Definition of Accounting

Accounting is the process of identifying, measuring, and communicating economic information to permit
informed judgment and decisions by users of information.
Identifying is the process of analyzing events and transactions to determine whether or not they will be
recognized in the books.
Accountable events – recognized in the books through a journal entry made in the books.
Non-accountable events – not recognized but disclosed in the notes to financial statements or recorded through
a memorandum entry when such events have accounting relevance.
Types of events or transactions:
1. External events
a. Exchange
b. Non-reciprocal transfer
c. Other than transfer
2. Internal events
a. Production
b. Casualty

Measuring is the process of assigning numbers, normally in monetary terms, to the economic transactions and
events.
Measurement bases:
From the Conceptual Framework:
1. Historical cost
2. Current cost
3. Realizable (settlement) value
4. Present value
From the Standards:
5. Fair value
6. Fair value less costs to sell
7. Revalued amount
8. Inflation-adjusted costs
Valuation by fact – items measured are unaffected by estimates.
Valuation by opinion – items measured are affected by estimates.

Communicating is the process of transforming economic data into useful accounting information such as
financial statements and other accounting reports for dissemination to users.
Aspects of the communication process:
1. Recording
2. Classifying
3. Summarizing
Interpreting processed information involves the computation of financial statement ratios.
NOTE: Bookkeeping refers to the process of recording the accounts or transactions of an entity.
Unlike accounting, it does not require interpretation of the significance of processed
information.

Basic Purpose of Accounting

The basic purpose of accounting is to provide quantitative financial information about economic activities
intended to be useful in making economic decisions.
Economic entities use accounting to record economic activities, process data, and disseminate information
intended to be useful in making economic decisions.
Economic entity – separately identifiable combination of persons and property that uses or controls economic
resources to achieve certain goals or objectives. Either not-for-profit or business.
Economic activity – affects the economic resources and obligations, and consequently, the equity of an
economic entity.
Includes production, exchange, consumption, income distribution, savings and investment.
Types of information provided by accounting:
1. Quantitative information – expressed in numbers, quantities or units.
2. Qualitative information – expressed in words or descriptive form.
3. Financial information – expressed in money. It is also considered a quantitative information.
NOTE: To be useful, accounting information should be stated in a common denominator. For example,
currencies denominated in foreign currencies should be translated to the presentation currency.
Types of accounting information classified as to users’ needs:
1. General purpose – designed to meet the common needs of most financial statement users. It is
governed by GAAP represented by the IFRSs.
2. Special purpose – designed to meet the specific needs of particular financial statement users. This is
provided by other types of accounting other than financial accounting.
Sources of information in financial statements:
Not obtained exclusively from the entity’s accounting records. Some are obtained from external sources.

Common Branches of Accounting

1. Financial accounting – focuses on general purpose reports of financial position and operating results
known as financial statements.
2. Management accounting – accumulation and communication of information for use by internal parties or
management.
3. Cost accounting – systematic recording and analysis of the costs of materials, labor and overhead
incident to production.
4. Auditing – a systematic process of objectively obtaining and evaluating evidence regarding assertions
about economic actions and events to ascertain the degree of correspondence between these assertions and
established criteria and communicating the results to interested users.
5. Tax accounting – preparation of tax returns and rendering of tax advice, such as determination of tax
consequences of certain proposed business endeavors.
6. Government accounting – accounting for the national government and its instrumentalities, focusing
attention on the custody of public funds and the purpose or purposes to which such funds are committed.
7. Fiduciary accounting – handling of accounts managed by a person entrusted with the custody and
management of property for the benefit of another.
8. Estate accounting – handling of accounts for fiduciaries who wind up the affairs of a deceased person.
9. Social accounting – process of communicating the social and environmental effects of organizations’
economic actions to particular interest groups within society and to society at large.
10. Institutional accounting – accounting for not-for-profit entities other than the government.
11. Accounting systems – installation of accounting procedures for the accumulation of financial data and
designing of accounting forms to be used in data gathering.

