Basic Accounting Notes

➢ EXEMPTION FROM CPD ➢ Bookkeeping is procedural and
- A CPA shall be permanently largely concerned with development

exempted from CPD and maintenance of accounting
requirements upon reaching records
the age of 65 years ➢ Bookkeeping is the “how” of
- The exemption applied only to the accounting
renewal of CPA license and not for ➢ Accounting is conceptual and is
the purpose of accreditation to concerned with the why reason or
practice the accountancy profession justification for any action adopted
➢ All certified public accountants shall
abide by the requirements, rules • ACCOUNTING VS.
and regulations on continuing ACCOUNTANCY
professional development to be ➢ Accountancy refers to the profession
promulgated by the Board of of accounting practice
Accountancy subject to the approval ➢ Accounting is used in reference only
of the Professional Regulation to a particular field of accountancy
Commission in coordination with the such as public accounting, private
accredited professional organization accounting and government
of certified public accountants or accounting
any accredited educational
institutions • FINANCIAL ACCOUNTING VS.
MANAGERIAL ACCOUNTING
• ACCOUNTING VS. AUDITING ➢ Financial Accounting is primarily
➢ Accounting is essentially concerned with the recording of
constructive in nature. Accounting business transactions and the
ceases when are already prepared eventual preparation of financial
➢ Auditing is analytical. The work of an statements
auditor begins when the work of the ➢ It focuses on general purpose
accountant ends financial statements intended for
➢ After the financial statements are internal and external users
prepared, the auditor will begin to ➢ Financial accounting is the area of
perform the task of auditing accounting that emphasizes
➢ The auditor examines the financial reporting to creditors and investors
statements to ascertain whether ➢ Managerial accounting is the
they are in conformity with accumulation and preparation of
generally accepted accounting financial reports for internal users
principles only
➢ Managerial accounting is the area of
• ACCOUNTING VS. accounting that emphasizes
BOOKKEEPING developing accounting information
for use within an entity
financial statements particularly the
• GENERALLY ACCEPTED measurement of assets and
ACCOUNTING PRINCIPLES liabilities
➢ Accounting has evolved through ➢ A set of high-quality accounting
time changing with the needs of standards is a necessity to ensure
society comparability and uniformity in
➢ New types of transactions occur in financial statements based on the
trade and commerce, accountants same financial information
develop rules and procedures for
recording them • FINANCIAL REPORTING
➢ Accounting rules, procedures and STANDARDS COUNCIL
practices came to known as ➢ In the Philippines, the development
Generally Accepted Accounting of generally accepted accounting
Principles (GAAP) principles is formalized initially
➢ These principles have developed through the creation of the
based on experience, reason, Accounting Standards Council (ASC)
custom, usage and practical ➢ The Financial Reporting Standards
necessity Council (FRSC) now replaces the
➢ Generally accepted principles Accounting Standards Council
represent rules, procedures, ➢ FRSC is the accounting standard
practice and standards followed in body created by the Professional
the preparation and presentation of Regulation Commission upon
financial statements recommendation of the Board of
➢ These are laws that must be Accountancy to assist BOA in
followed in financial reporting carrying out its powers and
➢ The process of establishing GAAP is functions provided by RA 9298
a political process which ➢ The main function is to establish and
incorporates political actions of improve accounting standards that
various intended users as well as will be considered generally
professional judgment, logic and accepted in the Philippines
research ➢ The accounting standards
promulgated by FRSC constitute the
• PURPOSE OF ACCOUNTING “highest hierarchy” of generally
STANDARDS accepted accounting principles in
➢ The overall purpose of accounting the Philippines
standards is to identify proper ➢ The approved statements of FRSC
accounting practices for the are known as the Philippine
preparation and presentation of Accounting Standards (PAS) and
financial statements Philippine Financial Reporting
➢ It creates a common understanding Standards (PFRS)
between preparers and users of ➢ COMPOSITION
- Commission on Audit (1), Major ➢ IASC is an independent private
organization of preparers and users sector body which objective is to
of financial statements (Financial achieve uniformity in the accounting
Executive Institute of the Philippines principles which are used by
(FINEX), Accredited national business and other organizations for
professional organizations of CPAs: financial reporting around the world
Public Practice (2), Commerce and ➢ It was formed in June 1973 through
Industry (2), Academe or Education an agreement made by professional
(2) and Government (2) accountancy bodies from Australia,
➢ The Chairman and the members of Canada, France, Germany, Japan,
FRSC shall have a term of 3 years Mexico, the Netherlands, United
renewable for another term Kingdom, Ireland and the United
➢ Any member of ADV shall not be States
disqualified from being appointed to ➢ Its headquarters is in London,
FRSC United Kingdom
➢ OBJECTIVE
• PHILIPPINE INTERPRETATIONS - To formulate and publish in the
COMMITTEE (PIC) public interest accounting standards
➢ PIC was formed by the FRSC in to be observed in the presentation
August 2006 and has replaced the of financial statements and to
Interpretation Committee or IC promote their worldwide
formed by the Accounting Standards acceptance and observance
Council in May 2000
➢ The role of PIC is to prepare • INTERNATIONAL ACCOUNTING
interpretations of PFRS for approval STANDARDS BOARD (IASB)
by FRSC and to provide timely ➢ IASB replaces the International
guidance on financial reporting Accounting Standards Committee or
issues not specifically addressed in IASC
current PFRS ➢ IASB publishes standards in a series
➢ Interpretations are intended to give of pronouncements called
authoritative guidance on issues International Financial Reporting
that are likely to receive divergent Standards (IFRS)
or unacceptable treatment because ➢ IASB has adopted the body of
the standards do not provide standards issued by the IASC
specific and clear-cut rules and ➢ The pronouncements of IASC
guidelines continue to be designated as
International Accounting Standards
• INTERNATIONAL ACCOUNTING (IAS)
STANDARDS COMMITTEE (IASC)
• REVISED CONCEPTUAL decision and fairness of the financial
FRAMEWORK FOR FINANCIAL statements
REPORTING ➢ Faithful representation – financial
➢ OBJECTIVE OF FINANCIAL reports represent economic
REPORTING phenomena or transactions in words
- The overall objective of financial and numbers.
reporting is to provide financial - Ingredients: Completeness,
information about the reporting Neutrality and free from error
entity that is useful to existing and - Measurement uncertainty arises
potential investors, lenders and when monetary amounts in financial
other creditors in making decisions reports cannot be observed directly
about providing resources to the and must instead be estimated.
entity.
• SUBSTANCE OVER FORM
• QUALITATIVE CHARACTERISTICS ➢ The economic substance of
➢ Qualitative characteristics are the transactions and events are usually
qualities or attributes that make emphasized when economic
financial accounting information substance differs from legal form.
useful to the users.
➢ It can be grouped into two: • ENHANCING QUALITATIVE
a. Fundamental qualitative CHARACTERISTICS
characteristics, and ➢ Relates to the presentation or form
b. Enhancing qualitative of the financial information.
characteristics ➢ Intended to increase the usefulness
of the financial information that is
➢ Fundamental characteristics: relevant and faithfully represented.
- Relates to content or substance ➢ The enhancing qualitative
- Relevance and faithful characteristics are comparability,
representation understandability, verifiability and
timeliness.
➢ Relevance – capacity of the ➢ COMPARABILITY - means the ability
information to influence a decision to bring together for the purpose of
- Ingredients: Predictive value and noting points of likeness and
Confirmatory value difference.
- *Materiality – practical rule in - Consistency – within the entity
