chairperson
who had been or presently a senior accounting practitioner in any of the
scope of accounting practice and fourteen (14) representative members:

Chairperson 1
Fourteen representative members from:
Board of Accountancy (BOA) 1
Commission on Audit (COA) 1

Securities and Exchange Commission (SEC) 1

Bangko Sentral ng Pilipinas (BSP) 1
Bureau of Internal Revenue (BIR) 1
A major organization composed of preparers and users 1
of financial statements
Accredited National Professional Organization
Of CPAs (i.e., PICPA):
Public Practice 2
Commerce and Industry 2
Academe/Education 2
Government 2 8 14
Total 15

2. Philippine Interpretations Committee (PIC) is a committee formed by

the Accounting Standards Council (ASC), the predecessor of FRSC, with
the role of reviewing the interpretations of the International Financial
Reporting Interpretations Committee (IFRIC) for approval and adoption by
the FRSC.

3. Board of Accountancy (BOA) – is the professional regulatory board

created under R.A. No. 9298 to supervise the registration, licensure and
practice of accountancy in the Philippines. The BOA consists of a
chairperson and six (6) members appointed by the President of the
Philippines. The Board shall elect a vice-chairperson from among its
members for a term of one (1) year.

4. Securities and Exchange Commission (SEC) – is the government

agency tasked in regulating corporations and partnerships, capital and
 investment markets, and the investing public. Some SEC rulings affect the
accounting requirements of entities and the adoption and application of
accounting policies.

5. Bureau of Internal Revenue (BIR) – administers the provisions of the

National Internal Revenue Code. These provisions do not always reflect
the goals of financial reporting. However, they do at times influence the
choice of accounting methods and procedures.

6. Bangko Sentral ng Pilipinas (BSP) – influences the selection and

application of accounting policies by banks and other entities performing
banking functions.

7. Cooperative Development Authority (CDA) – influences the selection

and application of accounting policies by cooperatives.

Accounting policies prescribed by a regulatory body (e.g. BSP, CDA) are

sometimes referred to as regulatory accounting principles.

International Accounting Standards

The International Accounting Standards Board (IASB) is the standard-setting body
of the IFRS Foundation with the main objectives of developing and promoting global
accounting standards.

The IASB was established in April 1, 2001 as part of the International Accounting
Standards Committee (LASC) Foundation. The IASC Foundation is a non-profit
organization based in Delaware, USA and is the parent of the IASB, which is based in
London. On July 1, 2010, the IASC Foundation was renamed to International Financial
Reporting Standards Foundation or IFRS Foundation.

The standards issued by the IASB are the International Financial Reporting
Standards (IFRSs), composed of the Following:

1. International Financial Reporting Standards (IFRSs)

2. International Accounting Standards (IASs)
3. Interpretations

The IFRSS are standards issued by the IASB after it replaced its predecessor,
the International Accounting Standards Committee (IASC), in April 1, 2001. The IASs
are standards issued by the IASC which were adopted by the IASB. The PFRSs and
PASS are based on these standards.

The IASC was founded in June 1973. It was established as a result of an

agreement by accountancy bodies in ten national jurisdictions which constituted the
original board, namely, Australia, Canada, France, Germany, Japan, Mexico, the
Netherlands, the UK, Ireland and the US.

DUE PROCESS

The IFRSS are developed through an international due process that involves
accountants and other various interested individuals and organizations from around the
world. Due process normally involves the following steps:

1. The staff identifies and reviews issues associated with a topic and considers the
application of the Conceptual Framework to the issues;
2. Study of national accounting requirements and practice, including consultation
with national standard-setters;
3. Consulting the Trustees and the Advisory Council about the advisability of adding
the topic to the IASB’s agenda;
4. Formation of an advisory group to give advice to the IASB on the project;
5. Publishing a discussion document for public comment;
6. Publishing an exposure draft(a) for public comment;
7. Publishing with an exposure draft a basis for conclusions and the alternative
views of any IASB member who opposes publication;
8. Consideration of all comments received;
9. Holding a public hearing and conducting field tests, if necessary; and
10. Publishing a standard (a), including (i) a basis for conclusions, explaining, among
other things, the steps in the IASB’s due process and how the IASB dealt with
public comments on the exposure draft, and (ii) the dissenting opinion of any
IASB member.
(Preface to IFRS.17)

Approved by at least 8 votes of the IASB if there are fewer than 14 members, or
by 9 if there are 14 members.
Other relevant international organizations

1. International Financial Reporting Interpretations Committee (IFRIC) – is a

committee that prepares interpretations of how specific issues should be
accounted for under the application of IFRS where:

a. The standards do not include specific authoritative guidance; and

b. There is a risk of divergent and unacceptable accounting practices.

The IFRIC is composed mostly of technical partners in audit firms but also
includes preparers and users. In 2002, IFRIC replaced the former Standing
Interpretations Committee (SIC) which had been created by the IASC. All of the
SIC Interpretations have been adopted by the IASB.

2. IFRS Advisory Council (previously known as the Standards Advisory Council

‘SAC’) is a group of organizations and individuals with an interest in international
financial reporting. The Advisory Council’s role includes advising on priorities
within the IASB’s work program. The IASB is required to consult with the
Advisory Council in advance of any board decisions on major projects that it
wishes to add to its agenda.

Members of the Advisory Council are appointed by the IFRS Foundation

which also appoints members to the IASB. These members are drawn from
different geographic locations and have a wide variety of backgrounds, including
users, preparers, academics, auditors, analysts, regulators and professional
accounting bodies.

3. Federation of Accountants (IFAC) – is a non profit, non-governmental, non-

political organization of accountancy bodies that represents the accountancy
profession. Its mission is to develop and enhance worldwide the profession to
provide services of consistently high quality in the public interest. Membership to
the IFAC is open to all accountancy bodies recognized by law or consensus
within their countries.

4. International Organization of Securities Commissions (IOSCO) is an

international body of security commissions. The Philippine SEC is a member of
IOSCO.
MOVE TO IFRSS
Prior to the full adoption of the IFRSs in 2005, the accounting standards used in the
Philippines were previously based on US GAAP, i.e., the Statements of Financial
Accounting Standards issued by the Federal Accounting Standards Board (FASB), the
U.S. national standard setting body.
The move to IFRSs was primarily brought about by the increasing acceptance of
IFRSs world-wide and increasing internationalization of businesses thereby increasing
the need for a common financial reporting standards that minimize, if not eliminate,
inconsistencies of financial reporting among nations.
"A good example of inconsistent national financial reporting is that of German
car manufacturer Daimler-Benz AG (prior to its merger with Chrysler). Daimler-Benz
obtained a listing of its shares in the US in 1993, and in so doing needed to report under
both U.S. GAAP and German GAAP. While one might expect that the profit reported
would be similar (as it was exactly the same set of economic transactions being
presented), this was not the case. The company reported a huge loss of $1 billion under
US GAAP, while at the same time reporting a profit of $370 million under its own
domestic German GAAP. This difference was simply the result of different accounting
practices being used by different countries. Such significant differences undermine the
usefulness of financial statements.

The future of IFRSs

A significant milestone towards achieving the goal of having one set of global
standards was reached in October 2002 when the FASB and the IASB entered into a
memorandum of understanding called the “Norwalk Agreement.”
In this Agreement, the FASB and the IASB formalized their commitment to the
convergence of U.S. GAAP and IFRSs by agreeing to use their best efforts to:

a. Make their existing financial reporting standards fully compatible as soon as

practicable, i.e., minimize differences, and
b. Coordinate their future work programs to ensure that once achieved,
compatibility is maintained.

Since the publication of the Norwalk Agreement, the IASB and FASB have been
working together with the common goal of producing a single set of global accounting
standards. “In a public statement issued in January 2017, the outgoing (US) SEC Chair
expressed support for the development of high-quality, globally accepted accounting
standards, and suggested that the (US) SEC support further efforts by the FASB and
IASB to converge their accounting standards to enhance the quality and comparability
financial reporting.

Changes in reporting standards

Once established, financial reporting standards are continually reviewed, revised
or superseded. Changes to reporting standards are primarily made in response to
users’ needs. Users’ needs for financial information change, and so must financial
reporting standards in order to continually provide useful information. Legal, political,
business and social environments also influence changes in reporting standards.
Regulatory bodies, lobbyists, laws and regulations, and changes in economic
environments affect the choice of accounting treatment provided under the reporting
standards.

Summary:

 Accounting involves the activities of identifying, measuring, and communicating

information that is useful in making economic decisions.
 Recognition refers to the process of incorporating the effects of an accountable
event in the financial statements through a Journal entry.
 External events are events which involve an entity and another external party. It
includes (a) exchanges, (b) non-reciprocal transfers, and (c) external events
other than transfers.
 Internal events are events which do not involve an external party. It includes (a)
production and (b) casualties.
 Measuring is the accounting process of assigning numbers, commonly in
monetary terms, the economic transactions and events. Several measurement
bases are used in preparing financial statements.
 Financial accounting is the branch of accounting that focuses on the general
purpose financial statements. General purpose financial statements are those
that cater to the common needs of a wide range of external users.
 External users are those who do not have the authority to Demand financial
reports tailored to their specific needs.
 The four sectors in the practice of accountancy are: (a) public practice, (b)
commerce and industry, (c) academe, and (d) government.
 The accounting standards used in the Philippines are the PFRSs, which are
based on the IFRSs. The PFRSs comprise the following: (1) PFRSs, (2) PASS,
and (3) Interpretations.
  The Financial Reporting Standards Council (FRSC) is the official accounting
standard setting body in the Philippines.
 Financial reporting standards continuously change primarily in response to users’
needs.

CONCEPTUAL FRAMEWORK FOR RINANCIAL REPORTING

Purpose of the Conceptual Framework

The Conceptual Framework prescribes the concepts for general purpose financial
reporting. Its purpose is to:

a. assist the International Accounting Standards Board (IASB) in developing

Standards that are based on consistent concepts
b. assist preparers in developing consistent accounting policies when no Standard
applies to a particular transaction or when a Standard allows a choice of
accounting policy; and
c. assist all parties in understanding and interpreting the Standards.

*In our succeeding discussions, we will use the term Standard(s) to refer to both the
International Financial Reporting Standards (IFRS) and the Philippine Financial
Reporting Standards (PFRS).

The Conceptual Framework provides the foundation for the development of

Standards that:

a. Promote transparency by enhancing the international comparability and quality of

financial Information.
b. Strengthen accountability by reducing the information gap between providers of
capital and the entity’s management.
c. Contribute to economic efficiency by helping investors to identify opportunities
and risks around the world, thus improving capital allocation. The use of a single,
trusted accounting language lowers the cost of capital and reduces international
reporting costs. (Conceptual Framework SP1.5)

STATUS OF THE CONCEPTUAL FRAMEWORK

The Conceptual Framework is not a Standard. If there is a conflict between a Standard
and the Conceptual Framework, the requirement of the Standard will prevail.

The authoritative status of the Conceptual Framework is depicted in the

hierarchy of guidance shown below:

o Hierarchy of reporting standards

1. PFRSs
2. Judgment
When making the judgment:
 Management shall consider the following:
a. Requirements in other PFRSs dealing with similar
transactions
b. Conceptual Framework
 Management may consider the following:
a. Pronouncements issued by other standard-setting
bodies
b. Other accounting literature and industry practices

The hierarchy guidance above means that in the absence of a PFRS that
specifically applies to a transaction, management shall consider the applicability of the
Conceptual Framework in developing and applying an accounting policy that results in
useful information.

To meet the objectives of general purpose financial reporting, a Standard

sometimes contains requirements that depart from the Conceptual Framework. In such
cases, the departure is explained in the Basis for Conclusions on that Standard.

The Conceptual Framework may be revised from time to time based on the
IASB’s experience of working with it. However, revisions do not automatically result to
changes in the Standards not until after the IASB goes through its due process of
amending a Standard.

SCOPE OF THE CONCEPTUAL FRAMEWORK

The Conceptual Framework is concerned with general purpose financial reporting.
General purpose financial reporting involves the preparation of general purpose
financial statements. The Conceptual Framework provides the concepts that underlie
general purpose financial reporting with regard to the following:
 1. The objective of financial reporting
2. Qualitative characteristics of useful financial information
3. Financial statements and the reporting
4. The elements of financial statements
5. Recognition and derecognition
6. Measurement
7. Presentation and disclosure
8. Concepts of capital and capital maintenance

The Objective of Financial Reporting

"The objective of general-purpose financial reporting is to provide financial
information about the reporting entity that is useful to existing and potential investors,
lenders and other creditors in making decisions about providing resources to the entity."
(Conceptual Framework.1.2)

This objective is the foundation of the Conceptual Framework. All the other
aspects of the Conceptual Framework revolve around this objective.

Primary users
The objective of financial reporting refers to the following, so called the primary users:
1. Existing and potential investors; and
2. Lenders and other creditors

These users cannot demand information directly from reporting entities and must
rely on general purpose financial reports for much of their financial information needs.
Accordingly, they are the primary users to whom general purpose financial reports are
directed to.

Lenders refer to those who extend loans (e.g., banks), while other creditors refer
to those who extend other forms of credit (e.g., supplier).

The Conceptual Framework is concerned with general purpose financial

reporting. General purpose financial reporting (or simply ‘financial reporting’) deals with
providing information that caters to the common needs of the primary users. Therefore,
general purpose financial reports do not and cannot provide all the information needs of
primary users. These users will need to consider other sources for their other
information needs (for example, general economic conditions and expectations, political
events and political climate, and industry and company outlooks).

The information needs of individual primary users may differ and possibly
conflict. Accordingly, financial reporting aims to provide information that meets the
needs of the maximum number of primary users. Focusing on common needs,
however, does not prohibit the provision of additional information that is most useful to a
particular subset of primary users.
Other users, such as the entity’s management, regulators, and the public, may
find general purpose financial reports useful. However, such reports are not primarily
directed to these users.
General purpose financial reports do not directly show the value of a reporting
entity. However, they provide information that helps users in estimating the value of an
entity.
Providing useful information requires making estimates and judgments. The
Conceptual Framework establishes the concepts that underlie those estimates and
judgments.

Decision about providing resources to the entity

The primary users’ decisions about providing resources to the entity involve decisions
on:
a. Buying, selling or holding investments;
b. providing or settling loans and other forms; or
c. exercising voting or similar rights that could influence management’s actions
relating to the use of the entity’s economic resources.

These decisions depend on the investor/lender/other creditor’s expected returns

(e.g., investment income or repayment of loan). Expectations about returns, in turn,
depend on assessments of the entity’s (i) prospects for future net cash inflows and (ii)
management stewardship. To make these assessments, investors, lenders and other
creditors need information on:

a. the economic resources of the entity, claims against the entity and changes in
those resources and claims; and
b. how efficiently and effectively the entity’s management has utilized the entity’s
economic resources.
Information on Economic resources, Claims, and Changes
General purpose financial reports provide information on a reporting entity’s:

a. Financial position – information on economic resources (assets) and claims

against the reporting entity (liabilities and equity); and
b. Changes in economic resources and claims – information on financial
performance (income and expenses) and other transactions and events that lead
to changes in financial position.

Collectively, these are referred to under the Conceptual Framework as the

economic phenomena.

Economic resources and Claims

Information about the nature and amounts of an entity’s economic resources
(assets) and claims (liabilities and equity) can help users to identify the entity’s financial
strengths and weaknesses. That information can help users in assessing the entity’s:

a. Liquidity and solvency;

b. Needs for additional financing and how successful it is likely to be in obtaining
that financing; and
c. Management’s stewardship on the use of economic resources.

 Liquidity refers to an entity’s ability to pay short-term obligations, while

solvency refers to an entity’s ability to meet its long-term obligations.

All of these contribute to the assessment of the entity’s ability to generate future
cash flows. For example:
o Information on currently maturing receivables and obligations can help
users assess the timing of future cash flows.
o Information about the nature of economic resources can help users
assess whether a resource can produce future cash flows independently
or only in combination with other resources.
o Information on liquidity and solvency can help users assess the entity’s
ability to obtain additional financing. Overleverage (use of too much debt)
may cause difficulty in obtaining additional financing.
o Information about priorities and payment requirements of claims can help
users predict how future cash flows will likely to be distributed among the
claims.
CHANGES IN ECONOMIC RESOURCES AND CLAIMS
Changes in economic resources and claims result from:

a. Financial performance (income and expenses); and

b. Other events and transactions.

Information on financial performance helps users assess the entity’s ability to

produce return from its economic resources.
Return provides an indication on how well management has efficiently and effectively
used the entity’s resources.

Information on the variability of the return helps users in assessing the

uncertainty of future cash flows. For example, significant fluctuations in reported profits
may indicate financial instability and uncertainty on the entity’s ability to generate cash
flows from its operations.

Information based on accrual accounting provides a better basis for assessing an

entity’s financial performance than information based solely on cash receipts and
payments during the period.

Information on past cash flows helps users assess the entity’s ability to generate
future cash flows by providing users a basis in understanding the entity’s operating,
investing and financing activities, assessing its liquidity or solvency, and interpreting
other information about its financial performance.

Economic resources and claims may also change for reasons aside from
financial performance, such as issuing debt or equity instruments. Information on these
types of changes is necessary for a complete understanding of the entity’s changes in
economic resources and claims and the possible impact of those changes on the
entity’s future financial performance.

Information about use of the entity’s economic resources

Information on how efficiently and effectively the entity’s management has
discharged its responsibilities to use the entity’s economic resources helps users
assess the entity’s management’s stewardship. This information also helps in predicting
how efficiently and effectively the entity’s resources will be used in future periods; thus,
helping in the assessment of the entity’s prospects for future net cash inflows.

Examples of management’s responsibilities to use the entity’s economic

resources include safeguarding those resources and ensuring the entity’s compliance
with laws, regulations and contractual provisions.

Summary:
The decisions of primary users are based on assessments of an entity’s prospects for
future net cash inflows and management stewardship. To make these assessments,
users need information on the entity’s financial position, financial performance and other
changes in financial position, and utilization of economic resources.

QUALITATIVE CHARACTERISTICS

The qualitative characteristics of useful financial information identify the types of

information that are likely to be most useful to the primary users in making decisions
using an entity’s financial report. Qualitative characteristics apply to information in the
financial statements as well as to financial information provided in other ways.

The Conceptual Framework classifies the qualitative characteristics into the

following:

1. Fundamental qualitative characteristics - these are the characteristics

that make information useful to users. They consist of the following:

a. Relevance
b. Faithful representation

2. Enhancing qualitative characteristics - these are the characteristics

that enhance the usefulness of information. They consist of the following:

a. Comparability
b. Verifiability
 c. Timeliness
d. Understandability

FUNDAMENTAL QUALITATIVE CHARACTERISTICS

Relevance
Information is relevant if it can make a difference in the decisions of users.
Relevant information has the following:
a. Predictive value - the information can help users in making predictions about
future outcomes.
b. Confirmatory value (feedback value) – the information can help users in
confirming their previous predictions.

Predictive value and confirmatory value are interrelated information that has
predictive value is likely to also have confirmatory value. For example, revenue in the
current period can be used to predict revenue in a future period and at the same time
can also be used in confirming a past prediction.

Materiality
"Information is material if omitting, misstating or obscuring it could reasonably be
expected to influence decisions that the primary users of a specific reporting entity's
general purpose financial statements make on the basis of those financial statements."
The Conceptual Framework states that materiality is an 'entity-specific' aspect of
relevance, meaning materiality depends on the facts and circumstances surrounding a
specific entity. Accordingly, the Conceptual Framework and the Standards do not
specify a uniform quantitative threshold for materiality.
Materiality is a matter of judgment.
IFRS® Practice Statement 2 Making Materiality Judgments provides a non-
mandatory guidance that entities may follow in making materiality judgments. The
guidance consists of a four step process called the "materiality process."

Step 1 - Identify information that has the potential to be material.

The starting point in making the identification is the requirements of the

Standards. This is because, when developing Standards, the IASB identifies the
information needs of a wide range of primary users and considers the balance between
the benefits to be derived from the information and the cost of producing it.
 However, cost is not a factor when making materiality judgments.
The entity also considers the common information needs of its primary users, in
addition to those specified in the PFRSs.

Step 2 - Assess whether the information identified in Step 1 is, in fact, material.

In making this assessment, the entity considers the following:

a. Whether the information could influence the users’ decisions, on the basis
of the financial statements as a whole.
b. The item’s nature or size, or both.
c. Quantitative and qualitative factors.

 Quantitative factors include the size of the impact of the item. The size
of an item can be assessed in relation to a percentage of another amount
(e.g., percentage of total assets or total revenues) or a threshold amount
(e.g., a capitalization threshold).
 Qualitative factors are characteristics of the item or its context. These
are:
i. Entity-specific qualitative factors, e.g., involvement of a related
party or rarity of the item.
ii. External qualitative factors, e.g., the entity’s industry sector or the
state of the economy.

Although there is no hierarchy among materiality factors, an entity normally first

assesses an item on the basis of quantitative factors. If an item is quantitatively
material, the entity need not reassess it on the basis of qualitative factors. However, if
an item is quantitatively not material, the entity needs to reassess it on the basis of
qualitative factors. For example, an item that has a zero amount (i.e., not quantitatively
material) may nevertheless be considered material in light of qualitative factors.

Step 3 – Organize the information within the draft financial statements in a way that
communicates the information clearly and concisely to primary users.

The entity exercises judgment on how to present information in a manner that

maximizes understandability to the primary users.
Step 4 – Review the draft financial statements to determine whether all material
information has been identified and materiality considered from a wide perspective and
in aggregate, on the basis of the complete set of financial statements.

The review allows the entity to ‘step-back’ and get a wider perspective of the
information provided. This is necessary because an item might not be material on its
own, but it might be material if used in conjunction with the other information in the
complete set of financial statements.

The four step of materiality process

1. Identify
2. Assess
3. Organize
4. Review

FAITHFUL REPRESENTATION

Faithful representation means the information provides a true, correct and complete
depiction of the economic phenomena that it purports to represent.

When an economic phenomenon’s substance differs from its legal form, faithful
representation requires the depiction of the substance (i.e., substance over form).
Depicting only the legal form would not faithfully represent the economic phenomenon.

Faithfully represented information has the following characteristics:

a. Completeness – all information (in words and numbers) necessary for users to
understand the phenomenon being depicted is provided. These include
description of the nature of the item, numerical depiction (e.g., monetary
amount), description of the numerical depiction (e.g., historical cost or fair value)
and explanations of significant facts surrounding the item.

b. Neutrality-information is selected or presented without bias Information is not

manipulated to increase the probability that users will receive it favorably or
unfavorably.
 Neutrality is supported by prudence, which is the use of caution when
making judgments under conditions of uncertainty, such that assets or income
are not overstated and liabilities or expenses are not understated. Equally, the
exercise of prudence does not allow the understatement of assets or
overstatement of liabilities because the financial statements would not be
faithfully represented.

c. Free from error – this does not mean that the information is perfectly accurate in
all respects. Free from error means there are no errors in the description and in
the process by which the information is selected and applied. If the information is
an estimate, that fact should be described clearly, including an explanation of the
process used in making that estimate.

ENHANCING QUALITATIVE CHARACTERISTICS

COMPARABILITY
Information is comparable if it helps users identify similarities and differences
between different sets of information that are provided by:
a. a single entity but in different periods (intra-comparability); or
b. Different entities in a single period (inter-comparability).

Unlike the other qualitative characteristics, comparability does not relate to only
one item because a comparison requires at least two items.

Comparison is not uniformity, meaning like things must look alike and different
things must look differently. It would be inappropriate to make different things look alike,
or vice versa.

Although related, consistency and comparability are not the same. Consistency
refers to the use of the same methods for the same items. Comparability is the goal
while consistency is the means of achieving that goal.

VERIFIABILITY
Information is verifiable if different users could reach a general agreement as to
what the information purports to represent. Verification can be direct or indirect. Direct
verification involves direct observation (e.g., counting of cash). Indirect verification
involves checking the inputs to a model or formula and recalculating the outputs using
the same methodology (e.g.. checking the debits and credits in the cash ledger and
recalculating the ending balance).

TIMELINESS
Information is timely if it is available to users in time to be able to influence their
decisions.

UNDERSTANDABILITY
Information is understandable if it is presented in a clear and concise manner.

Understandability does not mean that complex matters should be excluded to

make information understandable to users because this would make information
incomplete and potentially misleading. Accordingly, financial reports are intended for
users:

a. who have reasonable knowledge of business activities; and

b. who are willing to analyze the information diligently.

Summary: Qualitative Characteristics

1. Fundamental qualitative characteristics
a. Relevance (predictive value & confirmatory value)
 Materiality (entity-specific aspect of relevance)
b. Faithful representation (completeness, neutrality, & free from error)

2. Enhancing qualitative characteristics

a. Comparability
b. Verifiability
c. Timeliness
d. Understandability

APPLYING THE QUALITATIVE characteristics

The fundamental qualitative characteristics are essential to the usefulness of
information; meaning, information must be both relevant and faithfully represented for it
to be useful. For example, neither a relevant information that is erroneous nor a correct
information that is irrelevant helps users make good decisions.

The enhancing qualitative characteristics only enhance the usefulness of

information that is both relevant and faithfully represented but cannot make information
that is irrelevant or erroneous to be useful. Accordingly, the enhancing qualitative
characteristics should be maximized to the extent possible. There is no prescribed order
in applying the enhancing qualitative characteristics. Sometimes one enhancing
qualitative characteristic may have to be sacrificed to maximize another.

THE COST CONSTRAINT

Cost is a pervasive constraint on the entity's ability to provide useful financial
information.
Providing information entails cost and this can only be justified by the benefits
expected to be derived from using the information. Accordingly, an optimum balance
between costs and benefits is desirable such that costs do not outweigh the benefits.

FINANCIAL STATEMENTS AND THE REPORTING ENTITY

Objective and scope of financial statements

The objective of general-purpose financial statements is to provide financial information
about the reporting entity's assets, liabilities, equity, income and expenses that is useful
in assessing:
a. the entity's prospects for future net cash inflows; and
b. management's stewardship over economic resources.

That information is provided in the:

a. statement of financial position (for recognized assets, liabilities and
equity;
b. statement(s) of financial performance (for income and expenses);
c. other statements and notes (for additional information on recognized
assets and liabilities, information on unrecognized assets and
liabilities, information on cash flows, information on contributions
from/distributions to owners, and other relevant information).
REPORTING PERIOD
Financial statements are prepared for a specified period of time and provide information
on assets, liabilities and equity that existed at the end of the reporting period, or during
the reporting period, and income and expenses for the reporting period.

Comparative information
To help trends, financial statements also provide comparative information users
of financial statements in evaluating changes and for at least one preceding reporting
period. For example, an entity's 2019 current-year financial statements include the
2018 preceding year-financial statements as comparative information. This allows users
to assess the information's intra-comparability.

Forward-looking information
Financial statements are designed to provide information about past events (ie,
historical data). Information about possible future transactions and other events is
included in the financial statements only if relates to the past information presented in
the financial statements and is deemed useful to users of financial statements. Financial
statements, however, do not typically provide forward-looking information about
management's expectations and strategies for the reporting entity.
Financial statements include information about events after the end of the
reporting period if it is necessary to meet the objective of financial statements.

Perspective adopted in financial statements

Information in financial statements is prepared from the perspective of the
reporting entity, not from the perspective of any particular group of financial statement
user.

GOING CONCERN ASSUMPTION

Financial statements are normally prepared on the assumption that the reporting
entity is a going concern, meaning the entity has neither the intention nor the need to
end its operations in the foreseeable future.
If this is not the case, the entity's financial statements are prepared on another
basis (e.g., measurement at realizable values rather than mixture of costs and values).

THE REPORTING ENTITY

A reporting entity is one that is required, or chooses, to prepare financial
statements, and is not necessarily a legal entity. It can be a single entity or a group or
combination of two or more entities.
 Sometimes an entity controls another entity. The controlling entity is called the
parent, while the controlled entity is called the subsidiary. "If a reporting entity
comprises both the parent and its subsidiaries, the reporting entity's financial
statements are referred to as 'consolidated financial statements. If a reporting entity
is the parent alone, the reporting entity's financial statements are referred to as
'unconsolidated financial statements.
"If a reporting entity comprises two or more entities that are not all linked by a
parent-subsidiary relationship, the reporting entity's financial statements are referred to
as 'combined financial statements."
For example, Jollibee Foods Corporation controls Chowking, Greenwich, Mang
Inasal, Dunkin' Donuts and many other companies. Jollibee is the parent, while the
controlled companies are the subsidiaries. The financial statements of Jollibee,
including its subsidiaries, are called consolidated financial statements. The financial
statements of Jollibee alone, excluding its subsidiaries, are called unconsolidated
financial statements. (The financial statements of each subsidiary alone are referred to
as Individual financial statements.
If financial statements are prepared to include only Chowking and Greenwich
(two subsidiaries only without the parent), the financial statements would be referred to
as combined financial statements.

Consolidated and unconsolidated financial statements

Consolidated financial statements provide information on a parent and its
subsidiaries viewed as a single reporting entity. Consolidated financial statements are
not designed to provide information on any particular subsidiary; that information is
provided in the subsidiary's own financial statements.
Consolidated information enables users to better assess cash flows are affected
by the cash flows of its subsidiaries. the parent's prospects for future cash flows
because the parent's Accordingly, when consolidation is required, unconsolidated
financial statements cannot be used as substitute for consolidated financial statements.
However, a parent may nonetheless be required or choose to prepare unconsolidated
financial statements in addition to consolidated financial statements.

THE ELEMENTS OF FINANCIAL STATEMENTS

The elements of financial statements are:

1. Assets
2. Liabilities These relate to the entity’s financial position.
3. Equity
4. Income .
These relate to the entity’s financial performance.
5. Expenses

ASSET
Asset is "a present economic resource controlled by the entity as a result of past
events. An economic resource is a right that has the potential to produce economic
benefits."

The definition of asset has the following three aspects:

a. Right
b. Potential to produce economic benefits
c. Control

RIGHT
Asset is an economic resource and an economic resource is a right that has the
potential to produce economic benefits.
Rights that have the potential to produce economic benefits include:

a. Rights that correspond to an obligation of another party:

i. right to receive cash, goods or services.

ii. right to exchange economic resources with another party on
favorable terms.
iii. right to benefit from an obligation of another party to transfer an
economic resource if a specified uncertain future event occurs.

b. Rights that do not correspond to an obligation of another party:

i. right over physical objects (e.g., right to use a property or right

to sell an inventory).
ii. right to use intellectual property.

Rights normally arise from law, contract or similar means. For example, the right
to use a property may arise from owning it or leasing it. However, rights could also arise
from other means, for example, by creating a know-how (e.g., trade secret) that is not in
the public domain or through a constructive obligation created by another party.
For goods or services that are received and immediately consumed (e.g.,
supplies and employee services), the entity's right to obtain the related economic
benefits exists momentarily until the entity consumes the goods or services.
Not all rights are assets. To be an asset, the right must have the potential to
produce for the entity economic benefits that are beyond the benefits available to all
other parties and those economic benefits must be controlled by the entity. For
example, a public road which anybody can access without significant cost and a know-
how that is in the public domain are not assets of the entity.
An entity cannot have a right to obtain economic benefits from itself. Thus,
treasury shares are not an entity's assets. Similarly, debt and equity instruments issued
by a parent and held by its subsidiary (or vice versa) are not assets (or liabilities) in the
consolidated financial statements.
Theoretically, each right is a separate asset. However, for accounting purposes,
related rights are often treated as a single asset. For example, ownership of a physical
object typically gives rise to several rights, such as the right to use the object, the right
to sell it, the right to pledge it, and other similar rights.
The asset is the set of rights and not the physical object. For example, a lessee
(someone who rents a property) may recognize an asset for its right to use the property
(i.e., 'right-of-use asset or, in layman's terms, leasehold rights) but not for the property
itself (because the lessee does not legally own the leased property the lessor does).
Nonetheless, describing the set of rights as the physical object will often provide a
faithful representation of those rights.
There can be instances where the existence of a right is uncertain, for example,
when the entity's right is disputed by another party. Until that uncertainty is resolved (for
example, by a court ruling) it is uncertain whether an asset exists.

Potential to produce economic benefits

The asset is the present right that has the potential to produce economic benefits and
not the future economic benefits that the right may produce. Thus, the right's potential
to produce economic benefits need not be certain, or even likely - what is important is
that the right already exists and that, in at least one circumstance, it would produce
economic benefits for the entity.
Consequently, an asset can exist even if the probability that it will produce
benefits is low, although that low probability affects decisions on whether the asset is to
be recognized, how it is measured, what information is to be provided about the asset,
and how that information is provided.
 An economic resource can produce economic benefits an entity in many ways.
For example, the asset may be:
a. Sold, leased, transferred or exchanged for other assets;
b. Used singly or in combination with other assets to produce for goods or
provide services;
c. Used to enhance the value of other assets;
d. Used to promote efficiency and cost savings; or
e. Used to settle a liability.

The presence or absence of expenditure is not necessary in determining the

existence of an asset. For example, expenditure on penalty for violation of law does not
result to an asset. On the other hand, an asset can be obtained for free from donation.
Moreover, acquiring an asset and incurring expenditure do not necessarily need to
coincide. For example, inventory purchased on account is recognized as asset before
the purchase price is paid.

CONTROL
Control means the entity has the exclusive right over the benefits of an asset and the
ability to prevent others from accessing those benefits. Accordingly, if one party controls
an asset, no other party controls that asset.
Control does not mean that the entity can ensure that the resource will produce
economic benefits in all circumstances. It only means that if the resource produces
benefits, it is the entity who will obtain those benefits and not another party.
Control links an economic resource to an entity and indicates the extent to which
an entity should account for that economic resource. For example, an economic
resource that an entity does not control is not an asset of the entity. If an entity. controls
only a portion of an economic resource, the entity accounts only that portion and not the
entire resource.
Control normally stems from legally enforceable rights (e.g., ownership or legal
title). However, ownership is not always necessary for control to exist because control
can arise from other rights. For example, Entity A acquires a car through bank
financing. Although the bank retains legal title over the car until full payment, the car is
nonetheless an asset of Entity A because Entity A has the exclusive right to use the car
and therefore controls the benefits from it.
Physical possession is also not always necessary for control to exist. For
example, goods transferred by a principal to an agent on consignment remain as assets
of the principal until the goods are sold to third parties. This is because the principal
retains control over the goods despite the fact that physical possession is transferred to
the agent. Similarly, the agent does not recognize the goods as his assets because he
does not control the economic benefits from the goods - the principal does.

LIABILITY
Liability is "a present obligation of the entity to transfer economic resource as a result of
past events."

The definition of liability has the following three aspects:

a. Obligation
b. Transfer of an economic resource
c. Present obligation as a result of past events

OBLIGATION
An obligation is "a duty or responsibility that an entity has no practical ability to avoid."

An obligation is either:
a. Legal obligation - an obligation that results from a contract, legislation, or other
operation of law; or
b. Constructive obligation - an obligation that results from an entity's actions (e.g.,
past practice or published policies) that create a valid expectation on others that
the entity will accept and discharge certain responsibilities.

An obligation is always owed to another party. However, it is not necessary that

the identity of that party is known, for example, an obligation for environmental
damages may be owed to the society at large.
One party's obligation normally corresponds to another party's right. For
example, a buyer's obligation to pay an account payable of P100 normally corresponds
to the seller's right to collect an accounts receivable of P100. However, this accounting
symmetry is not maintained at all times because the Standards sometimes contain
different recognition and measurement requirements for the liability of one party and
the corresponding asset of the other party. For example, direct origination costs result
to different measurements of the lender's loan receivable and the borrower's loan
payable. Similarly, a seller may be required to recognize a warranty obligation but the
buyer would not recognize a corresponding asset for that warranty.
There can be instances where the existence of an obligation is uncertain. Until
that uncertainty is resolved (for example, by a court ruling), it is uncertain whether a
liability exists.
Transfer of an economic resource
The liability is the obligation that has the potential to require the transfer of an economic
resource to another party and not the future economic benefits that the obligation may
cause to be transferred. Thus, the obligation's potential to cause a transfer of economic
benefits need not be certain, or even likely, for example, the transfer may be required
only if a specified uncertain future event occurs. What is important is that the obligation
already exists and that, in at least one circumstance, it would require the entity to
transfer an economic resource.
Consequently, a liability can exist even if the probability of a transfer of an
economic resource is low, although that low probability affects decisions on whether the
liability is to be recognized, how it is measured, what information is to be provided about
the liability, and how that information is provided.

An obligation to transfer an economic resource may be an obligation to:

a. pay cash, deliver goods, or render services;
b. exchange assets with another party on unfavorable terms;
c. transfer assets if a specified uncertain future event occurs; or
d. issue a financial instrument that obliges the entity to transfer an economic
resource.

Present obligation as a result of past events

The obligation must be a present obligation that exists as a result of past events. A
present obligation exists as a result of past events if:

a. a the entity has already obtained economic benefits or taken an action; and
b. as a consequence, the entity will or may have to transfer an economic resource
that it would not otherwise have had to transfer.

Examples:
Entity A intends to acquire goods in the future.

Analysis:
Entity A has no present obligation. A present obligation arises only when Entity A:
a. has already purchased and received the goods; and
b. as a consequence, Entity A will have to pay the purchase price.
Entity B operates a nuclear power plant. In the current year, a new law was enacted
penalizing the improper disposal of toxic waste. No similar law existed in prior years.

Analysis:
The enactment of legislation is not in itself sufficient to result in an entity's present
obligation, except when the entity:
a. has already taken an action contrary to the provisions of that law; and
b. as a consequence, the entity will have to pay a penalty.

Accordingly:
- Entity B has no present obligation if its existing method of waste disposal does
not violate the new law. Similarly, Entity B has no present obligation if it can
avoid penalty by changing its future method of waste disposal.
- On the other hand, Entity B has a present obligation if its previous waste
disposal has already caused damages, and as a consequence, Entity B has to
pay for those damages.

Entity Centers into an irrevocable commitment with another party to acquire goods in
the future, on credit.

Analysis:
A non-cancellable future commitment gives rise to a present obligation only when it
becomes onerous (i.e., burdensome), for example, if the goods become obsolete before
the delivery but Entity C cannot cancel the contract without paying a substantial penalty.
Unless it becomes burdensome, no present obligation normally arises from a
future commitment.

Although not stated in the sales contract, Entity D has a publicly known policy of
providing free repair services for the goods it sells. Entity D has consistently honored
this implied policy in the past.

Analysis:
Entity D has a present constructive obligation to provide free repair services for the
goods it has already sold because:
a. Entity D has already taken an action by creating valid expectations on the
customers that it will provide free repair services; and
 b. as a consequence, Entity D will have to provide those free services.

Entity E obtained a loan from a bank. Repayment of the loan is due in 10-years' time.

Analysis:
Entity E has a present obligation because it has already received the loan proceeds,
and as a consequence, has to make the repayment, even though the bank cannot
enforce the repayment until a future date.

Entity F employed Mr. Juan.

Entity F has no present obligation until after Mr. Juan has rendered services. Before
then, the contract is executory - Entity F has a combined right and obligation to
exchange future salary for Mr. Juan's future services.

EXECUTORY CONTRACTS
An executory contract "is a contract that is equally unperformed - neither party has
fulfilled any of its obligations, or both parties have partially fulfilled their obligations to an
equal extent."
An executory contract establishes a combined right and obligation to exchange
economic resources, interdependent and inseparable. Thus, the two constitute a single
asset or liability. The entity has an asset if the terms of the contract are favorable; a
liability if the terms are unfavourable. However, whether such an asset or liability is
included in the financial statements depends on the recognition criteria and the selected
measurement basis, including any assessment of whether the contract is onerous.