Accounting assumptions are the fundamental concepts or principles and basic notions that provide the
foundation of the accounting process.
I. Underlying assumptions – explicitly provided in the Conceptual Framework
1. Going concern assumption – entity is assumed to carry on its operations for an indefinite period of time.
II. Implicit assumptions – not expressly provided in the Conceptual Framework
1. Separate entity – entity is treated separately from its owners
2. Stable monetary unit – items should be stated in terms of a unit of measure (pesos in the Philippines)
and its purchasing power is regarded as stable or constant
3. Time Period – life of the business is divided into series of reporting periods
III. Pervasive – affects all items in the financial statements
1. Materiality concept – information is material if its omission or misstatement could influence economic
decisions, a matter of professional judgment based on information’s size and nature
2. Cost-benefit – cost of processing and communicating information should not exceed the benefits to be
derived from it
IV. Other concepts
1. Accrual basis of accounting – effects of transactions and events are recognized when they occur
2. Concept of articulation – all the components of a complete set of financial statements are interrelated
3. Full disclosure principle – the nature and amount of information included in financial reports reflect a
series of judgmental trade-offs (sufficient detail vs. sufficient condensation)
4. Consistency concept – financial statements should be prepared on the basis of accounting principles
which are followed consistently from one period to the next
5. Matching – costs are recognized as expenses when the related revenue is recognized
6. Entity theory – accounting objective is geared towards proper income determination (A = L + C)
7. Proprietary theory – accounting objective is geared toward proper valuation of assets (A – L = C)
8. Residual equity theory – applicable where there are two classes of shares issued, ordinary and
preferred (A – L – PSHE = OSHE)
9. Fund theory – accounting objective is neither proper income determination nor proper valuation of
assets but the custody and administration of funds (Cash inflows – Cash outflows = Fund)
10. Realization – process of converting non-cash assets into cash or claims to cash
11. Prudence or Conservatism – inclusion of a degree of caution in the exercise of the judgments needed in
making the estimates required under conditions of uncertainty, such that assets or income are not overstated,
and liabilities or expenses are not understated (least effect on equity)

Accountancy refers to the profession or practice of accounting. The practice of accounting can be broadly
subdivided into two – public practice and private practice.
Practice of Public Accountancy - involves the rendering of audit or accounting related services to more than one
client on a fee basis.
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.
Practice in Education/Academe - employment in an educational institution which involves teaching of
accounting, auditing, management advisory services, finance, business law, taxation.
Practice in the Government - employment or appointment to a position in an accounting professional group in
government or in a GOCC
Accounting standards
The Generally Accepted Accounting Principles (GAAP) in the Philippines are represented by the Philippine
Financial Reporting Standards (PFRSs).
PFRSs are Standards and Interpretations adopted by the Financial Reporting Standards Council (FRSC). They
comprise:
a. Philippine Financial Reporting Standards
b. Philippine Accounting Standards
c. Interpretations
PFRSs are accompanied by guidance to assist entities in applying their requirements. Guidance that is an
integral part of the PFRSs is mandatory while guidance that is not an integral part of the PFRSs does not
contain requirements for financial statements.
Hierarchy of Reporting Standards
1. PFRSs
2. In the absence of a Standard or Interpretation that specifically applies to a transaction, management
must use its judgment in developing and applying an accounting policy that results in information that is relevant
and reliable
a. Requirements and guidance in PFRSs dealing with similar and related issues
b. Conceptual Framework
c. Most recent pronouncements of other standard-setting bodies
d. Other accounting literature and accepted industry practices
Accounting standard setting bodies and other relevant organizations
1. Financial Reporting Standards Council (FRSC) - formerly known as Accounting Standards Council
(ASC), the official accounting standard setting body in the Philippines created under RA 9298 by the PRC upon
recommendation of BOA; composed of 15 individuals – 1 chairperson and 14 members
2. Philippine Interpretations Committee (PIC) - committee formed by the ASC, the predecessor of FRSC,
with the role of reviewing interpretations prepared by IFRIC for approval and adoption of FRSC
3. Board of Accountancy (BOA) - professional regulatory board created under RA 9298 to supervise the
registration, licensure and practice of accountancy in the Philippines; composed of a chairperson and 6
members appointed by the President of the Philippines
4. Securities and Exchange Commission (SEC)
5. International Organization of Securities Commission (IOSCO)
6. Bureau of Internal Revenue (BIR)
7. Bangko Sentral ng Pilipinas (BSP)
8. Cooperative Development Authority (CDA)
NOTE: Financial reporting standards continuously change primarily in response to users’ needs. Changes in
financial reporting standards are also influenced by legal, political, business and social environments.

International Accounting Standards

1. International Accounting Standards Board (IASB) – established in April 2001 as part of the International
Accounting Standards Committee (IASC) Foundation with the responsibility of approving IFRSs and related
documents, such as the Conceptual Framework, exposure drafts and other discussion documents. The financial
reporting standards in the Philippines are adopted from the IASB standards.
NOTE: IFRSs are standards issued by the IASB while IASs are standards issued by the IASC which were
adopted by the IASB.
2. International Financial Reporting Interpretations Committee (IFRIC) – a committee that prepares
interpretations of how specific issues should be accounted for under the application of IFRS where (1) the
standards do not include specific authoritative guidance and (2) there is a risk of divergent and unacceptable
accounting practices. In 2002, IFRIC replaced the former Standing Interpretations Committee (SIC) which had
been created by the IASC.
3. Standards Advisory Council (SAC) – group of organizations and individuals with an interest in
international financial reporting, a body set up to participate in the standard-setting process. Members are
appointed by the IASC Foundation.
4. International Federation of Accountants (IFAC) – a non-profit, non-governmental, non-political
organization of accountancy bodies that represents the worldwide accountancy profession.