accounting which dictates that strict (from one accounting period to the
adherence to GAAP is not required next)
when the items are not significant ➢ Understandability requires that
enough to affect the evaluation, financial information must be
comprehensible or intelligible if it is
to be most useful. • REPORTING PERIOD
➢ VERIFIABILITY - means that different ➢ The reporting period is the period
knowledgeable and independent when financial statements are
observers could reach consensus, prepared for general purpose
although not necessarily complete financial reporting.
agreement, that a particular ➢ Interim financial statements are not
depiction is a faithful required but optional.
representation.
➢ TIMELINESS - means that the • UNDERLYING ASSUMPTIONS
financial information must be ➢ Accounting assumptions are the
available or communicated early basic notions or fundamental
enough when a decision is to be premises on which the accounting
made. process is based. It is also known as
postulates.
• COST CONSTRAINT ON USEFUL ➢ The Conceptual Framework for
INFORMATION Financial Reporting mentions only
➢ COST - is a pervasive constraint on one assumption, namely going
the information that can be concern. However, implicit in
provided by financial reporting. accounting are the basic
- The benefit derived from the assumptions of accounting entity,
information should exceed the cost time period and monetary unit.
incurred in obtaining the
information. (judgmental process) • GOING CONCERN
➢ Also known as continuity
• GENERAL OBJECTIVE OF FINANCIAL assumption. This means that in the
STATEMENTS absence of evidence to the contrary,
➢ Financial statements provide the accounting entity is viewed as
information about economic continuing in operation indefinitely.
resources if the reporting entity,
claims against the entity and • ACCOUNTING ENTITY
changes in the economic resources ➢ In financial accounting, the
and claims. accounting entity is the specific
business organization, which may be
• REPORTING ENTITY a proprietorship, partnership or
➢ Is an entity that is required or corporation.
chooses to prepare financial
statements. • TIME PERIOD
➢ A reporting entity is not necessarily ➢ The time period assumption
a legal entity. requires that the indefinite life of an
entity is subdivided into accounting - Obligation is a duty or responsibility
periods which are usually of equal that an entity has no practical ability
length for the purpose of preparing to avoid.
financial reports on financial ➢ Income – increases in assets or
position, performance and cash decreases in liabilities that result in
flows. increases in equity, other than those
relating to contributions from equity
• MONETARY UNIT holders.
- TWO (2) ASPECTS: ➢ Revenue arises during the ordinary
a. Quantifiability regular activities and is referred to
b. Stability of peso by variety of different names
including sales, fees, interest,
• ELEMENTS OF FINANCIAL dividends, royalties and rent.
STATEMENTS ➢ Gains represent other items that
➢ The elements of financial meet the definition of income and
statements refer to the quantitative do not arise during the ordinary
information reported in the regular activities.
statement of financial position and ➢ Expense – decreases in assets of
income statement. increase in liabilities that result in a
➢ The elements directly related to the decrease in equity, other than those
measurement of financial position relating to distribution to equity
are: a. Asset holders
b. Liability
c. Equity • RECOGNITION AND MEASUREMENT
➢ The Revised Conceptual Framework
➢ The elements directly related to the defines recognition as the process of
measurement of financial capturing for inclusion in the
performance are: financial statements an item that
a. Income meets the definition of an asset,
b. Expense liability, equity, income or expense.
- Only items that meet the definition
➢ Equity is the residual interest in the of an asset, liability or equity are
assets of the entity after deducting recognized in the statement of
all of the liabilities financial position.
➢ Asset – present economic resource - Similarly, only items that meet the
controlled by the entity as a result of definition of income or expense are
past events. recognized in the statement of
➢ Liability – present obligation of an financial performance
entity to transfer an economic - An asset or liability and any
resource as a result of past events corresponding income or expense
can exist if the probability of inflow - Current value – includes fair value,
or outflow of the benefits is low. value in use for asset, fulfilment
➢ Point of sale income recognition value for liability and current cost)
- The basic principle of income • Fair value – price that would be
recognition is that income shall be received to sell an asset in an
recognized when earned. orderly transaction between market
- With respect to sale of goods in the participants at measurement date
ordinary course of business, the • Value in use – present value of the
point of sale is unquestionably the cash flows that an entity expects to
point of income recognition. derive from the use of an asset and
➢ Expense recognition from the ultimate disposal
- The basic expense recognition • Fulfillment value – present value
means that expenses are recognized of cash that an entity expects to
when incurred. transfer in paying or settling a
- The matching principle requires that liability.
those costs and expenses incurred in • Current cost – cost of an
earning a revenue shall be reported equivalent asset at the
in the same period. measurement date comprising the
 Cause and effect association consideration paid and transaction
 Systematic and rational allocation cost.
 Immediate recognition
➢ Derecognition • PRESENTATION AND DISCLOSURE
- Removal of all or part of a ➢ The presentation and disclosure can
recognized asset or liability from the be an effective communication tool
statement of financial position. about the information in financial
- Derecognition of asset occurs when statements
the entity loses control of al or part ➢ Classification is the sorting of assets,
of the asset. liabilities, equity, income and
- Derecognition of liability occurs expenses on the basis of shared or
when the entity no longer has a similar characteristics.
present obligation for all or part of ➢ Classification of income and expense
the liability. - Income and expenses are classified
➢ Measurement – defined as as components of profit or loss and
quantifying in monetary terms the components of other
elements in the financial comprehensive income
statements. - Aggregation – adding together of
- Historical cost – cost incurred in assets, liabilities, equity, income and
acquiring or creating the asset expenses that have similar or shared
comprising the consideration paid characteristics and are included in
plus transaction cost. the same classification.
➢ Capital Maintenance – the financial 6. Notes, comprising a summary of
performance of an entity is significant accounting policies and
determined using two approaches, other explanatory notes
namely transaction approach and
capital maintenance approach. • OBJECTIVE OF FINANCIAL
- Financial capital – monetary STATEMENTS
amount of the net assets ➢ The objective of financial statements
contributed by shareholders and the is to provide information about the
amount of the increase in net assets financial position, financial
resulting from earnings retained by performance and cash flows of an
the entity. entity that is useful to a wide range
- Physical capital – quantitative of users in making economic
measure of the physical productive decisions.
capacity to produce goods and ➢ To meet this objective, financial
services. statements provide information
about the following:
• PAS 1 PRESENTATION OF FINANCIAL a. Assets
STATEMENTS b. Liabilities
- Statement of Financial Position c. Equity
• FINANCIAL STATEMENTS d. Income and expenses, including
➢ Financial statements are means by gains and losses
which the information accumulated e. Contributions by and distributions
and processed in financial to owners in their capacity as
accounting is periodically owners
communicated to the users. f. Cash flows
➢ General purpose financial
statements – intended to meet the • FREQUENCY OF REPORTING
needs of users who are not able to ➢ Financial statements shall be
require an entity to prepare reports presented at least annually.
tailored to their particular ➢ When an entity’s end of reporting