The contract ceases to be executory when one party performs its obligation. If
the entity performs first, the entity's combined right and obligation changes to an asset.
If the other party performs first, the entity's combined right and obligation changes to a
liability.

Continuing the previous example:

- Entity F neither recognizes an asset nor a liability upon entering the employment
contract with Mr. Juan because, at that point, the contract is executory.
- If Mr. Juan renders services, the contract ceases to be executory, and Entity F's
combined right and obligation changes to a liability - an obligation to pay Mr.
Juan's salary (e.g., salaries payable).
 - If Entity F pays Mr. Juan's salary in advance, Entity F's combined right and
obligation changes to an asset - a right to receive the services or a right to be
reimbursed if the services are not received (e.g., advances to employees).

EQUITY
"Equity is the residual interest in the assets of the entity after deducting all its
liabilities."

The definition of equity applies to all entities regardless of form (i.e.. sole
proprietorship, partnership, cooperative, corporation, non-profit entity, or government
entity).
Although, equity is defined as a residual, it may be sub classified in the
statement of financial position. For example, the equity of a corporation may be sub-
classified into share capital, retained earnings, reserves and other components of
equity. Reserves may refer to amounts set aside for the protection of the entity's
creditors or stakeholders from losses. For some entities (e.g., cooperatives), the
creation of reserves is required by law. Transfers to such reserves are appropriations of
retained earnings rather than expenses.

INCOME
Income is "increases in assets, or decreases in liabilities, that result in increases in
equity, other than those relating to contributions from holders of equity claims."

EXPENSES
Expenses are "decreases in assets, or increases in liabilities, that result in decreases in
equity, other than those relating to distributions to holders of equity claims."

The definition of income and expenses are opposite.

Income Expenses

Increases in assets or Decreases in assets or

Decreases in liabilities increases in Liabilities

Results in increase in equity Results in decrease in equity

 Excludes contributions from Excludes distributions to the
the entity's owners entity's owners

Contributions from, and distributions to, the entity's owners are not income, and
expenses, but rather direct adjustments to equity.
Although income and expenses are defined in terms of changes in assets and
liabilities, information on income and expenses is just as important as information on
assets and liabilities because financial statement users need information on both the
financial position and financial performance of an entity.

RECOGNITION AND DERECOGNITION (CHAPTER 5)

The recognition process

Recognition is the process of including in the statement of financial position or the
statement(s) of financial performance an item that meets the definition of one of the
financial statement elements (ie, asset, liability, equity, income or expense). This
involves recording the item in words and in monetary amount and including that amount
in the totals of either of those statements.
"The amount at which an asset, a liability or equity is recognized in the statement
of financial position is referred to as its 'carrying amount".
Recognition links the elements, the statement of financial position and the
statement(s) of financial performance as follows:

Statement of financial position at beginning of reporting period

Assets minus liabilities equal equity
+
Statement(s) of financial performance
Income minus expenses
Changes in
+
Equity
Contributions from holders of equity claims
minus distributions to holders of equity claims
=
Statement of financial position at end of reporting period
Assets minus liabilities equal equity
The statements are linked because the recognition of one element (or a change in its
carrying amount) requires the recognition or derecognition of another element(s).

Examples:
Recognition of income resulting in an - Recording a sale increases both
increase in asset. 'cash'/'receivable' (asset) and 'sales'
(income).

Recognition of income resulting in a - Earning an unearned income decreases

decrease in liability. 'unearned income (liability) and increases
income.

Recognition of expense resulting in an - Accruing unpaid salaries increases both

increase in liability. 'salaries expense and 'salaries payable'
(liability).

Recognition of expense resulting in a - Payment for supplies expense increases

decrease in assets. 'supplies expense' and decreases 'cash'.

Sometimes the recognition of income results in the simultaneous recognition of a

related expense. This simultaneous recognition of income and expense is also called
"matching of costs and income" (matching concept). For example, the sale of goods
results in the simultaneous recognition of 'sales' (income) and ‘cost of sales’ (expense)

Recognition Criteria
An item is recognized if:
a. it meets the definition of an asset, liability, equity, income or expense; and
b. recognizing it would provide useful information, i.e., relevant and faithful
represented information

Both the criteria above must be met before an item is recognized. Accordingly,
items that meet the definition of a financial statement element but do not provide useful
information are not recognized, and vice versa.
Providing information, as well as using that information, entails cost. For
example, the reporting entity may incur costs in appraising its property for measurement
purposes; users spend time and effort in analyzing and interpreting the information.
Thus, an entity should consider the cost constraint (cost-benefit principle) when making
recognition decisions such that the usefulness of the information justifies its cost. It is
not possible, however, to establish a uniform threshold for determining an optimum
balance between costs and benefits. This would depend on the item and the facts and
circumstances. Accordingly, judgment is required when deciding whether to recognize
an item, and thus the recognition requirements in the Standards may need to vary.
Even if an item that meets the definition of an asset or liability is not recognized,
information about that item may still need to be disclosed in the notes. In such cases,
the item is referred to as unrecognized asset or unrecognized liability.

RELEVANCE
The recognition of an item may not provide relevant information if, for example:
a) it is uncertain whether an asset or liability exists; or
b) an asset or liability exists, but the probability of an inflow or outflow of economic
benefits is low.

EXISTENCE UNCERTAINTY & LOW PROBABILITY OF INFLOWS/OUTFLOWS

Existence uncertainty or low probability of an inflow or outflow of economic benefits
may result in, but does not automatically lead to, the non-recognition of an asset or
liability. Other factors should be considered.
If one or both of the foregoing factors result to nonrecognition, information about
the unrecognized asset or liability may still need to be provided in the notes (e.g.,
information about the existence uncertainty or the possible inflows or outflows).
Despite the presence of one or both of the foregoing factors, an asset or liability
may nonetheless be recognized if this provides relevant information. For example, the
cost of asset (liability) arising from an exchange transaction on market terms generally
reflects the probability of an inflow (outflow) of economic benefits. Thus, the asset
(liability) may be recognized not recognizing it would result to the recognition of income
(expense), which may not faithfully represent the transaction.

FAITHFUL REPRESENTATION
The recognition of an item is appropriate if it provides both relevant and faithfully
represented information. The level of measurement uncertainty and other factors (i.e.,
presentation and disclosure) affect an item's faithful representation.
MEASUREMENT UNCERTAINTY
An asset or liability must be measured for it to be recognized. Often, measurement
requires estimation and thus subject to measurement uncertainty. The use of
reasonable estimates is an essential part of financial reporting and does not necessarily
undermine the usefulness of information. Even a high level of measurement uncertainty
does not necessarily preclude an estimate from providing useful information if the
estimate is dearly and accurately described and explained.
However, an exceptionally high measurement uncertainty can affect the faithful
representation of an item, such as when the asset or liability can only be measured
using cash-flow based measurement techniques and, in addition, one or more of the
following circumstances exists:
a. there is an exceptionally wide range of possible outcomes and each
outcome is exceptionally difficult to estimate.
b. the measure is highly sensitive to small changes in estimates of the
probability of different outcomes.
c. the measurement requires exceptionally difficult or exceptionally
subjective allocations of cash flows that do not relate solely to the asset or
liability being measured.

DERECOGNITION
Derecognition is the opposite of recognition. It is the removal of a previously
recognized asset or liability from the entity's statement of financial position.
Derecognition occurs when the item no longer meets the definition of an asset or
liability, such as when the entity loses control of all or part of the asset, or no longer has
a present obligation for all or part of the liability.

On derecognition, the entity:

a. derecognizes the assets or liabilities that have expired or have been consumed,
collected, fulfilled or transferred (ie, 'transferred component'), and recognizes any
resulting income and expenses.
b. continues to recognize any assets or liabilities retained after the derecognition
(i.e., 'retained component). No income or expense is normally recognized on the
retained component unless there is a change in its measurement basis. After
derecognition, the retained component becomes a unit of separate from the
transferred component.
UNIT OF ACCOUNT
Unit of account is "the right or the group of rights, the obligation or the group of
obligations, or the group of rights and obligations, to which recognition criteria and
measurement concepts are applied."
A unit of account can be an account title (e.g., Cash or Accounts receivable), a
group of similar assets (e.g., Property. plant and equipment), or a group of assets and
liabilities (e-g Cashgenerating unit).
A unit of account is selected for an asset or liability when determining how that
asset or liability, and the related income or expense, will be recognized and measured.
For example, 'Cash' is recognized when it is either on hand or deposited in the bank
and is measured at face amount, while accounts receivable is recognized when a sale
occurred and is measured at the transaction price, adjusted for any uncollectable
amount.
"If an entity transfers part of an asset or part of a liability, the unit of account may
change at that time, so that the transferred component and the retained component
become separate units of account."

Transfers
Derecognition is not appropriate if the entity retains substantial control of a transferred
asset. In such case, the entity continues to recognize the transferred asset and
recognizes any proceeds received from the transfer as a liability.
If there is only a partial transfer, the entity derecognizes only that transferred
component and continues to recognize the retained component.

Commentary on the changes in the Conceptual Framework

ASSET
Previous Version
❖ Definition
Asset is a resource controlled by
the entity as a result of past
events and from which future
economic benefits are expected
to flow to the entity.
New Version
❖ Definition
Asset is a present economic
resource controlled by the entity as
a result of past events.
An economic resource is a right
that has the potential to produce
economic benefits.
 ❖ Essential elements ❖ Essential elements
a. Control a. Right
b. Past events b. Potential to produce economic
c. Future economic benefits benefits
c. control

Commentary:
The new Conceptual Framework deleted the notion of an expected flow of future
economic benefits and clarifies that the assets is the 'right' and not the ultimate inflow of
economic benefits from that right. Moreover, it stresses that the right is what the entity
controls and not the future economic benefits. Accordingly, an asset can exist even if its
potential to produce economic benefits is not certain or even likely (although this could
affect the asset's recognition and measurement).

Previous version New version

❖ Recognition Criteria ❖ Recognition Criteria
a. The item meets the definition
of a financial statement a. The item meets the definition
element; of a financial statement element;
and
b. It is probable that any future
b. Recognizing it would provide
economic benefit associated
useful information, i.e., relevant
with the item will flow to or
and faithfully represented
from the entity; and
information
c. The item has a cost or value
that can be measured with
reliability.

Commentary:
The new Conceptual Framework deleted the notion of a 'probability threshold
and states that an asset can exist even if its probability to produce economic benefits is
low (although this can affect recognition decisions on the asset's ability to provide useful
information). It further states that what is important is that in at least one circumstance
the economic resource will produce economic benefits.
 The new Conceptual Framework also deleted the 'reliable measurement' criterion
and states that even a high level of measurement uncertainty does not necessarily
preclude an asset from being recognized if the estimate is clearly and accurately
described and explained.
The main effect of the changes is a shift of focus to the principle of providing
useful information, rather than on rules. Accordingly, the non-recognition of an asset
does not necessarily preclude an entity from providing information about that
unrecognized asset in the notes.

Previous version New version

❖ Derecognition (asset) ❖ Derecognition (asset)
Not specifically addressed An asset is derecognized when it
has been consumed, collected, or
transferred.

LIABILITY
Previous version New version
❖ Definition ❖ Definition
Liability is a present obligation of Liability is a present obligation of
the entity arising from past events, the entity to transfer an economic
the settlement of which is expected resource as a result of past events.
to result in an outflow from the
entity of resources embodying
economic benefits.

❖ Essential elements ❖ Essential elements

a. Present obligation arising a. Obligation
from past events b. Transfer of an economic
b. Outflow of economic benefits resource
c. Present obligation as a result
of past events

Commentary:
The notion of an 'expected' flow of future economic benefits is deleted, similar to the
change in the definition of an asset. The new Conceptual Framework emphasizes that
the liability is the obligation' and not the ultimate outflow of economic benefits from that
obligation.

The new Conceptual Framework also introduced the concept of 'no practical ability to
avoid to the definition of an obligation.

Recognition and Derecognition

The changes in the recognition and derecognition of a liability parallel those for an asset

EQUITY, INCOME & EXPENSES

Commentary:
 The new Conceptual Framework retained the definitions of equity, income
and expenses. However, the emphases that income includes both
revenues and gains, and expenses include both expenses and losses,
were deleted. The IASB, however, do not expect that these deletions
would cause any changes in practice.
 Also, the new Conceptual Framework states that income and expenses
are classified as recognized either in profit or loss or other comprehensive
income. (This will be discussed momentarily.)
 The new Conceptual Framework also removed the explicit references to
the expense recognition principles of 'systematic and rational allocation'
and 'immediate recognition', but not 'matching'. This, however, does not
mean that the former two are no longer relevant as they are still implied in
the new Conceptual Framework.
 Other relevant changes: The new Conceptual Framework also introduced
the concepts of 'unit of account' and executory contracts',

Summary:
The changes align the Conceptual Framework to the IASB's current thinking in
formulating Standards. For example:
 Focusing the definition of an asset to a right, rather than a physical object,
parallels the requirement of PFRS 16 Leases on the recognition of a 'right-of-use
asset' by a lessee.
 Focusing on providing useful information when making recognition decisions,
rather than on probability threshold and reliable measurement, parallels the
requirements of PFRS 3 Business Combination for goodwill, PFRS 9 Financial
 Instruments for certain derivative instruments and PFRS 13 Fair Value
Measurement on the hierarchy of fair value measurement."
 Including the concept that income and expenses are recognized either in profit or
loss or other comprehensive income parallels the requirements of PAS 1
Presentation of Financial Statements and other relevant standards.
 Introducing the concepts of unit of account' and 'executory contracts' aligns the
Conceptual Framework to the provisions of PFRS 9 on the accounting for
investment portfolios and PFRS 15 Revenue from Contracts with Customers on
the recognition of 'contract asset', 'contract liability' or 'receivable'.

The Conceptual Framework is not a Standard, hence it does not provide

requirements for specific transactions or other events - these are addressed by the
Standards. The Conceptual Framework's main purpose is to provide the foundation for
the development of globally acceptable Standards.

MEASUREMENT
Recognition requires quantifying an item in monetary terms, thus necessitating the
selection of an appropriate measurement basis.
The application of the qualitative characteristics, including the cost constraint, is
likely to result in the selection of different measurement bases for different assets,
liabilities, income and expenses. Accordingly, the Standards prescribe specific
measurement bases for different types of assets, liabilities, income and expenses.

Measurement bases
The Conceptual Framework describes the following measurement bases:
1. Historical cost
2. Current value
a. Fair value
b. Value in use and fulfilment value
c. Current cost

Historical cost
The historical cost of an asset is the consideration paid to acquire the asset plus
transaction costs.
The historical cost of a liability is the consideration received to incur the liability
minus transaction costs.
 In cases where it is not possible to identify the cost, such as on transactions that
are not on market terms, the resulting asset or liability is initially recognized at current
value. That value becomes the asset's (liability's) deemed cost for subsequent
measurement at historical cost.
Unlike current value, historical cost does not reflect changes in value, but is
updated overtime to depict the following:

Historical cost of an asset Historical cost of a liability

a. impairment, depreciation or a. increase in the obligation

amortization
b. collections that extinguish
part or all of the asset
resulting from the liability
becoming onerous
b. payments or fulfilments made
that extinguish part or all of
the liability

c. discount or premium d. discount or premium

amortization when the asset amortization when the
is measured at amortized liability is measured at
cost amortized cost

CURRENT VALUE
Current value measures reflect changes in values at the changes measurement date.
Unlike historical cost, current value is not derived from the price of the transaction or
other event that gave rise to the asset or liability.
Current value measurement bases include the following:
a. Fair value
b. Value in use for assets and Fulfilment value for liabilities
c. Current cost

FAIR VALUE
Fair value is "the price that would be received to sell an asset, or paid to transfer a
liability, in an orderly transaction between market participants at the measurement
date."
 Fair value reflects the perspective of market participants (ie, participants in a
market to which the entity has access). Accordingly, it is not an entity-specific
measurement.
Fair value can be measured directly by observing prices in an active market or
indirectly using measurement techniques, e.g., cash-flow-based measurement
techniques. Fair value is not adjusted for transaction costs.

VALUE IN USE AND FULFILMENT VALUE

Value in use is "the present value of the cash flows, or other economic benefits, that an
entity expects to derive from the use of an asset and from its ultimate disposal."
Fulfilment value is "the present value of the cash, or other economic resources,
that an entity expects to be obliged to transfer as it fulfils a liability."
Value in use and fulfilment value reflect entity-specific assumptions rather than
assumptions by market participants."
Value in use and fulfilment value are measured indirectly using cash-flow-based
measurement techniques, similar to those used in measuring fair value but from an
entity-specific perspective rather than from a market-participant perspective.
Value in use and fulfilment value do not include transaction costs in acquiring an
asset or incurring a liability but include transaction costs expected to be incurred on the
ultimate disposal of the asset or fulfilment of the liability.

CURRENT COST
Current cost of an asset is "the cost of an equivalent asset at the measurement date,
comprising the consideration that would be paid at the measurement date plus the
transaction costs that would be incurred at that date."
Current cost of a liability is "the consideration that would be received for an equivalent
liability at the measurement date minus the transaction costs that would be incurred at
that date."
Current cost and historical cost are entry values (i.e., they reflect prices in
acquiring an asset or incurring a liability), whereas fair value, value in use and fulfilment
value are exit values (ie. they reflect prices in selling or using an asset or transferring or
fulfilling a liability). Unlike historical cost, however, current cost reflects conditions at the
measurement date.
In some cases, current cost can only be measured indirectly, for example, by
adjusting the current price of a new asset to reflect the current age and condition of the
asset held by the entity.
CONSIDERATIONS WHEN SELECTING A MEASUREMENT BASIS
When selecting a measurement basis, it is important to consider the following:

a. the nature of information provided by a particular measurement basis; and

b. the qualitative characteristics, the cost constraint, and other factors.

INFORMATION PROVIDED BY PARTICULAR MEASUREMENT BASES

Different measurement bases result in different information to be provided in the
financial statements. For example:
 Measuring an asset at historical cost may result in the subsequent recognition
of depreciation or impairment, whereas measuring that asset at fair value would
result in the subsequent recognition of gain or loss from changes in fair value;
measuring an asset at current cost may result to the recognition of holding gains
and losses from price changes.
 Measuring an asset (liability) at historical cost or current cost does not
result to gain or loss on initial recognition, unless the asset is impaired (or the
liability is onerous), whereas measuring an asset at fair value or value in use
may result to gain or loss on initial recognition if the market in which the asset is
acquired is different from the market that is the source of the prices used in
measuring the asset's fair value; the initial gain or loss is the difference between
the consideration paid and the fair value of the asset acquired.
 Historical cost and current cost measurements include transaction costs in
acquiring an asset, whereas fair value measurement excludes transaction costs;
value in use measurement considers only the transaction costs on the asset's
disposal.
 The computation of gain or loss on the derecognition of an asset depends on its
measurement basis. For example, the gain or loss on the derecognition of an
asset measured at historical cost is computed as the difference between the net
disposal proceeds, if any, and the asset's historical cost adjusted for depreciation
and impairment, whereas, if the asset is measured at fair value, the gain or loss
is the difference between the net disposal proceeds, if any, and the asset's fair
value.

THE QUALITATIVE CHARACTERISTICS AND THE COST CONSTRAINT

An entity also considers whether the information provided by a particular measurement
basis is useful. Information is useful if it is relevant and faithfully represented and, as far
as possible, comparable, verifiable, timely and understandable.
Relevance
The relevance of information is affected by:
a) the characteristics of the asset or liability; and
b) how that asset or liability contributes to future cash flows.

The characteristics of the asset or liability affect the relevance an asset or

liability whose value is sensitive to market factors is more appropriately measured at fair
value rather than at historical cost. Fair value measurement results in reporting the
changes in market factors as they occur, rather than only when asset or liability is
derecognized. On the other hand, a financial asset or financial liability that is held solely
for collecting or repaying contractual cash flows, rather than for trading activities, is
more appropriately measured at amortized cost (historical cost).
How the asset or liability contributes to future cash flows also affects the
relevance of the information provided by a measurement basis. For example, an asset
that is used in combination with other assets to produce cash flows (e.g., property, plant
and equipment) is likely to be measured at historical cost. On the other hand, an asset
that can be sold independently (e.g., investment in stocks) is likely to be measured at
fair value.

Faithful representation
The level of measurement uncertainty may affect the faithful representation of
information. Measurement uncertainty arises when a measure cannot be determined
directly by observing prices in an active market and must instead be estimated. "A high
level of measurement uncertainty does not necessarily prevent the use of a
measurement basis that provides relevant information."
Thus, in cases where the measurement uncertainty associated with a particular
measurement basis is so high that it cannot provide sufficiently faithfully represented
information, it is appropriate to consider selecting a different measurement basis that
would also result in relevant information.
"Measurement uncertainty is different from both outcome uncertainty and
existence uncertainty:

a. outcome uncertainty arises when there is uncertainty about the amount or timing
of any inflow or outflow of economic benefits that will result from an asset or
liability.
b. existence uncertainty arises when it is uncertain whether an asset or a liability
exists."
 Outcome uncertainty or existence uncertainty may sometimes contribute, but
does not necessarily lead, to measurement uncertainty. For example, there is no
measurement uncertainty if an asset's fair value can be determined directly by
observing prices in an active market, even if it is uncertain how much cash that asset
will ultimately produce and hence there is outcome uncertainty.
Existence uncertainty may affect decisions on whether an asset or a liability is to
be recognized.

ENHANCING QUALITATIVE CHARACTERISTICS AND THE COST CONSTRAINT

Comparability
Consistently using same measurement bases for same items, either from period to
period within a single entity (intra-comparability) or within a single period across
different entities (inter-comparability), makes the financial statements more comparable.
This does not mean, however, that selected a measurement basis should never
be changed. A change is appropriate if it results in more relevant information. Because
a change in measurement basis can make financial statements less understandable,
explanatory information should be disclosed to enable users of financial statements to
understand the effect of the change.

Understandability
Generally, the more different measurement bases are used, the more complex the
resulting information become, and hence less understandable. Using more different
measurement bases is appropriate only if it is necessary to provide useful information.

Verifiability
Using measurement bases that result in measures that can be independently
corroborated either directly (e.g., by observing prices) or indirectly (e.g., by checking
inputs to a model) enhances verifiability. If a measure cannot be verified, explanatory
information should be disclosed to enable users of financial statements to understand
how the measure was determined. In some cases, it may be more appropriate to
indicate the use of a different measurement basis.
Depending on the facts and circumstances, the use of either historical cost or
current value has its own merits in relation to verifiability. For example:
 In many situations, using historical cost is simpler and generally well understood,
and hence verifiable. However, measuring depreciation, impairment or onerous
liabilities can be subjective, and hence lessens verifiability.
  Fair value is determined from the perspective of market participants, not from
the entity's perspective, and is independent of when the asset was acquired or
the liability was incurred. Thus, in principle, different entities that have access to
the same markets would come up with essentially the same amount of fair value
for a particular asset or a liability, and hence verifiable. This could also enhance
comparability because, unlike historical cost, fair value measurement results in
the same amount of measure for identical assets (liabilities) with different
acquisition (incurrence) dates.
 Value in use and fulfilment value are costly to implement and requires subjective
assumptions. Accordingly, these may result in different measures for identical
assets or liabilities by different entities. This reduces verifiability and
comparability. Nonetheless, value in use may provide useful information, for
example, when determining the recoverable amount of a group of assets, i.e.,
cash generating unit.
 Current cost results in the same amount of measure for identical assets
(liabilities) acquired (incurred) at different dates. This enhances comparability.
However, determining current cost can be costly, complex, and subjective, thus
reducing verifiability and understandability. Nonetheless current cost may provide
useful information, for example, when revaluing a property whose fair value
cannot be determined directly by observing prices in an active market.

Summary:
 The Conceptual Framework's purpose is to serve as a guide in developing,
understanding, and interpreting the Standards.
 The Conceptual Framework is not a Standard. In case of a conflict between
these two, the Standard prevails.
 The Conceptual Framework is concerned with general purpose financial
reporting. General purpose financial reporting involves the preparation of general
purpose financial statements.
 The objective of general purpose financial reporting is to provide information that
is useful to primary users in making decisions about providing resources to the
entity. To make those decisions, primary users need information on the entity's:
a. financial position and financial performance; and
b. management stewardship.
 The primary users are (a) existing and potential investors and (b) lenders and
other creditors.
 Financial reports do not and cannot provide all the information needs of the
primary users. Only their common needs are catered by financial reports.
 The fundamental qualitative characteristics are (1) Relevance and (2) Faithful
representation.
 The enhancing qualitative characteristics are (3) Comparability, (4)
Verifiability, (5) Timeliness and (6) Understandability.
 Relevant information has (a) Predictive value and (b) Feedback value.
 Materiality is an entity-specific aspect of relevance. It is a matter of judgment.
The overriding consideration when making materiality judgment is whether
information could reasonably be expected to influence the decisions of users.
This is in keeping with the objective of financial reporting of providing useful
information.
 The materiality process involves the following steps: (1) Identify, (2) Assess, (3)
Organize, and (4) Review.
 The elements of faithful representation include (a) Completeness, (b) Neutrality,
and (c) Free from error.
 Cost is a pervasive constraint-it affects virtually all aspects of financial reporting.
 The objective of general purpose financial statements is to provide financial
information about the reporting entity's assets, liabilities, equity, income and
expenses that is useful in assessing:
a. the entity's ability to generate future net cash inflows; and
b. management's stewardship over economic resources.
 A reporting entity is one that is required, or chooses, to prepare financial
statements.
 The elements directly related to the measurement of financial position are
assets, liabilities and equity.
 The elements directly related to the measurement of financial performance are
income and expenses.
 Asset is a present economic resource controlled by the entity as a result of past
events. An economic resource is a right that has the potential to produce
economic benefits.
 Liability is a present obligation of the entity to transfer an economic resource as a
result of past events.
 Equity is assets less liabilities.
 Income and expenses are changes in assets and liabilities, excluding owner
contributions/distributions and capital maintenance adjustments.
 An item is recognized if it: (a) meets the definition of an element; and (b)
recognizing it would provide useful information (i.e., relevant and faithfully
represented).
 An item is derecognized if it ceases to meet the definition of an asset or a
liability.
 The measurement bases used in financial reporting are broadly classified into
historical cost and current value (i.e. fair value, value in use/fulfillment value, and
current cost).
  Financial information is communicated to users through presentation and
disclosure in the financial statements.
 The two concepts of capital are financial and physical.

PAS 1 Presentation of Financial Statements

Introduction
Philippine Accounting Standard (PAS) 1 Presentation of Financial Statements
prescribes the basis for the presentation of general purpose financial statements, the
guidelines for their structure, and the minimum requirements for their content to ensure
comparability.
Types of comparability

a. Intra-comparability (horizontal or inter-period) - refers to the comparability of

financial statements of the same entity but from one period to another.
b. Inter-comparability (dimensional) - refers to the comparability of financial
statements between different entities.
Comparability requires consistency in the adoption and application of accounting
policies and in the presentation of financial statements, e.g., the use of line-item
descriptions and account titles, either within a single entity from one period to another or
across different entities.
PAS 1 applies to the preparation and presentation of general purpose financial
statements. The recognition, measurement and disclosure requirements for specific
transactions and other events are set out in other PFRSs.
The terminology used in PAS 1 is suitable for profit oriented entities. If non-profit
organizations apply PAS 1, they may need to amend the line-item and financial
statement descriptions.

Financial Statements

Financial statements are the "structured representation of an entity's financial position

and results of its operations." (PAS 1.9)
Financial statements are the end product of the financial reporting process and the
means by which the information gathered and processed is periodically communicated
to users. The financial statements of an entity pertain only to that entity and not to the
industry where the entity belongs or the economy as a whole.
General purpose financial statements ('financial statements') are "those intended
to meet the needs of users who are not in a position to require an entity to prepare
reports tailored to their particular information needs." (PAS 1.7)
General purpose financial statements cater to most of the common needs of a
wide range of external users. General purpose financial statements are the subject
matter of the Conceptual Framework and the PFRSs.

PURPOSE OF FINANCIAL STATEMENTS

1.Primary objective:
 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.

2.Secondary objective:
 To show the results of management's stewardship over the entity’s resources.
To meet the objective, financial statements provide information about an entity's:

a. Assets (economic resources);

b. Liabilities (economic obligations);

c. Equity;
d. Income;

e. Expenses;

f. Contributions by, and distributions to, owners; and

g. Cash flows.

This information, along with other information in the notes, helps users assess the
entity's prospects for future net cash inflows.

COMPLETE SET OF FINANCIAL STATEMENTS

A complete set of financial statements consist of:
1. Statement of financial position;

2. Statement of profit or loss and other comprehensive income;

3. Statement of changes in equity;

4. Statement of cash flows;

5. Notes;

(5a) Comparative information; and

6. Additional statement of financial position (required only when certain instances
occur).

An entity may use other titles for the statements. For example, an entity may use the
title "balance sheet" in lieu of "statement of financial position" or "statement of
comprehensive income" instead of "statement of profit or loss and other comprehensive
income."
However, an "income statement" is different from a "statement of profit or loss and
other comprehensive income" or a "statement of comprehensive income." We will
elaborate on this later.
Reports that are presented outside of the financial statements, such as financial reviews
by management, environmental reports and value added statements, are outside the
scope of PFRSs.
GENERAL FEATURES OF FINANCIAL STATEMENTS
1. Fair Presentation and Compliance with PFRSs
Fair presentation is faithfully representing, in the financial statements, the effects of
transactions and other events in accordance with the definitions and recognition criteria
for assets, liabilities, income and expenses set out in the Conceptual Framework.
Compliance with the PFRSS is presumed to result in fairly presented financial
statements.
Fair presentation also requires the proper selection and application of accounting
policies, proper presentation of information, and provision of additional disclosures
whenever relevant to the understanding of the financial statements.
Inappropriate accounting policies cannot be rectified by mere disclosure.
PAS 1 requires an entity whose financial statements comply with PFRSS to make an
explicit and unreserved statement of such compliance in the notes. However, an entity
shall not make such statement unless it complies with all the requirements of PFRSs.

Illustration: Excerpt from a note to financial statement:

Statement of Compliance with Philippine Financial Reporting Standards

The financial statements of the Bank have been prepared in accordance with Philippine
Financial Reporting Standards (PFRSs), which are adopted by the Financial Reporting
Standards Council (FRSC) from the pronouncements issued by the International
Accounting Standards Board (IASB).

There may be cases wherein an entity's management concludes that compliance with a
PFRS requirement is misleading.
In such cases, PAS 1 permits a departure from a PFRS requirement if the relevant
regulatory framework requires or allows such a departure.

Relevant regulatory framework refers to the accounting principles and other financial
reporting requirements prescribed by a government regulatory body. For example,
banks in the Philippines are regulated by the Bangko Sentral ng Pilipinas (BSP).
Therefore, in addition to the PFRSs, banks must also comply with the requirements of
the BSP. Accounting principles prescribed by a regulatory body are sometimes referred
to as "Regulatory Accounting Principles" (RAP). In practice, banks commonly refer to
the financial reporting required by the BSP as "FRP" or Financial Reporting Package.

When an entity departs from a PFRS requirement, it shall disclose the management's
conclusion as to the fair presentation of the financial statements; that all other
requirements of the PFRSs are complied with; the title of the PFRS from which the
entity has departed; and the financial effect of the departure. Can you identify these
disclosures in the excerpt below?

Illustration: Departure from a PFRS requirement

Statement of Compliance
The financial statements of the Bank have been prepared in compliance with Philippine
Financial Reporting Standards (PFRS), except for the deferral of losses on sale of
nonperforming assets (NPAs) to special purpose vehicles (SPVS), non-recognition of
allowance for credit losses on subordinated notes issued by the SPV, and the non-
consolidation of the SPV that acquired the NPAs sold in 20x5, and 20x4, as discussed
in Note 8.

PFRS 9 Financial Instruments and the Conceptual Framework require that the losses
be charged to current operations and that the accounts of SPVS be consolidated into
the Bank's accounts. Had the losses on the sale of NPAs been charged to current
operations, equity as of December 31, 20x5 and 20x4 would have decreased by 186,6
million and P87.3 million, respectively, and profits for the years ended December 30,
20x5 and 20x4 would have decreased by 171.3 million, P72.3 million, respectively.

In accordance with the BSP Memorandum dated February 16, 20x4, Accounting
Guidelines on the Sale on NPAs to Special Purpose Vehicles, the allowance for credit
losses previously provided for the NPAs sold to SPVS was released to cover additional
allowance for credit losses required for other existing NPAs and other risk assets of the
Bank.

All other requirements of the PFRSs have been complied with except those described
above. Management concludes that the financial statements present fairly the Bank's
financial position, financial performance and cash flows
2. Going Concern
Financial statements are normally prepared on a going concern basis unless the entity
has an intention to liquidate or has no other alternative but to do so.
When preparing financial statements, management shall assess the entity's ability to
continue as a going concern, taking into account all available information about the
future, which is at least, but not limited to, 12 months from the reporting date.
If the entity has a history of profitable operations and ready access to financial
resources, management may conclude that the entity is a going concern without
detailed analysis.
If there are material uncertainties on the entity's ability to continue as a going concern,
those uncertainties shall be disclosed.
If the entity is not a going concern, its financial statements shall be prepared using
another basis. This fact shall be disclosed, including the basis used, and the reason
why the entity is not regarded as a going concern.

3. Accrual Basis of Accounting

All financial statements shall be prepared using the accrual basis of accounting except
for the statement of cash flows, which is prepared using cash basis.

4. Materiality and Aggregation

Each material class of similar items is presented separately. A class of similar items is
called a "line item." Dissimilar items are presented separately unless they are
immaterial. Individually immaterial items are aggregated with other items.

5. Offsetting
Assets and liabilities or income and expenses are presented separately and are not
offset, unless offsetting is required or permitted by a PFRS.
Offsetting is permitted when it reflects the substance of the transaction. Examples of
offsetting:
 a. Presenting gains or losses from sales of assets net of the related selling
expenses.
b. Presenting at net amount the unrealized gains and losses arising from trading
securities and from translation of foreign currency denominated assets and
liabilities, except if they are material.
c. Presenting a loss from a provision net of a reimbursement from a third party.

Measuring assets net of valuation allowances is not offsetting. For example, deducting
allowance for doubtful accounts from accounts receivables or deducting accumulated
depreciation from a building account is not offsetting.

6. Frequency of reporting
Financial statements are prepared at least annually. If an entity changes its reporting
period to a period longer or shorter than one year, it shall disclose the following:
a. The period covered by the financial statements:

b. The reason for using a longer or shorter period, and

c. The fact that amounts presented in the financial statements are not entirely
comparable.

7. Comparative Information
PAS 1 requires an entity to present comparative information in respect of the preceding
period for all amounts reported in the current period's financial statements, unless
another PFRS requires otherwise.
As a minimum, an entity presents two of each of the statements and related notes. For
example, when an entity presents its 20x2 current year financial statements, the 20x1
preceding year financial statements shall also be presented as comparative information.
PAS 1 permits entities to provide comparative information in addition to the minimum
requirement. For example, an entity may provide a third statement of comprehensive
income. In this case, however, the entity need not provide a third statement for the other
financial statements, but must to provide the related notes for that additional statement
of comprehensive income.
ADDITIONAL STATEMENT OF FINANCIAL POSITION
As mentioned earlier, a complete set of financial statements includes an additional
statement of financial position when certain instances occur. Those instances are as
follows:
a. The entity applies an accounting policy retrospectively, makes a
retrospective restatement of items in its financial statements, or reclassifies
items in its financial statements; and
b. The instance in (a) has a material effect on the information in the
statement of financial position at the beginning of the preceding period.

For example, if any of the instances above occur, the entity shall present three
statements of financial position as follows:

Statement of financial position Date

1. CURRENT YEAR As at December 31, 20x2
2. PRECEDING YEAR (comparative info.) As at December 31, 20x1
3. Additional As at January 1, 20x1

The opening (additional) statement of financial position is dated as at the beginning of

the preceding period even if the entity presents comparative information for earlier
periods. The entity need not present the related notes to the opening statement of
financial position.

8. Consistency of presentation
The presentation and classification of items in the financial statements is retained from
one period to the next unless a change in presentation:
a. is required by a PFRS; or

b. results in information that is reliable and more relevant.

A change in presentation requires the reclassification of items in the comparative

information. If the effect of a reclassification is material, the entity shall provide the
"additional statement of financial position" discussed earlier.
 Summary: General Features
1. Fair presentation & Compliance with PFRSs 5. Offsetting
2. Going Concern 6. Frequency of reporting period

3. Accrual Basis 7. Comparative information

4. Materiality & aggregation 8. Consistency of presentation

Structure and content of financial statements

Each of the financial statements shall be presented with equal prominence and shall be
clearly identified and distinguished from other information in the same published
document. For example, financial statements are usually included in an annual report,
which also contains other information. The PFRSS apply only to the financial
statements and not necessarily to the other information.
The following information shall be displayed prominently and repeatedly whenever
relevant to the understanding of the information presented:
a. The name of the reporting entity

b. Whether the statements are for the individual entity or for a group of entities

c. The date of the end of the reporting period or the period covered by the financial

statements d. The presentation currency

e. The level of rounding used (e.g., thousands, millions, etc.)

Illustration: A heading for a financial statement is shown below:

ABC Group
Statement of financial positon
As of December 31, 20x2
(date of the end of the reporting period)
(in thousands of Philippine Pesos)

The statement of financial position is dated as at the end of the reporting period while
the other financial statements are dated for the period that they cover.
PAS 1 requires particular disclosures to be presented either in the notes or on the face
of the other financial statements (e.g., footnote disclosures). Other disclosures are
addressed by other PFRSs.

MANAGEMENT'S RESPONSIBILITY OVER FINANCIAL STATEMENTS

The management is responsible for an entity's financial statements. The responsibility
encompasses:
a. the preparation and fair presentation of financial statements in accordance with
PFRSs.;
b. internal control over financial reporting;

c. going concern assessment

d. oversight over the financial reporting process; and

e. review and approval of financial statements.

The responsibilities are expressly stated in a document called "Statement of

Management's Responsibility for Financial Statements," which is attached to the
financial statements as a cover letter. This document is signed by the entity's
a. Chairman of the Board (or equivalent),

b. Chief Executive Officer (or equivalent), and

c. Chief Financial Officer (or equivalent)

STATEMENT OF FINANCIAL POSITION

The statement of financial position shows the entity's financial condition (i.e., status of
assets, liabilities and equity) as at a certain date. It includes line items that present the
following amounts:
a. Property, plant and equipment;

b. Investment property;

c. Intangible assets;

d. Financial assets (excluding (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, including disposal groups;

k. Trade and other payables;

l. Provisions;

m. Financial liabilities (excluding (k) and (1));

n. Current tax liabilities and current tax assets;

o. Deferred tax liabilities and deferred tax assets;

p. Liabilities included in disposal groups;

q. Non-controlling interests; and

r. Issued capital and reserves attributable to owners of the parent.

PAS 1 does not prescribe the order or format of presenting items in the statement of
financial position. The foregoing is simply a list of items that are sufficiently different in
nature or function to warrant separate presentation.
Accordingly, an entity may modify the descriptions used and the sequence of their
presentation to suit the nature of the entity and its transactions. Moreover, additional
line items may be presented whenever relevant to the understanding of the entity's
financial position.