Move to IFRSs
Prior to full adoption of the IFRSs in 2005, GAAP in the Philippines were previously based on the Statements of
Financial Accounting Standards (SFAS) issued by Federal Accounting Standards Board (FASB). The move to
IFRSs was primarily brought about by the increasing acceptance of IFRSs worldwide and increasing
internationalization of businesses thereby increasing the need for a common financial reporting standards that
minimizes, if not eliminate, inconsistencies of financial reporting among nations.
The future of IFRSs
In October 2002, FASB and IASB entered into a Memorandum of Understanding (the Norwalk Agreement),
whereby they formalized their commitment to the convergence of US GAAP and IFRSs.

Accounting process comprises the activities of identifying, measuring and communicating economic information
that is useful for decision making purposes.
Accounting information system (accounting system) is the system of collecting and processing transaction data
and disseminating financial information to interested parties. It is a subsystem of MIS. Components are:
a. Personnel
b. Relevant accounting policies and standards
c. Procedures
d. Equipment and devices
e. Records and reports
Management information system is a set of data gathering, analyzing and reporting functions designed to
provide management with the information it needs to carry out its functions.
Components are:
a. Accounting Information System
b. Personnel Information System
c. Logistics Information System

Accounting cycle represents the steps or accounting procedures normally used by entities to record transactions
and prepare financial statements. It implements the accounting process.
1. Identifying and analyzing -the accountant gathers information from source documents and determines the
impact of the transactions on the financial position as represented by the basic equation A = L + E.
Accounting records: (1) Source documents, (2) Books of original entry, (3) Books of final entry Systems of
recording transactions: (1) Double-entry system, (2) Single-entry system
2. Journalizing - the process of recording transactions in the journal by means of journal entries.
Journal – a formal record where transactions are initially recorded chronologically through journal entries.
a. General journal – used to record transactions other than those recorded in special journals
b. Special journal – used to record transactions of a similar nature (e.g. Sales journal, Purchase journal,
Cash receipts book, Cash disbursements book)
Type of journal entries:
a. Simple journal entry – single debit and single credit
b. Compound journal entry – two or more debits or credits
c. Adjusting entries – made prior to the preparation of financial statements to update certain accounts so
that they reflect correct balances as at the designated time
d. Closing entries – made at the end of the accounting period after all adjustments have been made to
zero-out the balances of nominal accounts and to update the retained earnings account
e. Reversing entries – entries usually made in the next accounting period to reverse certain adjusting
entries made in the previous accounting period in order to facilitate recording of cash receipts and
disbursements in the next accounting period
f. Correcting entries – made to correct accounting errors committed
g. Reclassification entries – made to transfer an item from one account to another account that better
describes the nature of the item transferred

3. Posting - the process of transferring data from the journal to the appropriate accounts in the ledger. It
serves to classify the effects of transactions on specific asset, liability, equity, income and expense accounts.
Ledger – systematic compilation of a group of accounts.
Kinds of ledger:
a. General ledger – contains all accounts appearing in the financial statements
b. Subsidiary ledger – a supporting ledger consisting of a group of accounts with similar nature, the total of
which is in agreement with the balance of the related controlling account in the general ledger

Account is the basic storage of information in accounting. Accounts in the ledger follow the format of a T-
account, wherein the left side is called debit and the right side is called credit. Chart of accounts is a list of all the
accounts used by the entity.
a. Real or permanent accounts – not closed at the end of the accounting period
b. Nominal or temporary accounts – closed at the end of the accounting period
c. Mixed accounts – having both statement of financial position and income statement components
d. Contra accounts – offset accounts or accounts which are deducted from the related account
e. Adjunct account – accounts which are added to the related account