information needs. period changes and financial
statements are presented for a
• COMPONENTS period longer or shorter than one
1. Statement of Financial Position year, an entity shall disclose:
2. Income statement a. The period covered by the
3. Statement of comprehensive financial statements
income 4. Statement of changes in b. The reason for using a longer or
equity shorter period
5. Statement of cash flows
c. The fact that amounts presented b. Financial assets at fair value such
in the financial statements are not as trading securities and other
entirely comparable investments in quoted equity
instruments.
• STATEMENT OF FINANCIAL c. Trade and other receivables
POSITION d. Inventories
➢ A statement of financial position is a e. Prepaid expenses
formal statement showing the three
elements comprising financial • NON- CURRENT ASSETS
position, namely assets, liabilities ➢ Residual definition.
and equity ➢ Accordingly, non-current assets
• DEFINITION OF ASSET include the following:
➢ An asset is an economic resource a. Property, plant and equipment
controlled by an entity as a result of b. Long-term investments
past event. c. Intangible assets
➢ Classification: d. Deferred tax assets
- Current assets e. Other non-current assets
- Non-current assets
• CURRENT ASSETS • DEFINITION OF LIABILITY
a. The asset is cash or cash ➢ A liability is a present obligation of
equivalent unless the asset is an entity to transfer an economic
restricted to settle a liability for resource as a result of past event.
more than twelve months after the • CURRENT LIABILITIES
reporting period. ➢ PAS 1 provides that an entity shall
b. The entity holds the asset classify a liability as current when:
primarily for the purpose of trading. a. The entity expects to settle the
c. The entity expects to realize the liability within the entity’s normal
asset within twelve months after the operating cycle.
reporting period. b. The entity holds the liability
d. The entity expects to realize the primarily for the purpose of trading
asset or intends to sell or consume it c. The liability is due to be settled
within the entity’s normal operating within twelve months after the
cycle. reporting period.
d. The entity does not have an
• PRESENTATION OF CURRENT ASSETS unconditional right defer settlement
➢ Current assets are usually listed in of the liability for at least twelve
the order of liquidity. PAS 1 provides months after the reporting period.
that as a minimum, the line items
under current assets are: • PRESENTATION OF CURRENT
a. Cash and cash equivalents LIABILITIES
➢ PAS 1 provides that as a minimum, ➢ If the entity has the discretion to
the face of the statement of refinance or roll over an obligation
financial position shall include the for at least twelve months after the
following line items for current reporting period under an existing
liabilities: loan facility, the obligation is
a. Trade and other payables classifying as noncurrent even if it
b. Current provisions would otherwise be due within a
c. Short-term borrowing shorter period.
d. Current portion of long-term debt ➢ The reason for this treatment is that
e. Current tax liability such obligation is considered to
form part of the entity’s long-term
• NON-CURRENT LIABILITIES refinancing because the entity has
➢ Residual definition an unconditional right under the
➢ PAS 1 provides that all liabilities not existing loan agreement to defer
classified as current are classified as payment for at least twelve months
noncurrent. after the end of the reporting period
a. Non-current portion of long-term ➢ NOTE: the refinancing or rolling over
debt must be at the DISCRETION OF THE
b. Finance lease liability ENTITY
c. Deferred tax liability ➢ Otherwise, if the refinancing or
d. Long term obligations to company rolling over is not at the discretion
officers of the entity. The obligation is
e. Long-term deferred revenue classified as a current liability.
• COVENANTS
• CURRENTLY MATURING LONG-TERM ➢ Often attached to borrowing
DEBT agreements which represent
➢ A liability which is due to be settled undertakings by the borrower
within twelve months after the ➢ Actually restrictions on the borrower
reporting period is classified as as to undertaking further
current, even if: borrowings, paying dividends,
a. The original term was for a period maintaining specified level of
longer than twelve months. working capital and so forth.
b. An agreement to refinance or to ➢ Under these covenants, if certain
reschedule payment on a long-term conditions relating to the borrower’s
basis is completed after the financial situation are breached, the
reporting period and before the liability becomes payable on
financial statements are authorized demand.
for issue. • EFFECT OF BREACH OF COVENANTS
➢ PAS 1 provides that the liability is
• DISCRETION TO REFINANCE classified as current even if the
lender has agreed, after the - STATEMENT OF COMPREHENSIVE
reporting period and before the INCOME
statements are authorized for issue, • INCOME STATEMENT
not to demand payment as a ➢ An income statement is a formal
consequence of the breach. statement showing the financial
➢ The liability is classified as current performance of an entity for a given
because at reporting date the period of time.
borrower does not have an ➢ The financial performance is also
unconditional right to defer known as the results of operations
payment for at least twelve months of the entity
after the reporting period. • COMPREHENSIVE INCOME
➢ The liability is classified as ➢ Change in equity during a period
noncurrent if the lender has agreed resulting from transactions and
on or before the end of the other events, other than changes
reporting period to provide a grace resulting from transactions with
period ending at least twelve owners in their capacity as owners.
months after the end of reporting Accordingly, it includes:
period. a. Components of profit or loss
• DEFINITION OF EQUITY b. Components of other
➢ The term equity is the residual comprehensive income
interest in the assets of the entity
after deducting all of its liabilities. • PROFIT OR LOSS
➢ The terms used in reporting the ➢ The term profit or loss is the total of
equity of an entity depending on the income less expenses, excluding the
form of the business organization components of other
are: comprehensive income.
a. Owner’s equity in a proprietorship • OTHER COMPREHENSIVE INCOME
b. Partners’ equity in a partnership (OCI)
c. Stockholders’ equity or ➢ Comprises items of income and
shareholders’ equity in a expenses including reclassification
corporation. adjustments that are not recognized
in profit or loss as required or
• NOTES TO FINANCIAL STATEMENTS permitted by the PFRS. The
➢ It provides a narrative description or components of OCI include the
disaggregation of items presented in following:
the financial statements and  Unrealized gain or loss on equity
information about items that do not investment measured at fair value
qualify for recognition through OCI
• PAS 1 PRESENTATION OF FINANCIAL
STATEMENTS
 Unrealized gain or loss on debt • OCI THAT WILL BE RECLASSIFIED TO
investment measured at fair value RETAINED EARNINGS
through OCI. a. Unrealized gain or loss on equity
 Gain or loss from translation of the investment measured at fair value
financial statements of a foreign through OCI
operation b. Revaluation surplus during the
 Revaluation surplus during the year
year c. Remeasurements of defined
 Unrealized gain or loss from benefit plan, including actuarial gain
derivative contracts designated as or loss.
cash flow hedge d. Change in fair value attributable
 Remeasurements of defined to credit risk of a financial liability
benefit plan, including actuarial gain designated at fair value through
or loss profit or loss
 Change in fair value attributable to
credit risk of a financial liability • PRESENTATION OF COMPREHENSIVE
designated at fair value through INCOME
profit or loss. 1. Two statements
• PRESENTATION OF OCI a. An income statement showing the
➢ The line items for amounts of OCI components of profit or loss
shall be grouped as follows: b. A statement of comprehensive
a. OCI that will be reclassified income beginning with profit or loss
subsequently to profit or loss when as shown in the income statement
specific conditions are met. plus or minus the components of
b. OCI that will not be reclassified other comprehensive income.
subsequently to profit or loss but to 2. Single statement of
retained earnings. comprehensive income
• OCI THAT WILL BE RECLASSIFIED TO • SOURCES OF INCOME