PRESENTATION OF STATEMENT OF FINANCIAL POSITION

A statement of financial position may be presented in a "classified" or an "unclassified"

manner.
a. A classified presentation shows distinctions between current and noncurrent
assets and current and noncurrent liabilities.
b. An unclassified presentation (also called 'based on liquidity') shows no
distinction between current and noncurrent items.
 A classified presentation shall be used except when an unclassified presentation
provides information that is reliable and more relevant. When that exception applies,
assets and liabilities are presented in order of liquidity (this is normally the case for
banks and other financial institutions).
PAS 1 also permits a mixed presentation, i.e., presenting some assets and liabilities
using a current/non-current classification and others in order of liquidity. This may be
appropriate when the entity has diverse operations.
Whichever method is used, PAS 1 requires the disclosure of items that are expected
to be recovered or settled (a) within 12 months and (b) beyond 12 months, after the
reporting period.
A classified presentation highlights an entity's working capital and facilitates the
computation of liquidity and solvency ratios.
► Working capital = Current Assets - Current Liabilities

CURRENT ASSETS AND CURRENT LIABILITIES

Current Assets Current Liabilities

- Are assets that are: - Are liabilities that are:

a. Expected to be realized, sold, or a. Expected to be settled in the

consumed in the entity’s normal operating
cycle;
b. Held primarily for trading;
c. Expected to be realized within 12
months after the reporting period; or
d. Cash or cash equivalent, unless
restricted from being exchanged or used
to settle a liability for at least 12 months
after the reporting period.
entity’s normal operating cycle;
b. Held primarily for trading;
c. Due to be settled within 12 months
after the reporting period; or
d. The entity’s does not have an
unconditional right to defer settlement of
the liability for at least 12 months after the
reporting period.

All other assets and liabilities are classified as noncurrent.

"The operating cycle of an entity is the time between the acquisition of assets for
processing and their realization in cash or cash equivalents. When the entity's normal
operating cycle is not clearly identifiable, it is assumed to be 12 months." (PAS 1.68)
Assets and liabilities that are realized or settled as part of the entity's normal operating
cycle (e.g., trade receivables, inventory, trade payables, and some accruals for
 employee and other operating costs) are presented as current, even if they are
expected to be realized or settled beyond 12 months after the reporting period.
Assets and liabilities that do not form part of the entity's normal operating cycle (e.g.,
non-operating assets and liabilities) are presented as current only when they are
expected to be realized or settled within 12 months after the reporting period.
Deferred tax assets and liabilities are always presented as noncurrent items in a
classified statement of financial position, regardless of their expected dates of reversal.
Examples:
Current Assets Current Liabilities
• Cash and cash equivalents • Accounts payable
• Accounts receivable • Salaries payable
• Non-trade receivable • Dividends payable
collectible within 12 months • Income (current) tax payable
• Held for trading securities • Unearned revenue
• Inventory • Portion of notes/loans/bonds
• Prepaid assets payable due within 12 months

Noncurrent Assets Noncurrent Liabilities

Property, plant and equipment • Portion of notes/loans/bonds
Non-trade receivable collectible payable
beyond 12 months • due beyond 12 months
Investment in associate Deferred tax liability
Investment property
Intangible assets
Deferred tax asset

REFINANCING AGREEMENT

A long-term obligation that is maturing within 12 months after the reporting period is
classified as current, even if a refinancing agreement to reschedule payments on a
long-term basis is completed after the reporting period but before the financial
statements are authorized for issue.
However, the obligation is classified as noncurrent if the entity expects, and has the
discretion, to refinance it on a long term basis under an existing loan facility.
If the refinancing is not at the discretion of the entity (for example, there is no
arrangement for refinancing), the financial liability is current.
 ➢ Refinancing refers to the replacement of an existing debt with a new one but
with different terms, e.g., an extended maturity date or a revised payment
schedule. Refinancing normally entails a fee or penalty. A refinancing where the
debtor is under financial distress is called "troubled debt restructuring."

➢ Loan facility refers to a credit line.

Illustration:

Entity A's current reporting date is December 31, 20x1. A bank loan taken 10 years ago
is maturing on October 31, 20x2.

Analysis: A currently maturing obligation (i.e., due within 12 months after the reporting
date) is classified as current even if that obligation used to be noncurrent. Therefore, the
loan is presented as a current liability in Entity A's December 31, 20x1 statement of
financial position.

On January 15, 20x2, Entity A enters into a refinancing agreement to extend the
maturity date of the loan to October 31, 20x7. Entity A's financial statements are
authorized for issue on March 31,20x2.

Analysis: Continuing with the general rule, a currently maturing obligation is classified
as current even if a refinancing agreement, on a long-term basis, is completed after the
reporting period and before the financial statements are authorized for issue.
Accordingly, the loan is nevertheless presented as a current liability.

Under the original terms of the loan agreement, Entity A has the unilateral right to defer
(postpone) the payment of the loan up to a maximum period of 5 years from the original
maturity date. Entity A expects to exercise this right after the reporting date but before
the financial statements are authorized for issue.

Analysis: Entity A has the discretion (ie., unilateral right) to refinance the obligation on
a long term basis under an existing loan facility (i.e., the unilateral right is included in
the original terms of the loan agreement). Accordingly, the loan is classified as
noncurrent.
In this scenario, Entity A has an unconditional right to defer the settlement of the loan
for at least twelve months after the reporting period. Therefore, condition 'd' above for
current classification (i.e.,...does not have an unconditional right to defer settlement...')
is inapplicable.
LIABILITIES PAYABLE ON DEMAND

Liabilities that are payable upon the demand of the lender are classified as current.
A long-term obligation may become payable on demand as a result of a breach of a
loan provision. Such an obligation is classified as current even if the lender agreed,
after the reporting period and before the authorization of the financial statements for
issue, not to demand payment. This is because the entity does not have an
unconditional right to defer settlement of the liability for at least twelve months after the
reporting period.
However the liability is noncurrent if the lender provides the entity by the end of the
reporting period (e.g., on or before December 31) a grace period ending at least
twelve months after the reporting period, within which the entity can rectify the breach
and during which the lender cannot demand immediate repayment.

Illustration:

In 20x1, Entity A took a long-term loan from a bank. The loan agreement requires Entity
A to maintain a current ratio of 2:1. If the current ratio falls below 2:1, the loan becomes
payable on demand. On December 31, 20x1 (reporting date), Entity A's current ratio
was 1.8:1, below the agreed level. Entity A's financial statements were authorized for
issue on March 31, 20x2.

Case 1:
On January 5, 20x2, the bank gives Entity A a chance to rectify the breach of loan
agreement within the next 12 months and promises not to demand immediate
repayment within this period.

Analysis: The loan is classified as current liability because the grace period is received
after the reporting date.

Case 2:
On December 31, 20x1, the bank gives Entity A a chance to rectify the breach of loan
agreement within the next 12 months and promises not to demand immediate
repayment within this period.

Analysis: The loan is classified as noncurrent liability because the grace period is
received by the reporting date.

Illustration: Classified Statement of financial position

STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
Income and expenses for the period may be presented in either:
a. A single statement of profit or loss and other comprehensive income (statement
of comprehensive income); or

b. Two statements - (1) a statement of profit or loss (income statement) and (2) a
statement presenting comprehensive income.

These presentations have the following basic formats:

PAS 1 requires an entity to present information on the following:

a. Profit or loss;

b. Other comprehensive income;

C. and x Comprehensive income

Presenting a separate income statement is allowed as long as a separate statement

showing comprehensive income is also presented (i.e., "Two-statement presentation').
Presenting only an income statement is prohibited.
 PROFIT OR LOSS
Profit or loss is income less expenses, excluding the components of other
comprehensive income. The excess of income over expenses is profit; while the
deficiency is loss. This method of computing for profit or loss is called the "transaction
approach."
Income and expenses are usually recognized in profit or loss unless:
a. They are items of other comprehensive income; or
b. They are required by other PFRSS to be recognized outside of profit of loss.

The following are not included in determining the profit or loss for the period:
TRANSACTION ACCOUNTING
Correction of prior period error Direct adjustment to the beginning balance of
retained earnings. The adjustment is presented in
the statement of changes in equity.

Change in accounting policy Similar treatment to correction of prior period error.

Other comprehensive income
Changes during the period are presented in the
"other comprehensive income" section of the
statement of comprehensive income. Cumulative
balances are presented in the equity section of the
statement of financial position.

Transactions with owners (e.g., Recognized directly in equity. Transactions during

issuance of share capital, the period are presented in the statement of
declaration of dividends, and the changes in equity.
like)

The profit or loss section shows line items that present following amounts for the period:
a. revenue, presenting separately interest revenue;

b. finance costs;

c. gains and losses arising from the derecognition of financial assets measured at
amortized cost;
d. impairment losses and impairment gains on financial assets;
e. gains and losses on reclassifications of financial assets from amortized cost or fair
value through other comprehensive income to fair value through profit or loss;
f. share in the profit or loss of associates and joint ventures;

g. tax expense; and

h. result of discontinued operations.

(PAS 1.82)

Additional line items shall be presented whenever relevant to the understanding of the
entity's financial performance. The nature and amount of material items of income or
expense shall be disclosed separately.
Circumstances that would give rise to the separate disclosure of items of income and
expense include:
a. 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;
b. restructurings of the activities of an entity and reversals of any provisions for
restructuring costs;
c. disposals of items of property, plant and equipment; d. disposals of investments;

e. discontinued operations;

f. litigation settlements; and g. other reversals of provisions.

(PAS 1.98)
PAS 1 prohibits the presentation of extraordinary items in the statement of profit or loss
and other comprehensive income or in the notes.

PRESENTATION OF EXPENSES

Expenses may be presented using either of the following methods:

a. Nature of expense method - Under this method, expenses are aggregated
according to their nature (e.g., depreciation, purchases of materials, transport costs,
employee benefits and advertising costs) and are not reallocated according to their
functions within the entity.
b. Function of expense method (Cost of sales method) - Under this method, an
entity classifies expenses according to their function (e.g., cost of sales, distribution
costs, administrative expenses, and other functional classifications). At a minimum, cost
of sales shall be presented separately from other expenses.

The nature of expense method is simpler to apply because it eliminates considerable

judgment needed in reallocating expenses according to their function. However, an
entity shall choose whichever method it deems will provide information that is reliable
and more relevant, taking into account historical and industry factors and the entity's
nature.
If the function of expense method is used, additional disclosures on the nature of
expenses shall be provided, including depreciation and amortization expense and
employee benefits expense. This information is useful in predicting future cash flows.

OTHER COMPREHENSIVE INCOME (OCI)

Other comprehensive income "comprises items of income and expense (including
reclassification adjustments) that are not recognized in profit or loss as required or
permitted by other PFRSs." (PAS 1.7)
The components of other comprehensive income include the following:
a. Changes in revaluation surplus;

b. Remeasurements of the net defined benefit liability (asset);

c. Gains and losses on investments designated or measured at fair value through

other comprehensive income (FVOCI);
d. Gains and losses arising from translating the financial statements of a foreign
operation;
e. Effective portion of gains and losses on hedging instruments in a cash flow hedge;

f. Changes in fair value of a financial liability designated at fair value through profit or
loss
(FVPL) that are attributable to changes in credit risk;
g. Changes in the time value of option when the option's intrinsic value and time value
are separated and only the changes in the intrinsic value is designated as the
hedging instrument; and
h. Changes in the value of the forward elements of forward contracts when separating
the forward element and spot element of a forward contract and designating as the
hedging instrument only the changes in the spot element, and changes in the value of
the foreign currency basis spread of a financial instrument when excluding it from the
designation of that financial instrument as the hedging instrument. (PAS 1.7)

Amounts recognized in OCI are usually accumulated as separate components of equity.

For example, cumulative changes in revaluation surplus are accumulated in a
"Revaluation surplus” account, which is presented as a separate component of equity;
cumulative gains and losses from investments in FVOCI and from translation of foreign
operation are also accumulated in separate equity accounts.

RECLASSIFICATION ADJUSTMENTS

Items of OCI include reclassification adjustments.

➢ Reclassification adjustments "are amounts reclassified to profit or loss in the
current period that were recognized in other comprehensive income in the current or
previous periods." (PAS 1.7)

Reclassification adjustments arise, for example, on disposal of a foreign operation,

derecognition of debt instruments measured at FVOCI, or when a cash flow hedge
becomes ineffective or affects profit or loss.
On derecognition (or when the cash flow hedge becomes ineffective), the cumulative
gains and losses that were accumulated in equity on these items are reclassified from
OCI to profit or loss. The amount reclassified is called the reclassification adjustment.
 A reclassification adjustment for a gain is a deduction in OCI and an addition to profit
or loss. This is to avoid double inclusion in total comprehensive income. On the other
hand, a reclassification adjustment for a loss is an addition to OCI and a deduction
from profit or loss.
Reclassification adjustments do not arise on changes in revaluation surplus,
derecognition of equity instruments designated at FVOCI, and remeasurements of
the net defined benefit liability (asset).
On derecognition, the cumulative gains and losses that were accumulated in equity on
these items are transferred directly to retained earnings, rather than to profit or loss
as a reclassification adjustment.

PRESENTATION OF OCI

The other comprehensive income section shall group items of OCI into the following:
a. Those for which reclassification adjustment is allowed; and

b. Those for which reclassification adjustment is not allowed.

The entity's share in the OCI of an associate or joint venture accounted for under the
equity method shall also be presented separately and also grouped according to the
classifications above.
Types of Other Comprehensive Reclassification adjustment?
Income
a. Changes in revaluation surplus No
b. Remeasurements of the net No
defined benefit liability (asset)
c. Fair value changes on FVOCI -
Equity instrument (election) No
- Debt instrument (mandatory) Yes
d. Translation differences on foreign
operations Yes
e. Effective portion of cash flow
hedges Yes

Items of OCI, including reclassification adjustments, may be presented at either net of

tax or gross of tax.
TOTAL COMPREHENSIVE INCOME
Total comprehensive income is "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." (PAS 1.7)
Total comprehensive income is the sum of profit or loss and other comprehensive
income. It comprises all non-owner changes in equity. Presenting information on
comprehensive income, and not just profit or loss, helps users better assess the overall
financial performance of the entity,
ILLUSTRATION: STATEMENT OF COMPREHENSIVE INCOME
(Single-statement presentation/ Function of expense method)
STATEMENT OF CHANGES IN EQUITY
The statement of changes in equity shows the following information:
a. Effects of change in accounting policy (retrospective application) or correction of prior
period error (retrospective restatement);
b. Total comprehensive income for the period; and

c. For each component of equity, a reconciliation between the carrying amount at the
beginning and the end of the period, showing separately changes resulting from: i.
profit or loss;

ii. other comprehensive income; and iii. transactions with owners, e.g.,

contributions by and distributions to owners.

Retrospective adjustments and retrospective restatements are presented in the

statement of changes in equity as adjustments to the opening balance of retained
earnings rather than as changes in equity during the period.
Components of equity include, for example, each class of contributed equity, the
accumulated balance of each class of other comprehensive income and retained
earnings.
(PAS 1.108)
PAS 1 allows the disclosure of dividends, and the related amount per share, either in
the statement of changes in equity or in the notes.

Note:
“Non-owner “changes in equity are presented in the statement of comprehensive
income while "owner" changes (e.g., contributions by and distributions to owners) are
presented in the statement of changes in equity. This is to provide better information
by aggregating items with shared characteristics and separating items with different
characteristics.
STATEMENT OF CASH FLOWS
PAS 1 refers the discussion and presentation of statement of cash flows to PAS 7
Statement of Cash Flows.

NOTES
The notes provides information in addition to those presented in the other financial
statements. It is an integral part of a complete set of financial statements. All the other
financial statements are intended to be read in conjunction with the notes. Accordingly,
information in the other financial statements shall be cross referenced to the notes.
PAS 1 requires an entity to present the notes in a systematic manner. Notes are
normally structured as follows:
1. General information on the reporting entity.

This includes the domicile and legal form of the entity, its country of incorporation and
the address of its registered office (or principal place of business, if different from the
registered office) and a description of the nature of the entity's operations and its
principal activities.
2. Statement of compliance with the PFRSS and Basis of preparation of financial
statements.
3. Summary of significant accounting policies.

This includes narrative descriptions of the line items in the other financial statements,
their recognition criteria, measurement bases, derecognition, transitional provisions, and
other relevant information.
4. Disaggregation (breakdowns) of the line items in the other financial statements and
other supporting information.
5. Other disclosures required by PFRSs, such as (the list is not exhaustive):

a. Contingent liabilities and unrecognized contractual commitments.

b. Non-financial disclosures, e.g., the entity's financial risk management objectives and
policies. Events after the reporting date, if material.
d. Changes in accounting policies and accounting estimates and corrections of prior
period errors.
e. Related party disclosure.

f. Judgments and estimations. g. Capital management.

h. Dividends declared after the reporting period but before the financial statements
were authorized for issue, and the related amount per share.
i. The amount of any cumulative preference dividends not recognized.

6. Other disclosures not required by PFRSS but the management deems relevant to the
understanding of the financial statements.

Notes are prepared in a necessarily detailed manner. More often than not, they are
voluminous and occupy a bulk portion of the financial statements. For that reason (and
to save trees), only excerpts of notes to the financial statements are provided below,
sufficient to give you an idea on how the concepts discussed above are presented in the
notes.

Illustration 1: General information, Basis of preparation and Statement of compliance

Entity A
Notes
December 31, 20x2

1. General information
Entity A (the 'Company') is a stock corporation incorporated and domiciled in the
Philippines. The Company is engaged in the manufacture and sale of security devices,
fire prevention, and other electronic equipment. The Company's registered office is
located at 123 Kalsada St., Dalan City, Philippines.

The financial statements of the Company for the year ended December 31, 20x2 were
authorized for issue in accordance with a resolution of the board of directors on March
1, 20x3.

2.1 Basis of preparation

The financial statements have been prepared on a historical cost basis, except for
inventories which are measured at the lower of cost and net realizable value,
investments in equity securities which are measured at fair value with changes in fair
values recognized in other comprehensive income, and lands and buildings measured
at revalued amounts. The Company's financial statements are presented in Philippine
peso (P), which is the Company's functional currency.
2.2 Statement of compliance
The financial statements of the Company have been prepared in accordance with
Philippine
Financial Reporting Standards (PFRSs). PFRSS are adopted by the Financial Reporting
Standards Council (FRSC) from the pronouncements issued by the International
Accounting Standards Board (IASB).

Illustration 2: Summary of significant accounting policies

2.3 Summary of significant accounting policies

(f) Inventories
Inventories are stated at the lower of cost and net realizable value. Cost comprises
direct materials, direct labor costs and factory overheads that have been incurred in
bringing the inventories to their present location and condition. Cost is calculated using
the weighted average method. Net realizable value represents the estimated selling
price less all estimated costs to complete and costs to sell.

Illustration 3: Significant judgments, estimates and assumptions

3. Significant accounting judgments, estimates and assumptions

The key assumptions concerning the future and other key sources of estimation
uncertainty at the reporting date, that have a significant risk of causing a material
adjustment to the carrying amounts of assets and liabilities within the next financial year
are discussed below.
Revaluation of property, plant and equipment
The Company measures land and buildings at revalued amounts with changes in fair
value being recognized in other comprehensive income. The Company engaged
independent valuation specialists to determine fair value as at December 31, 20x1.

ILLUSTRATION 4: Supporting information for a line item in the statement of financial

position.
Summary:
• The objective of PAS 1 is to prescribe the basis for presentation of general
purpose financial statements to ensure comparability.
• General purpose financial statements are those statements that cater to the
common needs of a wide range of primary (external) users.
• The purpose 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.
• A complete set of financial statements consists of the following: (1) statement
of financial position, (2) statement of profit or loss and other comprehensive
income, (3) statement of changes in equity, (4) statement of cash flows, (5)
notes, (5a) comparative information, and (6) additional statement of financial
position when an entity makes a retrospective application, retrospective
restatement, or reclassifies items - with material effect.
• The statement of financial position may be presented either showing
current/noncurrent distinction (classified) or based on liquidity (unclassified). PAS
1 encourages the classified presentation.
• Deferred tax assets and deferred tax liabilities are presented as noncurrent
items in a classified statement of financial position.
• PAS 1 does not prescribe the order or format in which an entity presents items.
• Income and expenses may be presented: (a) in a single statement of profit or
loss and other comprehensive income, or (b) in two statements - an income
statement and a statement presenting comprehensive income
• Other comprehensive income (OCI) comprises items of income and expense
(including reclassification adjustments) that are not recognized in profit or loss as
required or permitted by other PFRSS. OCI include: (a) changes in revaluation
surplus, (b) remeasurements of the net defined benefit liability (asset), (c)
unrealized gains and losses on FVOCI investments, (d) translation gains and
 losses on foreign operation, and (e) effective portion of gains and losses on
hedging instruments in a cash flow hedge.
• Reclassification adjustments are amounts reclassified from OCI to profit or
loss.
• OCI may be presented net or gross of related taxes.
• Total comprehensive income includes all non-owner changes in equity. It
comprises profit or loss and other comprehensive income.
• Presenting extraordinary items in the financial statements, including the notes,
is prohibited.
• Expenses may be presented using either the Nature of expense or the
Function of expense method. Additional disclosure is required when the
function of expense method is used.
• Dividends are disclosed either in the statement of changes is equity or in the
notes.
• Owner changes in equity are presented in the statement of changes in equity.
Non-owner changes in equity are presented in the statement of comprehensive
income.
• The notes is an integral part of the financial statements. It presents (a)
information regarding the basis of preparation of financial statements, (b)
information required by the PERSS and (c) other information not required by
PFRSS but is relevant to users of financial statements.

PAS 2 INVENTORIES Introduction

PAS 2 prescribes the accounting treatment for inventories. PAS 2 recognizes that a
primary issue in the accounting for inventories is the determination of cost to be
recognized as asset and carried forward until it is expensed. Accordingly, PAS 2
provides guidance in the determination of cost of inventories, including the use of cost
formulas, and their subsequent measurement and recognition as expense.

PAS 2 applies to all inventories except for the following:

➢ Assets accounted for under other standards

a. Financial instruments (PAS 32 and PFRS 9); and

b. Biological assets and agricultural produce at the point of harvest (PAS 41).
 ➢ Assets not measured under the lower of cost or net realizable value (NRV) under
PAS 2
a. Inventories of producers of agricultural, forest, and mineral products measured
at net realizable value in accordance with well-established practices in those
industries.
b. Inventories of commodity broker-traders measured at fair value less costs to
sell.

INVENTORIES

Inventories are as assets:

a. Held for sale in the ordinary course of business (finished goods);
b. In the process of production for such sale (work in process); or
c. In the form of materials or supplies to be consumed in the
production process or in the rendering of services (raw materials and
manufacturing supplies). (PAS 2.6)

Examples of inventories:

a. Merchandise purchased by a trading entity and held for resale.

b. Land and other property held for sale in the ordinary course of business.

C. Finished goods, goods undergoing production, and raw materials and supplies
awaiting use in the production process by a manufacturing entity.

Ordinary course of business refers to the necessary, normal or usual business activities
of an entity.

MEASUREMENT
Inventories are measured at the lower of cost and net realizable value.
COST
The cost of inventories comprises the following:
a. Purchase cost - this includes the purchase price (net of trade discounts and other
rebates), import duties, non-refundable of non-recoverable purchase taxes, and
transport, handling and other costs directly attributable to the acquisition of the
inventory.
b. Conversion costs - these refer to the costs necessary in converting raw materials
into finished goods. Conversion costs include the costs of direct labor and production
overhead.
c. Other costs necessary in bringing the inventories to their present location and
condition.

The following are excluded from the cost of inventories and are expensed in the period
in which they are incurred:
a. Abnormal amounts of wasted materials, labor or other production costs;

b. Storage costs, unless those costs are necessary in the production process before a
further production stage (e.g., the storage costs of partly finished goods may be
capitalized as cost of inventory, but the storage costs of completed goods are
expensed);
c. Administrative overheads that do not contribute to bringing inventories to their present
location and condition; and
d. Selling costs. (PAS 2.16)

When a purchase transaction effectively contains a financing element, such as when

payment of the purchase price is deferred, the difference between the purchase price
for normal credit terms and the amount paid is recognized as interest expense over the
period of the financing.
ILLUSTRATION:
The advertisement costs are selling costs. These are expensed in the period in which
they are incurred.

COST FORMULAS
The cost formulas deal with the computation of cost of inventories that are charged as
expense when the related revenue is recognized (i.e., 'cost of sales' or 'cost of goods
sold') as well as the cost of unsold inventories at the end of the period that are
recognized as asset (i.e., 'ending inventory'). PAS 2 provides the following cost
formulas:
1. Specific identification - this shall be used for inventories that are not
ordinarily interchangeable (i.e., those that are individually unique) and those that
are segregated for specific projects.
Under this formula, specific costs are attributed to identified items of inventory.
Accordingly, cost of sales represents the actual costs of the specific items sold while
ending inventory represents the actual costs of the specific items on hand.
For example, if an inventory with a serial number of "ABC-123" costing P10,948.67 is
sold, the amount charged to cost of sales is also P10,948.67. If that inventory remains
unsold, the amount included in ending inventory is also P10,948.67.
In this regard, records should be maintained that enables the entity to identify the cost
and movement of each specific inventory.
Specific identification, however, is not appropriate when inventories consist of large
number of items that are ordinarily interchangeable. In such cases, the entity shall
choose between formulas 2 and 3 below.

2. First-In, First-Out (FIFO) - Under this formula, it is assumed that inventories that
were purchased or produced first are sold first, and therefore unsold inventories at the
end of the period are those most recently purchased or produced.
Accordingly, cost of sales represents costs from earlier purchases while the cost of
ending inventory represents costs from the most recent purchases.

3. Weighted Average - Under this formula, cost of sales and ending inventory are
determined based on the weighted average cost of beginning inventory and all
inventories purchased or produced during the period. The average may be calculated
on a periodic basis, or as each additional purchase is made, depending upon the
circumstances of the entity.

The cost formulas refer to "cost flow assumptions," meaning they pertain to the flow of
costs (i.e., from inventory to cost of sales) and not necessarily to the actual physical
flow of inventories. Thus, the FIFO or Weighted Average can be used regardless of
which item of inventory is physically sold first.
Same cost formula shall be used for all inventories with similar nature and use. Different
cost formulas may be used for inventories with different nature or use. However, a
difference in geographical location of inventories, by itself, is not sufficient to justify the
use of different cost formulas. (PAS 2.26)
PAS 2 does not permit the use of a last-in, first out (LIFO) cost formula.

Illustration:

Entity A, a trading entity, buys and sells Product A. Movements in the inventory of
Product A during the period are as follows:

Date Transaction Units Unit Cost Total Cost

Jan. 1 Beginning inventory 100 10 1,000
7 Purchase 300 12 3,600
12 Sale 320
21 Purchase 200 14 2,800
NET REALIZABLE VALUE (NRV)
Net realizable value is "the estimated selling price in the ordinary course of business
less the estimated costs of completion and the estimated costs necessary to make the
sale." (PAS 2.6)
NRV is different from fair value. "Net realizable value refers to the net amount that an
entity expects to realize from the sale of inventory in the ordinary course of business.
Fair value reflects the price at which an orderly transaction to sell the same inventory in
the principal (or most advantageous) market for that inventory would take place
between market participants at the measurement date. The former is an entity-specific
value; the latter is not. Net realizable value for inventories may not equal fair value less
costs to sell." (PAS 2.7)
Measuring inventories at the lower of cost and NRV is in line with the basic accounting
concept that an asset shall not be carried at an amount that exceeds its recoverable
amount.
The cost of an inventory may exceed its recoverable amount if, for example, the
inventory is damaged, becomes obsolete, prices have declined, or the estimated costs
to complete or to sell the inventory have increased. In these circumstances, the cost of
the inventory is written-down to NRV. The amount of write-down is recognized as
expense.
If the NRV subsequently increases, the previous write down is reversed. However, the
amount of reversal shall not exceed the original write-down. This is so that so that the
new carrying amount is the lower of the cost and the revised NRV.
Write-downs of inventories are usually carried out on an item by item basis, although
in some circumstances, it may be appropriate to group similar items. It is not
appropriate to write down inventories on the basis of their classification (e.g., finished
goods or all inventories of an operating segment).
Raw materials inventory is not written down below cost if the finished goods in which
they will be incorporated are expected to be sold at or above cost. If, however, this is
not the case, the raw materials are written down to their NRV. The best evidence of
NRV for raw materials is replacement cost.

Illustration 1:

Information on Entity A's inventories is as follows:

RECOGNITION AS AN EXPENSE

The carrying amount of an inventory that is sold is charged as expense (i.e., cost of
sales) in the period in which the related revenue is recognized. Likewise, the write-down
of inventories to NRV and all losses of inventories are recognized as expense in the
period the write-down or loss occurs.
"The amount of any reversal of any write-down of inventories, arising from an increase
in net realizable value, shall be recognized as a reduction in the amount of inventories
recognized as an expense in the period in which the reversal occurs." (PAS 234)
Inventories that are used in the construction of another asset is not expensed but rather
capitalized as cost of the constructed asset. For example, some inventories may be
used in constructing a building. The cost of those inventories is capitalized as cost of
the building and will be included in the depreciation of that building.

DISCLOSURES
a. Accounting policies adopted in measuring inventories, including the cost formula
used;
b. Total carrying amount of inventories and the carrying amount in classifications
appropriate to the entity;
c. Carrying amount of inventories carried at fair value less costs to sell;

d. Amount of inventories recognized as an expense during the period;

e. Amount of any write-down of inventories recognized as an expense in the period;

f. Amount of any reversal of write-down that is recognized as a reduction in the amount

of inventories recognized as expense in the period;
g. Circumstances or events that led to the reversal of a write down of inventories; and

h. Carrying amount of inventories pledged as security for liabilities.

Summary:

• Inventories include goods that are held for sale in the ordinary course of
business, in the process of production for such sale, and in the form of materials
and supplies to be consumed in the production.
• Inventories are measured at the lower of cost and net realizable value (NRV).
 • The cost of inventories comprises all costs of purchase, costs of conversion
and other costs incurred in bringing the inventories to their present location and
condition.
• Trade discounts, rebates and other similar items are deducted in determining the
costs of purchase.
• The following are excluded from the cost of inventory: Abnormal costs,
Storage costs, unless necessary, Administrative costs, and Selling costs.
• The cost formulas permitted under PAS' 2 are (a) specific identification, (b)
FIFO, and (c) weighted average.
• Specific identification shall be used for inventories which are not ordinarily
interchangeable.
• Net realizable value is the estimated selling price in the ordinary course of
business less the estimated costs of completion and the estimated costs
necessary to make the sale.
• Inventories are usually written down to NRV on an item by item basis.
• Raw materials inventory is not written down below cost if the finished goods in
which they will be incorporated are expected to be sold at or above cost.
• Reversals of inventory write-downs shall not exceed the amount of the original
write-down.

PAS 7 STATEMENT OF CASH FLOWS Introduction

PAS 7 prescribes the requirements in the presentation of statement of cash flows.
The statement of cash flows provides information about the sources and utilization
(i.e., historical changes) cash and cash equivalents during the period.
Definition of terms
❖ Cash comprises cash on hand and cash in bank.
❖ Cash equivalents are "short-term, highly liquid investments that are readily
convertible to known amounts of cash and which are subject to an insignificant
risk of changes in value." (PAS 7.6)
Only debt instruments acquired within 3 months or less before their maturity date can
qualify as cash equivalents.
Examples of cash equivalents:
a. 1-year treasury bill acquired 3 months before maturity date
 b. 90-day money market instrument or commercial paper

c. 3-month time deposit

❖ Cash flows include inflows (sources) and outflows (uses) of cash and cash
equivalents.

When used in conjunction with the rest of the financial statements, the statement of
cash flows helps users assess:
a. the ability of the entity to generate cash and cash equivalents,

b. the timing and certainty of the generation of cash flows, and

c. the needs of the entity to utilize those cash flows

The statement of cash flows may also provide information on the quality of earnings of
an entity. An entity may report profit under the accrual basis but suffers negative cash
flows from its operating activities. This may provide indicators of, among other things,
difficulty in collecting accounts receivable.
As the statement of cash flows can only be prepared on a cash basis, it enhances inter-
comparability among different entities because it eliminates the effects of using different
accounting treatments for the same transactions and events.

Classification of cash flows

The statement of cash flows presents cash flows according to the following
classifications:
1. Operating activities
2. Investing Activities
3. Financing Activities

OPERATING ACTIVITIES

"Cash flows from operating activities are primarily derived from the principal revenue-
producing activities of the entity." (PAS 7.14)
Operating activities usually include cash inflows and outflows on items of income and
expenses, or those that enter into the determination of profit or loss (i.e., included in
the income statement).
Examples of cash flows from operating activities:

a. cash receipts from the sale of goods, rendering of services, or other forms of
income
b. cash payments for purchases of goods and services

c. cash payments for operating expenses, such as employee benefits, insurance,

and the like, and payments or refunds of income taxes
d. cash receipts and payments from contracts held for dealing or trading purposes

Special items included in operating activities

➢ Cash flows from buying and selling held for trading securities (whether financial
assets or financial liabilities) are classified as operating activities. Held for
trading securities are similar to inventories in the sense that they are acquired
specifically for resale.

➢ Some entities, in the ordinary course of their activities, routinely manufacture or

acquire items of property, plant and equipment to be held for rental to others and
subsequently transfer these assets to inventories when they cease to be rented
and become held for sale. For these entities, cash flows from the acquisition,
rentals and subsequent sale of such assets are considered operating activities.
The proceeds from the sale of such assets are recognized as revenue.

➢ Loan transactions of financial institutions (e.g., banks) are operating activities

because they relate to the main revenue producing activity of a financial
institution.

INVESTING ACTIVITIES

Investing activities involve the acquisition and disposal of noncurrent assets

and other investments. Examples include:

a. cash receipts and cash payments in the acquisition and disposal of property, plant
and equipment, investment property, intangible assets and other noncurrent assets
b. cash receipts and cash payments in the acquisition and sale of equity or debt
instruments of other entities (other than those that are classified as cash equivalents
or held for trading)
c. cash receipts and cash payments on derivative assets and liabilities (other than those
that are held for trading or classified as financing activities)
d. loans to other parties and collections thereof (other than loans made by a financial
institution)

FINANCING ACTIVITIES
Financing activities are those that affect the entity's equity capital and borrowing
structure.
Examples include:
a. cash receipts from issuing shares or other equity instruments and cash payments
to redeem them
b. cash receipts from issuing notes, loans, bonds and mortgage payable and other
short-term or long-term borrowings, and their repayments
c. cash payments by a lessee for the reduction of the outstanding liability relating to
a lease. (PAS 7.17e)

Cash flows on trade payables, accrued expenses and other operating liabilities are
classified as operating activities and not financing activities. Only cash flows on non-
operating or non-trade liabilities are included as financing activities.

Remember the following:

1. Operating activities → affect profit or loss

2. Investing activities → affect non-current assets and other investments

3. Financing activities → affect borrowings and equity.

Cash flows excluded from the activities sections
➢ Cash flows on movements between "cash" and "cash equivalents" are not
presented separately because these are part of the entity's cash management
rather than its operating, investing and financing activities.

➢ Bank overdrafts that cannot be offset to cash are presented as financing

activities. Those that can be offset to cash (or are part of the entity's cash
management) forms part of the balance of cash and cash equivalents and
therefore not presented separately in the activities sections.

➢ Cash flows denominated in a foreign currency are translated using the spot
exchange rate at the date of the cash flow. Exchange differences are not cash
flows. "However, the effect of exchange rate changes on cash and cash
equivalents held or due in a foreign currency is reported in the statement of cash
flows in order to reconcile cash and cash equivalents at the beginning and the
end of the period." (PAS 7.28) The amount of reconciliation is reported
separately from the operating, investing and financing activities.

GENERAL CONCEPT IN THE PREPARATION OF STATEMENT OF CASH FLOWS

The statement of cash flows is prepared using cash basis. Under the cash basis of
accounting, income is recognized only when collected and expenses are recognized
only when paid, rather than when these items are earned, or incurred.
Accordingly, only transactions that affected cash and cash equivalents are
reported in the statement of cash flows. Non cash transactions are excluded and
disclosed only.

When preparing statement of cash flows:

➢ Include only transactions that have affected cash and cash equivalents (e.g.,
purchase of assets by paying cash).
➢ Exclude transactions that have not affected cash and cash equivalents (e.g.,
purchase of assets by issuing note payable or shares of stocks and conversion of
debt to equity).
INTERESTS AND DIVIDENDS
Entities (except financial institutions) may classify cash flows on interests and dividends
as follows:

Option 1
➢ Interest income, Interest expense and dividend income are classified as
operating activities because they enter into the determination of profit or loss
(i.e., income and expenses).
➢ Dividend paid is classified financing activity because it is a transaction with tile
owners and alters the equity structure.

Option 2
➢ Interest income and dividend income are classified as investing activities
because they result from investments.
➢ Interest expense is classified as financing activity because it results from
borrowing.
➢ Dividend paid is classified as operating activity in order to assist users in
assessing the entity's ability to pay dividends out of o operating cash flows.

Only interests and dividends received or paid in cash are included in the statement of
cash flows. For example, dividends declared in Year 1 but paid in Year 2 are excluded
from the statement of cash flows in Year 1 and reported only in Year 2.
Only option 1 is available to financial institutions.
When answering CPA board questions wherein the problem is silent, it is presumed that
the entity uses option 1.

PRESENTATION
Cash flows from operating activities may be presented using either.
a. Direct method - shows each major class of gross cash receipts and gross cash
payments; or
b. Indirect method - profit or loss is adjusted for the effects of non-cash items and
changes in operating assets and liabilities.
PAS 7 does not require any particular method; both methods are acceptable. However,

PAS 7 encourages the direct method because it provides information that may be
useful in estimating future cash flows which is not available under the indirect method.
In practice, however, the indirect method is more commonly used because it is easier to
apply.
Moreover, the choice between direct and indirect method of presentation is applicable
only for operating activities. For investing and financing activities, gross cash receipts
and gross cash payments for the related transactions are presented separately, unless
they qualify for net presentation.

CHANGES IN OWNERSHIP INTERESTS IN SUBSIDIARIES

Cash flows arising from acquisitions and disposals of subsidiaries or other business
units resulting to loss or obtaining of control are classified as investing activities.
Those that do not result to loss or obtaining of control are classified as financing
activities.

DISCLOSURE
PAS 7 requires the following disclosures:
a. Components of cash and cash equivalents and a reconciliation of amounts in the
statement of cash flows with the equivalent items in the statement of financial position.
b. Significant cash and cash equivalents held by the entity that are not available for
use by the group, together with a management commentary.
Summary:
➢ The statement of cash flows shows the historical changes (i.e., sources and
utilization) in cash and cash equivalents during the period. It is an integral part of
a complete set of financial statements and is used in conjunction with the other
financial statements in assessing the ability of an entity to generate cash and
cash equivalents, the timing and certainty of their generation, and the needs of
the entity to utilize those cash flows.
➢ Cash flows are classified into (a) operating activities, (b) investing activities,
and (c) financing activities.
➢ Operating activities include transactions that enter into the determination of
profit or loss, i.e., income and expenses.
➢ Investing activities include transactions that affect non-current assets and other
nonoperating assets.
➢ Financing activities include transactions that affect equity and non-operating
liabilities.
➢ Only transactions that have affected cash and cash equivalents are included
in the statement of cash flows. Non-cash transactions are excluded and
disclosed only.
➢ Entities other than financial institutions have options in presenting cash flows
relating to interests and dividends.
➢ Cash flows from operating activities may be reported using either (a) direct
method or (b) indirect method.