4. Unadjusted trial balance (optional) - an internal control as adjusting entries and consequently, financial
statements, cannot be prepared unless the total debits and credits agree.
Trial balance – list of accounts with their balances prepared for the purpose of proving the mathematical
accuracy of the monetary totals of debits and credits in the ledger.
a. Unadjusted trial balance – prepared before the preparation of adjusting entries, contains real, nominal,
and mixed accounts
b. Adjusted trial balance – prepared after the adjusting entries, contains real and nominal accounts
c. Post-closing trial balance – prepared after the closing process, contains real accounts only
Errors revealed by a trial balance:
a. Journalizing or posting one-half of an entry (a debit without credit or vice versa)
b. Recording one part of an entry for a different amount than the other part
c. Errors of transplacement (slide error) on one side of an entry
d. Errors of transposition on one side of an entry
Errors not revealed by a trial balance:
a. Omitting entirely the entry for a transaction
b. Journalizing or posting an entry twice
c. Using wrong account with the same normal balance as the correct account
d. Wrong computation with same erroneous amounts posted to debit and credit sides
5. Adjusting entries
These are made prior to the preparation of the financial statements to update certain asset, liability, income or
expense accounts in order to bring them to their adjusted balances. Involve at least one statement of financial
position account and one statement of profit or loss and other comprehensive account. All adjusting entries
affect the comprehensive income for the period.
a. Accrued expense – expense incurred but not yet paid
b. Accrued income – income earned but not yet received or collected
c. Prepaid expense – expense paid or acquired in advance
d. Unearned income – income already collected but not yet earned
e. Depreciation – systematic allocation of the depreciable amount of an item of property, plant and
equipment over its useful life
f. Uncollectible accounts – customers’ accounts that may no longer be collected or that may possibly
become bad debts
6. Adjusted trial balance (optional)
Worksheet – an analytical device used in accounting to facilitate the gathering of data for adjustments, the
preparation of financial statements, and closing entries. This is optional but usually prepared in practice using
spreadsheet application.
7. Financial statements
These are the means by which the information accumulated and processed in financial accounting is periodically
communicated to the users. These are the end products of the accounting process.
8. Closing the books
This is the process of preparing closing entries for nominal accounts and ruling and balancing real accounts.
This is an application of the periodicity concept.
Closing entries – prepared at the end of accounting period to “zero out” all temporary or nominal accounts in the
ledger. This is done so that the transactions in a period will not co-mingle with the next period’s transactions.
9. Post-closing trial balance (optional)
This is prepared after closing the books and contains only statement of financial position accounts since all
income statement accounts would have been closed. This serves as an internal control to ensure the equality of
the debits and credits in the ledger after the closing process.
10. Reversing entries (optional)
Reversing entries – usually made (but not always) on the first day of the next accounting period to reverse
certain adjusting entries made in the immediately preceding period.
Purposes:
a. To facilitate recording of cash receipts and disbursements in the next accounting period
b. For convenience in recording next period’s year-end adjustments for accruals
c. For consistency of accounting procedures
What may be reversed?
a. All accruals, whether for income or expense
b. Prepayments initially recorded using the expense method
c. Unearned income initially recorded using the income method
The conceptual framework of financial reporting
History of the Framework
1989 April - Framework for the Preparation and Presentation of Financial Statements (the Framework) was
approved by the IASC Board.
1989 July - Framework was published.
2001 April - Framework adopted by the IASB.
2010 September - Conceptual Framework for Financial Reporting 2010 (the IFRS Framework) approved by the
IASB.
Introduction
A conceptual framework is a coherent system of interrelated basic concepts and propositions that prescribe
objectives, limits, and other fundamentals of financial accounting and serves as a basis for developing and
evaluating accounting principles and resolving accounting and reporting controversies.
Purpose:
a. Assist the FRSC in developing accounting standards that represent generally accepted accounting
principles in the Philippines.
b. Assist the FRSC in its review and adoption of existing international financial reporting standards.
c. Assist preparers of financial statements in applying FRSC financial reporting standards and in dealing
with topics that have yet to form the subject of an FRSC statement.
d. Assist auditors in forming an opinion as to whether financial statements conform with Philippine
generally accepted accounting principles.
e. Assist users of financial statements in interpreting the information contained in financial statements
prepared in conformity with Philippine generally accepted accounting principles.
f. Provide those who are interested in the work of FRSC with information about its approach to the
formation of financial reporting standards.

Authoritative status:
1. The Conceptual Framework is not a PFRS and hence does not define standards for any particular
measurement or disclosure issue.
2. In the Conceptual Framework, nothing overrides any specific PFRS.
3. If there is a conflict between a requirement of a PFRS and a provision of the Conceptual Framework,
the requirement of the PFRS will prevail.
4. Hierarchy of guidance:
a. PFRSs
b. Similar and related PFRSs
c. Conceptual Framework
d. Most recent pronouncements of other standard-setting bodies
e. Other accounting literature and accepted industry practices

Scope of the Framework

The framework deals with:
a. The objective of financial reporting
b. The qualitative characteristics of useful information
c. The definition, recognition and measurement of the elements from which financial statements are
constructed
d. Concepts of capital and capital maintenance
Objective of financial reporting
The objective of general purpose financial reporting 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.