PROFIT OR LOSS a. Sales of merchandise to
a. Unrealized gain or loss on debt customers
investment measured at fair value b. Rendering of services
through OCI. c. Use of entity resources
b. Gain or loss from translation of d. Disposal of resources other than
the financial statements of a foreign products
operation.
c. Unrealized gain or loss from • COMPONENTS OF EXPENSE
derivative contracts designated as a. Cost of goods sold or cost of sales
cash flow hedge b. Distribution costs or selling
expenses c. Administrative expenses
d. Other expenses c. Dividends declared and paid to
e. Income tax expense shareholders
d. Effect of change in accounting
• NO MORE EXTRADITIONARY ITEMS policy e. Appropriation of retained
➢ PAS 1 specifically mandates that an earnings
entity shall not present any items of
income and expense as • STATEMENT OF CHANGES IN EQUITY
extraordinary either on the face of ➢ The statement of changes in equity
the income statement or statement is a basic statement that shows the
of comprehensive income or in the movements in the elements or
notes. components of the shareholders’
• FORMS OF INCOME STATEMENT equity.
➢ PAS 1 provides that an entity shall a. Comprehensive income for the
present an analysis of expenses period
recognized in profit or loss using a b. For each component of equity,
classification based on either the the effects of changes in accounting
function of expenses or their nature policies and correction of errors
within the entity, whichever c. For each component of equity, a
provides information that is reliable reconciliation between the carrying
and more relevant amount at the beginning and end of
➢ Accordingly, the income statement the period, separately disclosing
may be presented in two ways, changes from:
namely functional and natural. - Profit or loss
➢ PAS 1 does not prescribe any format - Each item of other comprehensive
• STATEMENT OF COMPREHENSIVE income
INCOME - Transactions with owners in their
➢ The statement of comprehensive capacity as owners showing
income starts with the profit or loss separately contributions by and
as shown in the income statement distributions to owners.
plus or minus the components of
other comprehensive income. • STATEMENT OF CASH FLOWS
• STATEMENT OF RETAINED ➢ The statement of cash flows us a
EARNINGS basic component of the financial
➢ The statement of retained earnings statement which summarizes the
shows the changes affecting directly operating, investing and financing
the retained earnings of an entity activities of an entity.
and relates the income statement to
the statement of financial position.
PHILIPPINE ACCOUNTING STANDARDS 1
a. Profit or loss for the period Presentation of Financial Statements
b. Prior period errors SUPPLEMENTARY DISCUSSION
presented in accordance with International
Overview Financial Reporting Standards (IFRSs). [IAS
IAS 1 Presentation of Financial 1.2]
Statements sets out the overall General purpose financial statements are
requirements for financial statements, those intended to serve users who are not
including how they should be structured, in a position to require financial reports
the minimum requirements for their tailored to their particular information
content and overriding concepts such as needs. [IAS 1.7]
going concern, the accrual basis of
accounting and the current/non-current Objective of financial statements
distinction. The objective of general purpose financial
statements is to provide information about
The standard requires a complete set of the financial position, financial
financial statements to comprise a performance, and cash flows of an entity
statement of financial position, a statement that is useful to a wide range of users in
of profit or loss and other comprehensive making economic decisions. To meet that
income, a statement of changes in equity objective, financial statements provide
and a statement of cash flows. information about an entity's: [IAS 1.9]
assets
IAS 1 was reissued in September 2007 and
applies to annual periods beginning on or • liabilities
after 1 January 2009.
• equity
Summary of IAS 1
• income and expenses, including
Objective of IAS 1 gains and losses
The objective of IAS 1 (2007) is to prescribe
the basis for presentation of general • contributions by and distributions to
purpose financial statements, to ensure owners (in their capacity as owners)
comparability both with the entity's
financial statements of previous periods • cash flows.
and with the financial statements of other
entities. IAS 1 sets out the overall That information, along with other
requirements for the presentation of information in the notes, assists users of
financial statements, guidelines for their financial statements in predicting the
structure and minimum requirements for entity's future cash flows and, in particular,
their content. [IAS 1.1] Standards for their timing and certainty.
recognising, measuring, and disclosing
specific transactions are addressed in other Components of financial statements
Standards and Interpretations. [IAS 1.3] • A complete set of financial
statements includes: [IAS 1.10]
Scope
IAS 1 applies to all general purpose financial
statements that are prepared and
• a statement of financial position reviews by management, environmental
(balance sheet) at the end of the reports, and value added statements – are
period outside the scope of IFRSs. [IAS 1.14]
• a statement of profit or loss and Fair presentation and compliance with