➢ The direct method shows each major class of gross cash receipts and gross
cash payments. Under the indirect method, profit or loss is adjusted for the
effects of noncash items and changes in operating assets and liabilities.
➢ Cash flows relating to investing and financing activities are presented
separately at gross amounts, unless they qualify for net presentation.

PAS 8 ACCOUNTING POLICIES, CHANGES IN

ACCOUNTINGBESTIMATES AND ERRORS
Introduction
PAS 8 prescribes the criteria for selecting, applying, and changing accounting policies
and the accounting and disclosure of changes in accounting policies, changes in
accounting estimates and correction of prior period errors. These are intended to
enhance the relevance, reliability and comparability of the entity's financial statements.

ACCOUNTING POLICIES
Accounting policies are "the specific principles, bases, conventions, rules and
practices applied by an entity in preparing and presenting financial statements." (PAS
8.5)
When selecting and applying accounting policies, an entity shall refer to the hierarchy
guidance summarized

Hierarchy of reporting standards

1. PFRSs

2. Judgment

When making the judgment:

➢ management shall consider the following:

a. Requirements in other PFRSS dealing with similar transactions

b. Conceptual Framework

➢ management may consider the following

a. Pronouncements issued by other standard-setting bodies

b. Other accounting literature and industry practices

The foregoing means that, to account for a transaction, an entity refers to the PFRSs
first (which consist of the PFRSs, PASs and Interpretations); in the absence of a PFRS
that specifically deals with that transaction, management uses its judgment in
developing and applying an accounting policy that results in information that is relevant
and reliable. In making the judgment, management considers the applicability of the
references listed above.
PFRSs are accompanied by guidance to assist entities in applying their requirements. A
guidance states whether it is an integral part of the PFRSS. A guidance that is an
integral part of the PFRSS is mandatory.

CHANGES IN ACCOUNTING POLICIES

PAS 8 requires the consistent selection and application of accounting policies.

PAS 8 permits a change in accounting policy only if the change:
a. is required by a PFRS; or

b. results in reliable and more relevant information

A change in accounting policy usually results from a change in measurement basis.

Examples of changes in accounting policies:
a. Change from FIFO to the Weighted Average cost formula for inventories.

b. Change from the cost model to the fair value model of measuring investment
property.
c. Change from the cost model to the revaluation model of measuring property, plant,
and equipment and intangible assets.
d. Change in business model for classifying financial assets.

e. Change in the method of recognizing revenue from long-term construction contracts.

f. Change to a new policy resulting from the requirement of a new PFRS.

8. Change in financial reporting framework, such as from PFRS for SMEs to full PFRSs.

The following are not changes in accounting policies:

a. the application of an accounting policy for transactions, other events or
conditions that differ in substance from those previously occurring
b. the application of a new accounting policy for transactions, other events or
conditions that did not occur previously or were immaterial (PAS 8.16)
ACCOUNTING FOR CHANGES IN ACCOUNTING POLICIES
Changes in accounting policies are accounted for using the following order of priority:
1. Transitional provision in a PFRS, if any.

2. Retrospective application, in the absence of a transitional provision.

3. Prospective application, if retrospective application is impracticable.

For example, if an entity changes an accounting policy, it shall refer first to any specific
transitional provision of the PFRS that specifically deals with that accounting policy. If
there is no transitional provision, the entity shall account for the change using
retrospective application. If, however, retrospective application is impracticable, the
entity is allowed to account for the change using prospective application.

RETROSPECTIVE APPLICATION

Retrospective application means adjusting the opening balance "of each affected
component of equity (e.g., retained earnings) 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." (PAS 8.22)
For example, if an entity changes its accounting policy from the Average to the FIFO
cost formula, all previous financial statements presented in comparative with the
current-year financial statements are restated to apply FIFO. It is as if FIFO had always
been applied.
If retrospective application is impracticable for all periods presented, the entity shall
apply the new accounting policy as at the beginning of the earliest period for which
retrospective application is practicable, which may be the current period. If retrospective
application is still impracticable as at the beginning of the current period, the entity is
allowed to apply the new accounting policy prospectively from the earliest date
practicable.
➢ Impracticable means it cannot be done after making every reasonable effort to do
so.

A retrospective treatment is impracticable if the prior period effects cannot be

determined or if it requires significant estimates and assumptions to have been made
 when the prior period financial statements were prepared and these are impossible to
determine in the current period.
A voluntary change in accounting policy is accounted for by retrospective
application. An early application of a PFRS is not a voluntary change in accounting
policy.

CHANGES IN ACCOUNTING ESTIMATES

Many items in the financial statements cannot be measured with precision but only
through estimation because of uncertainties inherent in business activities. The use of
reasonable estimates therefore is necessary in order to provide relevant information.
Estimates are an essential part of financial reporting and do not undermine the reliability
of financial reports. For example, the following necessarily requires estimation:
a. net realizable value of inventories;

b. depreciation;

c. bad debts;

d. fair value of financial assets or financial liabilities; and

e. provisions.

Estimates involve judgments based on latest available information or information.

Consequently, estimates need to be revised when there is a change in circumstances
such that new more experience is obtained.
A change in accounting estimate is "an adjustment of the carrying amount of an asset
or a liability, or the amount of the periodic consumption of an asset, that results from the
assessment of the present status of, and expected future benefits and obligations
associated with, assets and liabilities. Changes in accounting estimates result from new
information or new developments and, accordingly, are not corrections of errors." (PAS
8.5)
Change in accounting policy vs. Change in Accounting Estimate

Normally results from a change on Normally results from changes on how

measurement basis (e.g., FIFO to Weighted the expected inflows or outflows of
Average, Cost to Fair Value, etc.) economic benefits are realized from
assets or incurred on liabilities.
If a change is difficult to distinguish between these two, the change is treated as a
change in an accounting estimate.

Examples of changes in accounting estimates:

a. Change in depreciation method

b. Change in estimated useful life or residual value of a depreciable asset

c. Change in the required balance of allowance for uncollectible accounts or impairment

losses
d. Change in estimated warranty obligations and other provisions

ACCOUNTING FOR CHANGES IN ACCOUNTING ESTIMATES

Changes in accounting estimates are accounted for by prospective application.
Prospective application means recognizing the effects of the change in profit or loss,
either in:
a. the period of change; or

b. the period of change and future periods, if both are affected.

Under prospective application, the beginning balance of retained earnings and the
previous financial statements are not restated.

ERRORS
Errors include misapplication of accounting policies, mathematical mistakes, oversights
or misinterpretations of facts, and fraud.
"Financial statements do not comply with PFRSs if they contain either material errors
or immaterial errors made intentionally to achieve a particular presentation of an
entity's financial position, financial performance or cash flows." (PAS 8.41)
Material errors are those that cause the financial statements to be misstated.
Intentional errors are fraud. In the case of fraud, it does not matter whether the error is
material or immaterial. Fraudulent financial reporting does not comply with PFRSs.
Errors can be errors of commission errors of omission.
 An error of commission is doing something wrong while an error of omission is not
doing something that should have been done.
The types of errors according to the period of occurrence are as follows:
a. Current period errors - are errors in the current period that were discovered
either during the current period or after the current period but before the financial
statements were authorized for issue. These are corrected simply by correcting entries.
b. Prior period errors - are errors in one or more prior periods that were only
discovered either during the current period or after the current period but before the
financial statements were authorized for issue. These are corrected by retrospective
restatement.

RETROSPECTIVE RESTATEMENT

Retrospective restatement means:

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.
(PAS 8.42)
Retrospective restatement Retrospective application
Correcting a prior period error as if the Applying a new accounting policy as if
error had never occurred. the policy had always been applied.

Just like retrospective application, retrospective restatement shall be made as far back
as practicable. If it is impracticable to determine the cumulative effect of a prior period
error at the beginning of the current period, the entity is allowed to correct the error
prospectively from the earliest date practicable.

Summary:
➢ The two types of accounting changes are (a) change in accounting policy and (b)
change in accounting estimate.
➢ Accounting policies are those adopted by an entity in preparing and presenting
its financial statements.
 ➢ PAS 8 requires the consistent selection and application of accounting policies.
An accounting policy shall be changed only when it (a) is required by a PFRS; or
(b) results in relevant and more reliable information.
➢ When it is difficult to distinguish a change in accounting policy from a change in
accounting estimate, the change is treated as a change in an accounting
estimate.
➢ A voluntary change in accounting policy is accounted for by retrospective
application.
Early application of a PFRS is not a voluntary change in accounting policy.

PAS 10 Events after the Reporting Period

Introduction
PAS 10 prescribes the accounting for, and disclosures of, events after the reporting
period, including disclosures regarding the date when the financial statements were
authorized for issue.
EVENTS AFTER THE REPORTING PERIOD

Events after the reporting period are "those events, favorable and unfavorable, that
occur between the end of the reporting period and the date when the financial
statements are authorized for issue." (PAS 10.3)

For example, Entity A's reporting period ends on December 31, 20x1 and its financial
statements are authorized for issue on March 31, 20x2. Events after the reporting
period are those events that occur within January 1, 20x2 to March 31, 20x2.

➢ The date of authorization of the financial statements is the date when

management authorizes the financial statements for issue regardless of whether such
authorization is final or subject to further approval.

Two types of events after the reporting period

1. Adjusting events after the reporting period - are events that provide evidence
of conditions that existed at the end of the reporting period.
2. Non-adjusting events after the reporting period - are events that are
indicative of conditions that arose after the reporting period.

ADJUSTING EVENTS AFTER THE REPORTING PERIOD

Adjusting events, as the name suggests, require adjustments of amounts in the financial
statements. Examples of adjusting events:
a. The settlement after the reporting period of a court case that confirms that the
entity has a present obligation at the end of reporting period.
b. The receipt of information after the reporting period indicating that an asset was
impaired at the end of reporting period. For example:
i. The bankruptcy of a customer that occurs after the reporting period may
indicate that the carrying amount of a trade receivable at the end of reporting
period is impaired.
 ii. The sale of inventories after the reporting period may give evidence to
their net realizable value at the end of reporting period.
c. The determination after the reporting period of the cost of asset purchased, or
the proceeds from asset sold, before the end of reporting period.
d. The determination after the reporting period of the amount of profit-sharing or
bonus payments, if the entity had a present legal or constructive obligation at the
end of reporting period to make such payments.
e. The discovery of fraud or errors that indicate that the financial statements are
incorrect. (PAS 10.9)

NON-ADJUSTING EVENTS AFTER THE REPORTING PERIOD

Non-adjusting events do not require adjustments of amounts in the financial statements.
However, they are disclosed if they are material. Examples of non-adjusting events:
a. Changes in fair values, foreign exchange rates, interest rates or market prices
after the reporting period.
b. Casualty losses (e.g., fire, storm, or earthquake) occurring after the reporting
period but before the financial statements were authorized for issue.
c. Litigation arising solely from events occurring after the reporting period.

d. Significant commitments or contingent liabilities entered after the reporting

period, e.g., significant guarantees.
e. Major ordinary share transactions and potential ordinary share transactions
after the reporting period.
f. Major business combination after the reporting period.

g. Announcing, or commencing the implementation of, a major restructuring after

the reporting period.
h. Announcing a plan to discontinue an operation after the reporting period.

i. Change in tax rate enacted after the reporting period.

j. Declaration of dividends after the reporting period

(PAS 10.22)
DIVIDENDS
Dividends declared after the reporting period are not recognized as liability at the end of
reporting period because no present obligation exists at the end of reporting period.

GOING CONCERN
PAS 10 prohibits the preparation of financial statements on a going concern basis if
management determines after the reporting period either that it intends to liquidate the
entity or to cease trading, or that it has no realistic alternative but to do so.

PAS 24 RELATED PARTY DISCLOSURES

Introduction
PAS 24 prescribes the guidelines in identifying related party relationships, transactions,
outstanding balances commitments, and the necessary disclosures for these items. and
Related party relationships are a common feature of business. For example, the
companies operating under the trade names "Chowking," "Greenwich," "Red Ribbon,"
"Burger King," and "Mang Inasal" are all subsidiaries of Jollibee Foods Corporation,
the parent company. All these companies are related parties. Collectively, they are
referred to as the 'Jollibee Group.
Related party disclosures are necessary to indicate the possibility that an entity's
financial position and performance might have been affected by the existence of such
relationship. This is because related parties often enter into transactions that unrelated
parties would not. For example, a subsidiary might sell goods to its parent at preferential
rates that are unavailable to unrelated parties.
Sometimes the mere existence of a related party relationship is sufficient to affect an
entity's financial position and performance even in the absence of related party
transactions. For example, a parent might dictate a subsidiary's choice of supplier.
For these reasons, users of financial statements need information on related party
relationships, transactions, outstanding balances and commitments to help them better
assess the risks and opportunities surrounding entity.

RELATED PARTIES

Parties are related if one party has the ability to affect the financial and operating
decisions of the other party through control, significant influence or joint control.
Control, significant influence and joint control refer to the degree of one party's ability
to affect the relevant decisions of another. These are defined and discussed in the
other sections of this book.

Examples of related parties:

1. Parent and its subsidiary

2. Fellow subsidiaries with a common parent

3. Investor and its associate; and the associate's subsidiary

4. Venturer and the joint venture; and the joint venture's subsidiary

5. A joint venture and an associate of a common investor.

6. Key management personnel of the reporting entity or of the reporting entity's parent.

7. A person who has control, significant influence or joint control over the reporting
entity.
8. Close family member of the person referred to in (6) and (7)

9. Post-employment benefit plan of the employees of either the reporting entity or an

entity related to the reporting entity
➢ 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 director (whether executive or otherwise) of
that entity." (PAS 24.9)

➢ Close family member is one who may be expected to influence, or be

influenced by, the person in his/her dealings with the reporting entity. It includes
the person's spouse, their children and their dependents.
The following are not related parties:
a. Two entities simply because they have one director or key management personnel in
common.
b. Two joint venturers simply because they are co-venturers in a joint venture.

c. Financers, trade unions, public utilities, and government agencies that do not control,
jointly control or significantly influence the reporting entity, simply by virtue of their
normal dealings with the entity, even though they may place some restrictions on the
entity or participate it its decision-makings.
d. A customer, supplier, or other business that the entity does significant transactions
with, simply because of economic dependence.

AN ENTITY AS A RELATED PARTY

An entity is related to a reporting entity if any of the following conditions applies (IAS
24.9). See also a very useful diagram that follows.

▪ The entity and the reporting entity are members of the same group. ▪ One
entity is an associate or joint venture of the other entity ▪ Both entities are
joint ventures of the same third party.
▪ One entity is a joint venture of a third entity and the other entity is an associate of
the third entity.
▪ The entity is a post-employment 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.
▪ The entity is controlled or jointly controlled by a person identified as related party
in previous section.
▪ A person having control or joint control of the reporting entity (or his close family
member) has significant influence over the entity in question or is a member of
the key management personnel of this entity (or of a parent of this entity).
▪ 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.
Illustration:

Mr. X is a director in A Co. and also in B Co.

Analysis: The related parties are A Co. and Mr. X and B Co. and Mr. X because Mr. X
is a key management personnel of these companies. A Co. and B Co. are not related
parties simply because they have an interlocking director.

DISCLOSURE

Relationships between parents and subsidiaries

A parent-subsidiary relationship is disclosed even if there have been no transactions
between them during the period.
A subsidiary discloses the name of its parent, and if different, the name of the ultimate
parent. If neither of these two prepares consolidated financial statements for public use,
the subsidiary discloses the name of the next most senior parent that does so.

KEY MANAGEMENT PERSONNEL COMPENSATION

An entity discloses the total key management personnel compensation broken down as

follows:
a. short-term employee benefits;

b. post-employment benefits;

c. other long-term benefits;

d. termination benefits; and

e. share-based payment.

RELATED PARTY TRANSACTIONS

A related party transaction is "a transfer of resources, services or obligations between

a reporting entity and a related party, regardless of whether a price is charged." (PAS
24.9)

Examples of transactions that are disclosed if they are with a related party:
a. purchases or sales of goods, services or other assets

b. leases

c. transfers of research and development

d. transfers under license agreements e. loans and other financing arrangements,

including equity contributions
f. provision of guarantees or collateral

g. commitments

h. settlement of liabilities by or on behalf of either party

i. participation by a parent or subsidiary in a defined benefit plan wherein risks are

shared

The following are disclosed when there are related party transactions during the periods
covered by the financial statements:
a. nature of the related party relationship

b. nature, terms and amount of the transaction balances and outstanding

c. doubtful debts recognized on the outstanding balances

Related party transactions and their outstanding balances are disclosed in an entity's
separate or individual financial statements. These, however, are eliminated in the
group's consolidated financial statements.
Disclosures that related party transactions were on arm's length basis are not made
unless this can be substantiated.

GOVERNMENT-RELATED ENTITIES

A government-related entity is "an entity that is controlled, jointly controlled or

significantly influenced by a government." (PAS 24.9)
A government-related entity discloses the following if there have been related party
transactions with the government:
a. name of the government and the nature of the relationship

b. nature and amount of each individually significant transaction

c. other transactions that are collectively significant but are individually

insignificant

PAS 27 SEPARATE FINANCIAL STATEMENTS

Introduction

PAS 27 prescribes the accounting and disclosure requirements for investments in

subsidiaries, associates and joint ventures when an entity prepares separate financial
statements.
PAS 27 does not mandate which entities should produce separate financial statements.
PAS 27 is applied when an entity chooses, or is required by law, to present separate
financial statements that comply with PFRSs.
SEPARATE FINANCIAL STATEMENTS
Separate financial statements are those presented in addition to:

a. consolidated financial statements; or

b. the financial statements of an entity with an investment in associate or joint venture

that is accounted for using equity method in accordance with PAS 28 Investments in
Associates and Joint Ventures.

The financial statements of an entity that does not have an investment in subsidiary,
associate or joint venturer are not separate financial statements.
Entities exempted from preparing consolidated financial statements present separate
financial statements as their only financial statements.

➢ Consolidated financial statements are "the financial statements of a group in

which the assets, liabilities, equity, income, expenses and cash flows of the parent
and its subsidiaries are presented as those of a single economic entity." (PAS 27.4)

PREPARATION OF SEPARATE FINANCIAL STATEMENTS

Separate financial statements are prepared in accordance with all applicable

PFRSs, except that investments in subsidiaries, associates or joint ventures are
accounted for either: a. at cost,

b. in accordance with PFRS 9 Financial Instruments, or

c. using the equity method under PAS 28 Investments in Associates and Joint
Ventures

The entity applies the same accounting for each investment category (i.e., subsidiaries,
associates, and joint ventures).
If the investments are measured at fair value through profit or loss in non-separate
financial statements, that same measurement is also used in the separate financial
statements.
Investments classified for as held for sale are accounted for in accordance with PFRS 5
Non-current Assets Held for Sale and Discontinued Operations.
DIVIDENDS

Dividends from a subsidiary, associate or joint venture are recognized in profit or loss
when the entity's right to receive the dividends is established, except when the
investment is accounted for using the equity method, in which case the dividends are
recognized as deduction to the carrying amount of the investment.

PAS 29 FINANCIAL REPORTING ON HYPERINFLATORY

ECONOMIES

INTRODUCTION

PAS 29 prescribes the restatement procedures for the financial statements of an entity
whose functional currency is the currency of a hyperinflationary economy.
Inflation is normally ignored in accounting due to the stable monetary unit
assumption. However, when inflation is very high (hyper), it can no longer be ignored.
This is because financial statements are stated in terms of money and when money
loses its purchasing power at a very high rate, the financial statements become
misleading. The financial statements therefore must be restated otherwise they are
useless.
Inflation refers to a general increase in prices and decrease in the purchasing power of
money.

PAS 29 does not prescribe an absolute rate at which hyperinflation is deemed to arise.
This is a matter of judgment. Instead, PAS 29 provides the following indicators which an
entity considers when determining the existence of hyperinflation:
a. the general population prefers to keep its wealth in non monetary assets or in a
relatively stable foreign currency. Amounts of local currency held are immediately
invested to maintain purchasing power;
 b. the general population regards monetary amounts not in terms of the local currency
but in terms of a relatively stable foreign currency. Prices may be quoted in that
currency:
c. sales and purchases on credit take place at prices that compensate for the expected
loss of purchasing power during the credit period, even if the period is short;
d. interest rates, wages and prices are linked to a price index; and

e. the cumulative inflation rate over three years is approaching, or exceeds, 100%.
(PAS 29.3)

CORE PRINCIPLE

The financial statements of an entity that reports in the currency of a hyperinflationary

economy, whether they are based on historical cost or current cost, shall be stated in
terms of the measuring unit current at the end of the reporting period. Comparative
figures for prior period(s) shall also be restated into the same current measuring unit.
PAS 29 prohibits the presentation of the required information as supplement to
unrestated financial statements. PAS 29 discourages the separate presentation of the
financial statements before restatement.

RESTATEMENT OF FINANCIAL STATEMENTS

Financial statements are restated by applying a general price index as follows:
Statement of Financial Position
a. Monetary items
b. Non-monetary items Measured
at cost
c. Non-monetary items measured at
fair value or NRV at the end of the
reporting period
- Not restated
- restated
- Not restated. However, if the
fair value or NRV was determined
at a date other than the end of the
reporting period, that fair value or
NRV is nonetheless restated, from
the date it was determined.

Statement of comprehensive income & Statement of cash flows

d. All items are restated.
The corresponding figures for prior period(s), whether monetary or nonmonetary, are all
restated.
The gain or loss on the net monetary position resulting from the restatements is
recognized in profit or loss.

Formula for restatement:

Historical cost × Current price index (index as of end of reporting period) ÷ Historical
price index* (index as of acquisition date)

"When it is impracticable to determine the historical price indices, such as for

transactions recurring very frequently, an entity may use the average price index for the
period.

Illustration:
Entity A operates in a hyperinflationary economy. Entity A's building has a carrying
amount of P1M on December 31, 20x2. The building was acquired on June 21, 20x0.
The general price indices are as follows:
June 21, 20x0 100
December 31, 20x1 150
Average-20x2 180
December 31, 20x2 200

➢ The building's carrying amount is restated as follows:

1M x 200 Current price index, Dec. 31, 20x2 ÷ 100 Historical price index, June 21,

20x0 = 2M restated amount to current measuring unit as of Dec. 31, 20x2

Assume that the 20x2 depreciation expense on the building is $200,000. The
depreciation is restated in the same manner as follows: (200K x 200/100) = 400K.
Assume further that the carrying amount of the building is 1.2M on December 31, 20x1.
This corresponding figure is restated also in the same manner as follows: (1.2M x
200/100) = 2.4M.

CONSOLIDATED FINANCIAL STATEMENTS

If any of the entities belonging to a group entity reports in a hyperinflationary economy,

the financial statements of that entity needs to be restated first before they are
consolidated in the group's financial statements.
If a foreign operation reports in a hyperinflationary economy, its financial statements are
also restated first under PAS 29 before they are translated in accordance with PAS 21.

DISCLOSURES
a. the fact that the financial statements, including corresponding figures, have been
restated for changes in the general purchasing power of the reporting currency.
b. whether the financial statements are based on historical cost or current cost.

c. the identity and level of the price index at the end of the reporting period and the
movements during the current and previous reporting period.

PAS 34 INTERIM FINANCIAL REPORTING

INTRODUCTION
PAS 34 prescribes the minimum content of an interim financial report and the
recognition and measurement principles in complete or condensed financial statements
for an interim period.
PAS 34 does not mandate which entities should produce interim financial reports. PAS
34 is applied when an entity chooses, or is required by the government or other
institution, to publish interim financial report that complies with PFRSs.
PAS 34, however, encourages publicly listed entities to provide at least a semi-
annual financial report for the first half of the year to be issued not later than 60 days
after the end of the interim period.

 Under the reportorial requirements of the Revised Securities Act in the

Philippines, the Securities and Exchange Commission (SEC) and the Philippine
Stock Exchange (PSE) require certain entities to provide quarterly financial
reports within 45 days after the end of each of the first three quarters. Similarly,
the SEC requires entities covered under the Rules of Commercial Papers and
Financing Act to file quarterly financial reports within 45 days after each quarter-
end.

Financial reports, whether annual or interim, are evaluated for conformity to the PFRSS
on their own. Non preparation of interim reports or non-compliance with PAS 34 does
not necessarily prevent the entity's annual financial statements from conforming to the
PFRS.

INTERIM FINANCIAL REPORT

An interim financial report is a financial report prepared for an interim period and
contains either:
a. A complete set of financial statements as described in PAS 1; or

b. A set of condensed financial statements as described in PAS 34.

➢ Interim period is "a financial reporting period shorter than a full financial year." (PAS
34.4)

An entity presenting an interim financial report has the option of applying either PAS 1
or PAS 34.
▪ The entity applies PAS 1 if it opts to provide a complete set of financial
statements in its interim financial report.
▪ The entity applies PAS 34 if it opts to provide a condensed set of financial
statements in its interim financial report.
PAS 1 Complete set of FS PAS 34 Condensed set of FS
1. Statement of financial position
2. Statement of profit or loss and other
comprehensive income
3. Statement of changes in equity
4. Statement of cash flows
5. Notes
(5.a) Comparative information
6. Additional statement of financial position
(required only when certain instances occur)
1. Condensed statement of financial
position
2. Condensed statement of profit or
loss and other comprehensive
income 3. Condensed statement of
changes in equity
4. Condensed statement of cash flows
5. Selected explanatory notes

An entity is not prohibited or discouraged from preparing a complete set of financial

statements (in accordance with PAS 1) for its interim financial reporting.
However, in view of timeliness and cost considerations and to avoid repetition of
information previously reported, an entity may be required or elect to provide less
information at interim dates as compared with its annual financial statements. In such
case, the entity applies PAS 34 to provide a set of condensed financial statements.
"Condensed" means the entity need only provide the minimum information required
under PAS 34.
At a minimum, condensed interim financial include each of the headings and subtotals
that were included in the entity's most recent annual financial statements and the
selected explanatory notes required by PAS 34. Additional line items or notes are
provided if their omission makes the condensed financial statements misleading.

SIGNIFICANT EVENTS AND TRANSACTIONS

Interim reports are intended to provide an update on the latest complete set of annual
financial statements. Hence, they focus on providing information on significant
events and transactions that have occurred since the latest annual period, rather
than duplicating previously reported information providing relatively or insignificant
updates on them.
Consequently, users of interim financial report are assumed to also have access to the
entity's latest annual financial report.
Examples of events and transactions for which disclosures would be required if they are
significant:
a. write-down of inventories and reversal thereof
 b. impairment losses and reversal thereof
c. reversal of provision for restructuring costs
d. acquisitions and disposals of PPE, including purchase commitments
e. litigation settlements
f. corrections of prior period errors
g. business or economic circumstances affecting the fair value of financial assets
and financial liabilities
h. unremedied loan default or breach of loan agreement

i. related party transactions

j. transfers between levels of the fair value hierarchy used in measuring the fair
value of financial instruments
k. changes in the classification of financial assets
l. changes in contingent liabilities or contingent assets (PAS 34.158)

OTHER DISCLOSURES

In addition to significant events and transactions, the following are also disclosed in the
interim financial report:
a. a statement that the same accounting policies were used in the interim financial
statements as those used in the latest annual financial statements. If there have been
changes, those changes are disclosed.
b. explanation of seasonality or cyclicality of interim operations

c. unusual items affecting the financial statement elements

d. changes in accounting estimates

e. issuances and settlements of debt and equity securities

f. dividends paid

g. segment information (if the entity is covered by PFRS 8)

h. events after the reporting period

i. changes in the composition of the entity, e.g., business combinations, obtaining or

losing control subsidiaries, restructurings, and discontinued operations
j. disclosures on the fair value of financial instruments

k. disclosures required by PFRS 12 when the entity becomes or ceases to be an

investment
entity
l. Disaggregation of revenue from contracts with customers as required by PFRS 15

• The entity presents basic and diluted earnings per share if the entity is
within the scope of PAS 33.
• The entity discloses its compliance with PFRSs if it has complied with PAS
34 and all the requirements of other PFRSs.

Periods for which interim financial statements are presented

The following illustrates the periods covered by interim financial statements, including
comparative information:
❖ Semi-annual interim financial reporting
For an entity that uses the calendar year as its accounting period, the following interim
financial statements will appear in its semi-annual interim financial report on June 30,
20x1:

❖ Quarterly interim financial reporting

For an entity that uses the calendar year, the following statements will appear in its third
quarter interim financial report on September 30, 20x1.
Notes:
• The comparative statement of financial position is the most recent annual
financial statement.
• For the other financial statements, the comparatives are presented on a
comparable year-to-date period.
• The interim financial statements are presented on a cumulative basis
(year-to-date). However, an additional statement of profit or loss and other
comprehensive income is presented that covers the current quarter only.

If an entity's business is highly seasonal, PAS 34 encourages disclosure of financial

information for the latest 12 months and comparative information for the prior 12-month
period in addition to the interim period financial statements above.
If an entity changes an accounting estimate in the final I interim period (e.g., 4th quarter)
but interim financial statements are not prepared for that period, the change in
accounting estimate is disclosed in the annual financial statements.

MATERIALITY
Materiality judgments on recognition, classification and disclosure of items in the interim
financial report are assessed in relation to the interim period financial data, and not
forecasted annual data. PAS 34 recognizes that interim measurements may rely on
estimates to a greater extent than measurements of annual financial data.

RECOGNITION AND MEASUREMENT Same accounting policies as annual

The same accounting policies are used in interim reports as those used in annual
reports, except for accounting policy changes made after the date of the most recent
annual financial statements that are to be reflected in the next annual financial
statements.

TWO VIEWS ON INTERIM REPORTING

1. Integral view - the interim period is considered as an integral part of the annual
accounting period. Thus, annual operating expenses are estimated and then allocated
to the benefitted interim periods based on forecasted annual activity levels. Subsequent
interim period financial statements are adjusted to reflect the effect of changes in
estimates in earlier interim periods of the same financial year.
2. Discrete view - the interim period is considered as a discrete ('stand-alone')
accounting period. The same expense recognition principles applied in annual reporting
are used in the interim period. No special interim accruals or deferrals are made.
Annual operating expenses are recognized in the interim period in which they are
incurred regardless of whether subsequent interim periods are benefitted.

Proponents of the integral view argue that the estimation and allocation procedures
for interim expenses are necessary to avoid fluctuations in period-to-period results that
might be misleading to financial statement users. The use of integral view arguably
increases the predictive value of interim reports by showing interim performance that is
indicative of what the annual performance would be.
Proponents of the discrete view argue that smoothing interim results for purposes of
forecasting annual performance may have undesirable effects. A significant change in
performance trend could be obscured if smoothing techniques implied by the integral
view approach were to be employed.
PAS 34 adopts a combination of the two views. PAS 34.29 recognizes that while the
requirement that same accounting policies shall be used in the interim period as those
used in the annual period suggests that the interim period is a stand-alone period
(discrete view), PAS 34.28 states that the frequency of the reporting (annual, half-
yearly, or quarterly) shall not affect the measurement of the annual results, which is on
a year-to-date basis; and therefore, the interim period is part of a larger financial year
(integral view).

PAS 34 provides the following accounting principles:

a. Losses from inventory write-downs, restructurings, or impairments in an interim
period are accounted for in the same way as in annual financial statements (i.e., losses
are recognized immediately in the interim period in which they arise).
If there are subsequent changes in estimates, the original estimate is adjusted by
accruing an additional loss or by reversing a previously recognized loss. Financial
statements in previous interim periods are not restated.
b. A cost that does not qualify as an asset in an interim period is not deferred either
to wait if it qualifies in the next period or to smooth earnings over the interim periods
within a financial year.
Likewise, a liability at the end of an interim period I must meet all the recognition criteria
at that date, just as it must at the end of an annual reporting period.
c.Income tax expenses in interim periods are based on the best estimate of the
weighted average annual income tax rate expected for the full financial year.

Items (a) and (b) above favor the discrete view while item (c) favors the integral view.
The recognition principles of assets, liabilities, income and expenses under the
Conceptual Framework are interim period in the same way as in the annual period.
Thus, items that do not qualify as assets, liabilities, income or expenses applied in the in
the annual period do not also qualify as such in the interim period.

MEASUREMENT
Measurements in the interim period are made on a year-to-date basis, so that the
frequency of reporting (annual, semi-annual, or quarterly) does not affect the
measurement of annual results.
Revenues received seasonally, cyclically, or occasionally
Revenues that are received seasonally, cyclically, or occasionally are not anticipated or
deferred in the interim period if anticipation or deferral is also not appropriate at the end
of the annual period.
Examples include: dividend revenue, royalties, and government grants. Such revenues
are recognized when they occur.

Costs incurred unevenly during the financial year

Costs that are incurred unevenly during a financial year are anticipated or deferred in
the interim period only if it is also appropriate to anticipate or defer them at the end of
the financial year.

PAS 37 PROVISIONS, CONTINGENT LIABILITIES AND

CONTINGENT ASSETS

Introduction
PAS 37 prescribes the accounting and disclosure requirements for provisions,
contingent liabilities and contingent assets to help users understand their nature, timing
and amount.
PAS 37 applies to the accounting for provisions, contingent liabilities and contingent
assets, except those arising from executory contracts, unless they are onerous, and
those that are covered by other PFRSs.
➢ Executory contracts are contracts that are not yet fully executed,
meaning, the parties thereto still have obligations to perform.
➢ Onerous means burdensome. A contract becomes when the cost of
fulfilling it exceeds the economic benefits expected to be derived from it.

For example, Entity A commits to purchase 1,000 units of inventory for $100 per unit
under a non-cancellable purchase commitment for future delivery. Generally, no liability
is recognized on the contract until the inventories are delivered. However, if the
inventories become obsolete before the delivery, such that the price declines to $20 per
unit, Entity A recognizes a loss of $80 per unit (100 committed price - P20 actual price).
In this case, PAS 37 applies because the contract became onerous.

PROVISIONS

A provision is "a liability of uncertain timing or amount." (PAS 37.10)

Provisions differ from other liabilities because of the uncertainty in the timing of their
settlement or the amount needed to settle them. Unlike other liabilities, provisions must
necessarily be estimated. Although some other liabilities are also estimated, their
uncertainty is generally much less compared to provisions.

Examples of provisions:

a. Warranty obligations

b. Estimated liabilities on pending lawsuits

c. Provisions for environmental damages

d. Provisions of decommissioning costs of an item of PPE

e. Obligations caused by an entity's policy to make refunds to customers

f. Obligations arising from guarantees

g. Provisions on onerous contracts (e.g., purchase commitment)

h. Provisions for restructuring costs

Provisions are presented in the statement of financial position separately from other
types of liabilities.
RECOGNITION
A provision is recognized when all of the following conditions are met:
a. The entity has a present obligation (legal or constructive) resulting from a past
event;
b. It is probable that an outflow of resources embodying economic benefits will be
required to settle the obligation; and
c. The amount of the obligation can be reliably estimated.
If any of the conditions is not met, no provision is recognized. (PAS 37.14)

PRESENT OBLIGATION
In rare cases where it is not clear whether there is a present obligation, an entity deems
a past event to give rise to a present obligation if available evidence shows that it is
more likely than not that a present obligation exists at the end of the reporting period.

PAST EVENT

A past event that creates a present obligation is called an obligating event. An

obligating event is one whereby the entity does not have any other recourse but to
settle an obligation. This is the case where:
a. the obligation is legally enforceable (legal obligation); or

b. the entity's actions (e.g., past practice or published policies) have created valid
expectations on others that the entity will discharge the obligation
(constructive obligation).

Financial statements deal with past or historical information. Therefore, no provision is

recognized for future operating costs. "The only liabilities recognized in an entity's
statement of financial position are those that exist at the end of the reporting period."
(PAS 37.18)
Only those obligations arising from past events existing independently of an entity's
future actions are recognized as provisions. Thus, possible outflows of resources
embodying economic benefits that the entity can avoid by changing its future actions
are not recognized as provision.
Although an obligation always involve another party to whom the obligation is owed
(i.e., obligee), it is not necessary that the identity of the obligee is known - indeed the
obligee may be the public at large.
For a constructive obligation to create a valid expectation on others, it is necessary
that the commitment must have been communicated to the parties concerned before
the end of the reporting period.
 PROBABLE OUTFLOW OF RESOURCES EMBODYING ECONOMIC BENEFITS
Probable means "more likely than not." Meaning, there is a greater chance that the
present obligation will cause settlement than not.

RELIABLE ESTIMATE OF THE OBLIGATION

Provisions necessarily need to be estimated. If a reliable estimate cannot be made, no
provision is recognized.

CONTINGENT LIABILITIES
In a general sense, all provisions are contingent because they are of uncertain timing or
amount. However, PAS 37 uses the term "contingent" to refer to those liabilities and
assets that are not recognized because they do not meet all of the recognition criteria.
A provision and a contingent liability are differentiated below:

Provision Contingent liability

➢ A liability of an uncertain timing or ➢ A possible obligation whose existence
amount that meets all of the following will be confirmed only by the occurrence or
conditions: non-occurrence of one or more uncertain
a. present obligation; future events not wholly within the control
b. probable outflow; and of the entity; or ➢ A present obligation but:
c. reliably estimated i. it is not probable that it will cause an
outflow in its settlement; or ii. its
amount cannot be reliably estimated.

Contingent liabilities are disclosed only, except when the possibility of an outflow of
resources embodying economic benefits is remote.

CONTINGENT ASSETS

Contingent assets are those that are not recognized because they do not meet all
of the asset recognition criteria (i.e., 'resource controlled arising from past events',
'probable inflow', and reliable estimation').
Contingent assets include possible inflows of economic benefits from unplanned or
unexpected events, such as claims that an entity is seeking through legal processes
where the outcome is uncertain (e.g., claims under tax disputes and disputed insurance
claims).
Contingent assets are disclosed only, if the inflow of economic benefits is probable.
They are not recognized because recognizing them may result to the recognition of
income that may never be realized.
However, when the realization of income is virtually certain (100% chance of
occurrence), the asset is not a contingent asset and therefore it is appropriate to
recognize it.