Primary users – cannot require reporting entities to provide information directly to them
a. Existing and potential investors
b. Lenders and other creditors

The Framework notes that general purpose financial reports cannot provide all the information that users may
need to make economic decisions. They will need to consider pertinent information from other sources as well.

Information on economic resources, claims and changes in them

a. Financial position – information on economic resources (assets) and claims against the reporting entity
(liabilities and equity). Assists users to
i. assess that entity's financial strengths and weaknesses
ii. assess liquidity and solvency
iii. assess its need and ability to obtain financing
iv. predict how future cash flows will be distributed among those with a claim on the reporting entity
(information about claims and payment requirements)
b. Changes in economic resources and claims – information on financial performance and other
transactions and events that lead to changes in financial position
i. Financial performance reflected by accrual accounting (statement of comprehensive income)
ii. Financial performance reflected by past cash flows (statement of cash flows)
iii. Changes in economic resources and claims not resulting from financial performance (statement of
changes in equity)

NOTE: To assess future cash flows, all information regarding an entity’s financial position, financial
performance, cash flows, and other changes in financial position must be considered.
Qualitative characteristics of useful information
These identify the types of information that are likely to be most useful to the primary users for making decisions
about the reporting entity on the basis of information in its financial report.
a. Fundamental (Relevance, Faithful representation)
b. Enhancing (Comparability, Verifiability, Timeliness, Understandability)
Fundamental qualitative characteristics
1. Relevance – capability of making a difference in the decisions made by users. Ingredients are:
a. Predictive value – can be used as an input in predicting or forecasting future outcomes.
b. Confirmatory (feedback) value –provides feedback about previous evaluations.
c. Materiality – its omission or misstatement could influence decisions that users make. It is an entity-
specific aspect of relevance based on the nature or magnitude (or both) of the items to which the information
relates in the context of an individual entity's financial report.

2. Faithful representation – financial reports represent economic phenomena in words and in numbers that
it purports to represent. Ingredients are:
a. Completeness – all information necessary for the understanding of the phenomenon being depicted
shall be provided.
b. Neutrality – financial information are selected or presented without bias.
c. Free from error – does not mean accurate in all respects, there are no errors or omissions in the
description of the phenomenon and the process used to produce the reported information has been selected
and applied with no errors in the process.
NOTE: Information must be both relevant and faithfully represented if it is to be useful.

Enhancing qualitative characteristics

1. Comparability – can be compared with similar information about other entities (inter-comparability)
and with similar information about the same entity for another period or another date (intra- comparability). It
enables users to identify and understand similarities in, and differences among, items.
2. Verifiability - different knowledgeable and independent observers could reach consensus, although not
necessarily complete agreement, that a particular depiction is a faithful representation. Verification can be done
through direct observation (direct) or checking inputs to a model, formula and other technique and recalculating
the outputs using the same methodology (indirect).
3. Timeliness - information is available to decision-makers in time to be capable of influencing their
decisions.
4. Understandability – information is classified, characterized and presented clearly and concisely. While
some phenomena are inherently complex and cannot be made easy to understand, to exclude such information
would make financial reports incomplete and potentially misleading. Financial reports are prepared for users
who have a reasonable knowledge of business and economic activities and who review and analyze the
information with diligence.
NOTE: Enhancing qualitative characteristics should be maximized to the extent necessary. However, enhancing
qualitative characteristics (either individually or collectively) cannot make information useful if that information is
irrelevant or not represented faithfully.

The cost constraint on useful financial reporting

Cost is a pervasive constraint on the information that can be provided by general purpose financial reporting.
Reporting such information imposes costs and those costs should be justified by the benefits of reporting that
information. The IASB assesses costs and benefits in relation to financial reporting generally, and not solely in
relation to individual reporting entities. The IASB will consider whether different sizes of entities and other factors
justify different reporting requirements in certain situations.