other comprehensive income for the IFRSs
period (presented as a single The financial statements must "present
statement, or by presenting the fairly" the financial position, financial
profit or loss section in a separate performance and cash flows of an entity.
statement of profit or loss, Fair presentation requires the faithful
immediately followed by a representation of the effects of
statement presenting transactions, other events, and conditions
comprehensive income beginning in accordance with the definitions and
with profit or loss) recognition criteria for assets, liabilities,
income and expenses set out in
• a statement of changes in equity for the Framework. The application of IFRSs,
the period with additional disclosure when necessary,
is presumed to result in financial
• a statement of cash flows for the statements that achieve a fair presentation.
period [IAS 1.15]
• notes, comprising a summary of IAS 1 requires an entity whose financial

significant accounting policies and statements comply with IFRSs to make an
other explanatory notes explicit and unreserved statement of such
compliance in the notes. Financial
• comparative information prescribed statements cannot be described as
by the standard. complying with IFRSs unless they comply
with all the requirements of IFRSs (which
An entity may use titles for the statements includes International Financial Reporting
other than those stated above. All financial Standards, International Accounting
statements are required to be presented Standards, IFRIC Interpretations and SIC
with equal prominence. [IAS 1.10] Interpretations). [IAS 1.16]
Inappropriate accounting policies are not
When an entity applies an accounting policy rectified either by disclosure of the
retrospectively or makes a retrospective accounting policies used or by notes or
restatement of items in its financial explanatory material. [IAS 1.18]
statements, or when it reclassifies items in
its financial statements, it must also present IAS 1 acknowledges that, in extremely rare
a statement of financial position (balance circumstances, management may conclude
sheet) as at the beginning of the earliest that compliance with an IFRS requirement
comparative period. would be so misleading that it would
Reports that are presented outside of the conflict with the objective of financial
financial statements – including financial statements set out in the Framework. In
such a case, the entity is required to depart
from the IFRS requirement, with detailed financial information about a specific
disclosure of the nature, reasons, and reporting entity. [IAS 1.7]*
impact of the departure. [IAS 1.19-21] Each material class of similar items must be
presented separately in the financial
Going concern statements. Dissimilar items may be
The Conceptual Framework notes that aggregated only if they are individually
financial statements are normally prepared immaterial. [IAS 1.29]
assuming the entity is a going concern and However, information should not be
will continue in operation for the obscured by aggregating or by providing
foreseeable future. [Conceptual immaterial information, materiality
Framework, paragraph 4.1] considerations apply to the all parts of the
IAS 1 requires management to make an financial statements, and even when a
assessment of an entity's ability to continue standard requires a specific disclosure,
as a going concern. If management has materiality considerations do apply. [IAS
significant concerns about the entity's 1.30A-31]
ability to continue as a going concern, the * Clarified by Definition of Material
uncertainties must be disclosed. If (Amendments to IAS 1 and IAS 8), effective
management concludes that the entity is 1 January 2020.
not a going concern, the financial
statements should not be prepared on a Offsetting
going concern basis, in which case IAS 1 Assets and liabilities, and income and
requires a series of disclosures. [IAS 1.25] expenses, may not be offset unless required
Accrual basis of accounting or permitted by an IFRS. [IAS 1.32]
IAS 1 requires that an entity prepare its Comparative information
financial statements, except for cash flow IAS 1 requires that comparative information
information, using the accrual basis of to be disclosed in respect of the previous
accounting. [IAS 1.27] period for all amounts reported in the
financial statements, both on the face of
Consistency of presentation the financial statements and in the notes,
The presentation and classification of items unless another Standard requires
in the financial statements shall be retained otherwise. Comparative information is
from one period to the next unless a change provided for narrative and descriptive
is justified either by a change in where it is relevant to understanding the
circumstances or a requirement of a new financial statements of the current period.
IFRS. [IAS 1.45] [IAS 1.38]
An entity is required to present at least two
Materiality and aggregation of each of the following primary financial
Information is material if omitting, statements: [IAS 1.38A]
misstating or obscuring it could reasonably statement of financial position*
be expected to influence decisions that the
primary users of general purpose financial • statement of profit or loss and other
statements make on the basis of those comprehensive income
financial statements, which provide
• separate statements of profit or loss • information about the reporting
(where presented) period
• statement of cash flows • the presentation currency (as

defined by IAS 21 The Effects of
• statement of changes in equity Changes in Foreign Exchange Rates)
• related notes for each of the above • the level of rounding used (e.g.
items. thousands, millions).
* A third statement of financial position is
required to be presented if the entity Reporting period
retrospectively applies an accounting policy, There is a presumption that financial
restates items, or reclassifies items, and statements will be prepared at least
those adjustments had a material effect on annually. If the annual reporting period
the information in the statement of changes and financial statements are
financial position at the beginning of the prepared for a different period, the entity
comparative period. [IAS 1.40A] must disclose the reason for the change and
Where comparative amounts are changed state that amounts are not entirely
or reclassified, various disclosures are comparable. [IAS 1.36]
required. [IAS 1.41] Statement of financial position (balance
Structure and content of financial sheet)
statements in general
IAS 1 requires an entity to clearly identify: Current and non-current classification
[IAS 1.49-51] An entity must normally present a classified
• the financial statements, which must statement of financial position, separating
be distinguished from other current and non-current assets and
information in a published liabilities, unless presentation based on
document liquidity provides information that is
reliable. [IAS 1.60] In either case, if an asset
• each financial statement and the (liability) category combines amounts that
notes to the financial statements. will be received (settled) after 12 months
• In addition, the following with assets (liabilities) that will be received
information must be displayed (settled) within 12 months, note disclosure
prominently, and repeated as is required that separates the longer-term
necessary: [IAS 1.51] amounts from the 12-month amounts. [IAS
1.61]
• the name of the reporting entity and
any change in the name Current assets are assets that are: [IAS 1.66]
• expected to be realised in the
• whether the financial statements entity's normal operating cycle
are a group of entities or an
individual entity • held primarily for the purpose of
trading
• expected to be realised within 12 entity can rectify the breach and during
months after the reporting period which the lender cannot demand
immediate repayment. [IAS 1.75]
• cash and cash equivalents (unless Settlement by the issue of equity
restricted). instruments does not impact classification.
[IAS 1.76B]
All other assets are non-current. [IAS Line items
1.66] The line items to be included on the face of
the statement of financial position are: [IAS
Current liabilities are those: [IAS 1.69] 1.54]
• expected to be settled within the (a) property, plant and equipment
entity's normal operating cycle (b) investment property
(c) intangible assets
• held for purpose of trading financial assets (excluding amounts
(d) shown under (e), (h), and (i))
• due to be settled within 12 months investments accounted for using the
(e) equity method
• for which the entity does not have (f) biological assets
the right at the end of the reporting (g) inventories
period to defer settlement beyond (h) trade and other receivables
12 months. (i) cash and cash equivalents
• Other liabilities are non-current. (j) assets held for sale
(k) trade and other payables
When a long-term debt is expected to be (l) provisions
refinanced under an existing loan facility, financial liabilities (excluding amounts
and the entity has the discretion to do so, (m)shown under (k) and (l))
the debt is classified as non-current, even if current tax liabilities and current tax
the liability would otherwise be due within (n) assets, as defined in IAS 12
12 months. [IAS 1.73] deferred tax liabilities and deferred tax
If a liability has become payable on demand (o) assets, as defined in IAS 12
because an entity has breached an (p) liabilities included in disposal groups
undertaking under a long-term loan non-controlling interests, presented
agreement on or before the reporting date, (q) within equity
the liability is current, even if the lender has issued capital and reserves attributable
agreed, after the reporting date and before (r) to owners of the parent.
the authorisation of the financial
statements for issue, not to demand Additional line items, headings and
payment as a consequence of the breach. subtotals may be needed to fairly present
[IAS 1.74] However, the liability is classified the entity's financial position. [IAS 1.55]
as non-current if the lender agreed by the When an entity presents subtotals, those
reporting date to provide a period of grace subtotals shall be comprised of line items
ending at least 12 months after the end of made up of amounts recognised and
the reporting period, within which the measured in accordance with IFRS; be
presented and labelled in a clear and
understandable manner; be consistent from
period to period; and not be displayed with • par value (or that shares do not have
more prominence than the required a par value)
subtotals and totals. [IAS 1.55A]*
• a reconciliation of the number of
* Added by Disclosure Initiative shares outstanding at the beginning
(Amendments to IAS 1), effective 1 January and the end of the period
2016.
Further sub-classifications of line items • description of rights, preferences,
presented are made in the statement or in and restrictions
the notes, for example: [IAS 1.77-78]:
• classes of property, plant and • treasury shares, including shares
equipment held by subsidiaries and associates
• disaggregation of receivables • shares reserved for issuance under