MEASUREMENT
Provisions are measured at the best estimate of the amount needed to settle them at
the end of the reporting period.
Making the estimate requires management's judgment, supplemented by experience
from similar transactions, and in some cases, reports from independent experts. The
estimate also considers events after the reporting period.
If the provision being measured involves a large population items, the obligation is
measured at its "expected value."
Expected value is computed by weighting all possible outcomes by their associated
probabilities.
If there is a continuous range of possible outcomes, and each point in that range is
as likely as any other, the mid-point of the range is used.
Estimates take into account risks and uncertainties. Thus, estimates may be increased
by a risk adjustment factor to provide an allowance for imprecision inherent in
estimates. This, however, does not mean that the entity can make excessive provisions
or can deliberately overstate liabilities.
If the effect of time value of money is material, the estimate of a provision is
discounted to its present value using a pre-tax discount rate. This is usually the case
for provisions for restoration and decommissioning costs where cash outflows occur
only after a relatively long period of time from the date of initial recognition.
Future events may affect the amount needed to settle an obligation. However, future
events are considered in estimating a provision only if there is objective evidence that
supports their anticipation. For example, the penalty for an environmental damage may
be affected by legislation. If a new law that will increase the amount of penalty is
expected to be enacted, that new law is anticipated only when it is virtually certain that
it will be enacted. Otherwise, it would not be appropriate to anticipate it.
Gains from the expected disposal of assets are not taken into account when measuring
a provision. Gains are recognized separately when the disposals occur.
If another party is expected to reimburse the settlement amount of a provision, a
reimbursement asset is recognized if it is virtually certain that the reimbursement will be
received. The reimbursement asset is presented in the statement of financial position
separately from the provision. However, in the statement of comprehensive income, the
expense related to the provision may be presented net of the reimbursement. The
amount recognized for the reimbursement should not exceed the amount of the
provision.
An example of an instance where a reimbursement asset may be recognized is when
the obligating event that caused the recognition of a provision is insured. The
reimbursement asset would be the amount that the entity can claim from the insurance
company.
RECORDING THE PROVISION
Provisions are normally recognized as a debit to expense (or loss) and a credit to an
estimated liability account. However, sometimes a provision forms part of the cost of an
asset. For example, provisions for restoration and decommissioning costs are
capitalized as part of the cost of a PPE.

CHANGES IN PROVISIONS

Provisions are reviewed at the end of each reporting period and adjusted to reflect the
current best estimate. Changes in provisions are accounted for prospectively by
accruing an additional amount or by reversing a previously recognized amount.
When the provision is discounted, the unwinding (amortization) of the related discount
which increases the carrying amount of the provision is recognized as interest expense.

USE OF PROVISIONS

A provision is used only for the expenditure it was originally intended for. Charging
expenditure against a provision that is intended for another purpose is inappropriate as
it would conceal the impact of two different events.

APPLICATION OF THE RECOGNITION AND MEASUREMENT RULES

FUTURE OPERATING LOSSES

No provision is recognized for future operating losses because they do not meet the
definition of a liability (i.e., 'arising from past events'). The expectation of future
operating losses may indicate that certain assets may be impaired. Those assets are
tested for impairment under PAS 36.

ONEROUS CONTRACTS
The provision recognized from an onerous contract reflects the least net cost of exiting
from the contract, which is the lower of the cost of fulfilling it and any compensation or
penalties arising from failure to fulfill it.
RESTRUCTURING
Restructuring is "a program that is planned and controlled by management, and
materially changes either:
a. The scope of a business undertaken by an entity; or

b. The manner in which that business is conducted." (PAS 37.10)

Examples:
a. Sale or termination of a line of business;

b. Closure of business locations in a country or region or the relocation of business

activities from one country or region to another;
c. Changes in management structure, for example, eliminating a layer of management;
and
d. Fundamental reorganizations that have a material effect on the nature and focus of
the entity's operations. (PAS 37.70)

An entity applies the general recognition criteria provided earlier when recognizing
provisions for restructuring costs. In addition, the entity considers the following:

Sale of operation
A legal obligation exists (and therefore a provision is recognized) only if, at the end of
reporting period, a binding sale agreement is obtained. This is because, until a binding
sale agreement is obtained, the entity can still change its mind and may withdraw its
plan to sell if it cannot find a purchaser under acceptable terms.
If the binding sale agreement is obtained only after the end of the reporting period, no
provision is recognized because no present obligation exists at the end of the
reporting period. This, however, may be disclosed as a non-adjusting event after the
reporting period.

Closure or Reorganization
A constructive obligation exists (and therefore a provision is recognized) only if at the
reporting date, the entity has created valid expectations from others that it will discharge
certain responsibilities. This would be the case if, at the end of the reporting period, both
the following conditions are met:
a. Detailed formal plan for the restructuring is adopted; and

b. The plan is announced to those affected by it.

A mere board decision to restructure is not enough. No provision is recognized if the

detailed plan is adopted or announced after the end of the reporting period. This may
also be disclosed as a non-adjusting event after reporting period.

Measurement of restructuring provision

A restructuring provision includes only the direct costs that are necessarily entailed with
the restructuring. It does not include costs that relate to the ongoing activities of the
entity or the future conduct of its business. A restructuring provision excludes the
following costs:
a. retraining or relocating continuing staff

b. marketing

c. investment in new systems and distribution networks (PAS 37.81)

DISCLOSURE

a. Reconciliation for each class of provision showing:

i. Beginning balance

ii. Additions (additional provisions recognized, unwinding of the discount, and

effect of a change in the discount rate)
iii. Deductions (amounts charged against the provision or reversed) iv.

Ending balance

b. Comparative information is not required.

C. For each class of provision, a brief description of the:

i. Nature ii. Timing

iii. Uncertainties iv.

Assumptions

v. Reimbursement

PFRS 1 FIRST-TIME ADOPTION OF PHILIPPINE FINANCIAL

REPORTING STANDARDS

Introduction
Prior to the full adoption of the IFRSs in 2005, the reporting standards used in the
Philippines were primarily based on US GAAP (then called 'SFASS' Statements of
Financial Accounting Standards). In 2005, these SFASS were superseded by PFRSs
(based on IFRSs). Reporting entities in the Philippines were mandated to transition from
their previous GAAP to PFRSs. On their transition to PFRSs in 2005, reporting entities
were required to apply PFRS 1.

The application of PFRS 1, however, is not confined only to the year 2005. Entities that
were previously exempted from applying the "full" PFRSs, such as Small and Medium-
sized Entities (SMEs) who have adopted the PFRS for SMEs and Micro entities who
have adopted Other Acceptable Basis of Accounting (OCBOA), are required to apply
PFRS 1 when they transition to the "full" PFRSs. Also, entities that are issuing general
purpose financial statements for the first time may need to apply PFRS 1.

"Fuil" PFRSS refer to the Standards that we are discussing in this book.

Objective
The objective of PFRS 1 is to ensure that an entity's First PFRS financial statements,
including interim financial reports covered thereon, contain high quality information that
is transparent to users, comparable, makes way for accounting in accordance with
PFRSs, and can be prepared with cost efficiency.
FIRST PFRS FINANCIAL STATEMENTS
First PFRS financial statements are "the first annual financial statements in which
an entity adopts PFRSs, by an explicit and unreserved statement of compliance with
PFRSs." (PFRS 1.3)
Financial statements prepared in accordance with PFRSs are considered the
entity's "First PFRS financial statements" if the previous financial statements:

a. were prepared in accordance with other reporting standards not consistent

with the PFRSs; or
b. did not contain an explicit and unreserved statement of compliance with
PFRSs; or
c. contained an explicit and unreserved statement of compliance with some,
but not all, PFRSs; or
d. were prepared using some, but not all, applicable PFRSs; or e. prepared
in accordance with PFRSs but were used for internal reporting purposes
only; or
e. did not contain a complete set of financial statements as required under
PAS 1 Presentation of Financial Statements. g. The entity did not present
financial statements in previous periods.

PFRS 1 is applied only once, that is, when the entity first adopts PFRSs. PFRS 1
does not apply when previous financial statements contained an explicit and unreserved
statement of compliance with PFRSs, even if the auditors' report has been qualified.
Also, PFRS 1 does not apply when an entity that has been applying the PFRSs
subsequently changes its accounting policy in accordance with PAS 8 or specific
transitional provisions of other standards.

An entity presenting its first PFRS financial statements is called a "first-time

adopter."

Illustration: Explicit and unreserved statement of compliance with PFRSs

An excerpt from a published financial statement of a first-time adopter is shown below:

Note 2. Basis of preparation

(a) Statement of compliance
The financial statements have been prepared in accordance with Philippine Financial
Reporting Standards (PFRSs). These are the Company's first financial statements
prepared in accordance with PFRSS and PFRS 1 First-time Adoption of Philippine
Financial Reporting Standards has been applied.

An explanation of how the transition to PFRSS has affected the reported financial
position, financial performance and cash flows of the Company is provided in Note 25.

Recognition and measurement

PFRS 1 requires an entity to prepare and present an opening PFRS statement of
financial position at the date of transition to PFRSs.
The date to transition to PFRSs is the beginning of the earliest period for which
an entity presents full comparative information under PFRSs in its first PFRS financial
statements. The application of the PFRSS starts on this date.

Accounting policies
The entity selects its accounting policies based on the latest versions of PFRSs
as at the current reporting date. The selected polices are then applied to all financial
statements presented together with the first PFRS financial statements (i.e., opening
statement of financial position, comparative financial statements, and current-year first
PFRS financial statements).

PFRS 1 prohibits the application of non-uniform accounting policies or earlier

versions of PFRSs to the comparative periods as these undermine comparability. The
latest standards provide the most up-to-date requirements and therefore provide the
most suitable starting point for the application of the PFRSs.
Early application of PFRSs that have not yet become effective as of the current
reporting period is permitted, but not required.

Illustration:
ABC Co. uses a calendar year accounting period. In 20x3, ABC Co. decides to adopt
the PFRSS for the first time. ABC Co. reports one-year comparative information.

Requirements:
a. What is the date of transition to PFRSs?
b. What is the date of the opening PFRS statement of financial position?
c. What financial statements shall be prepared on December 31, 20x3?
d. What if ABC Co. reports two-year comparative information, what is the date of
transition to PFRSs?
Answers:

Requirement (a): The date of transition is January 1, 20x2, the beginning of the earliest
period for which ABC Co. presents full comparative information under PFRSs in its first
PFRS financial statements.

Requirement (b): The date of the opening PFRS statement of financial position is
January 1, 20x2.

Requirement (c): ABC Co. shall prepare the following financial statements:

1. Statement of financial position as of January 1, 20x2 (opening)

2. Complete set of financial statements dated December 31, 20x2 (comparative)
3. Complete set of financial statements dated December 31, 20x3 (current-year first
PFRS financial statements)

ABC Co. shall apply uniform accounting policies based on the latest version of PFRSs
on December 31, 20x3 to all of the financial statements listed above.

Requirement (d): January 1, 20x1- see discussion in requirement (a) above.

RETROSPECTIVE APPLICATION
In general (but subject to some exceptions which will be discussed momentarily), PFRS
1 requires retrospective application of the accounting policies selected by the first-time
adopter.

Retrospective application means as if PFRSs have been used all along. This
application requires restating assets and liabilities in the opening statement of financial
position in order to conform to PFRSs. The resulting adjustments are recognized
directly in retained earnings (or other category of equity, if appropriate).
PFRS 1 requires an entity to do the following in its opening PFRS statement of
financial position:

a. Recognize all assets and liabilities whose recognition is required by PFRS$;

b. Not recognize items as assets or liabilities if PFRSs do not permit such recognition;
c. Reclassify items recognized under previous GAAP that have different classifications
under PFRSs; and
d. Apply PFRSs in measuring all recognized assets and liabilities.
(PFRS 1.10)
 PFRS 1 clarifies that the transitional provisions in other PFRSS apply only to
entities that already use PFRSs. First-time adopters should not apply these, except in
certain cases specified under PFRS 1. In general, first-time adopters shall apply the
transitional provisions of PFRS 1.

Illustration 1: Restatement of Opening SFP

ABC Co. is adopting the PFRSS for the first time. ABC's financial statements prepared
under previous GAAP included the items listed below. You are to state the accounting
treatments for these items in ABC's opening statement of financial position.

a. Significant losses from robbery have been deferred pending recovery of losses from
the insurance company.

 Accounting:
PFRS principle
Impairment of assets and related
compensation from third party are
separate economic events. Hence,
they are accounted for separately
under PFRSs.
Application
 Derecognize the deferred losses
that were recognized as assets
and charge them to retained
earnings.
 Recognize the compensation
from the insurance company in
profit or loss when it becomes
receivable.

b. ABC received deposits for future subscription of its own shares from investors. ABC
classified the deposits as equity. The deposits are refundable in case of failure or delay
by ABC Co. to obtain authorization for increased capitalization from the SEC. ABC Co.
has not yet filed amended articles of incorporation to reflect the planned increase in
capitalization.

 Accounting:
PFRS principle Application
If the deposits are repayable in cash at  Reclassify the deposits from
any time prior to the approval of the equity to liability.
entity's application for increase in
capitalization, the deposits are
classified as liability. In the absence of
such provision, the deposits are
 classified as equity, i.e., as contributed
capital.

c. ABC declared dividends and classified them as liability. However, the dividends are
subject to final approval by a regulatory agency. ABC received the approval two months
after the date of transition.

 Accounting:
PFRS principle
Liability for dividends is recognized
when the dividends are appropriately
authorized and is no longer at the
discretion of the entity.
Dividends declared after the reporting
period are non-adjusting events.
Application
 Derecognize the dividends
payable from the opening
statement of financial position
and revert it to retained
earnings.

d. Organization costs have been capitalized and are being amortized over a period of 5
years.

 Accounting:
PFRS principle Application
PAS 38 prohibits the recognition of  Derecognize the organization
organization costs as assets. costs and charge them to
retained earnings.

e. Redeemable preference shares issued are classified as equity under the previous
GAAP.

 Accounting:
PFRS principle
Preference shares with mandatory
redemption are classified as debt
instruments (i.e., liability).
Application
 Reclassify the redeemable
preference shares to liability.
f. Deferred taxes have been discounted to their present values under the previous
GAAP.

 Accounting:
PFRS principle Application
PAS 12 prohibits the discounting of  Restate the deferred taxes to
deferred taxes. their undiscounted amounts.

Illustration 2: Restatement of Opening SFP

ABC Co. is adopting the PFRSS for the first time. The following information has been
gathered:

a. Derivative assets and liabilities were not recognized because they are not accounted
for under the previous GAAP.

 Accounting:
PFRS principle
PFRS requires the recognition of
derivative assets and liabilities.
Application
Recognize the derivative assets and
liabilities, measured at their fair values
on the date of transition.

b. ABC Co. has obtained a right to charge users of public infrastructure under a service
concession arrangement with the government. This transaction is not accounted for
under ABC's previous GAAP.

 Accounting:
PFRS principle
The 'operator' in a service concession
arrangement recognizes an intangible
asset if the 'operator has a contractual
right to charge users of the public
services.
Application
 Recognize an intangible asset
for the license obtained from the
government, unless
impracticable (see discussion on
exceptions below).
c. Research and development costs incurred in developing an intangible asset have
been capitalized under the previous GAAP and being amortized over a period of 5
years.

 Accounting:
PFRS principle Application
R&D costs are generally expensed  Derecognize the carrying
when incurred. However, development amount of the R&D costs and
costs may be capitalized in limited charge it to retained earnings.
cases where all of the capitalization
criteria under PAS 38 Intangible Assets
are met.

d. Land which was sold a few days after the date of transition to PFRSs was classified
as current asset. This treatment is permitted under the previous GAAP.

 Accounting:
PFRS principle Application
Noncurrent assets are classified as  Reclassify the land back to
current only when all of the criteria noncurrent assets.
under PFRS 5 Non Current Assets
Held for Sale and Discontinued
Operations are met of the end of the
reporting period. If the criteria are met
after the end of the reporting period, it
is treated a s a non-adjusting event.

e. ABC Co. operates in a geographical area frequently struck by typhoons. Losses on

typhoons are recurring every year. ABC believes that such losses are probable and can
be measured reliably. Accordingly, ABC recognized a provision for losses on future
typhoons.

 Accounting:
PFRS principle Application
A liability is recognized if it is a "present  Derecognize the provision
obligation arising from past events" and because it does not meet the
 meets the recognition criteria of definition of a liability.
"probable" and "measured reliably."

f. Warranty obligation has not been recognized because the previous GAAP requires
recognition of warranty only if there is legal obligation. Although, ABC Co. is not
contractually obliged to provide warranty, it has a past practice of honoring warranty
claims of customers. Warranty costs are charged as expenses when the warranty
services are rendered.

 Accounting:
PFRS principle Application
Liabilities arise from obligating events,  Recognize a liability based on
which are either: the concept of "constructive
1. Legal obligation (i.e., law, contracts, obligation."
or other operation of law); or

2. Constructive obligation (i.e., past

practice that creates valid expectations
from that entity will settle an
obligation).

EXCEPTIONS TO THE REQUIREMENTS OF PFRS 1

PFRS 1 grants certain exemptions from compliance with the retrospective application"
requirement when the cost of compliance exceeds the expected benefits.
Also, PFRS 1 prohibits retrospective application in cases where retrospective
application requires management judgments about past conditions after the outcome of
a particular transaction is already known.

For example, estimates as at the date of transition made under the previous
GAAP are not changed unless there are differences in accounting policies or the
previous estimates were erroneous. Information received after the date of transition
about the previous estimates is treated as non-adjusting event. Any resulting change in
estimate is accounted for prospectively in profit or loss.
Illustration: Estimates as at the date of transition

Fact pattern
ABC Co. uses a calendar year accounting period. In 20x3, ABC Co. decides to adopt
the PFRSS for the first time. ABC Co. reports one-year comparative information.

Case 1: Consistent estimate ABC's statement of financial position as of January 1, 20x2

(prepared under previous GAAP) included an allowance for bad debts computed using
the "aging of accounts receivable" method.

Question: Does ABC Co. need to revise its previous estimate of bad debts as of
January 1, 20x2 (date of transition) on December 31, 20x3 (end of first PFRS reporting
period)?

Answer: No. The "aging of accounts receivable" method is also acceptable under
PFRSs. ABC Co. need not revise its previous estimate.

Case #2: Difference in accounting policies ABC's statement of financial position as of

January 1, 20x21 (prepared under previous GAAP) did not include an allowance for bad
debts. The "direct write-off" method had been used because it was allowed under the
previous GAAP.

Question: Is ABC Co. required to provide an allowance for debts as of January 1, 20x2
(date of transition) on December 31, 20x3 (end of first PFRS reporting period)?

Answer: Yes. PFRSs require the use of the accrual basis of accounting and the "direct
write-off" is not consistent with this concept. ABC shall estimate the uncollectible
accounts as of January 1, 20x2 and establish an allowance account. Bad debts
recognized in years 20x2 and 20x3 under the previous GAAP shall be adjusted
prospectively in profit or loss.

The same accounting treatment shall also be made if the previous estimate is
clearly erroneous.

Case #3: Change in accounting estimate ABC's statement of financial position as of

January 1, 20x2 (prepared under previous GAAP) included an allowance for bad debts
computed using the "percentage of accounts receivable" method based on a 5%
allowance rate. A review of the events that occurred in 20x2 revealed that significant
amounts of accounts receivable have been written-off. The rate that should have been
used is 10% rather than 5%. ABC Co. could not have foreseen this event when it made
its previous estimate.

Question: Does ABC Co. need to revise its previous estimate of bad debts as of
January 1, 20x2 (date of transition) on December 31, 20x3 (end of first PFRS reporting
period)?

Answer: No. The change in accounting estimate shall be accounted for prospectively.
The effects of the increase in the rate shall be reflected in profit or loss in 20x2 and
20x3.

OTHER EXCEPTIONS
PFRS 1 provides numerous other exemptions from retrospective application. Some of
those exemptions are briefly summarized below:

1. Derecognition of financial instruments. A first-time adopter may not recognize

financial instruments that has already derecognized under its previous GAAP prior to
the date of transition.

2. Hedge accounting. A first-time adopter is required to do the following at the date of

transition to PFRS:
i. measure all derivatives at fair value; and
ii. eliminate all deferred losses and gains on derivatives that were reported under its
previous GAAP.

3. Business combinations. A first-time adopter is exempted from applying PFRS 3

Business Combinations retrospectively to business combinations that occurred prior to
the date of transition to PFRSs. However, if it elects to restate any business
combination to comply with PFRS 3, it shall also restate all subsequent business
combinations.
For example, a first-time adopter may apply PFRS 3 prospectively from January
1, 20x2 (date of transition). If, I however, the first-time adopter elects to restate a
business combination that occurred on April 1, 20x1, it shall also restate all business
combinations that occurred between April 1, 20x1 and January 1, 20x2.

4. Fair value or Revaluation amount as deemed cost. An entity adopting the cost
model for its (a) property, plant and equipment, (b) investment property, or (c) intangible
assets is permitted to measure those assets at the date of transition to PFRSS at fair
value and use that fair value as their deemed cost at that date.
 Alternatively, the entity may elect to use a revaluation amount determined under
its previous GAAP as the deemed cost at the date of revaluation, if the revaluation is
comparable to (a) fair value or (b) cost or depreciated cost in accordance with PFRSs,
adjusted to reflect, for example, changes in a general or specific price index.

5. Cumulative translation differences. A first-time adopter is permitted to zero-out any

cumulative translation differences recognized in equity under the previous GAAP.

6. Compound financial instruments. A first-time adopter need not separate the two
components of a compound financial instrument (i.e., liability and equity components) if
the liability component is no longer outstanding at the date of transition to PFRSs.

PRESENTATION AND DISCLOSURE

 The first PFRS financial statements shall include at least one year comparative
information.
 If the entity presents non-PFRS comparative information and historical
summaries for periods before the date of transition (e.g. summary of income and
expenses earned in the previous three years), it need not restate those
summaries to PFRS. However, it shall label them as being prepared in
accordance with the previous GAAP and shall disclose the nature of the main
adjustments that would make those summaries comply with PFRSs.
 The entity shall explain how the transition from previous GAAP to PFRSS
affected its financial position, financial performance and cash flows. This
includes:

a. Reconciliations of equity reported under previous GAAP to equity under

PFRSs both (a) at the date of transition to PFRSS and (b) the end of the last
annual period reported under the previous GAAP.
For example, for an entity adopting the PFRSS for the first time in its
December 31, 20x3 financial statements, the reconciliations would be as of
January 1, 20x2 (date of transition) and December 31, 20x2 (end of last annual
period reported under the previous GAAP).

b. Reconciliation of total comprehensive income for the last annual period

reported under the previous GAAP to total comprehensive income under PFRSs
for the same period. Using the example above, this reconciliation would be for
the period ended December 31, 20x2.
 c. Disclosure of impairment losses and reversals of impairment losses
recognized when the opening statement of financial position was prepared.

d. Disclosures of errors discovered in the course of transition to PFRSs.

e. Material adjustments made to restate the financial statements to PFRSs.

f. Appropriate explanations if the entity has elected to apply any of the

exemptions permitted under PFRS 1.

Summary:
 First PFRS financial statements are the first annual financial statements in which
an entity adopts PFRSs by an explicit and unreserved statement of compliance
with PFRSs.
 The first PFRS financial statements include (1) at least one-year comparative
information and (2) an opening PFRS statement of financial position at the date
of transition to PFRSs.
 The date to transition to PFRSs is the beginning of the earliest period for which
an entity presents full comparative information under PFRSs in its first PFRS
financial statements. The application of the PFRSS starts on this date.
 The first-time adopter selects accounting policies from the latest versions of
PFRSs and applies them to all financial statements presented together with the
first PFRS financial statements.
 PFRS 1 requires the retrospective application of the accounting policies chosen.
However, PFRS 1 grants certain exemptions from retrospective application if (a)
the cost exceeds the benefits or (b) retrospective application requires
management judgments about past conditions after the outcome of a particular
transaction is already known.
 Estimates as at the date of transition made under the previous GAAP are
deemed consistent with PFRSs, unless there are differences in accounting
policies or errors. Changes in estimates are accounted for prospectively as non-
adjusting events after the reporting period.
 The first-time adopter shall explain how the transition to PFRSS affected its
financial statements by providing reconciliations of equity and comprehensive
income and providing other disclosures that are relevant to users in
understanding the impact of the PFRSs to the entity's financial statements.
 PFRS 2 SHARE BASED PAYMENT

Introduction
A corporation may issue its own shares in exchange for noncash consideration, such
as noncash assets or services. However, the Corporation Code of the Philippines
prohibits the issuance of shares in exchange for promissory notes or future services.
Meaning, the consideration must be received first, if in the form of services, the
services must have been rendered first, before shares are issued. Furthermore, the
value of the consideration received must not be less than the par value or issued
value of the shares. Transactions involving the issuance of shares in exchange for
noncash consideration are accounted for under PFRS 2.

Share-based payment transactions

Share-based payment transaction is a transaction in which the entity acquires goods
or services and pays for them by issuing its own equity instruments or cash based on
the value of its own equity instruments. A share-based payment transaction can be:

1. Equity-settled share-based payment transaction - one in which the entity

receives goods or services and pays for them by issuing its shares of stocks or share
options; or

2. Cash-settled share-based payment transaction - one in which the entity

receives goods or services and incurs an obligation to pay cash at an amount that is
based on the fair value of its own equity instruments; or

3. Choice between equity-settled and cash-settled - one in which the entity

receives goods or services and either the entity or the counterparty is given a choice
of settlement in the form of equity instruments or cash based on the fair value of
equity instruments.

Equity instrument is "a contract that evidences a residual interest in the assets of
an entity after deducting all of its liabilities."
PFRS 2 applies to all entities, including subsidiaries using their parent's or fellow
subsidiary's equity instruments as consideration for goods or services, and to all
share-based payment arrangements except the following:

a. Transactions with owners (including employees who are also shareholders) acting
in their capacity as owners, e.g., issuance of dividends, granting of stock rights in
relation to an owner's preemptive right, and treasury share transactions.
 b. Business combinations (PFRS 3 Business Combinations).

c. Issuance of shares as settlement of forward contracts, futures, and other derivative

instruments (PAS 32 and PFRS 9 Financial instruments.

RECOGNITION
Goods or services acquired in share-based payment transactions are recognized when
the goods are received or as the services are received. Goods or services received that
do not qualify as assets are recognized as expenses.

The entity recognizes:

a. a corresponding increase in equity if the goods or services are received in an

equity-settled share-based payment transaction, or
b. a liability if the goods or services are acquired in a cash-settled share-based
payment transaction.

Equity-settled share-based payment transactions

Goods or services received from equity-settled share-based payment transactions with
non-employees are measured at the fair value of the goods or services received, or if
this is not determinable, at the fair value of the equity instruments granted.

For transactions with employees and others providing similar services, the fair
value of the services received is often not possible to estimate reliably. Accordingly,
PFRS 2 requires those services to be measured at the fair value of the equity
instruments granted, or if this is not determinable, at the intrinsic value of the entity's
shares of stocks.

Equity-settled share-based payment transaction with:

Non-employees Employees and Others providing
similar services
Order of priority in measurement: Order of priority in measurement:
1. Fair value of goods or services received 1. Fair value of equity instruments granted
2. Fair value of equity instruments granted 2. Intrinsic value
  Employees and others providing similar services refer to "individuals who
render personal services to the entity and either

a. The individuals are regarded as employees for legal or tax purposes,

b. The individuals work for the entity under its direction in the same way as
individuals who are regarded as employees for legal or tax purposes, or
c. The services rendered are similar to those rendered by employees."

 Equity instrument granted is "the right (conditional or unconditional) to an

equity instrument of the entity conferred by the entity on another party under a
share-based payment arrangement."

 Fair value is measured at the measurement date.

a. For transactions with non-employees, the measurement date is the date

when the entity receives the goods or services.
b. For transactions with employees and others providing similar services,
the measurement date is the grant date.

 Grant date is the date at which the entity and the counterparty agree to, and
have shared understanding of the terms and conditions of, a share-based
payment arrangement. If the agreement is subject to further approval (e.g., by
shareholders), grant date is the date when that approval is obtained.

 Intrinsic value is the difference between the fair value of the shares which the
counterparty has the right to subscribe or receive and the subscription price (if
any) that the counterparty is required to pay. For example, a share option with
fair value of P50 and an exercise price of 30 has an intrinsic value of P20 (i.e.,
P50-P30).

Illustration:
Entity A agrees to issue 1,000 of its shares of stocks as consideration for services that it
has received.

Case 1: Transaction with Non-employee

The counterparty is a non-employee. The fair value of the services received is $50,000
while the fair value of the shares is 40 per share.
Accounting: The services are measured at $50,000, the fair value of the services
received. If this amount cannot be determined reliably, the services will be measured by
reference to the fair value of the shares or 40,000 (P40 x 1,000 sh.).

Case 2: Transaction with Employee

The counterparty is an employee. The fair value of the shares is 40 per share.

Accounting: The services are measured at $40,000, the fair value of the equity
instruments granted. If this amount cannot be determined reliably, the services will be
measured at the intrinsic value. Assuming the subscription price is 30 per share, the
intrinsic value is $10,000 [(P40-P30) x 1,000 shares].

SHARE-BASED COMPENSATION PLANS

Share-based compensation plan is an arrangement whereby, in exchange for services,

an employee is compensated in the form of (or based on) the entity's equity instrument.
Examples of share based compensation:
a. Employee share options (equity-settled)
b. Employee share appreciation rights (cash settled)
c. Compensation plans with a choice of settlement between (a) and (b) above

Share-based compensations are given to key employees as bonuses or additional

compensation. The benefits of a share-based compensation to the employer may
include a possible reduction in employee turnover because employees will have to
remain in the entity's employ during the service period in order to exercise the equity
instrument granted. Employees will also be more motivated in contributing to the
achievement of the entity's goals because they are given an opportunity to become
owners of the entity.

EMPLOYEE SHARE OPTION PLANS

Share option is a "contract that gives the holder the right, but not the obligation, to
subscribe to the entity's shares at a fixed or determinable price for a specified period of
time." (PFRS 2.Appx.A)
Some share options given to employees do not require any subscription price,
meaning the shares will be issued solely in exchange for employee services.
 MEASUREMENT OF COMPENSATION

Employee share option plans are equity-settled share-based payment transactions with
employees. Accordingly, the services received are measured using the following order
or priority:
1. Fair value of equity instruments granted at grant date
2. Intrinsic value

The compensation expense (salaries expense) on the employee share option

plan is recognized as follows:
a. If the share options granted vest immediately, meaning the employee is
entitled to the shares without the need to satisfy any condition, salaries
expense is recognized in full, with a corresponding increase in equity, at
grant date.
b. If the share options granted do not vest until the employee completes a
specified period of service, the entity recognizes salaries expense as the
employee renders service over the vesting period.

In the absence of evidence to the contrary, it is presumed that share options vest
immediately.

Illustration:

On January 1, 20x1, Entity A grants 10,000 share options to its key employees. The
share options entitle the employees to purchase Entity A's shares at a subscription price
of 110 per share. Entity A's shares have a par value 100 per share and a fair value on
grant date of 120 per share. The share options have fair value of 15 per share option.

Case 1: Share options vest immediately

If the share options vest immediately, Entity A will recognize salaries expense of
P150,000 (10,000 share options x P15 fair value per share option) on January 1, 20x1.

Case 2: Share options do not vest immediately

If the share options vest in 3 years, Entity A recognizes salaries expense over the 3-
year vesting period as follows:

Dec. 31, 20x1 Total share options expected to vest 10,000

Multiply by: Fair value per share option at grant date 15
Fair value of share options at grant date 150,000
 Multiply by: Vesting pd. passed over Total vesting period 1 yr. /3 yrs.
Cumulative salaries expense to date 50,000
Less: Salaries expense recognized in previous periods -
Salaries expense-20x1 50,000

Dec. 31, 20x2 Total share options expected to vest 10,000

Multiply by: Fair value per share option at grant date 15
Fair value of share options at grant date 150,000
Multiply by: Vesting pd. passed over Total vesting period 2 yrs. /3 yrs.
Cumulative salaries expense to date 100,000
Less: Salaries expense recognized in previous periods (50,000)
Salaries expense-20x2 50,000

Dec. 31, 20x2 Total share options expected to vest 10,000

Multiply by: Fair value per share option at grant date 15
Fair value of share options at grant date 150,000
Multiply by: Vesting pd. passed over Total vesting period 3 yrs. /3 yrs.
Cumulative salaries expense to date 150,000
Less: Salaries expense recognized in previous periods (100,000)
Salaries expense-20x3 50,000

Notice that no salaries expense is recognized on January 1, 2x (grant date)

because the employees have not yet rendered service. Expenses are recognized at the
end of each year over the vesting period (i.e., every December 31) after the employees
have rendered services for the year

Summary of solution: Date

Date Salaries Expense
Jan. 1, 20x1
Dec. 31, 20x1 (10,000 x 15 x 1/3) 50,000
Dec. 31, 20x2 (10,000 x 15 x 2/3) -50,000 50,000
Dec. 31, 20x3 (10,000 x 15 x 3/3) -50,000 - 50,000 50,000

Changes in service condition

Service condition means, to be entitled to receive or subscribe to the shares embodied
in the share options, the employee needs to remain in the entity's employ for a specified
period of time.
Adjustments for employees leaving the entity's employ before the share options
vest are accounted for prospectively. Salaries expense recognized in previous periods
are not restated.

Illustration:
On January 1, 20x1, Entity A grants 100 share options to each of its 100 key employees
conditional upon each employee remaining in Entity A's employ over the next 3 years.
The fair value of each share option is P15.

On the basis of a weighted average probability, Entity A estimates on January 1,

20x1 that about 20 employees (i.e., 20% or 20 out of the 100 employees) will leave
during the three-year period and therefore forfeit their rights to the share options.
During 20x1, 7 employees left. Entity A revises its estimate to a total of 25%
employee departure over the vesting period.
During 20x2, 9 employees left. Entity A revises its estimate to a total of 28%
employee departure over the vesting period.
During 20x3, 8 employees left. Therefore, the actual employee departure over
the past three years is 24% [(7+9+8)+100].

 Entity A recognizes salaries expense over the vesting period as follows:

Date Salaries Expense

Jan. 1, 20x1
Dec. 31, 20x1 (10,000 x 75%) x 15 x 1/3 37,500
Dec. 31, 20x2 [(10,000 x 72%) x P15 x 2/3] -37,500 34,500
Dec. 31, 20x3 [(10,000 x 76%) x 15 x 3/3] -37,500-34,500 42,000

a) 100 employees x 100 share options = 10,000 total share options granted
b) 100%-25% estimate of total employee departure -75%

Notes:
 The initial estimate of 20% on January 1, 20x1 is ignored because salaries
expense are recognized at year-end.
  On the vesting date (Dec. 31, 20x3), the actual employee departures are used in
computing for salaries expense.
 The total salaries expense recognized over the vesting period equals the grant
date fair value of the share options that have actually vested. This amount is only
allocated over the vesting period. Analyze the reconciliation below:
o 10,000 x 76% = 7,600 share options that have actually vested x P15-
114,000 total salaries expense;
o 37,500+ 34,500+ 42,000= 114,000 total salaries expense

Cash-settled share-based payment transactions

A cash-settled share based payment transaction is one whereby an entity acquires
goods or services and incurs an obligation to pay cash at an amount that is based on
the fair value of equity instruments.

The goods or services received, and the related liability, are measured at the fair
value of the liability.
At the end of each reporting period and even on settlement date, the liability is
remeasured to fair value. Changes in fair value are recognized in profit or loss.
The most common form of a cash-settled share-based payment transaction is
share appreciation rights (SARs) granted to an employee.

Employee share appreciation rights (SARs)

A share appreciation right is a form of compensation given to an employee whereby the
employee is entitled to future cash payment (rather than equity instrument), based on
the increase in the entity's share price from a specified level over a specified period of
time.
Another form of a share appreciation right is when an employee is granted a right
to receive future cash payment by a grant to a right to shares that are redeemable,
either mandatorily (e.g., upon cessation of employment) or at the employee's option.

Measurement of compensation
The liability for the future cash payment on share appreciation rights is measured,
initially and at the end of each reporting period until settled, at the fair value of the share
appreciation rights. Changes in fair value are recognized in profit or loss.

The fair value of the share appreciation rights is derived by applying an option
pricing model, taking into account the terms and conditions on which the share
appreciation rights were granted, and the extent to which the employees have rendered
service to date.

The compensation expense (salaries expense) on the SARS is recognized

similar to employee share options, that is, if the SARS vest immediately, salaries
expense is recognized in full, with a corresponding increase in liability, at grant date; if
the SARS do not vest immediately, salaries expense is recognized over the vesting
period as the employee renders service.

Illustration: Share appreciation rights

On January 1, 20x1, Entity A grants 1,000 share appreciation rights (SARS) to
employees with the condition that the employees remain in service within the next 3
years. Information on the SARS is shown below:

Date No. of SARS expected to vest Fair value of each SAR

Jan. 1, 20x1 1,000 10
Dec. 31, 20x1 900 12
Dec. 31, 20x2 800 15
Dec. 31, 20x3 750 16

 Entity A recognizes salaries expense over the vesting period as follows:

Date Salaries Expense

Jan. 1, 20x1
Dec. 31, 20x1 900 x 12 x 1/3) 3,600
Dec. 31, 20x2 (800 x 15 x 2/3)-3,600 4,400
Dec. 31, 20x3 (750x P16 x 3/3)-3,600-4,400 4,000

Remember the following:

Employee share option plans
Share options are not remeasured.
Expenses recognized over the vesting
period are based on the fair value of the
share options at grant date.
Settled through the issuance of equity
instruments.
Employee share appreciation rights
(SARs)
SARs are remeasured at each year-end
and on settlement date. Changes in fair
value are recognized in profit or loss
Settled through payment in cash.
Choice between equity-settled and cash-settled
A share-based payment transaction that can be settled either through equity instrument
or cash is accounted for depending on which party is given the right of choice of
settlement:

a) The counterparty has the right of choice of settlement; or

b) The entity has the right of choice of settlement

Counterparty has the right of choice

If the counterparty has the right to choose settlement between cash (or other assets) or
equity instruments, the entity has granted a compound instrument.

A compound instrument is one which includes both a debt component (e.g., the
counterparty's right to demand payment in cash) and an equity component (i.e., the
counterparty's right to demand settlement in equity instruments rather than in cash).
As discussed earlier, the accounting for a share-based payment transaction
depends on whether the counterparty is a non-employee or an employee or others
providing similar services.

Transactions with non-employees

For transactions with non-employees, the equity component is computed as the
difference between (a) the fair value of goods or services received and (b) the fair value
of the debt component at the date the goods or services are received.

 The computation resembles the basic accounting equation:

"Assets - Liabilities - Equity."

For example, if the goods or services acquired from a non employee have a fair
value of P100 (asset) while the cash alternative has a fair value of P80 (liability), the
equity component is P20.

Transactions with employees

For transactions with employees and others providing similar services, the entity
measures the fair value of the compound instrument and its components as follows:

a. If the fair value of one settlement alternative is the same as the other, the fair
value of the equity component is zero, and hence the fair value of the compound
financial instrument is the same as the fair value of the debt component.
b. If the fair values of the settlement alternatives differ, the fair value of the equity
component will be greater than zero, in which case, the fair value of the
compound financial instrument will be greater than the fair value of the debt
component.

Each component of the compound instrument is accounted for separately, similar to

a purely equity-settled or a purely cash-settle share-based payment transaction.
Meaning,
a. the value assigned to the equity alternative on grant date (if any) is
recognized as salaries expense and an increase in equity over the vesting
period; and
b. the value assigned to the cash alternative is recognized as salaries expense,
and a liability, that is remeasured at each year-end and on settlement, as the
services are received. Changes in fair values are recognized in profit or loss.

Settlement
On settlement date, the liability component is remeasured to fair value. If the entity
settles the transaction in the form of:

a. Equity instruments - the liability is transferred directly to equity as consideration

for the issuance of the shares.
b. Cash - the cash payment is applied as settlement of the liability.