Underlying assumption
The IFRS Framework states that the going concern assumption is an underlying assumption. Thus, the financial
statements presume that an entity will continue in operation indefinitely or, if that presumption is not valid,
disclosure and a different basis of reporting are required.
Elements of financial statements
1. Elements directly related to financial position (balance sheet):
a. Asset - 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.
b. Liability - a present obligation of the entity arising from past events, the settlement of which is
expected to result in an outflow from the entity of resources embodying economic benefits.
c. Equity - the residual interest in the assets of the entity after deducting all its liabilities.
2. Elements directly related to performance (income statement):
a. Income - increases in economic benefits during the accounting period in the form of inflows or
enhancements of assets or decreases of liabilities that result in increases in equity, other than those
relating to contributions from equity participants.
i. Revenue – arises in the course of the ordinary activities of an entity and is referred to by a
variety of different names including sales, fees, interest, dividends, royalties and rent.
ii. Gain – other items that meet the definition of income and may, or may not, arise in the course of the
ordinary activities of an entity.
b. Expense - decreases in economic benefits during the accounting period in the form of outflows or
depletions of assets or incurrences of liabilities that result in decreases in equity, other than those
relating to distributions to equity participants.
i. Expense – arise in the course of the ordinary activities of the entity include, for example, cost of
sales, wages and depreciation.
ii. Loss – other items that meet the definition of expenses and may, or may not, arise in the course
of the ordinary activities of the entity.

Recognition of the elements of financial statements

Recognition is the process of incorporating in the balance sheet or income statement an item that meets the
definition of an element and satisfies the following criteria for recognition:
a. It is probable that any future economic benefit associated with the item will flow to or from the entity; and
b. The item's cost or value can be measured with reliability

Based on these general criteria:

1. An asset is recognized in the balance sheet when it is probable that the future economic benefits will
flow to the entity and the asset has a cost or value that can be measured reliably.
2. A liability is recognized in the balance sheet when it is probable that an outflow of resources embodying
economic benefits will result from the settlement of a present obligation and the amount at which the settlement
will take place can be measured reliably.
3. Income is recognized in the income statement when an increase in future economic benefits related to
an increase in an asset or a decrease of a liability has arisen that can be measured reliably. This means, in
effect, that recognition of income occurs simultaneously with the recognition of increases in assets or decreases
in liabilities (for example, the net increase in assets arising on a sale of goods or services or the decrease in
liabilities arising from the waiver of a debt payable).
4. Expenses are recognized when a decrease in future economic benefits related to a decrease in an
asset or an increase of a liability has arisen that can be measured reliably. This means, in effect, that recognition
of expenses occurs simultaneously with the recognition of an increase in liabilities or a decrease in assets (for
example, the accrual of employee entitlements or the depreciation of equipment).
a. Direct association - costs are recognized as expenses when the related revenue is recognized
b. Systematic and rational allocation – applied when economic benefits are expected to arise over several
accounting periods
c. Immediate recognition

Measurement of the elements of financial statements

Measurement involves assigning monetary amounts at which the elements of the financial statements are to be
recognized and reported. (historical cost, current cost, realizable (settlement) value, present value)
NOTE: Historical cost is the measurement basis most commonly used today, but it is usually combined with
other measurement bases. The IFRS Framework does not include concepts or principles for selecting which
measurement basis should be used for particular elements of financial statements or in particular circumstances.
Individual standards and interpretations do provide this guidance, however.
Concepts of capital and capital maintenance
1. Concepts of capital
a. Financial concept of capital – capital is synonymous with the net assets or equity of the entity.
b. Physical concept of capital – capital is regarded as the productive capacity of the entity based on, for
example, units of output per day.
2. Concepts of capital maintenance
a. Financial capital maintenance – a profit is earned only if the financial (or money) amount of the
net assets at the end of the period exceeds the financial (or money) amount of the net assets at the
 beginning of the period, after excluding any distributions to, and contributions from, owners during the
period. Does not require the use of a particular basis of measurement.
b. Physical capital maintenance – a profit is earned only if the physical productive capacity (or
operating capability) of the entity (or the resources or funds needed to achieve that capacity) at the end
of the period exceeds the physical productive capacity at the beginning of the period, after excluding
any distributions to, and contributions from, owners during the period. Requires the adoption of the
current cost basis of measurement.
NOTE: The principal difference between the two concepts of capital maintenance is the treatment of the effects
of changes in the prices of assets and liabilities of the entity.

PAS 1 Presentation of Financial Statements

FINANCIAL STATEMENTS - are the means by which information accumulated and processed in financial
accounting is communicated to the users; structured financial representation of the financial position and
financial performance of an entity

“General purpose” financial statements are statements that have been prepared for use by those who are not in
a position to require an entity to prepare reports tailored to their particular needs.

OBJECTIVE OF FINANCIAL STATEMENTS

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.