options and contracts
• disaggregation of inventories in
accordance with IAS 2 Inventories • a description of the nature and
purpose of each reserve within
• disaggregation of provisions into equity.
employee benefits and other items
Additional disclosures are required in
• classes of equity and reserves. respect of entities without share capital and
where an entity has reclassified puttable
Format of statement financial instruments. [IAS 1.80-80A]
IAS 1 does not prescribe the format of the Statement of profit or loss and other
statement of financial position. Assets can comprehensive income
be presented current then non-current, or
vice versa, and liabilities and equity can be Concepts of profit or loss and
presented current then non-current then comprehensive income
equity, or vice versa. A net asset Profit or loss is defined as "the total of
presentation (assets minus liabilities) is income less expenses, excluding the
allowed. The long-term financing approach components of other comprehensive
used in UK and elsewhere – fixed assets + income". Other comprehensive income is
current assets - short term payables = long- defined as comprising "items of income and
term debt plus equity – is also acceptable. expense (including reclassification
Share capital and reserves adjustments) that are not recognised in
Regarding issued share capital and reserves, profit or loss as required or permitted by
the following disclosures are required: [IAS other IFRSs". Total comprehensive income
1.79] is defined as "the change in equity during a
• numbers of shares authorised, period resulting from transactions and
issued and fully paid, and issued but other events, other than those changes
not fully paid
resulting from transactions with owners in
The effective portion of gains and
their capacity as owners". [IAS 1.7]
losses on hedging instruments in a
cash flow hedge under IAS 39
Profit or IFRS 9 Financial Instruments Other
= or loss + other comprehensive comprehensive in
income Gains and losses on remeasuring an
income in equity instruments
investment
where the entity has elected to
All items of income and expense recognised present them in other comprehensive
in a period must be included in profit or loss income in accordance with IFRS 9
unless a Standard or an Interpretation
requires otherwise. [IAS 1.88] Some IFRSs The effects of changes in the credit risk
require or permit that some components to of a financial liability designated as at
be excluded from profit or loss and instead fair value through profit and loss under
to be included in other comprehensive IFRS 9.
income. In addition, IAS 8 Accounting Policies,
Examples of items recognised outside Changes in Accounting Estimates and
of profit or loss Errors requires the correction of errors and
the effect of changes in accounting policies
Changes in revaluation surplus where to be recognised outside profit or loss for
the revaluation method is used the current period. [IAS 1.89]
under IAS 16 Property, Plant and Choice in presentation and basic
Equipment and IAS 38 Intangible requirements
Assets
An entity has a choice of presenting:
Remeasurements of a net defined • a single statement of profit or loss
benefit liability or asset recognised in and other comprehensive income,
accordance with IAS 19 Employee with profit or loss and other
Benefits (2011) comprehensive income presented in
two sections, or
Exchange differences from translating
functional currencies into presentation • two statements:
currency in accordance with IAS 21 The • a separate statement of profit or
Effects of Changes in Foreign Exchange loss
Rates
• a statement of comprehensive
Gains and losses on remeasuring income, immediately following the
available-for-sale financial assets in statement of profit or loss and
accordance with IAS 39 Financial beginning with profit or loss [IAS
Instruments: Recognition and 1.10A]
Measurement
The statement(s) must present: [IAS Expenses recognised in profit or loss should
1.81A] be analysed either by nature (raw materials,
• profit or loss staffing costs, depreciation, etc.) or by
function (cost of sales, selling,
• total other comprehensive income administrative, etc). [IAS 1.99] If an entity
categorises by function, then additional
• comprehensive income for the information on the nature of expenses – at
period a minimum depreciation, amortisation and
employee benefits expense – must be
• an allocation of profit or loss and disclosed. [IAS 1.104]
comprehensive income for the
period between non-controlling Other comprehensive income section
interests and owners of the parent. The other comprehensive income section is
required to present line items which are
classified by their nature, and grouped
Profit or loss section or statement between those items that will or will not be
The following minimum line items must be reclassified to profit and loss in subsequent
presented in the profit or loss section (or periods. [IAS 1.82A]
separate statement of profit or loss, if An entity's share of OCI of equity-accounted
presented): [IAS 1.82-82A] associates and joint ventures is presented in
• revenue aggregate as single line items based on
whether or not it will subsequently be
• gains and losses from the reclassified to profit or loss. [IAS 1.82A]*
derecognition of financial assets * Clarified by Disclosure Initiative
measured at amortised cost (Amendments to IAS 1), effective 1 January
2016.
• finance costs
When an entity presents subtotals, those
subtotals shall be comprised of line items
• share of the profit or loss of
made up of amounts recognised and
associates and joint ventures
measured in accordance with IFRS; be
accounted for using the equity
presented and labelled in a clear and
method
understandable manner; be consistent from
period to period; not be displayed with
• certain gains or losses associated
more prominence than the required
with the reclassification of financial
subtotals and totals; and reconciled with
assets
the subtotals or totals required in IFRS. [IAS
1.85A-85B]*
• tax expense
* Added by Disclosure Initiative
(Amendments to IAS 1), effective 1 January
• a single amount for the total of
2016.
discontinued items
Other requirements
Additional line items may be needed to total comprehensive income for the period,
fairly present the entity's results of showing separately amounts attributable to
operations. [IAS 1.85] owners of the parent and to non-controlling
Items cannot be presented as interests
'extraordinary items' in the financial
statements or in the notes. [IAS 1.87] • the effects of any retrospective
Certain items must be disclosed separately application of accounting policies or
either in the statement of comprehensive restatements made in accordance
income or in the notes, if material, with IAS 8, separately for each
including: [IAS 1.98] component of other comprehensive
• write-downs of inventories to net income
realisable value or of property, plant
and equipment to recoverable • reconciliations between the carrying
amount, as well as reversals of such amounts at the beginning and the
write-downs end of the period for each
component of equity, separately
• restructurings of the activities of an disclosing:
entity and reversals of any • profit or loss
provisions for the costs of
restructuring • other comprehensive income*
• disposals of items of property, plant • transactions with owners, showing

and equipment separately contributions by and
distributions to owners and changes
• disposals of investments in ownership interests in
subsidiaries that do not result in a
• discontinuing operations loss of control
* An analysis of other comprehensive
• litigation settlements income by item is required to be presented
either in the statement or in the notes. [IAS
• other reversals of provisions 1.106A]
Statement of cash flows The following amounts may also be