The previously recognized equity component remains within equity, regardless of the
settlement option chosen. However, a transfer within equity may be made. For example,
by transferring any balance in the "Share premium - share options outstanding" account
to the "Share premium" general account

Entity has the right of choice

If the entity has the right to choose settlement between cash (or other assets) or equity
instruments, the entity has not granted a compound instrument.
 Accordingly, the entity accounts for the transaction as either equity-settled or
cash-settled share-based payment transaction, depending on whether the entity has a
present obligation to pay cash.

a. If the entity has a present obligation to pay cash, the transaction is

accounted for as cash-settled. Consequently, the equity alternative is simply
ignored.
b. If the entity has no present obligation to pay cash, the transaction is
accounted for as equity-settled. Consequently, the cash alternative is simply
ignored.

Settlement
Upon settlement

a. If the entity elects to settle in cash, the cash payment is accounted for as a
repurchase of an equity interest, i.e., as a deduction from equity, except as noted in (c)
below.

b. If the entity elects to settle by issuing equity instruments, no further accounting is

required other than a transfer from one component of equity to another, if necessary,
except as noted in (c) below.

c. If the entity elects the settlement alternative with the higher fair value as at the date of
settlement, the entity recognizes an additional expense for the:

i. Excess of cash paid over the fair value of equity instruments that would
otherwise have been issued, or
ii. Excess of fair value of the equity instruments issued and the amount of
cash that would otherwise have been paid, whichever is applicable.

Summary:

 A share-based payment transaction is either: (a) equity-settled, (b) cash-settled,

and (b). or (c) provides a choice of settlement between (a) and (b).
 A share-based transaction with a non-employee is measured using the following
order of priority:
1. Fair value of the goods or services received
2. Fair value of the equity instrument granted
  A share-based payment transaction with an employee or others providing similar
services is measured using the following order of priority:
1. Fair value of the equity instrument granted
2. Intrinsic value
 Measurement date is the date at which the fair value of the equity instruments
granted is measured:
a. For transactions with non-employees, the measurement date is the date
the goods or services are obtained.
b. For transactions with employees and others providing similar services, the
measurement date is the grant date.

 The compensation expense on share-based compensation plans (employee

share options and SARS) are recognized:
a. in full at grant date if they vest immediately; or
b. over the vesting period if there are vesting conditions.

 Share-based payment transactions with a choice of settlement are accounted for

as follows:
a. Counterparty has the right of choice - the components of the compound
instrument are accounted for separately as equity-settled and cash-
settled, respectively.
b. Entity has the right of choice - the transaction is accounted for as either
equity-settled or cash-settled depending on whether the entity has a
present obligation to pay cash.

PFRS 5 NON-CURRENT ASSETS HELD FOR SALE AND

DISCONTINUED OPERATIONS

Introduction

Assets classified as noncurrent in accordance with PAS 1 are classified as current

assets only if they meet the criteria to be classified as held for sale under PFRS 5.

PFRS 5 prescribes the accounting for assets held for sale, including disposal
groups, and the presentation and disclosure of discontinued operations.
  Noncurrent asset - is "an asset that does not meet the definition of a current
asset." (PFRS 5.Appendix A)

 Noncurrent assets within the scope of PFRS 5:

a. Property, plant and equipment

b. Investment property measured under the cost model
c. Investment in associate, subsidiary, or joint venture
d. Intangible assets

 Noncurrent assets outside the scope of PFRS 5:

a. Deferred tax assets

b. Assets arising from employee benefits
c. Financial assets within the scope of PFRS 9 Financial Instruments
d. Investment property measured under the fair value model
e. Biological assets
f. Contractual rights under insurance contracts

 Disposal group - is "a group of assets to be disposed of, by sale or otherwise,

together as a group in a single transaction, and liabilities directly associated with
those assets that will be transferred in the transaction." (PFRS 5.Appendix A)

Classification as Held for Sale

A noncurrent asset (or disposal group) is classified as held for sale or held for
distribution to owners if its carrying amount will be recovered principally through a sale
transaction rather than through continuing use.
This means that more economic benefits will be derived from the asset if it is to
be sold rather than continually used.

Conditions for classification as held for sale

A noncurrent asset or a disposal group is classified as held for sale (and
consequently, presented as current asset in the statement of financial position) if the
both of the following conditions are met:
a. The noncurrent asset or disposal group is available for immediate sale in its
present condition subject only to terms that are usual and customary; and
b. The sale is highly probable, as evidenced by the existence of all of the following:
 i. The entity's management is committed on selling the asset;
ii. The entity is actively locating a buyer;
iii. The sale price is reasonable in relation to the asset's (or disposal group's)
current fair value;
iv. The sale is expected to be completed within one year from the date of
classification; and
v. It is unlikely that the plan to sell will be withdrawn.

The terms "highly probable" and "probable" are used differently in the Standards.
"Highly probable" connotes a higher chance of occurrence than "probable." Highly
probable means “significantly more likely than not” while probable means "more likely
than not."

Sale includes exchanges (of noncurrent assets for other noncurrent assets) that
have commercial substance.

Illustration 1: Available for immediate sale in present condition

ABC Co. is committed to a plan to sell its office building and has initiated actions to
locate a buyer.

Case #1:
ABC Co. will transfer the ownership of the building to the buyer after ABC Co. vacates
the building.

Analysis: The building will be classified as held for sale. The criteria would be met at
the plan commitment date because the time to vacate is necessary, usual and
customary for sales.

Case #2:
ABC Co. will continue to use the building until the construction of a new building is
completed.

Analysis: The building will not be classified as held for sale. The criteria would not be
met because the delay in the transfer of ownership imposed by the entity (seller)
indicates that the building is not available for immediate sale, even if a purchase
commitment for the future transfer of the building is obtained earlier. The building
continues to be classified as PPE.
Illustration 2: Highly probable sale
ABC Co. is a commercial leasing and finance company. As of year-end, ABC holds
equipment that is available either for sale or lease. ABC is not yet decided whether to
sell or to lease the equipment.

Analysis: The equipment is not classified as held for sale because the criterion for
highly probable sale is not met as the ultimate form of the future transaction (sale or
lease) has not yet been determined.

Exception to the one-year requirement

An asset (or disposal group) that is not sold within 1 year from the date of its
classification as held for sale is reclassified back to its previous classification (e.g., from
'held for sale' back to 'PPE').
However, the asset (or disposal group) is continued to be classified as held for
sale if the following conditions are met:
a. the delay is caused by events beyond the entity's control; and
b. there is sufficient evidence that the entity remains committed on selling the
asset (or disposal group).

Illustration:
On December 31, 20x1, Entity A commits to a plan to sell its building. The building has
a fair value of 1M and is being actively marketed at a sale price of P990K. On
December 31, 20x2, the building is not yet sold.

 General rule: Entity A shall reclassify the building from "held for sale" back to
PPE on December 31, 20x2.

 Exception: The delay in the sale is beyond the control of Entity A. Entity A
reduces the sale price from P990K to P890K.
Entity A shall continue to classify the building as "held for sale" in its
December 31, 20x2 financial statements because the conditions for the
exception to the one-year requirement are met. The fact that Entity A reduced the
sale price evidences that Entity A remains committed to its plan to sell the asset.

Exclusive view of subsequent disposal

A noncurrent asset (or disposal group) that is acquired exclusively with a view to its
subsequent disposal is classified as held for sale at the acquisition date if the "sale
within one-year" requirement is met and it is highly probable that the other requirements
will be met within a short period of time after the acquisition (usually within three
months).

Event after the reporting period

A noncurrent asset or disposal group that meets the criteria for classification as held for
sale only after the reporting period is not classified as held for sale in the current
period's financial statements. Meaning, the event is treated as a non-adjusting event
after the reporting period.

Property dividends
Noncurrent assets (or disposal groups) declared as property dividends are classified as
held for distribution to owners when they are available for immediate distribution in their
present condition and the distribution is highly probable. The probability that a further
approval (if any) of the dividend declaration will be obtained is considered as part of the
assessment of whether the distribution is highly probable.

Non-current assets that are to be abandoned

A noncurrent asset or disposal group that is to be abandoned is not classified as held
for sale because its carrying amount will be recovered through continuing use rather
than principally through sale. Noncurrent assets to be abandoned include those that are
to be used to the end of their economic life or are to be closed rather than sold

Noncurrent assets that are temporarily taken out of use are not treated as if they
have been abandoned.

Measurement
Held for sale assets are initially and subsequently measured at the lower of carrying
amount and fair value less costs to sell.

 Fair value - is the "price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the
measurement date." (PFRS 13.Appdx. A)

 Costs to sell - are the "incremental costs directly attributable to the disposal of
an asset or disposal group, excluding finance costs and income tax expense."
(PFRS 5.Appendix A)
 Costs to sell are discounted to their present value if the sale is expected to occur
beyond one year.

Assets classified as held for distribution to owners are measured at the lower of
carrying amount and fair value less costs to distribute.

Held for sale assets that are acquired as part of a business combination are
measured at fair value less costs to sell, not at fair value as required by PFRS 3.

Changes in fair value less costs to sell

Subsequent changes in fair value less costs to sell are recognized in profit or loss as
impairment losses or gains on reversal of impairment.
However, a gain on reversal of impairment is recognized only to the extent of
cumulative impairment losses that have previously been recognized.

Depreciation and amortization

Held for sale assets are not depreciated or amortized while they are classified as held
for sale. However, interest and other related expenses attributable to financial
instruments included in a disposal group are continued to be recognized.

Changes to a plan of sale

An asset that ceases to be classified as held for sale is measured that the lower of the
asset's
a. carrying amount before it was classified as held for sale, adjusted for any
depreciation, amortization or revaluation that would have been recognized had
the asset not been classified as held for sale; and
b. recoverable amount at the date of subsequent decision not to sell.

 Recoverable amount is "the higher of an asset's (a) fair value less costs of
disposal and its (b) value in use." (PFRS 5.Appendix A)

 Value in use is the "present value of estimated future cash flows expected to
arise from the continuing use of an asset and from its disposal at the end of its
useful life." (PFRS 5.Appendix A)

Discontinued operations
A discontinued operation is "a component of an entity that either has been disposed of
or is classified as held for sale, and

a. represents a major line of business or geographical area of operations;

b. is part of a single coordinated plan to dispose of a separate major line of
business or geographical area of operations; or
c. is a subsidiary acquired exclusively with a view to resale."

 A component of an entity comprises "operations and cash flows that can be

clearly distinguished, operationally and for financial reporting purposes, from the
rest of the entity." (PFRS 5.Appendix A)

Operations and cash flows can be clearly distinguished operationally and for
financial reporting purposes if the assets, liabilities, income, and expenses that are
directly attributable to the component will be eliminated if the component is to be sold.
A component of an entity can be a cash-generating unit (CGU) or group of
CGUS, an operating segment, a reporting unit, a geographical area or operations, a
subsidiary, or an asset group.

 A CGU is "the smallest identifiable group of assets that generates cash inflows
that are largely independent of the cash inflows from other assets of group of
assets." (PAS 36.6)

A discontinued operation occurs when two things happen:

a. A company eliminates (or will eliminate) the results of operations and cash flows
of a component of an entity from its ongoing operations; and
b. There is no significant continuing involvement in that component after its
disposal.

Discontinued operations occur at the earlier of the date the component is actually
disposed of and the date the criteria for classification as held for sale are met.

Presentation of discontinued operations

The results of discontinued operations are presented in the statement of profit or loss
and other comprehensive income as a single amount comprising the total of the
following:
a. post-tax profit or loss of discontinued operations; and
b. post-tax gain or loss recognized on the measurement to fair value less costs to
sell or on the disposal of the assets constituting the discontinued operation I
 The results of discontinued operations are presented after "profit or loss from
continuing operations."

Gains or losses on disposal of discontinued operations

If the actual disposal of a discontinued operation occurs in the same period that the
component is classified as "held for sale," the gain or loss on disposal of discontinued
operations is the actual gain or loss on the disposal.

If the actual disposal of a discontinued operation occurs in a subsequent period

after the component is classified as "held for sale," the entity recognizes an estimated
loss on disposal in the period that the component is classified as discontinued
operation. However, any gain on sale is not recognized until the component is actually
disposed of.

Gains or losses on disposal of discontinued operations, including estimated

losses, are presented as part of the single amount representing the post-tax results of
discontinued operations.

Gains or losses on held for sale assets that do not meet the criteria for
presentation as discontinued operations are presented as part of continuing operations.

Illustration:
On March 1, 20x1, Entity A classifies a component of an entity as held for sale. The
event qualifies for presentation as discontinued operations, Entity A makes the following
estimates:
 Estimated gain on sale of some assets of the component, P100,000.
 Estimated impairment losses and losses on sale of the remaining assets of the
component, P200,000.
 Estimated operating losses prior to the expected date of sale, P300,000. .

The component's actual operating profit and loss in 20x1 are as follows:

 January 1 to February 28, 20x1-P50,000 profit

 March 1 to December 31, 20x1- P1,000,000 loss

Entity A's tax rate is 30%. The actual sale of the component occurred in 20x2.
  The single amount representing the post-tax results of discontinued operations is
computed as follows:

Estimated impairment losses and losses on sale (200,000)

Jan. 1 to Feb. 28 profit from operations 50,000
Mar. 1 to Dec. 31 loss from operations (1,000,000)
Total (1,150,000)
Multiply by: 100% less 30% tax rate 70%
Loss from discontinued operations (805,000)

Notice that both the estimated gain on disposal and estimated operating losses
and are disregarded.

Presentation in the statement of financial position

Held for sale assets are presented in the statement of financial position as current
assets.
The assets and liabilities of a disposal group are presented separately. Offsetting
is prohibited.

Summary:
Noncurrent assets are presented as current assets in the statement of financial
position only when they qualify as held for sale assets.
Held for sale classification is permitted when the noncurrent asset or disposal
group is (a) available for immediate sale in its present condition and (b) the sale
is highly probable.
If the criteria for classification as held for sale are met after the reporting period
but before the financial statement are authorized for issue, that event is treated
as a non-adjusting event after reporting period.
Held for sale assets are measured at the lower of carrying amount and fair value
less costs to sell.
Held for sale assets are not depreciated.
Gains and losses on remeasurement of held for sale assets are recognized in
profit or loss.
Gain on impairment reversal is recognized only to the extent of cumulative
impairment losses previously recognized.
 A disposal group may qualify as discontinued operation if it is a component of an
entity and meets the other requirements under PFRS 5.
The results of discontinued operations are presented separately in the statement
of comprehensive income as a post-tax single amount.
The assets and liabilities of a disposal group are presented separately on the
face of the statement of financial position. Offsetting is prohibited.

PFRS 6 EXPLORATION FOR AND EVALUATION OF MINERAL

RESOURCES

Introduction
PFRS 6 addresses the accounting for expenditures on exploration for and evaluation of
mineral resources.

 Exploration for and evaluation of mineral resources is "the search for mineral
resources, including minerals, oil, natural gas and similar non-regenerative
resources after the entity has obtained legal rights to explore in a specific area,
as well as the determination of the technical feasibility and commercial viability of
extracting the mineral resource." (PFRS 6.Appendix A)

 Exploration and evaluation expenditures - are "expenditures incurred by an

entity in connection with the exploration for and evaluation of mineral resources
before the technical feasibility and commercial viability of extracting a mineral
resource are demonstrable." (PFRS 6.Appendix A)

PFRS 6 applies to expenditures incurred after the entity has obtained legal rights
to explore in a specific area (it is illegal to explore for mineral resources without
obtaining first an authorization from the government) but before the existence of mineral
reserves is in fact established and the technical feasibility and commercial viability of
extracting mineral resources are demonstrable. Expenditures incurred after technical
feasibility and commercial viability are demonstrable are called development costs.
Development costs are accounted for under other applicable Standards.
PFRS 6 is not applicable before legal rights to explore are obtained
PFRS 6 is applicable after legal rights are obtained but before technical feasibility and
commercial viability are demonstrable
PFRS 6 is not applicable after technical feasibility and commercial viability are
demonstrable

Exemption from Hierarchy of reporting standards under PAS 8

Hierarchy of reporting standards (PAS 8)

1. PFRSS
2. Judgment
When making the judgment:
 management shall consider the following:
a. Requirements in other PFRSS dealing with similar transactions
b. Conceptual Framework

 management may consider the following:

a. Pronouncements issued by other standard-setting bodies
b. Other accounting literature and Industry practices

PFRS 6 temporarily exempts an entity from applying the hierarchy above. PFRS
6 permits entities to develop their own accounting policy for exploration and evaluation
assets that results in relevant and reliable information based entirely on management's
judgment and without the need to consider the hierarchy of standards in PAS 8.

Accordingly, an entity may recognize exploration and evaluation expenditures as

expenses or assets depending on its chosen accounting policy (which is developed
based entirely on management's judgment). In making the judgment, an entity
considers the degree to which the expenditure can be associated with finding specific
mineral resources.

Initial measurement
Exploration and evaluation assets are initially measured at cost.

 Exploration and evaluation assets - are "exploration and evaluation expenditures

recognized as assets in accordance with the entity's accounting policy." (PFRS
6.Appendix A)
Examples of expenditures that might be included in the initial measurement of
exploration and evaluation assets:

a. Acquisition of rights to explore

b. Topographical, geological, geochemical and geophysical studies
c. Exploratory drilling
d. Trenching
e. Sampling
f. Activities in relation to evaluating the technical feasibility and commercial viability
of extracting a mineral resource. (PFRS 6.9)

The initial measurement also includes the present value of any decommissioning
and restoration costs for which the entity has incurred an obligation as a consequence
of having undertaken the exploration and evaluation activities.

Expenditures related to the development of mineral resources are not recognized

as exploration and evaluation assets.

Subsequent measurement
Exploration and evaluation assets are subsequently measured using either the cost
model or the revaluation model.

Changes in accounting policies

An entity may change its accounting policy for exploration and evaluation expenditures
if the change results in more relevant and no less reliable, or more reliable and no less
relevant, information. The entity judges relevance and reliability using the criteria in PAS
8.

Classification of exploration and evaluation assets

Exploration and evaluation assets are treated as a separate class of assets and
classified as tangible (e.g. vehicles and drilling rigs) or intangible (e.g. drilling rights)
depending on the nature of the assets.

Reclassification of exploration and evaluation assets

When the technical feasibility and commercial viability of extracting a mineral resource
are demonstrable, the exploration and evaluation assets are reclassified in accordance
with other relevant Standards. The exploration and evaluation assets are assessed first
for impairment before the reclassification.
Impairment Loss
Exploration and evaluation assets are assessed for impairment when indication exists
that their carrying amount exceeds their recoverable amount. The entity applies PAS 36
when making the assessment, except for the allocation of impairment loss on assets
within cash-generating units wherein the entity is allowed to determine its own
accounting policy for the allocation.
Examples of indications that exploration and evaluation assets need to be
assessed for impairment:

a. The right to explore has expired or will expire in the near future and is not
expected to be renewed.
b. Expenditures for further exploration and evaluation activities are
significantly higher than expected.
c. The exploration and evaluation activities in a specific area have to be
discontinued because no mineral resources have been discovered.
d. Indication exists that, although a specific area will be developed, the
carrying amount of the exploration and evaluation asset is unlikely to be
fully recovered.

PFRS 7 FINANCIAL INSTRUMENTS: DISCLOSURES

Introduction
PFRS 7 prescribes the disclosure requirements for financial instruments. The
disclosures are broadly classified into the following two main categories:

a. significance of financial instruments to the entity's financial position and

performance; and
b. the nature and extent of risks arising from financial instruments to which the
entity is exposed, and how the entity manages those risks. (PFRS 7.1)

PFRS 7 complements the presentation principles in PAS 32 Financial

Instruments: Presentation and the recognition and measurement principles in PFRS 9
Financial Instruments.
 PFRS 7 applies to financial instruments that are within the scope of PFRS 9.
PFRS 7 does not apply to financial instruments that are dealt with under other
Standards, such as interests in subsidiaries (PFRS 10 Consolidated Financial
Statements), associates and joint ventures (PAS 28), those arising from employee
benefit plans (PAS 19) and share-based payment transactions (PFRS 2), and those that
are required to be classified as equity instruments.

Significance of financial instruments

 Statement of financial position

Carrying amounts of financial assets and financial liabilities

An entity is required to disclose the carrying amounts of each of the following categories
of financial instruments under PFRS 9:

a. Financial assets measured at fair value through profit or loss (FVPL), showing
separately (i) those that are designated and (ii) those that are mandatorily
measured at FVPL.
b. Financial assets measured at amortized cost.
c. Financial assets measured at fair value through other comprehensive income
(FVOCI), showing separately (i) those that are mandatorily classified as such and
(ii) those that are elected to be classified as such.
d. Financial liabilities at amortized cost.
e. Financial liabilities at fair value through profit or loss (FVPL), showing separately
(i) those that are designated and (ii) those that meet the definition of held for
trading.

Financial assets and financial liabilities measured at FVPL

If an entity designates a financial asset to be measured at FVPL, it shall disclose the
financial asset's exposure to credit risk and the change in fair value attributable to
changes in credit risk.

If an entity designates a financial liability to be measured at FVPL, it shall

disclose the change in fair value that is attributable to changes in credit risk, the
difference between the carrying amount and maturity value, and, if the entity is required
to present the effects of changes in the liability's credit risk in OCI, any cumulative gain
or loss that were transferred within equity or were realized.

Financial assets measured at FVOCI

If an entity elected to measure investments in equity securities at FVOCI, it shall
disclose those investments, the reason for the election, any dividends recognized during
the period, and any transfers of cumulative gain or loss within equity.

If any of those investments were disposed of, the entity shall disclose the reason
for the disposal, the fair value on derecognition date, and the cumulative gain or loss on
disposal.

Reclassification
If an entity has reclassified financial assets, it shall disclose the date of reclassification,
an explanation of the change in business model, and the amount reclassified between
categories.

If the entity reclassifies financial assets from FVOCI or FVPL to amortized cost or
from FVPL to FVOCI or amortized cost, it shall disclose the fair value gain or loss that
would have been recognized in profit or loss or OCI if the financial asset had not been
reclassified.

Offsetting financial assets and financial liabilities

If an entity has offset financial assets and financial liabilities, it shall disclose the gross
amounts of those assets and liabilities, the amounts that were set-off, the net amounts
presented in the statement of financial position and a description of the related legal
right of set-off.

Collateral
An entity shall disclose the carrying amounts of financial assets pledged as collateral for
liabilities, including the terms and conditions of the pledge.

If the entity holds collateral that it is permitted to sell or repledge, the entity shall
disclose the fair value of such collateral and, if it has been sold or repledged, whether
the entity has an obligation to return it, and the terms and conditions associated with the
entity's use of the collateral.

Allowance account for credit losses

The carrying amount of a financial asset that is mandatorily measured at FVOCI is not
reduced by a loss allowance. However, the loss allowance is disclosed in the notes.
Defaults and breaches
The entity shall disclose any defaults and breaches relating to loans payable, including
the carrying amount of those loans payable, the principal, interest, sinking fund, or
redemption terms, and whether the default was remedied, or the terms of the loans
payable were renegotiated, before the financial statements were authorized for issue.

 Statement of comprehensive income

Items of income, expense, gains or losses
An entity shall disclose the following:

a. Net gains or net losses on:

i. financial assets and financial liabilities measured at FVPL, showing
separately those relating to designated and mandatorily measured
at FVPL
ii. financial assets measured at amortized cost
iii. financial liabilities measured at amortized cost
iv. financial assets measured at FVOCI, showing separately those
relating to elected and mandatorily measured at FVOCI
b. Total interest revenue and total interest expense, computed using the
effective interest method, for financial instruments measured at amortized
cost or mandatory FVOCI (showing these amounts separately).
c. Fee income and expense

 Other disclosures

Fair value
The entity shall disclose the fair value of each class of financial assets and financial
liabilities in a way that the fair value can be -compared with the carrying amount.

However, fair value disclosure is not required when the carrying amount
approximates fair value, such as for short-term trade receivables and payables, and for
lease liabilities.

Nature and extent of risks arising from financial instruments

The second category of disclosures required by PFRS 7 is the disclosure of the nature
and extent of risks arising from financial instruments to which the entity is exposed, and
how the entity manages those risks. PFRS 7 requires the disclosure of the following
risks:

1. Credit risk - is "the risk that one party to a financial instrument will cause a financial
loss for the other party by failing to discharge an obligation." (PFRS 7.Appendix A)

2. Liquidity risk - is "the risk that an entity will encounter difficulty in meeting
obligations associated with financial liabilities that are settled by delivering cash or
another financial asset." (PFRS 7.Appendix A)

Credit risk and liquidity risk are opposites. For example, credit risk includes the
possibility that an entity cannot collect on its receivables, while liquidity risk includes the
possibility that an entity cannot pay its payables. As a guide, recall that liquidity is
defined in the Conceptual Framework as the ability of the entity to pay its short-term
liabilities.

3. Market risk-is "the risk that the fair value or future cash flows of a financial
instrument will fluctuate because of changes in market prices." (PFRS 7.Appendix A)
Market risk comprises the following three types of risk:

a. Currency risk-is "the risk that the fair value or future cash flows of a financial
instrument will fluctuate because of changes in foreign exchange rates." (PFRS
7, Appendix A)
b. Interest rate risk - is "the risk that the fair value or future cash flows of a
financial instrument will fluctuate because of changes in market interest rates."
(PFRS 7.Appendix A)
c. Other price risk - "the risk that the fair value or future cash flows of a financial
instrument will fluctuate because of changes in market prices (other than those
arising from interest rate risk or currency risk), whether those changes are
caused by factors specific to the individual financial instrument or its issuer, or
factors affecting all similar financial instruments traded in the market." (PFRS
7.Appdx.A)

The entity shall provide both qualitative and quantitative disclosures for each type of the
foregoing risks.

Examples of qualitative disclosures:

a. Risk exposures and how they arise.

 b. The entity's risk management objectives, policies and processes, including
methods used to measure risk.
c. Any changes in (a) or (b) from the previous period.

Examples of quantitative disclosures

a. Summary of quantitative data about the entity's risk exposure at the end of the
reporting period.
b. Concentrations of risk.
c. Other relevant disclosures not provided in (a) and (b).

Disclosure of concentration of credit risk is required of most financial instruments.

Disclosure of market risk (or price risk) is normally required of financial instruments
measured at fair value. Disclosure of interest rate risk is normally required of debt
instruments with variable interest rates. Disclosure of currency risk is required of
financial instruments measured in foreign currency.

PFRS 8 OPERATING SEGMENT

Introduction
The business environment is constantly changing the needs of consumers change,
business regulations change, the demand for products and services, and consequently
the supply thereof, may decline or end. Entities need to adapt to these changes in order
to stay in business.

One response to the constantly changing business environment is diversification

of operations. Increasingly, many entities engage in diversified business activities and
operate in different market environments.

For example, business scandals in insurance and banking industries create loss
of trust on consumers. Consumers become reluctant in doing business with entities
belonging to this industry. To minimize loss of revenue, these entities may need to
diversify their operations to address this type of industry-specific risk.

Another example is market saturation. Entities may find that the oversupply of or
lack of demand for products or services in certain geographical areas would pose threat
to profitability. As a response to this risk, entities expand their business operations to
new territories.

Diversification of operations, either by engaging in different business activities or

doing business in different geographical areas, creates operating segments within an
entity.

The more diverse an entity's operations become, the more information is needed
by users in making economic decisions about the entity. The full disclosure principle
calls for financial reporting of any financial facts significant enough to influence the
judgment of an informed user. To address users' needs, PFRS 8 prescribes the
required disclosures for operating segments.

Core principle
PFRS 8 requires an entity to disclose information needed in evaluating the nature and
financial effects of the business activities in which it engages and the economic
environments in which it operates.

The required disclosures under PFRS 8 aim to help users of financial statements

a. Better understand the entity's performance.

b. Better assess the entity's prospects for future net cash flows.
c. Make more informed judgments about the entity as a whole.

Scope
PERS 8 applies to the separate or individual financial statements of an entity, and to the
consolidated financial statements of a group with a parent, that is publicly listed or in the
process of enlisting.

If a financial report contains both consolidated and separate financial statements,

segment information is required only in the consolidated financial statements.

Non-publicly listed entities are not required to disclose segment information.

However, if they choose to do so, they will need to apply PFRS 8.

Operating Segments
An operating segment is "a component of an entity:
 a. that engages in business activities from which it may earn revenues and incur
expenses (including revenues and expenses relating to transactions with other
components of the same entity),
b. whose operating results are regularly reviewed by the entity's chief operating
decision maker to make decisions about resources to be allocated to the
segment and assess its performance, and
c. for which discrete financial information is available." (PFRS 8.5)

 A component of an entity comprises "operations and cash flows that can

be clearly distinguished, operationally and for financial reporting purposes,
from the rest of the entity." (PFRS 5.Appendix A)

Not every part of an entity is necessarily an operating segment. To qualify as an

operating segment, one must be a profit center (i.e., it earns its own revenues and
incurs its own expenses), used internally by management for decision making, and on
which separate financial information is available.

A start-up operation can be an operating segment even if it has yet to earn

revenues. However, departments that do not earn revenues or earn revenues that are
only incidental to the activities of the entity are not operating segments (e.g., corporate
headquarters). Also, an entity's post-employment benefit plan is not an operating
segment.

The term "chief operating decision maker" refers to a function rather than a
manager with a specific title. That function includes allocating resources and assessing
the performance of operating segments. A chief operating decision maker may be the
entity's chief executive officer, chief operating officer, a group of executive directors, or
others.

Reportable segments
An operating segment is reportable (i.e., disclosed separately) if it:
a. is used by management in internal reporting or results from aggregating two or
more segments; and
b. qualifies under the quantitative thresholds

Management approach
PFRS 8 adopts a management approach to identifying reportable segments. Under
this approach, operating segments are identified on the basis of internal reports that are
regularly reviewed by the entity's chief operating decision maker in order to allocate
resources to the segment and assess its performance.

Basically, the decision on whether an operating segment is reportable or not is

based on management's judgment. Operating segments used by management for
internal reporting are also operating segments used for external reporting.

Aggregation criteria
Two or more operating segments may be aggregated into a single operating segment if
aggregation is consistent with the core principle of PFRS 8, the segments have similar
economic characteristics, and the segments are similar in each of the following
respects:

a. Nature of the products and services;

b. Nature of the production processes;
c. Type or class of customer for their products and services;
d. The methods used to distribute their products or provide their services; and
e. Nature of the regulatory environment, if applicable, e.g., banking, insurance or
public utilities. (PFRS 812)

Quantitative thresholds
An operating segment is reportable if it meets any of the following:

a. Its revenue, including both external and intersegment sales, is 10% or more of
the total revenue, external and internal, of all operating segments.
b. Its profit or loss is 10% or more of the greater, in absolute amount, of the:
i. total profit of all operating segments that reported a profit; and
ii. total loss of all operating segments that reported a loss.

c. Its assets are 10% or more of the total assets of all operating segments.

Illustration: Quantitative thresholds

Entity A is preparing its year-end financial statements and has identified the following
operating segments:
Segments Revenues Profit (loss) Assets
A 1,000,000 200,000 14,000,000
B 1,200,000 240,000 18,000,000
C 270,000 (70,000) 12,000,000
D 240,000 (700,000) 1,000,000
E 290,000 50,000 1,400,000
Totals 3,000,000 (380,000) 46,400,000

Requirement: Identify the reportable segments.

Solution:

Revenue test
The threshold under the revenue test is P300,000 (3,000,000 total revenues x 10%).

Segments A and B qualify under this test because their respective revenues are at least
P300,000.

Profit or loss test

Step 1: Total separately the profits and losses of the operating segments.

Segments Profit Loss

A 200,000
B 140,000
C (70,000)
D (700,000)
E 50,000
Totals 390,000 (770,000)

Step 2: Determine the higher between the totaled amounts, in absolute terms (i.e.,
ignore the negative value of losses). The higher amount is used for the 10% test.

Based on the table above, the aggregate losses of P770,000 is higher than the
aggregate profits. Therefore, the 10% threshold for profit or loss is P77,000 (770,000 x
10%).
Segments A, B and D qualify under this test because each of their profit or loss is at
least P77,000.

Assets test
The threshold under the asset test is P4,640,000 (46,400,000 total assets x 10%).

Segments A, B, and C are reportable because each of their total assets is at least
P4,640,000.

(Note: Total assets may include inter-segment assets, such as intersegment

receivables.)

Conclusion
Based on all the tests performed, the reportable segments are A, B, C, and D. Each of
these segments will be disclosed separately in the notes.

Segments Revenue test Profit or loss test Assets test

A / / /
B / / /
C x x /
D x / x
E x x x

To be reportable, operating segments need only to qualify in any of the quantitative

thresholds. So even if segment C did not qualify under the revenue and profit or loss
tests, it is still reportable because it qualified under the assets test. The same applies to
segment p.

Segment E is not reportable because it did not qualify in any of the quantitative tests.

Reporting of non-reportable segments

Operating segments that are not reportable are combined and disclosed in an "all other
segments" category.

Limit on external revenue

If the total external revenues of the identified reportable segments are less than 75% of
the entity's total external revenue, additional operating segments are included as
reportable, even if they do not meet the quantitative threshold, until at least 75% of the
entity's external revenue is included in reportable segments.

Additional reportable segments are identified based on management's judgment.

Reporting of interest revenue and interest expense

Interest revenue and interest expense are reported separately for each reportable
segment unless the segment's revenue is primarily from interest (e.g., the segment is a
financial institution) and internal decision-making is based on net interest revenue. In
such case, the entity may report the segment's interest revenue net of interest expense
and disclose that fact.

Information about major customers

An entity di loses the extent of its reliance on its major customers.
A major customer is a single external customer who has provided 10% or more of the
entity's revenues.

If an entity has major customers, it discloses that fact, along with the total amount of
revenues from each major customer, and the identity of the segment or segments
reporting the revenues.

The entity need not disclose the identity of a major customer or the amount of revenues
that each segment reports from that customer.

For the purpose of this disclosure, a group of customers under common control, such as
subsidiaries of a common parent, or various government agencies are considered as a
single customer.

Summary:
PFRS 8 uses a "management approach" to identifying reportable segments.
A reportable operating segment is one which management uses in making
decisions about operating matters or results from the aggregation of two or more
segments and qualifies under any of the quantitative thresholds.
The quantitative thresholds are: (a) at least 10% of total revenues (external and
internal), (b) at least 10% of the higher of total profits of segments with profits
 and total losses of segments with losses, and (c) at least 10% of total assets
(inclusive of intersegment receivables).
The total external revenues of reportable segments should be at least 75% of the
entity's total external revenue. If the 75% limit is not met, additional segments are
included as reportable segments, even if they do not meet the quantitative
threshold, until the 75% limit is met.
Disclosures for major customer are required if revenues from a single external
customer amount to 10% or more of the entity's external revenues.

PRELIMS EXAM

1. These are authoritative statements of how particular types of transactions and other
events should be reflected in financial statements.
ANS: Accounting Standards

2. Who issues International Financial Reporting Standards?

ANS: The International Accounting Standards Board

3. According to IASB Conceptual framework which of the following is not an objective of

financial statements?
ANS: Helping to assess the going concern status of a business

4. The IASB Conceptual Framework identifies user groups. Which of the following is not
an information need for the ‘investor’ group?
ANS: assessment of repayment ability of an entity

5. Which of the following correctly defines equity according to the IASB’s conceptual
framework for financial reporting?
ANS: Equity is the residual interest in the assets of the entity after deducting all
its liabilities.

6. According to the IASB’s conceptual framework for financial reporting, which two of
the following are parts of faithful representation?
ANS: It is neutral; It is free from material error

7. Which of these are fundamental characteristics according to the IASB’s conceptual

framework for financial reporting?
ANS: Relevance and Faithful representation

8. The IASB’s conceptual framework for financial reporting gives four enhancing
qualitative characteristics?
ANS: Comparability, timeliness, understandability, verifiability

9. Which of the following statements is true of the historical cost invention?

ANS: It has been replaced in accounting records by a system of current cost
accounting

10. Which of the following is the main aim of accounting?

ANS: To provide financial information to users of such information

11. Which accounting concept or convention which, in times of rising prices, tends to
understate asset values and overstate profits?
ANS: Historical cost convention

12. Which of the following is not an enhancing qualitative characteristic of good financial
information?
ANS: Profitability

13. Which of the following statements is correct?

ANS: An entity is not going concern if the management has the needs to liquidate
the entity

14. Which three of the following are not included in the fundamental qualitative
characteristics of useful financial reporting information?
ANS: Materiality, Prudence, Comparability

15. According to the conceptual framework, which of these characteristics contribute to

the faithful representation?
ANS: Neutrality, Free from error, Completeness
16. Which of the following are qualitative characteristics that enhance the usefulness of
information that is relevant and faithfully represented?
ANS: Understandability, timeliness, comparability, verifiability

17. Which of the following statements is correct according to the conceptual framework?
ANS: Cost is a pervasive constraint on the information that can be provided by
the financial reporting.

18. Which of the following is correct?

ANS: General purpose financial statements are those financial statements
prepared to meet the common needs of users who are not in position to require
an entity to prepare reports tailored to their particular information needs; the
conceptual framework identifies the primary users of financial statements to be
the existing and potential investors, lenders, and other creditors; The benefits of
recording financial reporting information must justify the costs of reporting that
information.

19. Which of the following can be recognized as an asset in the financial statements in
accordance with the conceptual framework?
ANS: A P100, 000 contract with a customer to deliver goods at a specified date in
the future

20. The role of financial reporting is to provide users with information to enable them to
make effective decisions. Which of the following groups of users are general purpose
financial reports specifically prepared for according to the Conceptual framework?
ANS: Investors, potential investors and creditors

21. Which of the following statements is correct in accordance with the conceptual
framework?
ANS: Individual primary users have different and possibly conflicting information
needs.

22. Fair presentation is achieved by the application of IFRSs along with additional
disclosures when necessary. Which of the following statements regarding disclosure is
correct?
ANS: Information must be presented in a manner that provides relevant, reliable,
comparable and understandable information

23. Which one of the following are not items required by IAS 1 presentation of financial
statements to be shown on the face of the statement of financial position?
ANS: Government grants

24. Which of the following statements is correct of general purpose financial

statements?
ANS: General purpose financial statements meet the specific needs of users
including banks and regulations; General purpose financial statements are
designed to help decision-makers make their own estimates as to an
organization’s value.

25. Which of the following is not an advantage of measurement using historical cost?
ANS: It is relevant

26. Which of the following user groups are general purpose financial statements that
least useful?
ANS: the public, for the purpose of assessing the impact of a company on the
local community

27. An entity must disclose the accounting policies adopted in the preparation of its
financial reports. Which of the qualitative characteristics does this requirement reflect?
ANS: Comparability

28. Which of the following is not one of the principal objectives of the IFRS foundation?
ANS: To review and provide advice to the trustees on their fulfillment of the
responsibilities set out in the IFRSF constitution or to bring out convergence of
national accounting standards and IFRSs to high quality solutions

29. The following are true about the IASB, except

ANS: Some meetings of the IASB are held in private

30. Who is the first IASB chairman?

ANS: Sir David Tweedie

31. The historical cost of a liability is updated overtime to depict if applicable

ANS: accrual of interest to reflect any financing component of the liability

32. According to the conceptual framework, the following are the primary users of
financial statements, except
ANS: customers

33. Which of the following is/are INCORRECT regarding materiality?

ANS: Materiality process involves 5 steps according to the IFRS Practice
Statement 2

34. Each of the following pertains to the fundamental qualitative characteristics that
make information useful to users, except
ANS: Timeliness

35. Which of the following statement is incorrect?

ANS: In case of conflict between the conceptual framework and a standard, the
conceptual framework prevails.