GENERAL FEATURES of Financial Statements

1. Fair Representation and Compliance with PFRS
- Faithful representation; requires an entity to select and apply accounting policies in accordance
with PFRS to present information in a manner that provides relevant, reliable, comparable, and
understandable information, and to provide additional disclosures necessary for the users to
understand the entity’s financial position and financial performance.
2. Going Concern
- Entity is viewed as continuing in operation indefinitely. If financial statements are not prepared on
a going concern basis, this fact shall be disclosed together with the measurement basis and
reason therefor.
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
- An entity shall present separately each material class of similar items. “Line items” is a class of
similar items. Dissimilar items are presented separately unless they are immaterial. Individually
immaterial items are aggregated with other items.
5. Offsetting
- Assets and liabilities, and income and expenses, when material, shall not be offset against each
other. Offsetting may be done when it is permitted by another PFRS.
6. Frequency of Reporting
- Financial statements are prepared at least annually. 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:
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
7. Comparative Information
- Financial statements shall be presented with comparative figures of the financial statements of
the preceding year.
 Retrospective – looking back; Prospective – looking forward and in the future
8. Consistency of Presentation
- Presentation and classification of financial statement items shall be uniform from one reporting
period to the next.
COMPONENTS OF FINANCIAL STATEMENTS
1. Statement of Financial Position
Formal statement showing the three elements comprising financial position, namely assets, liabilities and equity.
Presentation of statement of financial position:
a.Classified – shows distinctions between current and noncurrent assets and current and noncurrent
liabilities
b. Unclassified – also called based on liquidity, shows no distinction between current and noncurrent
items
ASSET
Resource controlled by the entity as a result of past events and from which future economic benefits are
expected to flow the entity.
Essential characteristics of an asset
1. The asset is controlled by the entity

2. The asset is the result of a past transaction or event.

3. The asset provides future economic benefits

4. The cost of the asset can be measured reliably.

Operating Cycle – time between the acquisition of assets for processing and their realization in cash or cash
equivalents.
Classifications of asset CURRENT ASSETS
PAS 1 paragraph 66 provides that an entity should classify asset as current asset when:
a. The asset is cash or cash equivalent unless the asset is restricted from being exchanged or used to settle a
liability for at least 12 months after the reporting period.
b. The entity holds the asset primarily for the purpose of trading.

c. The entity expects to realize the asset within twelve months after the reporting period.

B. the entity expects to realize the asset or intends to use or consume it within the entity’s operating cycle.

PAS 1 paragraph 54, the line items under current assets are (listed in order of liquidity):
A. Cash and cash equivalents

B. Financial assets at fair value such as trading securities and other investments in quoted equity instruments.

C. Trade and other receivables

D. Inventories

E. Prepaid expenses

NONCURRENT ASSETS
PAS 1 paragraph 66 states that an entity shall classify all other assets not classified as current as noncurrent.

NONCURRENT ASSETS include

 A. PROPERTY, PLANT AND EQUIPMENT

PAS 16 paragraph 6, tangible assets which are held by an entity for use in production or supply of goods and
services, for rental to others, or for administrative purposes, and are expected to be used during more than one
period.

B. LONG-TERM INVESTMENTS

IASC defines investment as an asset held by an entity for the accretion of wealth through capital distribution,
such as interest, royalties, dividends and rentals, for capital appreciation or for other benefits to the investing
entity such as those obtained through trading relationships.

C. INTANGIBLE ASSETS
An identifiable nonmonetary asset without physical substance (PAS 38).

D. DEFERRED TAX ASSETS

E. OTHER NONCURRENT ASSETS

Assets that do not fit in the definition of noncurrent assets.

 Asset valuation accounts are neither assets nor liabilities.

LIABILITY
Present obligation of an entity arising from past events, the settlement of which is expected to result in an
outflow from the entity of resources embodying economic benefits.

Essential characteristics of a liability

a. The liability is the present obligation of a particular entity.

b. The liability arises from past transaction or event.

C. the settlement of the liability requires an outflow of resources embodying economic benefits.
CURRENT LIABILITIES
PAS 1 paragraph 69 provides that an entity should classify a liability as current when:

A. The entity expects the liability to settle within the entity’s normal operating cycle.

B. the entity holds the liability primarily for the purpose of trading.

C. the liability is due to be settled within 12 months after the reporting period.

D. the entity does not have an unconditional right to defer settlement of the liability for at least 12 months after
the reporting period.

PAS 1 paragraph 54, the line items under current liability are:

A. Trade and other receivables

B. Current provisions

C. Short term borrowing

D. Current portion of long term debt

E. Current tax liability

NONCURRENT LIABILITIES
PAS 1 paragraph 69 states that an entity shall classify all liabilities not classified as current are classified as
noncurrent.