Rather than setting out separate presented on the face of the statement of
requirements for presentation of the changes in equity, or they may be
statement of cash flows, IAS 1.111 refers presented in the notes: [IAS 1.107]
to IAS 7 Statement of Cash Flows. • amount of dividends recognised as
distributions
Statement of changes in equity
IAS 1 requires an entity to present a • the related amount per share.
separate statement of changes in equity.
The statement must show: [IAS 1.106] Notes to the financial statements
The notes must: [IAS 1.112]
• present information about the basis of cash flows, in the order in which
of preparation of the financial each statement and each line item is
statements and the specific presented
accounting policies used
• other disclosures, including:
• disclose any information required by • contingent liabilities (see IAS 37)
IFRSs that is not presented and unrecognised contractual
elsewhere in the financial commitments
statements and
• non-financial disclosures, such as
• provide additional information that the entity's financial risk
is not presented elsewhere in the management objectives and
financial statements but is relevant policies (see IFRS 7 Financial
to an understanding of any of them Instruments: Disclosures)
* Disclosure Initiative (Amendments to IAS
Notes are presented in a systematic manner 1), effective 1 January 2016, clarifies this
and cross-referenced from the face of the order just to be an example of how notes
financial statements to the relevant note. can be ordered and adds additional
[IAS 1.113] examples of possible ways of ordering the
IAS 1.114 suggests that the notes should notes to clarify that understandability and
normally be presented in the following comparability should be considered when
order:* determining the order of the notes.
• a statement of compliance with
IFRSs • CONCEPTUAL FRAMEWORK AT A
GLANCE
• a summary of significant accounting ➢ Introduction:
policies applied, including: [IAS - The International Accounting
1.117] Standards Board (Board) issued the
• the measurement basis (or bases) revised Conceptual Framework for
used in preparing the financial Financial Reporting (Conceptual
statements Framework), a comprehensive set of
concepts for financial reporting, in
• the other accounting policies used March 2018. It sets out:
that are relevant to an - the objective of financial reporting
understanding of the financial - the qualitative characteristics of
statements useful financial information
• supporting information for items - a description of the reporting entity
presented on the face of the and its boundary
statement of financial position - definitions of an asset, a liability,
(balance sheet), statement(s) of equity, income and expenses
profit or loss and other - criteria for including assets and
comprehensive income, statement liabilities in financial statements
of changes in equity and statement
(recognition) and guidance on when who develop an accounting policy
to remove them (derecognition) based on the Conceptual Framework
- measurement bases and guidance
on when to use them • WHY HAVE WE REVISED THE
- concepts and guidance on CONCEPTUAL FRAMEWORK?
presentation and disclosure This ➢ Previous Conceptual Framework
Project Summary summarises: - issued in 1989 and partly revised in
- why the Board revised the 2010
Conceptual Framework - useful, but incomplete and needed
- the main changes from the improvement
previous Conceptual Framework ➢ Priority
- the main concepts and guidance in - identified as a priority by
each chapter of the Conceptual stakeholders in the 2011 Agenda
Framework Consultation
➢ Filling gaps
➢ Purpose - for example, guidance on
- to assist the Board to develop IFRS measurement, presentation and
Standards (Standards) based on disclosure
consistent concepts, resulting in ➢ Updating
financial information that is useful - for example, the definitions of an
to investors, lenders and other asset and a liability
creditors ➢ Clarifying
- to assist preparers of financial - for example, the role of
reports to develop consistent measurement uncertainty
accounting policies for transactions ➢ Revised Conceptual Framework - a
or other events when no Standard comprehensive set of concepts for
applies, or a Standard allows a financial reporting
choice of accounting policies • MAIN CHANGES
- to assist all parties to understand The revised Conceptual Framework
and interpret Standards. introduces the following main
➢ Status improvements:
- provides concepts and guidance ➢ NEW
that underpin the decisions the - Measurement - concepts on
Board makes when developing measurement, including factors to
Standards be considered when selecting a
- not a Standard measurement basis
- does not override any Standard or - Presentation and disclosure -
any requirement in a Standard concepts on presentation and
➢ Effective date disclosure, including when to classify
- immediately for the Board and the income and expenses in other
IFRS Interpretations Committee comprehensive income
- annual periods beginning on or
after 1 January 2020 for preparers
- Derecognition - guidance on when ➢ the entity’s economic resources, claims
assets and liabilities are removed against the entity and changes in those
from financial statements resources and claims
➢ how efficiently and effectively
management has discharged its
➢ UPDATED
responsibilities to use the entity’s
- Definitions - definitions of an asset economic resources
and a liability • Summary of changes
- Recognition - criteria for including ➢ This chapter was issued in 2010 and
assets and liabilities in financial went through extensive due process at
statements that time. Therefore, in revising the
Conceptual Framework, the Board did
➢ CLARIFIED not fundamentally reconsider this
- Prudence chapter. However, it clarified why
information used in assessing
- Stewardship
stewardship is needed to achieve the
- Measurement uncertainty objective of financial reporting.
- Substance over form • Stewardship
➢ Users of financial reports need
• Chapter 1—The objective of financial information to help them assess
reporting management’s stewardship. The
➢ This chapter sets out the objective of Conceptual Framework explicitly
general purpose financial reporting discusses this need as well as the need
(financial reporting), what information for information that helps users assess
is needed to achieve that objective and the prospects for future net cash
who the primary users (users) of inflows to the entity
financial reports are. • Users of financial reports
• Objective of financial reporting ➢ Users of financial reports are an entity’s
➢ To provide financial information that is existing and potential investors, lenders
useful to users in making decisions and other creditors. Those users must
relating to providing resources to the rely on financial reports for much of the
entity financial information they need.
• Users’ decisions involve decisions about
➢ buying, selling or holding equity or debt • Chapter 2—Qualitative characteristics
instruments of useful financial information
➢ providing or settling loans and other ➢ This chapter discusses what makes
forms of credit financial information useful.
➢ voting, or otherwise influencing ➢ For information to be useful it must
management’s actions both be relevant and provide a faithful
• To make these decisions, users assess representation of what it purports to
➢ prospects for future net cash inflows to represent. Relevance and faithful
the entity representation are the fundamental
➢ management’s stewardship of the qualitative characteristics of useful
entity’s economic resources financial information, and the guiding
• To make both these assessments, users concepts that apply throughout the
need information about both revised Conceptual Framework.
• Fundamental qualitative characteristics
➢ Relevance - information is relevant if it • Measurement uncertainty
is capable of making a difference to the ➢ Measurement uncertainty does not
decisions made by users prevent information from being useful.
- financial information is capable of However, in some cases the most
making a difference in decisions if it has relevant information may have such a
predictive value or confirmatory value high level of measurement uncertainty
➢ Faithful representation that the most useful information is
- information must faithfully represent information that is slightly less relevant
the substance of what it purports to but is subject to lower measurement
represent uncertainty.
- a faithful representation is, to the
maximum extent possible, complete, • Chapter 3—Financial statements and
neutral and free from error the reporting entity
- a faithful representation is affected by ➢ This chapter describes the objective and
level of measurement uncertainty scope of financial statements and
• Enhancing qualitative characteristics provides a description of the reporting
➢ Comparability entity.
➢ Verifiability • Reporting entity
➢ Timeliness ➢ an entity that is required, or chooses,
➢ Understandability to prepare financial statements
- these four qualitative characteristics ➢ not necessarily a legal entity—could be
enhance the usefulness of information a portion of an entity or comprise more
- but they cannot make non-useful than one entity
information useful • Financial statements
• Cost constraint ➢ a particular form of financial reports
➢ the benefit of providing the information that provide information about the