36. According to the conceptual framework, the amount at which an asset, a liability or
equity is recognized in the statement of financial position is referred to as its
ANS: Carrying amount

37. Which of the following is an example of recognition of income resulting in an

increase in asset?
ANS: Recording a sales transaction

38. Which of the following is an example of recognition of income resulting in a

decrease in liability?
ANS: Earning an unearned income

39. Which of the following is an example of recognition of expense resulting in an

increase in liability?
ANS: Accruing unpaid salaries

40. Which of the following is an example of recognition of expense resulting in a

decrease in assets?
ANS: Payment for supplies expense

41. The objective of PAS 1 is

ANS: To ensure comparability by prescribing the basis for presentation of
general purpose financial statements

42. Entity’s A financial statements in the current period is comparable with entity A’s
financial statements in the previous period. This type of comparability is called
ANS: Intra-comparability

43. The statement of financial position is also called

ANS: Balance sheet
44. When preparing financial statements, PAS 1 requires management to assess the
entity’s ability to continue as a going concern. The assessment covers a minimum
period of
ANS: At least one year from the end of the reporting period

45. PAS 1 requires an entity to provide an additional balance sheet dated as of the
beginning of the preceding period if certain instances occur. Assuming all of the
following has a material effect, which is not one of those instances?
ANS: Change in the frequency of reporting

46. Which of the following would not necessarily lead to a liability being classified as a
current liability?
ANS: The liability has arisen during the current accounting period

47. How does IAS 1 define the operation cycle of an entity?

ANS: The time between acquisition of assets for processing and receipt of cash
from customers.

48. The notes to the financial statements will amplify the information shown therein by
giving the following, except
ANS: Additional information

49. It is the precursor of the financial reporting standards council (FRSC)

ANS: Accounting standards council

50. In the conceptual framework for financial reporting, what provides the “why” of
accounting?
ANS: Objective of financial reporting

MIDTERM EXAM

1. Which of the following best indicates that two parties are related for purposes of PAS
24?
ANS: One party has the ability to affect the financial and operating decisions of
the other party through control, significant influence or joint control

2. According to PAS 24, related party disclosures are necessary

ANS: to indicate the possibility that an entity’s financial position and performance
might have been affected by the existence of such relationship

3. What is the overriding consideration when determining the existence of a related

party relationship?
ANS: The ability of one party to affect decisions of another party regarding
relevant activities through the existence of control, joint control or significant
influence

4. Mr. Y and Ms. Z share joint control over Ventures, Inc. Which of the following are
related parties?
ANS: Ventures, Inc. and Mr. Y

5. Entity A is the parent company of Entity B. Which of the following is required to be

disclosed in the group’s (Entity A and B’s) consolidated financial statements?
ANS: the related party relationship between entity A and Entity B

6. Which of the following is an example of faithful representation as defined in the

conceptual framework?
ANS: the IAS 37 requirement to disclose contingent liabilities in order to provide
complete information

7. The financial statement of Lincoln Corp. for the year ended December 31, 2019 were
authorized for issue on April15, 2020. According to IAS 10 events after the reporting
period, which of the following is treated as a non-adjusting event in the financial
statements for the year ended December 31, 2019?
ANS: On April 2, 2020, there was a fire in Lincoln Corp’s main warehouse that
destroyed 60% of the total inventory

8. A company reporting period ends on June 30, 2020 and the financial statements are
authorized for issue on Aug. 31, 2020. On July 30, 2020, a major drop in the price of
shares means that the value of the company’s investments has declined by P150,000
since the period end. The fail in value is material. How should this event be treated in
the financial statements for the period ended June 30, 2020?
ANS: a non-adjusting event with disclosure that a major fall in the price of shares
has resulted in a loss of P150,000

9. In accordance with IAS 37 Provisions, Contingent liabilities and contingent assets

which of the following is recognized as a provision?
ANS: the expected costs of meeting warranty claims from customers in relation
to sales made
10. In accordance with IAS 37 Provisions, contingent liabilities and contingent assets
which of the following is the correct treatment for a present obligation arising from past
events, the amount of which cannot be reliably estimated?
ANS: It is disclosed as a contingent liability

11. Mandela is being sued by a customer for P2 million for breach of contract over a
cancelled order. Mandela has obtained legal opinion that there is a 20% chance that
Mandela will lose the case. Accordingly, Mandela has provided P400,000 in respect of
the claim. The unrecoverable legal costs of defending the action are estimated at
P100,000. These have not been provided for as the case will not go to court until next
year. What is the amount of provision that should be made by Mandela in accordance
with IAS 37?
ANS: P100,000

12. An entity sells appliances that include a three-year warranty. Service calls under the
warranty are performed by an independent mechanic under a contract with the entity.
Based on experience, warranty costs are expected to be incurred for each machine
sold. When should the entity recognize these warranty costs?
ANS: When the machines are sold

13. The accrual approach in accounting for product warranty cost

ANS: represents accepted practice and should be used whenever the warranty is
an integral and inseparable part of the sale

14. Which of the following best describes the accrual approach of accounting for
warranty cost?
ANS: Expensed based on estimate in year of sale

15. When an entity has a continuing policy of guaranteeing new products against
defects for three years, the liability arising from the warranty
ANS: should be reported as part current and part noncurrent

16. Which of the following is the correct definition of a provision?

ANS: A liability of uncertain timing or amount

17. A provision shall be recognized as liability when

ANS: An entity has a present obligation as a result of past event; It is probable
that an outflow of resources embodying economic benefits will be required to
settle the obligation; the amount of the obligation can be measured reliably
18. It is a past event that creates a present obligation
ANS: Obligating event

19. What amount is recognized as provision?

ANS: Best estimate of the expenditure

20. Hyperinflation is indicated by characteristics of the economic environment of a

country which include all of the following except
ANS: The cumulative inflation rate over three years is approaching or exceeds
50%

21. All of the following would indicate that hyperinflation exists, except
ANS: Inflation rates have exceeded interest rate in three successive years

22. Which of the following would indicate that hyperinflation exists?

ANS: People prefer to keep their wealth in nonmonetary assets or stable foreign
currency

23. The financial statements of an entity that reports in the currency of hyperinflationary
economy shall be stated in terms of
ANS: Measuring unit current at the end of reporting period

24. The gain or loss on the net monetary position in hyperinflationary economy shall be
included in
ANS: Profit or loss and separately disclosed

25. The entity’s monetary assets exceed the monetary liabilities. Which of the following
statements in relation to financial reporting in a hyperinflationary economy is true?
ANS: There will be a loss in the net monetary position; any gain or loss in the net
monetary position is recognized in profit or loss

26. According to PAS 37, where there is continuous range of possible outcomes, and
each point in that range is as likely as any other, the range to be used is the
ANS: Midpoint

27. (PAS 37) When the provision involves a large population of items, the estimate of
the amount
ANS: reflects the weighting of all possible outcomes by their associated
probabilities
28. When the provision arises from a single obligation, the estimate of the amount
ANS: is the individual most likely outcome adjusted for the effect of other
possible outcomes

29. Which statement is incorrect where some or all of the expenditure required to settle
a provision is expected to be reimbursed by another party?
ANS: The reimbursement shall not be treated as separate asset and therefore
“netted” against the estimated liability for the provision

30. In a hyperinflationary economy. Amounts in the statement of financial position not

expressed in the measuring unit current at the end of the reporting period are restated
by applying
ANS: General price index

31. In hyperinflationary economy, monetary items

ANS: are not restated because they are already expressed in terms of the
measuring unit current at the end of reporting period

32. All of the following are monetary items, except

ANS: Administration costs paid in cash

33. An entity has a subsidiary that operates in a hyperinflationary economy. The

subsidiary’s financial statements are measured in terms of the local currency, which is
the zloty. The subsidiary’s financial statements have been restated in accordance with
IAS 29. The parent is located in the United States and prepares the consolidated
financial statements in U.S. dollars. Which of the following accounting procedures is
correct in terms of the consolidation of the subsidiary’s financial statements?
ANS: The subsidiary’s financial statements should be prepared using the zloty,
then restated according to IAS 29, and then retranslated into US dollars at closing
rates

34. When computing information on a constant peso basis, which of the following is
classified as nonmonetary?
ANS: Accumulated depreciation-equipment

35. When computing information on a constant peso basis, which of the following is
classified as nonmonetary?
ANS: Obligations under warranty

36. When computing information on a constant peso basis, which of the following is
classified as nonmonetary?
ANS: Inventories

37. When computing information on a constant peso basis, which of the following is
classified as monetary?
ANS: Allowance for doubtful accounts

38. During a period of inflation, an account balance remains constant. With respect to
this account, a purchasing power loss will be recognized if the account is
ANS: Monetary asset

39. During a period of inflation, an account balance remains constant. With respect to
this account, a purchasing power gain will be recognized if the account is
ANS: Monetary Liability

40. During a period of deflation, an entity would have the greatest gain in general
purchasing power gain by holding
ANS: cash

41. During a period of deflation in which a liability account balance remains constant,
which of the following occur?
ANS: A purchasing power loss if the item is a monetary liability

42. During a period of inflation in which a liability account balance remains constant,
which of the following occurs?
ANS: A purchasing power gain if the item is a monetary liability.

43. An entity that wishes to present information about the effect of changing prices in a
hyperinflationary economy should report this information in
ANS: the body of the financial statements

44. An entity shall prepare and present a statement of cash flows as

ANS: Integral part of the entity’s basic financial statements

45. Cash flows in the statement of cash flows are

ANS: inflows and outflows of cash and cash equivalents

46. Cash equivalents are

ANS: Short-term, highly liquid investments that are readily convertible to known
amount of cash and which are subject to an insignificant risk of changes in value

47. Which can qualify as cash equivalent

ANS: One-year BSP treasury bill

48. Cash receipts from royalties, fees, commissions and other revenue are
ANS: cash inflows from operating activities

49. Cash flows arising from the purchase and sale of trading securities are
ANS: classified as operating activities

50. Cash payments to acquire investments of other entities and interests in joint
ventures are
ANS: cash outflows from investing activities

51. Cash receipts from issuing shares and other equity instruments are
ANS: cash inflows from financing activities

52. Cash payments to owners to acquire or redeem the entity’s shares are
ANS: cash outflows from financing activities

53. Cash flows arising from income taxes shall be separately disclosed and classified
as
ANS: operating activities

54. An entity shall report cash flows from operating activities using
ANS: Either Direct method of indirect method

55. Which of the following shall be presented under cash flows from investing activities
ANS: Development costs capitalized in the period

56. When an entity purchased a three-month BSP Treasury bill, how would the
purchase be treated in preparing the statement of cash flows?
ANS: no effect

57. In a statement of cash flows using indirect method, a decrease in prepaid expenses
is
ANS: added to net income

58. The effect of which of the following is presented in profit or loss in the current period
(or current and future periods, if both are affected) rather than as an adjustment to the
opening balance of retained earnings.
ANS: Change in accounting estimate
59. Which of the following is presented in the financing activities section of the
statement of cash flows?
ANS: Purchase of treasury bill three months before its maturity date

60. Which of the following cash flows is presented in the operating activities section of a
statement of cash flows?
ANS: cash receipts from the sale of goods, rendering of services, or other forms
of income

MIDTERM QUIZ

ANSWERS:
FALSE 1. Cash flows are presented in the statement of cash flows into four activities.
TRUE 2. Non-financial institutions have the option of classifying interest income
received as either investing activities or operating activities.
FALSE 3.Cash flows relating to income and expenses are normally classified as
investing activities in the statement of cash flows.
TRUE 4. Only transactions that have affected cash and cash equivalents are included
in the statement of cash flows. Non-cash transactions are excluded and disclosed only.
FALSE 5. According to PAS 7, the indirect method of presenting cash flows relating to
operating activities shows each major class of gross cash receipts and gross cash
payments.
6. 460,000

7. Which of the following cash flows is presented in the operating activities section of a
statement of cash flows?
= Cash receipts from the sale of goods, rendering of services, or other forms of
income
8. In the statement of cash flows of a non-financial institution, interest expense paid is
presented under operating or financing activities.
9. Which of the following is presented in the activities section of the statement of cash
flows? = Acquisition of equipment through issuance of note payable
10. Entity A acquires equipment by paying a 10% down payment and issuing a note
payable for the balance. How should Entity A report the transaction in the statement
of cash flows?
= Down payment-investing activities; Note payable-None
11. A change in measurement basis is most likely a change in accounting policy.

12. A correction of prior period error is accounted for by retrospective restatement.

13. Which of the following is a change in accounting estimate?

= change in the depreciation method, useful life or residual value of an item of
property, plant and equipment

14. These result from new information or new developments.

= change in accounting estimates

15. The effect of which of the following is presented in profit or loss in the current period
(or current and future periods, if both are affected) rather than as an adjustment to
the opening balance of retained earnings. = Change in accounting estimate
16. Which of the following best indicates that two parties are related for purposes of
PAS 24?
= one party has the liability to affect the financial and operating decisions of
the other party through control, significant influence or joint control.

17. Which of the following are not related parties?

= two co-ventures of a common joint venture business

18. Which of the following is not a required disclosure under PAS 24?

= Related party transactions (in the consolidated financial statements)

19. According to PAS10, these are events that provide evidence of conditions that
existed at the end of the reporting period. = Adjusting events
20. Which of the following events after the reporting period are treated as adjusting
events?
= Discovery of prior period fraud or errors
21. It is an entity that is controlled, jointly controlled or significantly influenced by a
government? = Government-related entity
22. It refers to a transfer of resources, services or obligations between a reporting entity
and a related party, regardless of whether a price is charged.
= Related party transactions
23. All of the following are examples of related parties except.
= two entities simply because they have one director or key management
personnel in common
24. These include transactions that affect equity and non-operating activities. PAS 7

= Financing activities
25. These include transactions that affect non-current assets and other non-operating
assets. PAS7 = Investing activities
26. Liabilities arise from either legal or constructive obligation. Which of the following is
a source of constructive obligation? = an established pattern of past practice
27. According to PAS 37, provision are measured at any of these, whichever is most
appropriate.
28. According to PAS 27, a provision does not arise from future operating losses.

29. According to PAS 37, a provision is a liability of uncertain timing or amount.

30. According to PAS 37, contingent liabilities are always disclosed.

Overview of Accounting up to PAS 1

1. Its accounting objective is geared towards proper income determination.

ENTITY THEORY

2. Entity A engages in importing and reporting activities. At the end of the period, Entity
A has assets and liabilities denominated in foreign currencies. When preparing its
financial statements, Entity A translates these assets and liabilities to pesos. Entity A
is most likely to be applying which of the following accounting concept?

STABLE MONETARY UNIT

3. Entity A values its fixed assets at their historical costs and does not restate them for
changes in the purchasing power of the Philippine Pesos due to inflation. Entity A is
applying which of the following accounting concept?

STABLE MONETARY UNIT

4. As provided for by law, the Chairman and members of the Professional Regulatory
Board of Accountancy shall hold office for a term of 3 years.

4. The IASC was founded in JUNE 1973

5. If an IFRS Standard sets out requirements that are inconsistent with the Conceptual
Framework, preparers have to apply the Conceptual Framework for affected
transactions. FALSE

6. For information to be relevant, it has to possess: EITHER PREDICTIVE OR

CONFIRMATORY VALUE, OR BOTH

7. Which of the following equations is the fundamental accounting equation?

ASSETS= LIABILITIES + OWNER’S EQUITY

8. For a right to meet the definition of an asset, it needs to be likely that the right will
produce economic benefits for the entity. FALSE

9. It refers to the principles upon which the process of accounting is based.

ACCOUNTING CONCEPTS

10. It is one of the expense recognition principles wherein costs that are directly related
to the earning of revenue are recognized as expenses in the same period the
related revenue is recognized. MATCHING CONCEPT

11. It refers to the process of converting non-cash assets into cash or claims for cash.
REALIZATION

12. One of the accounting stating that all of the components of a complete set of
financial statements are interrelated. CONCEPT OF ARTICULATION

13. The effects of the transactions and other events are recognized when they occur
and not as cash is received or paid and they are recorded in the accounting records
and reported in the financial statements of the periods to which they relate.
ACCRUAL BASIS OF ACCOUNTING

14. Costs that are not directly related to the earning of revenue are initially recognized
as assets and recognized as expenses over the periods their economic benefits are
consumed, using some method of allocation.

SYSTEMATIC AND RATIONAL ALLOCATION

15. Branch of accounting that focuses on general purpose financial statements.

FINANCIAL ACCOUNTING
16. The R.A. 9298 is also known as Philippine Accountancy Act of 2004.

17. Which of the following is not among the four sectors in the practice of accountancy
as enumerated in RA 9298.

PRACTICE OF PRIVATE ACCOUNTANCY

18. An analysis of income and expenses recognized in the statement of profit or loss is
sufficient to understand an entity’s financial performance for the period. FALSE

19. The Conceptual Framework can override requirements in a standard. FALSE

20. Revision of the Conceptual Framework will automatically lead to changes in

Standards that are inconsistent with the revised concepts. FALSE

21. It refers to the process of recording the accounts or transactions of an entity. It

normally ends with the preparation of the trial balance. BOOKKEEPING

22. When selecting its accounting policies in the absence of a PFRS that specifically
applies to a transaction or event, management shall us ITS JUDGEMENT.

23. These are standards issued by the IASB after it replaced its predecessor, the
International Accounting Committee (IASC).

INTERNATIONAL FINANCIAL REPORTING STANDARDS

24. It is the standard-setting body of the IFRS Foundation.

INTERNATIONAL ACCOUNTING STANDARDS BOARD

25. The accounting period may end on any month when the business is at the lowest or
experiencing slack season. TRUE

26. The going concern assumption is abandoned when an entity incurs a loss. FALSE

27. Which of the following is considered valued by fact rather than by opinion?
DISCOUNT ON SHARE CAPITAL

28. Mr. A is assessing the ability of entity A to generate future cash and cash
equivalents. In making the assessment, Mr. A uses not only the statement of cash
flows but also the other components of a complete set of financial statements. This
is because of which of the following concepts? ARTICULATION

29. On day 1, a customer buys goods from Entity A and promises to pay the sale price
on Day 30. Entity A recognizes sales revenue on Day 1 rather on Day 30. This is an
application of which of the following accounting concepts? ACCRUAL BASIS
30. Which of the following statements is/are incorrect?

ONE OF THE ABOVE, GENERAL PURPOSE FINANCIAL STATEMENTS MUST BE

PREPARED BY A CPA

PROBLEM 1: TRUE OR FALSE

FALSE 1. All events and transactions of an entity are recognized the books of accounts.

FALSE 2. The accounting process of assigning. numbers, commonly in monetary terms, to the
economic transactions and events is referred to as classifying.

TRUE 3. The basic purpose of accounting is to provide information about economic activities
intended to be useful in making economic decisions.

TRUE 4. Financial accounting is the branch of accounting that focuses on general purpose
reports of financial position and operating results known as the financial statements.

FALSE 5. General purpose financial statements are those statements that cater to the common
and specific needs of a wide range of external users.

TRUE 6. The financial statements are the only source of information when making economic
decisions.

TRUE 7. All information presented in the financial statements are sourced from the accounting
records of the entity.

TRUE 8. Entity A's accounting period starts on July 1 and ends on June 30 of the following year.
Entity A uses a fiscal year period.

FALSE 9. Once promulgated, accounting standards are never changed.

FALSE 10. The entity's management is responsible for the selection of appropriate accounting
policies, not the accountant.

PROBLEM 2: MULTIPLE CHOICE

1. The concept of recognition is applied in which of the following instances?

a. An entity includes the effects of an event in the financial statements through a journal
entry.

b. An entity removes the effects of an event from the financial statements through a journal
entry.
c. An entity discloses only an event in the notes, rather than including the effects of the event in
the monetary totals in the financial statements.

d. An entity records an event through a memorandum entry.

2. Which of the following events is not considered an exchange or reciprocal transfer?

a. purchase of inventory on account

b. lending money to another entity

c. payment of a loan payable

d. payment of taxes

3. Which of the following events is considered a nonreciprocal transfer?

a. sale of an asset c. loss from a calamity

b. donation d. production of finished goods

4. To be useful, accounting information should be presented using

a. monetary amounts. c. historical costs.

b. a common denominator. d. fair values.

5. Which of the following violates the historical cost concept?

a. Recording purchases of merchandise inventory at the purchase price.

b. Recording a building at the total construction costs.

c. Measuring inventories at net realizable value.

d. Recording an equipment acquired in an installment purchase at the cash price equivalent.

6. Entity A values its fixed assets at their historical costs and does not restate them for changes
in the purchasing power of the Philippine pesos due to inflation. Entity A is applying which of the
following accounting concepts?
a. prudence c. stable monetary unit

b. accrual basis d. time period

7. Entity A engages in importing and exporting activities. At the end of the period, Entity A has
assets and liabilities denominated in foreign currencies. When preparing its financial
statements, Entity A translates these assets and liabilities to pesos. Entity A is most likely' to be
applying which of the following accounting concepts?

a. double entry c. stable monetary unit

b. accrual basis d. time period

8. Preparing financial statements at least annually is application of which of the following

accounting concepts?

a. historical cost c. stable monetary unit

b. accrual basis d. time period

9. Entity A acquires merchandise inventory. Entity A initially records the acquisition cost of the
inventory as asset rather than an outright expense. When the inventory is subsequently sold,
Entity A recognizes the cost of the inventory sold as expense, in the same period the sale
revenue is recognized. This is an application of which of the following accounting concepts?

a. stable monetary unit c. matching

b. materiality d. proprietary

10. On Day 1, a customer buys goods from Entity A and promises to pay the sale price on Day
30. Entity A recognizes sales revenue on Day 1 rather than on Day 30. This is an application of
which of the following accounting concepts?

a. prudence c. consistency

b. accrual basis d. materiality

PROBLEM 3: MULTIPLE CHOICE

1. All the following are considered internal events, except

a. transfer of goods from work-in-process to finished goods inventory

b. losses from flood, earthquake, fire and other calamities

c. transformation of biological assets from immature to mature

d. vandalism committed by the entity's employees

2. Which of the following is considered an internal user of Entity A's financial reports?

a. Entity B, a bank, requires Entity A to submit audited financial statements in conjunction

to a loan being applied for by Entity A.

b. Mr. I is deciding whether to invest in Entity A. Mr. I uses Entity A's financial statements in
making its investment decision.

c. Ms. S, a shareholder of Entity A, is deciding whether to hold or sell her shareholdings in

Entity A. Ms. S uses Entity A's financial statements in making its "hold or sell" decision.

d. Mr. X, a member of Entity A's board of directors, uses financial reports to make
decisions regarding the financial and operational affairs of Entity A.

3. When resolving accounting problems not specifically addressed by current standards, an

entity shall be guided by the hierarchy of financial reporting standards. The correct sequence of
the hierarchy of financial reporting standards in the Philippines is

I. PASs, PFRSs and Interpretations

H. Conceptual Framework.

III. Judgment

IV. Pronouncement of other standard-setting bodies

a. I, III, II and IV

b. I, II, IV and III

c. I, IV, 11 and 111

d. I, II, III and IV

4. The proper application of accounting principle is most dependent upon the

a. management

b. accountant

c. auditor

d. chief executive officer

5. Which of the following statements is correct?

a. Accounting provides quantitative information only.

b. Accounting is considered an art because it requires the use of creative skills and
judgment.

c. The only acceptable measurement basis in accounting is historical cost.

d. Qualitative information can be found only in the notes to the financial statements.

6. Which of the following statements is correct?

a. All quantitative information are also financial in nature.

b. The accounting process of assigning peso amounts to economic transactions and

events is measuring.

c. The economic activity that involves using current inputs to increase the stock of resources
available for output is called savings.

d. The economic activity of using the final output of the production process is called income
distribution.

7. Which of the following statements is incorrect regarding accounting concepts?

a. Under the Accrual Basis of accounting, revenues are recognized when earned and
expenses are recognized when incurred, not when cash is received and disbursed.

b. Under the Going concern concept, the business entity is assumed to carry on its
operations for an indefinite period of time.

c. Under the Business entity/ Separate entity/ Entity/ Accounting entity Concept, the
business is treated separately from its owners.

d. Under the Time Period/ Periodicity/ Accounting Period concept, the life of the business is
divided into series of reporting periods.

e. Under the Cost-benefit concept, the cost of processing and communicating

information should exceed the benefits derived from it.
8. Which of the following statements is incorrect?

a. Financial reporting standards may at times be influenced by legal, political, business and
social environments.

b. General-purpose financial statements must be prepared by a Certified Public

Accountant.

c. General purpose financial statements are prepared primarily for the use of external users.

d. The PFRSs are issued by the Financial Reporting Standards Council.

9. Mr. John Doe, CPA, is a professor in a university where he teaches mainly home economics,
music and physical education. Those subjects require that the teacher must be awesome. Mr.
Doe is also frequently invited as a judge in beauty pageants and singing contests and as a
referee in mixed martial arts competitions. Mr. Doe is considered to be practicing accountancy
in which of the following sectors?

a. Academe c. Commerce and industry

b. Public accounting d. None of these

10. Changes to reporting standards response to

a. government regulations.

b. users' needs.

c. global modernization

d. all of these

PROBLEM 4: FOR CLASSROOM DISCUSSION

1. Entity A buys bananas and converts them into banana chips. The conversion of bananas into
banana chips is a (an)

a. non-accountable event . c. non-reciprocal transfer.

b. external event. d. internal event.

Valuation by fact or opinion

2. Which of the following is considered valued by fact rather than by opinion?

a. Depreciation d. Retained earnings

b. Cost of goods sold c. Discount on share capital

Measurement Bases

3. Which of the following is not one of the several measurement bases used in accounting? a.

historical cost c. present value

b. fair value d. all of these are used

Accounting Concept

4. Entity A is owned by Mr. X and Ms. Y. Which of the following transactions does not violate the
separate entity concept and therefore is appropriately recorded in the accounting records of
Entity A?

a. Mr. X purchases groceries for his home consumption.

b. Mr. X gives Ms. Y chocolate and flowers on Valentine's Day.

c. Ms. Y provides capital to Entity A.

d. Ms. Y provides capital to Entity B, another business entity

5. Mr. A is assessing the ability of Entity A to generate future cash and cash equivalents. In
making the assessment, Mr. A uses not only the statement of cash flows but also the other
components of a complete set of financial statements. This is because of which of the following
concepts?

a. Going concern c. Intercalation

b. Time period d. Articulation

6. Entity A acquires a stapler. Instead of recognizing the cost of the stapler as an asset to be
subsequently depreciated, Entity A immediately charges it as expense. This is an application of
which of the following concepts?

a. Prudence c. Cost-benefit

b. Materiality d. b and c

Common branches of accounting

7. What type of users' needs is catered by general purpose financial statements?

a. common needs c. a and b

b. specific needs d. neither a nor b

Four sectors in the practice of accountancy

8. Which of the following is not among the Four Sectors in the practice of accountancy as
enumerated in R.A. 9298 also known as the "Philippine Accountancy Act of 2004"?

a. Practice in Commerce and Industry

b. Practice in the Government

c. Practice in Education/Academe

d. Practice of Private Accountancy

Accounting standards
9. The Philippine Financial Reporting Standards (PFRSs) comprise:

I. Philippine Financial Reporting Standards

II. Philippine Accounting Standards

III. Interpretations

IV. Accounting Practice Statements and Implementation Guidance

a. I, II and III c. I and II

b. I, II, III and IV d. I and HI

10. Which of the following statements is incorrect regarding the PFRSs?

a. The PFRSs based on the IFRSs.

b. The Financial Reporting Standards used in the Philippines are the same as those used
globally.

c. The PFRSs have higher authority than the PASS and Interpretations.

d. The PFRSs are accompanied by guidance. The use of such guidance is sometimes
mandatory and sometimes optional.
PROBLEMS

PROBLEM 1: TRUE OR FALSE

FALSE 1. All changes in an entity's economic resources and claims to those resources result
from the entity's financial performance.

FALSE 2. The qualitative characteristics of useful information apply only to the financial
information provided in the financial statements.

FALSE 3. According to IFRS® Practice Statement 2 Making Materiality Judgments, cost is an

important consideration when making materiality judgments.

TRUE 4. When making materiality judgments, a quantitative assessment alone is not always
sufficient to conclude that an item of information is not material.

FALSE 5. Materiality judgments apply only to items that are recognized but not to those that are
unrecognized.

TRUE 6. The more significant the qualitative factors are, the lower the quantitative thresholds
will be. Thus, an item with a zero amount can be material in light of qualitative thresholds.

FALSE 7. When making materiality judgments, an entity should judge an item's materiality only
on its own and not in combination with other information in the complete set of financial
statements.

FALSE 8. The Conceptual Framework and the Standards specify a uniform quantitative
threshold for materiality.

TRUE 9.To meet the objectives of general-purpose financial reporting, a Standard sometimes
contains requirements that depart from the Conceptual Framework.

FALSE10.The Conceptual Framework is concerned with the provision of financial information to

both external users and-internal users.

PROBLEM 2: TRUE OR FALSE

FALSE 1. The Conceptual Framework may be revised from time to time Revisions in the
Conceptual Framework automatically result to changes in the Standards.

TRUE 2. According to the revised Conceptual Framework, the asset is the right, while the
liability is the obligation, rather than the ultimate inflows or outflow; of economic benefits
resulting from the asset or liability.

FALSE 3. Legal enforceability of a right, for example ownership, necessary for control over an
economic resource to exist.
TRUE 4. According to the revised Conceptual Framework, an asset can exist even if the
probability that it will provide inflows of future economic benefits is low, and even if the asset is
subject to a high measurement uncertainty.

TRUE 5.According to the revised Conceptual Framework, what the entity controls is the right,
and not the ultimate inflows of future economic benefits that the economic resource may
produce.

TRUE 6.The Conceptual Framework defines income and expenses in terms of changes in
assets and liabilities.

TRUE 7. Not all items that meet the definition of a financial statement element are recognized;
they are recognized only if recognizing them will also result in relevant and faithfully represented
information.

FALSE 8. Measuring an asset at historical cost will always' result in the same carrying amount
of the asset from period to period.

TRUE 9. According to the Conceptual Framework, amortized cost measurement relates to

historical cost, rather than current value.

TRUE 10. Although the use of a single measurement basis improves the understandability of
the financial statements, this may not always lead to useful information. Thus, the Standards
require different measurement bases for different assets, liabilities, income and expenses.

PROBLEM 3: MULTIPLE CHOICE

1. According to the Conceptual Framework, these are the qualitative characteristics that make
information useful to users.

a. Fundamental c. Relevance

b. Enhancing d. Comparability

2. Information that is capable of making a difference in the decisions made by users has this
qualitative characteristic.

a. Relevance c. Timeliness

b. Faithful representation d. Verifiability

3. When making materiality judgments, the overriding consideration is

a. the ability of the item being judged to influence users' decisions.

b. the size of the impact of the item being judged.

c. the characteristics of the item being judged.

d. c and d

4. This qualitative characteristic is unique in the sense that it necessarily requires at least two
items.

a. Verifiability c. Timeliness

b. Faithful representation d. Comparability

5. Which of the following enhances the comparability of information?

a. Making unlike things look alike.

b. Making like things look different.

c. Using different methods to account for similar transactions from period to period.

d. Consistent application of accounting policies from period to period.

6. Information has this qualitative characteristic if different, knowledgeable and independent

observers could reach consensus, although not necessarily complete agreement, that a
particular depiction is a faithful representation.

a. Relevance c. Verifiability

b. Faithful representation d. Comparability

7. The Conceptual Framework uses the term "claims" against the reporting entity to refer to a.

expenses.

b. liabilities.

c. equity

d. both b and c
8. Entity A is assessing whether an item meets the definition of a financial statement element.
Entity A considers the transaction's substance and economic reality rather than merely its legal
form. Entity A is applying which of the following accounting concepts?

a. Substance over form

b. Form over substance

9. Which of the following is not one of the aspects in the revised definition of an asset? a.

Right

b. Potential to produce economic benefits

c. Probability of the expected inflows of economic benefits from the asset d. Control

10. The new definition of an asset (a liability) focuses on the asset (liability) being

a. a present right (obligation) that has resulted from past events and has the potential to
produce (cause a transfer of) economic benefits.

b. the expected inflows (outflows) of economic benefits that are both probable and can be
measured reliably.

c. a physical object (a duty to pay cash or other resources).

d. All of these.

11. Which of the following is not an indication of an economic resource's potential to produce
economic benefits?

a. The economic resource can be used in combination with other resources to produce goods
for sale.

b. The economic resource can be used to pay liabilities.

c. The economic resource can be distributed to the owners.

d. The resource has no use in the entity's operations and has no resale value.

12. Which of the following does not meet the definition of an asset?
a. Equipment that the entity intends, and is very certain, to acquire in the future.

b. Inventories purchased and received but not yet paid.

c. Land received from a donation.

d. A publishing title for a college textbook. The publishing title has no physical substance,
meaning you cannot see or touch it.

13. Entity A determined that an asset exists. However, the asset's low probability .of inflows of
economic benefits and its very high level of measurement uncertainty affected Entity A's
recognition decisions about the asset, as these raised doubt on whether the asset's recognition
would result in useful information. Consequently, Entity A did not recognize the asset, but
because Entity A deemed it relevant, information about the asset was nonetheless provided in
the notes. Which of the following statements is correct?

a. Entity A's accounting treatment is grossly incorrect because, according to the

Conceptual Framework, all items that meet the definition of an asset should always be
recognized, regardless of the asset's potential to produce economic benefits and its
measurement uncertainty.

b. Entity A's treatment for the asset is acceptable. The asset is referred to as an
'unrecognized' asset.

c. Entity A's treatment for the asset is acceptable. The asset is referred to as anon-existent'
asset.

d. Entity A's non-recognition of the asset is correct. However the asset should have been
completely ignored as providing information about unrecognized items in the notes is not
acceptable under the Conceptual Framework.

14. Which of the following will most likely affect the determination of whether an asset or a
liability exists?

a. A low probability that the asset or liability win cause inflows or outflows of future
economic benefits.

b. A high level of measurement uncertainty regarding the asset or liability.

c. An unresolved dispute over a right or obligation.

d. All of these are relevant in determining the existence of an asset or a liability, according to the
Conceptual Framework.
15. An increase in the carrying amount of an asset could not possibly result in

a. the recognition of an income.

b. the recognition of an expense.

c. an increase in total equity.

d. no change in total equity.

PROBLEM 4: MULTIPLE CHOICE

1. The Conceptual Framework is least applicable in which of the following cases?

a. to account for a transaction that is specifically dealt with by a Standard

b. in resolving issues not addressed directly by a Standard

c. in developing Standards

d. in analyzing and interpreting Standards

2. General purpose financial statements are designed to

a. meet all the information needs of the primary users.

b. meet all of the common needs of all primary users.

c. meet most of the common needs of most primary users.

d. meet none of the needs of users of financial information.

3. These are users of financial information who are not in a position to require are reporting
entity to prepare reports tailored to their particular information needs.

a. Primary users

b. Secondary users

c. heavy users

d. slight users
4. Which of the following is not one of the primary users listed in the Conceptual Framework?

a. Investors

b. Lenders

c. creditors

d. debtors

5. Which of the following would least likely to need general purpose financial statements in
making economic decisions?

a. Stockholders c. Management

b. Potential investors d. Lenders

6. Which of the following is not a factor to consider when applying the qualitative
characteristics?

a. The information must be both relevant and faithfully represented for it to be useful.

b. The enhancing qualitative characteristics only enhance the usefulness of information but
cannot make irrelevant information or erroneous information to be useful.

c. Sometimes, it may be necessary to make trade-offs between the qualitative characteristics in

order to provide useful information.

d. To be useful, information need only to meet one, but not necessarily all, of the
qualitative characteristics.

7. Which of the following is an example of a qualitative factor used in making materiality

judgments?

a. 10% of total revenues

b. 2.5% of total assets

c. P25,000 or more

d. The context of an item in relation to a current crisis in the banking and insurance
industry.
8. According to the Conceptual Framework, this information provides a direct indication of how
well management has discharged its responsibilities to make efficient and effective use of the
reporting entity's resources.

a. The changes in the' entity's economic resources and claims to those resources.

b. The return that the entity has produced from its economic resources.

c. The level of the entity's economic resources in relation to the claims thereof.

d. The entity's liquidity and solvency.

9. Which of the following statements about the concepts in the Conceptual Framework is least
accurate?

a. General purpose financial reports are intended to meet equally the needs of all
types of external users.

b. A low probability of expected inflows or outflows of economic benefits resulting from an

asset or liability may affect the recognition of that asset or liability, but not necessarily its
existence.

c. A high level of measurement uncertainty associated with an asset or liability can affect
the faithful representation of that asset or liability, but not necessarily its relevance.

d. Recognition means including an item in the totals of the financial statements when that
item meets the definition of a financial statement element and recognizing it would result in
useful information.

10. According to the revised Conceptual Framework, the degree of uncertainty in the expected
inflows or outflows of economic benefits from an asset or liability or the degree of measurement
uncertainty associated with that asset or liability

a. does not necessarily affect the conclusion that an asset or a liability exists, although it
may affect recognition decisions about the asset or liability.

b. greatly affects the conclusion that an asset or a liability exists if the expectation of
inflows or outflows is low or the measurement uncertainty is high.

c. may not always affect the conclusion that an asset or a liability exists, but will most
certainly result to the non-recognition of an asset or liability if the expectation of inflows or
outflows is low or the measurement uncertainty is high.

d. is irrelevant, both in determining the existence of an asset or a liability and in making

recognition decisions about that asset or liability.
PROBLEM 5: FOR CLASSROOM DISCUSSION Purpose

1. Which of the following statements is incorrect regarding the purpose of the Conceptual
Framework?

a. The Conceptual Framework is intended to provide a foundation for the development of

globally acceptable Standards.

b. Globally acceptable Standards contribute to economic efficiency by lowering the cost of

capital and reducing international reporting costs.

c. Globally acceptable Standards reduces the information gap between financial statement
users and the reporting entity's management.

d. The Conceptual Framework prescribes the concepts for both general purpose and
specific purpose financial reporting.

Status

2. The Conceptual Framework (choose the incorrect statement)

a. is not a PFRS.

b. in the absence of a PFRS, shall be considered by management when making its judgment in
developing and applying an accounting policy that results in useful information.

c. is concerned with general purpose financial reporting only.

d. prevails over the PFRSs in cases of conflicts.

Scope

3. Which of the following is excluded from the scope of the Conceptual Framework?

a. The objective of financial reporting.

b. Qualitative characteristics of useful of financial statements financial information.

c. The components of a complete set and their presentation requirements

d. Definitions, recognition criteria and derecognition of financial statement elements.

e. Descriptions of the measurement bases used in financial reporting.

The objective of financial reporting.

4. Which of the following is incorrect regarding the objective of general purpose financial
reporting?

a. The objective of general purpose financial reporting is to provide information that is

useful to primary users in making decisions about providing resources to the entity.
b. Decisions about providing resources to the entity depend on the users' expected returns,
which in turn, depend on assessments of the entity's prospects for future net cash inflows and
management stewardship.

c. The objective of general purpose financial reporting forms the foundation of the
Conceptual Framework.

d. General purpose financial reporting provides information about an entity's

economic resources, claims, and changes in those resources and claims, but not on the
utilization of those resources by the entity's management.

Primary users

5. Which of the following statements best explains why government regulators are the
reporting entity's management and government not considered primary users under the
Conceptual Framework?

a. These users are considered related parties, and hence do not make relevant decisions.

a. These users have the ability to curtail the operations of the reporting entity and therefore
have the ability to affect the entity's going concern.

b. These users have the ability to curtail the operations of the reporting entity and therefore
have the ability to affect the entity's going concern.

c. These users have the power to demand information they need directly from the
reporting entity.

d. All of these.

Information on economic resources, claims, and changes

6. Information about the reporting entity's economic resources, claims against the reporting
entity and changes in those resources and claims is referred to in the Conceptual
Framework as the

a. economic phenomena.

b. entity's return.

c. financial performance.

d. prospects for future cash flows.

Qualitative characteristics

7. Entity A deliberately overstated its liabilities from PM to 01.2M. What qualitative characteristic
is violated?

a. Relevance c. Timeliness

b. Faithful representation d. Understandability

8. Two primary users are using the financial information of Entity A. If User #1 concludes that
Entity A's sales has increased while User #2 concludes that it has decreased, Entity A's
financial information is not

a. relevant.

b. faithfully represented.

c. comparable

d. verifiable.

Materiality

9. Entity A is making a materiality judgment. Entity A considers the size of the impact of an item
to be material if it exceeds 5% of total assets. What type of materiality assessment is this?

a. Quantitative c. Requirement of a Standard

b. Qualitative d. Relevance

Financial statements and the Reporting entity

10. Which of the following is incorrect regarding the objective of general purpose financial
statements?

a. General purpose financial statements show information on the reporting entity's assets,
liabilities, equity, income and expenses.

b. General purpose financial statements are intended to show the value of the
reporting entity.

c. General purpose financial statements provide information that is useful in assessing the
entity's ability to generate future net cash inflows.

d. General purpose financial statements provide information that is useful in assessing the
entity's management stewardship in relation to the use of the entity's economic resources.
The Elements of Financial Statements

11. Which of the following is least likely to be considered when determining whether an item
meets the definition of an asset?

a. whether there is a present economic resource, which is a right, that has resulted from past
events

b. whether the right has a potential to produce economic benefits, evidenced by at least one
circumstance

c. whether the entity controls the right

d. whether it is probable (more likely than not) that the resource will produce economic
benefits

12. The revised definitions of an asset and a liability emphasize that

a. an asset is a right, and a liability is an obligation, that has the potential to

produce, or cause the transfer of, economic benefits.

b. an asset is a controlled resource, and a liability is an obligation, that is expected to

cause inflows or outflows of economic benefits.

c, an asset is the physical object and the liability is ultimate outflow of economic benefits from
settling the obligation.

d. All of these are emphasized in the revised definitions.

13. Which of the following is correct when determining the existence of an asset or a liability?

a. An asset or a liability exists if the associated right or obligation arises from legal or contractual
requirements.

b. An asset or a liability exists only if the expected inflows or outflows of economic benefits from
the asset or the liability are probable, meaning they are more likely than not to occur,

c. An asset or a liability can exist even if its potential to produce, or cause a transfer of,
economic benefits is not certain or even likely — what is important is that the right or
the obligation exists in the present and that in at least one circumstance it will
produce, or cause a transfer of, economic benefits.

d. All of these are correct.

14. Control is a necessary element of an asset. Control means

a. the entity has the exclusive right over the benefits -of an asset, including the ability to
prevent others from accessing those benefits.

b. that the entity can ensure that the resource will produce economic benefits in all
circumstances.

c. the entity has the exclusive right over the entire economic resource, and not only a portion of
it.

d. a legally enforceable right conferred to the entity by a law or other operation of law.

15. An asset is an economic resource and an economic resource is a right that has the potential
to produce economic benefits. Which. of the following is not one of the potentials of an
economic resource to produce economic benefits for an entity?

a. Service potential, i.e., the resource can be used to provide services in the entity's normal
business activities.

b. The resource can be converted into cash.

c. The resource has the ability to provide cost-savings to the entity.

d. The resource causes more outflows of cash from the entity than inflows.

Executory contracts

16. Entity A enters into a purchase commitment with Entity B (a seller). Neither party performs
its obligation on the contract, i.e., Entity A did not yet pay the purchase price, while Entity B did
not yet deliver the goods. Which of the following is incorrect?

a. The contract is executory. Entity A has a combined right to receive the goods and an
obligation to pay for them.

b. Entity A recognizes neither an asset nor a liability except when the contract
becomes burdensome, such as when the goods become obsolete before they are
delivered.

c. If Entity B performs its obligation first, Entity A's combined right and obligation changes
to a liability.

d. If Entity A performs its obligation first, Entity A's combined right and obligation changes
to a liability.

Recognition and Derecognition

17. According to the revised Conceptual Framework, an item is recognized if

a. it meets the definition of a financial statement element.

b. recognizing it would provide useful information.

c. it is probable that the item will result to an inflow or outflow of economic benefits and its cost
can be measured reliably.

d. a and b

18. According to the Conceptual Framework, an item is recognized if it meets the definition of an
asset, liability, equity, income or expense, and recognizing it would provide relevant and
faithfully represented information. Which of the following relates faithful representation rather
than relevance?

a. It is uncertain whether the asset exists.

b. The asset exists but the probability that it will produce inflows of economic benefits is low.

c. A high level of measurement uncertainty associated with the asset.

d. None of these. An item that meets the definition of an asset is always recognized as an asset.

19. Which of the following will most likely to cause the non-recognition of an asset or a liability?

a. The probability of an inflow (outflow) of future economic benefits from the asset (liability) is
low.

b. There is a measurement uncertainty regarding the asset or liability.

c. It is uncertain whether the asset or liability exists.

d. Recognizing the asset or liability would not provide relevant and faithfully represented
information.

20. Which of the following would not result to the recognition of a liability?

a. Receipt of the proceeds of a bank loan.

b. Receipt of delivery of equipment purchased on credit.

c. A commitment for future execution becomes burdensome.

d. Paying in advance the purchase price of inventories for future delivery.

21. Entity A determined that a previously recognized asset no longer meet the definition of an
asset. Accordingly, Entity A removed the carrying amount of the asset from the statement of
financial position and recognized it as an expense. Entity A is applying which of the following
principles?

a. Matching

b. Recognition

c. Derecognition

d. Presentation and disclosure

22. Recognizing a financial statement element requires measuring it in monetary terms.

Which of the following statements is incorrect regarding measurement?

a. The Conceptual Framework only describes the measurement bases used in financial
reporting but does not specify how a particular statement element should be measured- this
is addressed by the Standards.

b. The Conceptual Framework broadly classifies the measurement bases used in financial
reporting into two, namely, historical cost and current value.

c. Measurement uncertainty will always cause the non-recognition of a financial

statement element.

d. Measuring a financial statement element often requires estimation.

Presentation and Disclosure

23. Effective communication makes information more useful. Effective communication requires
all of the following except

a. focusing on presentation and disclosure objectives and principles rather than focusing
on rules

b. classifying information in a manner that groups similar items and separates dissimilar
items.

c. aggregating information in such a way that it is not obscured either by unnecessary

detail or by excessive aggregation.

d. using standardized descriptions, a.k.a `boilerplate', rather than entity-specific

information.

24. According to the revised Conceptual' Framework, income and expenses are classified as
either

a. recognized in profit or loss or in other comprehensive

b. gains and revenues and expenses and losses, respectively

c. contributions form, or distributions to the entity’s owners.

d. increases or decreases in the entity's assets or liabilities.

Concepts of Capital and Capital maintenance

25. Under this concept of capital maintenance, profit is earned if net assets increased during the
period after excluding the effects of transactions with the owners.

a. Financial capital maintenance

b. Physical capital maintenance

c. Repairs and maintenance

d. Building maintenance

PROBLEMS PROBLEM 1: TRUE OR FALSE

TRUE 1.The application of PFRSs, with additional disclosure when necessary, is presumed to
result in financial statements that achieve a fair presentation.

TRUE 2.According to PAS 1, an entity shall make an explicit and unreserved statement of
compliance with the PFRSs in the notes only if the entity complies with all the requirements of
PFRSs.

FALSE 3. PAS 1 encourages, but does not require, the presentation of the preceding year's
financial statements as comparative information to the current year's financial statements.

FALSE 4. According to PAS 1, assets and liabilities or income and expenses are offset, unless
separate presentation is required or permitted by a PFRS.

FALSE 5.According to PAS 1, PFRSs apply to financial statements as well as to other

information presented in an annual report, a regulatory filing, or another document.

FALSE 6.According to PAS 1, the line item "Cash and cash equivalents" should always be
presented first in the statement of financial position.

FALSE 7. PAS 1 prescribes an order or format of presenting items in the financial statements.

FALSE 8. An entity may omit the notes when presenting general purpose financial statements.

FALSE 9. If profit or loss is P100 while other comprehensive income is P20, total
comprehensive income must be P130.
FALSE 10. PAS 1 encourages, but does not require, the disclosure of an entity's domicile and
legal form, its country of incorporation and the address of its registered office and a description
of the nature of its operations and its principal activities.

PROBLEM 2: MULTIPLE CHOICE

1. The objective of PAS 1 is

a. to ensure comparability by prescribing the basis for presentation of general purpose

financial statements.

b. to ensure the faithful representation of financial statements.

c. to ensure the relevance of information presented in the financial statements.

d. to prescribe the recognition and measurement principles applicable to assets, liabilities,

income and expenses.

2. Entity A's financial statements in the current period is comparable with Entity A's financial
statements in the previous period. This type of comparability is called

a. Inter-comparability c. Extra-comparability

b. Intra-comparability d. Intro-comparability

3. The scope of PAS 1 is

a. the preparation and presentation of general purpose financial statements.

b. the recognition, measurement and disclosure requirements for specific transactions and other
events.

c. the presentation of general purpose financial statements as well as all other information
contained in an entity's annual report.

d. all of these

4. The statement of financial position is also called

a. balance sheet. c. positions statement.

b. income statement. d. all of these

5. When preparing financial statements, PAS 1 requires management to assess the entity's
ability to continue as a going concern. The assessment covers a minimum period of

a. at least one year from the end of the reporting period.

b. at least two years from the end of the reporting period.

c. at least five years from the end of the reporting period.

d. there is no such requirement.

6. Which of the following is not considered an appropriate application of offsetting under PAS 1?

a. Presenting a gain from the sale of a noncurrent asset net of the related selling expenses.

b. Deducting foreign exchange losses from foreign exchange gains and presenting only the net
amount.

c. Deducting unrealized losses from unrealized gains from trading securities and presenting
only the net amount.

d. Deducting accumulated depreciation from the equipment account and presenting only
the carrying amount.

]7. PAS 1 requires an entity to provide an additional balance sheet dated as of the beginning of
the preceding period if certain instances occur. Which of the following is not one of those
instances? (Assume all of the following has a material effect)

a. Retrospective application of an accounting policy.

b. Retrospective restatement

c. Reclassification of items in the financial statements

d. Change in the frequency of reporting

8. The PFRSs apply to which of the following?

a. A management's review of the entity's financial performance during the period vis-a-vis
its targets for that period contained in the entity's annual report, which also includes the entity's
financial statements.

b. Schedules, reconciliations and returns required by the Bureau of Internal Revenue (BIR)
to be filed together with the financial statements.

c. Environmental reports required by the Department of Environment and Natural

Resources (DENR) that are included in the entity's annual report.

d. Explanatory material and other information that are disclosed in the notes to the
financial statements.
9. This is the most used method of presenting a statement of financial position. It facilitates the
computation of liquidity and solvency ratios.

a. Classified presentation

b. Unclassified presentation

c. Classified as to liquidity

d. Based on liquidity

10. Which of the following best reflects the definition of normal operating cycle under PAS 1?

a. For a manufacturing entity, this is the usual time it takes for the entity to acquire raw
materials, process those raw materials into finished goods, and sell the finished goods.

b. For a manufacturing entity, this is the usual time it takes for the entity to acquire
raw materials, process those raw materials into finished goods, sell the finished goods
on account, and collect the receivables.

c. For a manufacturing entity, this is the usual time it takes for the entity to acquire raw
materials on account and settle the account.

d. For a manufacturing entity, this is the usual time it takes for the entity to sell finished
goods on account and coiled the receivables.

PROBLEM 3: MULTIPLE CHOICE

1. Who is responsible for the preparation and fair presentation of an entity's financial statements
in accordance with the PFRSs?

a. Accountant c. Auditor

b. Management d. Government regulatory body

2. The statement of financial position may be presented either showing current/non-current

distinction (classified) or based on liquidity (unclassified). PAS 1 encourages a(an)

Classified representation

3 Which of the following is a current asset?

a. Deferred tax asset expected to reverse within 3 months from the reporting date

b. Property, plant and equipment

c. Non-trade note receivable due in 13 months

d. Accounts receivable

4. Which of the following statements is incorrect regarding the provisions of PAS 1?

a. An entity is required to present separate sections of profit or loss and other comprehensive
income.

b. Presenting an income statement or statement of profit or loss in addition to a statement of

other comprehensive income is permitted when an entity elects to use the "two-statement"
presentation.

c. Presenting an income statement or statement of profit or loss alone without a

statement of other comprehensive income is allowed.

d. Presenting comprehensive income as a note disclosure only is prohibited.

5. When a separate statement of profit or loss (income statement) is presented,

a. it shall be displayed immediately before the statement presenting comprehensive

income.

b. it shall be displayed immediately after the statement presenting comprehensive income.

c. it shall be displayed alone. The entity may opt not to present information on comprehensive
income.

d. Any of these.

6. Which of the following is not correct when an entity opts to use the "two-statement
presentation" of income and expenses.

a. The separate income statement forms part of a complete set of financial statements and
shall be displayed immediately before the statement presenting comprehensive income.

b. The profit or loss section is not presented anymore in the statement presenting
comprehensive income.

c. The profit or loss section is required to be presented in the statement presenting

comprehensive income.
d. The separate statement presenting comprehensive income begins with the amount of
profit or loss.

7. Entity A reclassifies a gain that was previously recognized in other comprehensive income to
the current period's profit or loss. According to PAS 1, how should Entity A present the
reclassification adjustment in the other comprehensive income section of the statement of
comprehensive income?

a. as an addition c. only at net of tax

b. as a deduction d. none of these

8. Which of the following is a current liability?

a. Deferred tax liability

b. An obligation for which the entity has an unconditional right to defer

c. A long-term obligation that becomes payable on demand because of a breach of loan

agreement but the lender agrees before the balance sheet date to provide a grace
period for the lender to rectify the breach.

d. An obligation for which the entity has a conditional right to defer.

9. According to PAS 1, items of other comprehensive income are presented according to the
following groupings

a. ordinary and extraordinary items

b. by nature and by function

c. those that are subsequently reclassified to profit or 1°s5 and those that are not

d. continuing and discontinued operations

10. When an entity changes the end of its reporting period and presents financial statements for
a period longer or shorter than one year, an entity shall disclose all of the following, except

a. the period covered by the financial statements

b. the reason for using a longer or shorter period.

c. the fact that amounts presented in the financial statements are not entirely comparable.

d. a quantification of the possible adjustments that would eliminate the effects of the
longer or shorter reporting period.
PROBLEM 4: FOR CLASSROOM DISCUSSION Scope

1. PAS 1 applies to which of the following?

a. The preparation and presentation of general purpose financial statements.

b. The recognition and measurement of specific assets, liabilities, income and expenses.

c. The disclosure requirements for specific transactions and other events. d. All of these.

General features

2. In 20x3, Entity A makes a retrospective application of an accounting policy that has a material
effect on the information in the statement of financial position as at the beginning of the
preceding period. Entity A wishes to provide comparative information in addition to the minimum
requirement of PAS 1, i.e., Entity A will be presenting its 20x3 financial statements together with
the 20x2 and 20x1 financial statements. In this case, the additional statement of financial
position required by PAS 1 will be dated

a. as at January 1, 20x1.

b. as at January 1, 20x2.

c. as at January 1, 20x3

d. for the period ended 20x1

3. Entity A wants to change the presentation of, and the classification of some items in, its
financial statements. Which of the following statements is incorrect?

a. Entity A can make the change if it is required by a PFRS.

b. Entity A can make the change if the change is expected to result in reliable and more relevant
information to the users of its financial statements.

c. Entity A may be required to provide an additional balance sheet dated as at the beginning of
the preceding period.

d. Entity A can make the change only if it makes an irrevocable promise not to make
another change within the next five years.
4. The financial statements of Entity A shows line items described as "Other current assets,"
"Other noncurrent liabilities," and "Miscellaneous expenses." Which of the following is correct?

a. Entity A considers the items included in these line items as dissimilar and cannot be
included in material classes of similar items and are also individually immaterial to
warrant separate presentation.

b. Entity A considers the items included in these line items as individually material but with
dissimilar nature or function.

c. Entity A considers the items included in these line items as comprising a material class of
similar items.

d. This manner of presenting items is unacceptable under PAS 1.

Complete set of financial statements

5. According to PAS 1, a complete set of financial statements includes which of the following?

a. Income tax return

b. Directors' reports

c. Notes

d. All of these

Additional Statement of financial position

6. PAS 1 requires an entity to present an additional statement of financial position as at the

beginning of the preceding period when an entity makes any of the following, except

a. the retrospective application of an accounting policy.

b. the retrospective restatement of items in the financial statements.

c. the reclassification of items in the financial statements.

d. the prospective application of a change in accounting estimate.

Statement of financial position

7. The statement of financial position of which of the following entities does not show current
and noncurrent distinctions among assets and liabilities?

a. Banks and other financial institutions

b. Mining companies

c. Trading enterprises

d. Manufacturing firms
8. The principles of PAS 1 in relation to the classification of liabilities as current or noncurrent
favor the current classification. PAS 1 provides stricter conditions for classifying liabilities as
noncurrent. Which of the following statements best reflects a valid reason for this?

a. Noncurrent liabilities are usually more material in terms of size compared to current
liabilities.

b. Most primary users are concerned more with an entity's current liabilities when making
economic decisions because of the shorter duration of time before they cause an outflow of
economic resources.

c. The stricter conditions for noncurrent classification address the potential misuse
of classification in order to present favorably the entity's liquidity. d. All of these.

Statement of profit or loss and other comprehensive income

9. Which of the following is not an acceptable method of presenting income and expenses?

a. Presenting income and expenses that affect profit or loss and those that are components of
other comprehensive income in a single statement.

b. Presenting an income statement in addition to a statement that presents comprehensive

income.

c. Presenting an income statement alone without a statement that presents

comprehensive income.

d. All of these are acceptable methods of presentation.

10. This method of presenting expenses is more difficult to apply but has the potential of
providing more relevant information to users. Its downside, however, is that it involves
considerable judgment and may require arbitrary allocations.

a. Nature of expense. c. Classified presentation

b. Function of expense d. Based on liquidity

Notes

11. Which of the following is not a purpose of the notes?

a. to present information about the basis of preparation of the financial statements and the
specific accounting policies
b. to disclose the information 'required by PFRSs that is not presented elsewhere in the financial
statements

c. to provide information that is not presented elsewhere in the financial statements but is
relevant to an understanding of any of the financial statements.

d. to rectify inappropriate accounting policies.

PAS 2 INVENTORIES
PROBLEMS
TRUE OR FALSE
FALSE 1. According to PAS 2, inventories are measured at net realizable value.
FALSE 2. According to PAS 2, net realizable value and fair value less costs to sell are
the same.
FALSE 3. Storage costs of part-finished goods may be included in the cost of inventory
but not storage costs of finished goods.
TRUE 4. Trade discounts are added to the cost of inventories.
TRUE 5. Import duties, freight-in and non-refundable purchase taxes form part of the
cost of inventories.
TRUE 6. Raw materials inventory is not written down below cost if the finished goods to
which they will be incorporated are expected to be sold at or above cost.
FALSE 7. Reversals of inventory write-downs may exceed the amount of the original
write-down previously recognized.
TRUE 8. The cost of factory management is included in the cost of inventory.
FALSE 9. The maintenance costs of a machine used in the manufacturing process are
not included in the cost of inventories.
TRUE 10. If the cost of an inventory is P8 while its net realizable value is P6, the
amount of write down is 2.
PROBLEM 2: MULTIPLE CHOICE
1. Which of the following is not included as part of the cost of an inventory?

Purchase cost, net of trade discount

Direct labor cost
Freight in
Selling cost
2. Conversion costs do not include which of the following costs?

Direct materials c. Production

Direct labor d. All of these are included
3. These deal with the computation of cost of sales and cost of ending inventory.

net realizable value c. cost formulas

perpetual inventory system d.. costing

4. Entity A’s inventories consist of items that are ordinarily interchangeable. According
to PAS 2, which of the following cost formulas shall Entity A use?
Specific identification c. Weighted Average
FIFO d. b or c
5. Which of the following statements is incorrect regarding the use of cost formulas?

PAS 2 requires the use of specific identification of costs for inventories that are not
ordinarily interchangeable.
Entities may choose between FIFO and Weighted Average cost formulas for inventories
that are ordinarily interchangeable.
Different cost formulas may be used for each class of inventory with dissimilar nature
and use.
Only one formula shall be used for all inventories regardless of differences in their
nature and use.
6. Entity A’s buys and sells two types of products – Product A and Product B. Items of
Product A are not ordinarily interchangeable while items of Product B are ordinarily
interchangeable.
According to PAS 2, what cost formula shall Entity A use? (specific identification ‘SI’,
first-in, first-out ‘FIFO’, weighted average ‘WA’)
Product A – SI; Product B- FIFO or WA

7. Entity A is a distributor of oil. Entity A’s inventories are ordinarily interchangeable.

Entity A maintains a specific level of inventory such that the latest purchases are the
ones dispatched first to the sales outlets. Consequently, the latest purchases are sold
first. Which of the following cost formulas shall be used by Entity A?
Last-in. first-out (LIFO) c. Weighted Average
FIFO d. b or c
8. In which of the following instances is a write-down of inventories to net realizable
value may not be required?
selling prices are rising because demand has increased
9. Write-downs of inventories to their net realizable value are recognized

in profit or loss

PROBLEM 1: TRUE OR FALSE

FALSE 1. Cash flows are presented in the statement of cash flows into four activities.
TRUE 2. Non-financial institutions have the option of classifying interest income
received as either investing activities or operating activities.
FALSE 3. Cash flows relating to income and expenses are normally classified as
investing activities in the statement of cash flows.
TRUE 4. Only transactions that have affected cash and cash equivalents are included in
the statement of cash flows. Non-cash transactions are excluded and disclosed only.
FALSE 5. According to PAS 7, the indirect method of presenting cash flows relating to
operating activities shows each major class of gross cash receipts and gross cash
payments.
PROBLEM 2: MULTIPLE CHOICE
1. Entity A had the following balances at December 31, 20x1:
Cash in bank P 35,000
Cash in 90-day money market account 75,000
Treasury bill, purchased 11/1/xl, maturing 1/31/x2 350,000
Treasury bill, purchased 12/1/xl, maturing 3/31/x2 400,000
How much is the cash and cash equivalents to be reported in Entity A's December
31, 20x1 statement of financial position?
a. 110,000 c. 460,000
b. 385,000 d. 860,000
2. Which of the following cash flows is presented in the operating activities section of a
statement of cash flows?
a. cash receipts from issuing shares or other equity instruments and cash payments to
redeem them
b. cash receipts from issuing notes, loans, bonds and mortgage payable and other
short-term or long-term borrowings, and their repayments
c. cash receipts from the sale of goods, rendering of services, or other forms of
income
d. cash payments by a lessee for the reduction of the outstanding liability relating to a
lease

3. In the statement of cash flows of a non-financial institution, interest expense paid is

presented under
a. operating activities.

b. investing activities.

c. financing activities

d. a or c

4. Which of the following is presented in the activities section of the statement of cash
flows?
a. Purchase of a treasury bill three months before its maturity date.

b. Exchange differences from translating foreign currency denominated cash flows.

c. Acquisition of equipment through issuance of note payable.

d. Bank overdrafts that can be offset.

5. Entity A acquires equipment by paying a 10% down payment and issuing a note
payable for the balance. How should Entity A report the transaction in the statement of
cash flows?
Down payment Note payable
a. Investing Activities None
b. Investing Activities Financing Activities

c. Financing Activities None

d. None None

PROBLEM 3: FOR CLASSROOM DISCUSSION

Cash and cash equivalents
1. Entity A had the following balances at December 31, 20x2;
Cash on hand P300,000
Cash in bank 700,000
Cash in 90-day money-market account 500,000
Treasury bill, purchased 12/1/x2, maturing 2/28/x3 1,600,000
Treasury bond, purchased 3/1/x2, maturing 2/28/x3 1,000,000
How much cash and cash equivalents is reported in Entity A's December 31, 20x2
statement of financial position?
a. 3,800,000 c. 2,800,000

b. 1,100,000 d. 1,500,000

Presentation
2. Which of the following is included in the investing activities section of the statement of
cash flows?
a. Acquisition and sale of investments in held for trading securities.

b. Acquisition and sale of items of property, plant and equipment that are
routinely manufactured in the entity's ordinary course of business and are to
be held for rentals and reclassified to inventories when the assets cease to be
rented and become held for sale.

c. Acquisition and sale of short-term investments in cash equivalents.

d. Cash inflow from repayment of loan.

3. Which of the following is included in the financing activities section of the statement of
cash flows?
a. cash payments for purchases of goods and services

b. cash receipts and cash payments in the acquisition and disposal of property, plant
and equipment, investment property, intangible assets and other noncurrent assets
c. loans to other parties and collections thereof (other than loans made by a financial
institution)
d. cash receipts from issuing shares or. other equity instruments and cash
payments to redeem them
4. This method of presenting cash flows from (used in) operating activities involves
adjusting accrual basis profit or loss for the effects of changes in operating assets
and liabilities and effects of non-cash items. a. Direct method
c. Inverse method
b. Indirect method
d. Reverse method
5. Entity A declares cash dividends in 20x1 and pays the dividends in 20x2. How
should Entity A report the dividends paid in the statement of cash flows for 20x1 20x2
a. Operating activities None
b. Financing activities None

c. None Financing Activities

d. None Operating or Financing

10. Inventories are usually written-down to net realizable value

a. on an item by item basis.
b. on the basis of their classification, for example, as all finished goods, all work
in process and all raw materials and supplies. c. every year.
d. on the basis of their relative stand-alone selling prices.

PAS 8 PROBLEMS
PROBLEM 1: MULTIPLE CHOICE
1. A change in measurement basis is most likely a change in accounting policy

2. A correction of prior period error is accounted for by retrospective restatement

3. Which of the following is a change in accounting estimate?

4. These result from new information or new developments. Change in accounting

estimates

5. The effect of which of the following is presented in profit or loss in the current period
(or current and future periods, if both are affected) rather than as an adjustment to the
opening balance of retained earnings. Change in accounting estimates

PROBLEM 2:
1. According to PAS 8, in the absence of a PFRS that specifically deals with
a transaction, management shall its judgement

2. According to PAS 8, a change in accounting policy is accounted for a,b,c

3. This refers to applying a new accounting policy to transactions, other

events and conditions as if that policy had always been applied.

4. According to PAS 8, a change in accounting estimate is accounted for

prospective application.

5. Entity A changes its inventory cost formula from FIFO to weighted

average. How should Entity A account for this change?

PAS 10 PROBLEM 1
1. ABC Co. completes the draft of its December 31, 20x1 year-end financial
statements on January 31, 20x2. On March 1, 20x2, the management of ABC
Co. authorizes the financial statements for issue to its supervisory board. The
supervisory board is made up solely of non-executives and includes
representatives of employees and other outside interests. The supervisory board
approves the financial statements on March 10, 20x2. The financial statements
are made available to shareholders and others on March 14, 20x2. The
shareholders approve the financial statements at their annual meeting on March
23, 20x2 and the financial statements are then filed with a regulatory body on
April 1, 20x2. For purposes of PAS 10, what is the date of authorization of the
financial statements?
 2. According to PAS 10, these are events that provide evidence of conditions
that existed at the end of the reporting period. ADJUSTING

3. Which of the following events after the reporting period are treated as
adjusting events? Discovery of prior period fraud or errors

4. Entity A's inventories on December 31, 20x1 have a cost of $100,000 and
a net realizable value of $80,000. Shortly after December 31, 20x1, but before
the financial statements were authorized for issue, the inventories were sold for a
net sale proceeds of P70,000. The correct valuation of Entity A's inventories in
the December 31, 20x1 financial statements is

5. According to PAS 10, non-adjusting events after the reporting period

disclosed if material

PROBLEM 2
1. ABC Co. completes the draft of its December 31, 20x1 year-end financial
statements on January 31, 20x2. On February 5, 20x2, the board of directors
reviews the financial statements and authorizes them for issue. The entity
announces its profit and selected other financial information on February 23,
20x2. The financial statements are made available to shareholders and others on
March 1, 20x2. The shareholders approve the financial statements at their annual
meeting on March 18, 20x2 and the approved financial statements are then filed
with a regulatory body on April 1, 20x2. Events after the reporting period are
those occurring

2. These are events that are indicative of conditions that arose after the
reporting period. NON ADJUSTING

3. Entity A recognized a provision for a pending litigation amounting to

$50,000 on December 31, 20x1 (end of current reporting period). This amount is
reflected in Entity A's reported profit of $600,000 for the year 20x1. Shortly after
December 20x1, but before the financial statements were authorized for issue,
the litigation is settled for 40,000. The correct profit in 20x1 is
4. Which of the following is an example of an adjusting event?

Sale of inventories

5. Which of the following is an example of a non-adjusting event?

Significant decline of foreign
PROBLEMS

PROBLEM 1: MULTIPLE CHOICE

1. Financial statements prepared in accordance with PFRSS are said to be the entity's
"First PFRS financial statements" if the previous financial statements:

a. were prepared in accordance with PFRSs but were used for internal reporting
purposes only
b. did not contain a complete set of financial statements as required under PAS 1.
c. The entity did not present financial statements in previous periods.
d. any of these

2. The explicit and unreserved statement of compliance with PFRSS required under
PFRS 1 is presented
a. on the face of the opening statement of financial statements.
b. on the face of all of the financial statements.
c. in the notes.
d. all of these

3. The opening PFRS statement of financial position is dated as

a. at the beginning of the first PFRS reporting period.
b. at the beginning of the comparative period.
c. at the date of transition to PFRSs.
d. at the end of the earliest period presented with the first PFRS financial statements.

4. The application of the PFRSs starts

a. at the beginning of the first PFRS reporting period.
b. at the beginning of the comparative period to the first PFRS reporting period.
c. at the date of transition to PFRSs
d. at the earliest of a, b and c.

5. Which of the following statements is incorrect regarding the provisions of PFRS 1?

a. The first-time adopter shall select its accounting policies based on the latest versions
of PFRSs as at the current reporting date.
b. Accounting policies based on the latest versions of PFRSs are applied to the current
period financial statements while those based on earlier versions of PFRSs are applied
to the comparative financial statements.
c. The selected polices are applied to all financial statements presented together with
the first PFRS financial statements
d. Early application of PFRSs that have not yet become effective as of the current
reporting period is permitted, but not required.

PROBLEM 2: MULTIPLE CHOICE

1. Financial statements prepared in accordance with PFRSs are said to be the entity's
"First PFRS financial statements" if the previous financial statements

a. were prepared in accordance with other reporting standards not consistent with the
PFRSs.
b. did not contain an explicit and unreserved statement of compliance with PFRSs.

c. contained an explicit and unreserved statement of compliance with some, but not all,
PFRSs.

d. were prepared using some, but not all, applicable PFRSs.

e. any of these

PFRS 2

1. A share-based payment transaction is one in which an entity receives goods or

services and pays for them

a. by issuing its own equity instruments

b. through cash, but the amount is based on the fair value of the entity's equity
instruments.
c. either a or b, as a choice given to either the entity or the supplier of the goods or
services
d. any of these
2. Which of the following is excluded from the scope of PFRS 2?

a. Employee share option plans

b. Employee share appreciation rights
c. Purchase of goods from an unrelated party in exchange for an entity's own shares of
stocks
d. Transfer of equity instruments as consideration for a business combination

3. On February 1, 20x1, Entity A offered its employees share options subject to the offer
being ratified in the shareholders' general meeting. The share option offer was
approved in the shareholders' general meeting held on March 1, 20x1. Entity A issued
the share options on April 1, 20x1. The fair value of the share options vary between
these dates. For purposes of PFRS 2, the share options should be valued at the fair
value determined on

a. February 1, 20x1.
b. March 1, 20x1.
c. April 1, 20x1.
d. any of these

PROBLEMS

PROBLEM 1: MULTIPLE CHOICE

1. Non-current assets are presented as current assets in the statement of financial

position
a. only when they are expected to be sold within 12 months from the end of reporting
period.
b. only if they are actually sold after the reporting period but before the date of
authorization of the financial statements for issue.
c. only when they qualify as held for sale assets under PFRS 5.
d. never presented as current items.

2. The qualification of an asset to be classified as held for sale after the reporting period
but before the financial statements are authorized for issue
a. is a non-adjusting event after the reporting period.
b. is an adjusting event after the reporting period.
c. is an extraordinary item.
d. a or b

3. A noncurrent asset classified as held for sale in accordance with PFRS 5 has not
been sold after a year. The asset shall continue to be presented as held for sale under
PFRS 5 if

a. the delay is due to events beyond the entity's control.

b. the entity remains committed to its plan to sell the asset.
c. the noncurrent asset is actually sold after the reporting period but before the financial
statements were authorized for issue.
d. a and b

4. According to PFRS 5, gain on impairment reversal on an asset held for sale is

a. recognized for the fair value change during the period.
b. recognized in other comprehensive income.
c. recognized only to the extent of cumulative impairment losses previously
recognized.
d. not recognized.

5 The results of discontinued operations are presented separately in the statement of

profit or loss and other comprehensive income

a. as a single amount gross of tax.

b. as a single amount net of tax.
c. as part of the regular line items.
d. a orb

PROBLEM 2: FOR CLASSROOM DISCUSSION Classification as Held for sale

1. According to PFRS 5, held for sale classification is permitted when

a. the noncurrent asset or disposal group is available for immediate sale in its present
condition.
b. the sale is highly probable
c. a and b
d. the sale actually occurred after the reporting period but before the financial
statements were authorized for issue.
Measurement

2. According to PFRS 5, assets held for sale are measured at

a. fair value.
b. fair value less costs to sell.
c. carrying amount.
d. lower of b and c

Discontinued operations
3. According to PFRS 5, a disposal group may qualify as discontinued operation if

à. it is a component of an entity.
b. it meets the held for sale classification criteria.
c. a and b
d. none of these

Presentation

4. The results of a discontinued operations are presented in the statement of profit or

loss
a. before the profit or loss from continuing operations but after the profit for the year.
b. after the profit or loss from continuing operations but before the profit for the
year.
c. separately from the profit or loss from continuing operations and it does not affect the
profit for the year.
d. as an adjustment to the beginning balance of the retained earnings.

5. Which of the following is included in profit from continuing operations?

a. extraordinary items
b. discontinued operations
c. other comprehensive income
d. income tax expense

PROBLEMS

PROBLEM 1: MULTIPLE CHOICE

1. Exploration for and evaluation of mineral resources is

a. the search for mineral resources before the entity has obtained legal rights to explore
in a specific area.
b. the search for mineral resources after the entity has obtained legal rights to
explore in a specific area, as well as the determination of the technical feasibility
and commercial viability of extracting the mineral resource.
c. the search for mineral resources before the entity has obtained legal rights to explore
in a specific area up to the date when mineral resources are actually confirmed to exist
in the area.
d. the search for mineral resources after the entity has obtained legal rights to explore in
a specific area up to the date when commercial operations begin.

2 According to PFRS 6 Exploration for and Evaluation of Mineral Resources, an entity

may change its accounting policies for exploration and evaluation expenditures if

a. the change makes the financial statements more relevant and more reliable.
b. the PFRSS do not prohibit the change.
c. the change makes the financial statements more relevant and no less reliable,
or more reliable and no less relevant.
d. a or b

PROBLEM 2: FOR CLASSROOM DISCUSSION

Exemption from Hierarchy of reporting standards under PAS 8

1. According to PFRS 6, expenditures on exploration for and evaluation of mineral
resources are recognized as
a. assets.
b. expenses.
c. a or b depending on the entity's accounting policy.
d. not accounted for

Measurement

2. According to PFRS 6, how are exploration and evaluation assets measured?

Initial Subsequent
Cost cost model or revaluation model

PROBLEMS
PROBLEM 1: MULTIPLE CHOICE

1. PFRS 7 requires the disclosure of the significance of financial instruments to the

entity's financial position and performance. Which of the following is not included in this
disclosure?

a. Disclosure of fair values of financial instruments in a way that the fair value can be
compared with the carrying amount of the financial instrument.
b. The carrying amounts of the various categories of financial instruments.
c. Information on any reclassification between categories of financial instruments.
d. Information on financial instruments arising from employee benefits plans and share-
based payment transactions.

2. PFRS 7 requires the disclosure of the nature and extent of risks arising from financial
instruments. Which of the following is not included in this disclosure?
a. Qualitative and quantitative information about credit risk.
b. Qualitative and quantitative information about liquidity risk.
c. Qualitative and quantitative information about market risk.
d. Qualitative and quantitative information about operational risk

PROBLEM 2: FOR CLASSROOM DISCUSSION

1. PFRS 7 addresses which of the following?

a. The presentation of financial instruments as financial assets, financial liabilities or

equity instruments.
b. The recognition and measurement of financial instruments.
c. The disclosures about the significance of financial instruments to the entity's financial
position and performance and the nature and extent of risks arising from financial
instruments to which the entity is exposed, and how the entity manages those risks.
d. All of these

2. Which of the following properly describes credit risk?

a. The possibility that Entity A will not be able to settle its financial liabilities when they
become due.
b. The possibility that Entity A will incur loss on its foreign currency denominated
financial instruments when there is an adverse change in foreign exchange rates.
c. The possibility that Entity A cannot collect on its receivables.
d. The possibility that Entity A will be required to pay higher interest on its variable-rate
loan when market interest rates increase.
PROBLEMS

PROBLEM 1: MULTIPLE CHOICE

1. PFRS 8 requires which of the following approaches in identifying operating

segments?

a. manager's approach
c. direct approach
d, management approach
b. gentle approach

2. According to PFRS 8, a reportable operating segment is one

a. management uses in making decisions about operating which matters.

b. results from aggregation of two or more segments and qualify under any of the
quantitative thresholds.
c. a and b
d. none of these

3. Which of the following is not among the quantitative thresholds under PFRS 8?

a. At least 10% of total revenues (external and internal).

b. At least 10% of the higher of total profits of segments reporting profits and total
losses of segments reporting losses, in absolute amount.
c. At least 10% of total assets (inclusive of intersegment receivables).
d. At least 10% of total revenues (external only).

4. ABC Co. operates in six geographical areas offering three major types of products
and services. Internal reports are structured based on the major types of products and
services. How should ABC Co. identify its reportable segments for external reporting in
accordance with PFRS 8?

a. Based on the six geographical areas.

b. Based on the three products and services.
c. Based on quantitative threshold.
d. Based on the operating results of either the geographical areas or the products and
services.
5. According to PFRS 8, disclosures for major customer shall be provided if revenues
from transactions with a single external customer amount to

a. at least 75% of the entity's external and internal revenues.

b. at least 75% of the entity's external revenues.

c. 10% or more of the entity's external revenues.

d. less than 10% of the entity's external revenues.