needs to justify the cost of providing reporting entity’s assets, liabilities,
and using the information equity, income and expenses
• Summary of changes • Consolidated financial statements
➢ This chapter was issued in 2010 and ➢ provide information about assets,
went through extensive due process at liabilities, equity, income and expenses
that time. Therefore, in revising the of both the parent and its subsidiaries
Conceptual Framework the Board did as a single reporting entity
not fundamentally reconsider this • Unconsolidated financial statements
chapter. However, the Board clarified ➢ provide information about assets,
the roles of prudence, measurement liabilities, equity, income and expenses
uncertainty and substance over form in of the parent only
assessing whether information is useful. • Combined financial statements
• Prudence ➢ provide information about assets,
➢ Neutrality is supported by the exercise liabilities, equity, income and expenses
of prudence. Prudence is the exercise of of two or more entities that are not all
caution when making judgements linked by a parent-subsidiary
under conditions of uncertainty. relationship
Prudence does not allow for • Summary of changes
overstatement or understatement of ➢ This chapter is new
assets, liabilities, income or expenses. • Boundary of a reporting entity
➢ Determining the appropriate boundary • Revised definition of a liability
of a reporting entity can be difficult if, ➢ A present obligation of the entity to
for example, the entity is not a legal transfer an economic resource as a
entity. In such cases, the boundary is result of past events
determined by considering the ➢ An obligation is a duty or responsibility
information needs of the users of the that the entity has no practical ability to
entity’s financial statements. Those avoid
users need information that is relevant • Main changes in the definition of a
and that faithfully represents what it liability
purports to represent. A reporting ➢ separate definition of an economic
entity does not comprise an arbitrary or resource—to clarify that a liability is the
incomplete collection of assets, obligation to transfer the economic
liabilities, equity, income and expenses. resource, not the ultimate outflow of
economic benefits
• Chapter 4—The elements of financial ➢ deletion of ‘expected flow’—with the
statements same implications as set out above for
➢ This chapter defines the five elements an asset
of financial statements—an asset, a ➢ introduction of the ‘no practical ability
liability, equity, income and expenses. to avoid’ criterion to the definition of
• Previous definition of an asset obligation
➢ A resource controlled by the entity as a • Summary of changes
result of past events and from which ➢ The definitions of an asset and a liability
future economic benefits are expected have been refined and the definitions of
to flow to the entity income and expenses have been
• Revised definition of an asset updated only to reflect that refinement.
➢ A present economic resource controlled ➢ The definition of equity as the residual
by the entity as a result of past events interest in the assets of the entity after
➢ An economic resource is a right that has deducting all its liabilities is unchanged.
the potential to produce economic The Board’s research project on
benefits Financial Instruments with
• Main changes in the definition of an Characteristics of Equity is exploring the
asset distinction between liabilities and
➢ separate definition of an economic equity.
resource—to clarify that an asset is the • No practical ability to avoid
economic resource, not the ultimate ➢ The revised Conceptual Framework
inflow of economic benefits discusses how the ‘no practical ability
➢ deletion of ‘expected flow’—it does not to avoid’ criterion is applied in the
need to be certain, or even likely, that following circumstances:
economic benefits will arise (a) if a duty or responsibility arises from
➢ a low probability of economic benefits the entity’s customary practices,
might affect recognition decisions and published policies or specific
the measurement of the asset statements—the entity has an
• Previous definition of a liability obligation if it has no practical ability to
➢ A present obligation of the entity act in a manner inconsistent with those
arising from past events, the settlement practices, policies or statements.
of which is expected to result in an (b) if a duty or responsibility is
outflow from the entity of resources conditional on a particular future action
embodying economic benefits that the entity itself may take—the
entity has an obligation if it has no statements must report their
practical ability to avoid taking that substance. In some cases, the substance
action. of such rights and obligations is clear
from a contract’s legal form. But, in
• Unit of account other cases, the terms of the contract,
➢ the right(s) or obligation(s), or group of or of a group or series of contracts, may
rights and obligations, to which require analysis to identify the
recognition criteria and measurement substance of the rights and obligations.
concepts are applied
• Selecting the unit of account • Chapter 5—Recognition and
➢ Relevance - a unit of account is selected derecognition
to provide relevant information about ➢ This chapter discusses criteria for
the asset or liability and any related including assets and liabilities in
income and expenses Faithful financial statements (recognition) and
➢ Representation - a unit of account is guidance on when to remove them
selected to provide a faithful (derecognition).
representation of the substance of the • Recognition
transaction or other event from which ➢ The process of capturing for inclusion in
the asset, liability and any related the statement of financial position or
income or expenses have arisen. the statement(s) of financial
• Revised definition of income performance an item that meets the
➢ Increases in assets, or decreases in definition of an asset, a liability, equity,
liabilities, that result in increases in income or expenses
equity, other than those relating to ➢ Recognition is appropriate if it results in
contributions from holders of equity both relevant information about assets,
claims liabilities, equity, income and expenses
• Revised definition of expenses and a faithful representation of those
➢ Decreases in assets, or increases in items, because the aim is to provide
liabilities, that result in decreases in information that is useful to investors,
equity, other than those relating to lenders and other creditors
distributions to holders of equity claims • Recognition criteria
➢ Although income and expenses are ➢ Relevance - whether recognition of an
defined in terms of changes in assets item results in relevant information
and liabilities, information about may be affected by, for example:
income and expenses is just as - low probability of a flow of economic
important as information about assets benefits
and liabilities. - existence uncertainty
• Executory contract ➢ Faithful representation - whether
➢ An executory contract is a contract that recognition of an item results in a
is equally unperformed. It establishes a faithful representation may be affected
single asset or liability for the by, for example:
inseparable combined right and - measurement uncertainty
obligation to exchange economic - recognition inconsistency (accounting
resources. mismatch)
• Substance of contracts - presentation and disclosure
➢ To represent contractual rights and • Cost constraint
obligations faithfully, financial
➢ Cost constrains recognition decisions,
just as it constrains other financial
reporting decisions
• Summary of changes
➢ The previous recognition criteria were
that an entity should recognize an item
that met the definition of an element if
it was probable that economic benefits
would flow to the entity and if the item
had a cost or value that could be
determined reliably.
➢ The revised recognition criteria refer
explicitly to the qualitative
characteristics of useful information.
➢ The Board’s aim was to develop a more
coherent set of concepts, not to
increase or decrease the range of assets
and liabilities recognized.
• Why recognition is important
➢ Recognizing assets, liabilities, equity,
income and expenses depicts an
entity’s financial position and financial
performance in structured summaries
(the statements of financial position
and financial performance). The
amounts recognized in a statement are
included in the totals and, if applicable,
subtotals, in the statement. The
statements are linked because income
and expenses are linked to changes in
assets and liabilities

Basic Accounting Notes

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Basic Accounting Notes

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➢ EXEMPTION FROM CPD ➢ Bookkeeping is procedural and

- A CPA shall be permanently largely concerned with development

• OCI THAT WILL BE RECLASSIFIED TO • SOURCES OF INCOME

• a statement of profit or loss and Fair presentation and compliance with

• notes, comprising a summary of IAS 1 requires an entity whose financial

• statement of cash flows • the presentation currency (as

• disaggregation of receivables • shares reserved for issuance under

• disposals of items of property, plant • transactions with owners, showing

Statement of cash flows The following amounts may also be

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