A. Noncurrent portion of a long term debt

B. Finance lease liability

C. Deferred tax liability

D. Long term obligations to company officers

E. Long term deferred revenue.

EQUITY
Residual interest in the assets of the entity after deducting all of its liabilities.

Working Capital – current assets less current liabilities.

PAS 1 paragraph 7
The holders of instruments classified as equity are OWNERS.

SHAREHOLDER’S EQUITY
Is the residual interest of owners in the net assets of a corporation measured by the excess of assets over
liabilities.

PHILIPPINE TERM IAS TERM

Capital Stock Share Capital
Subscribed Capital Stock Subscribed Share Capital
Preferred Stock Preference Share Capital
Common Stock Ordinary Share Capital
 Additional Paid In Capital
Retained Earnings (deficit)
Retained Earnings
Appropriated
Revaluation Surplus
Treasury Stock
Share Premium
Accumulated Profits (Losses)
Appropriated Reserve
Revaluation Reserve
Treasury Share

NOTES TO FINANCIAL STATEMENTS

Provide narrative description or disaggregation of items presented in the financial statements and information
about items that do not qualify for recognition.
Purpose: to provide the necessary disclosures required by PFRS. FORMS OF FINANCIAL POSITION
A. REPORT FORM
This form sets form the three major sections in a downward sequence of assets, liabilities and equity.
B. ACCOUNT FORM
The assets are shown on the left side and the liabilities and equity on the right side of the balance sheet.

PAS 1, paragraph 54, balance sheet line items

1. Cash and cash equivalents

2. Financial assets
3. Trade and other receivables
4. Inventories
5. Property, plant and equipment
6. Investment in associates accounted for by the equity method
7. Intangible assets
8. Investment property
9. Biological asset
10. Total assets classified as held for sale and assets included in disposal group classified as held for
sale
11. Trade and other payables
12. Current tax liabilities
13. Deferred tax asset and deferred tax liability
14. Provisions
15. Financial liabilities
16. Liabilities included in disposal group classified as held for sale
17. Noncontrolling assets
18. Share capital and reserves
PAS 1, paragraph 60, provides that an entity shall present current and noncurrent assets, liabilities on
the face of the statement of financial position.
2. Statement of comprehensive income

COMPREHENSIVE INCOME
The change in equity during a period resulting from transactions and other events, other than
changes resulting from transactions with owners in their capacity as owners.

Includes:
A. components of profit or loss

Profit or loss
The total income less expenses, excluding the components of other comprehensive income.

B. components of other comprehensive income

OTHER COMMPREHENSIVE INCOME

Comprises items of income and expenses including reclassification adjustments that are not
recognized in profit or loss as required or permitted by PFRS.

Components:

A. OCI that will be reclassified subsequently to profit or loss when specific conditions are met.

1. Unrealized gain or loss on equity investment measured at fair value through other
comprehensive income.
2. unrealized gain or loss on debt investment measured at fair value through other comprehensive income.
3. Gain or loss from translation of the financial statements of a foreign operation.

B. OCI that will not be reclassified subsequently to profit or loss

4. revaluation surplus during the year.

5. Unrealized gain or loss from derivative contracts designated as cash flow hedge.
6. “remeasurements” of defined benefit plan, including actuarial gain or loss.
7. Change in fair value attributable to credit risk of a financial liability designated at fair value through profit
or loss.

Presentation of other comprehensive income

PAS 1 paragraph 82A, provides that the statement of comprehensive income shall present line items for
amounts of other comprehensive income during the period classified by nature.

The line items for amounts of OCI shall be grouped as follows.

PRESENTATION OF COMPREHENSIVE INCOME

1. TWO STATEMENTS

A. An income statement showing the components of profit or loss.

B. A statement of comprehensive income beginning with profit or loss as shown in the
income statement plus or minus the components of other comprehensive income

2. SINGLE STATEMENT OF COMPREHENSIVE INCOME

This is the combined statement showing the components of profit or loss and components of other
comprehensive income in a single statement.

SOURCES OF INCOME

A. Sales of merchandise to customers

B. Rendering of services
C. Use of entity resources
D. Disposal of resources other than products

COMPONENTS OF EXPENSE

A. COGS
B. Distribution costs or selling expenses
C. Administrative expenses
D. Other expenses
E. Income tax expense

DISTRIBUTION COSTS constitute costs which are directly related to selling, advertising and delivery
of goods to customers.

ADMINISTRATIVE EXPENSES constitute cost of administering the business. These ordinarily include
all operating expenses not related to selling and cost of goods sold.
OTHER EXPENSES are those expenses which are not directly related to the selling and administrative
function.

PAS 1 paragraph 87
An entity shall not present any items of income and expense as extraordinary items, either on the
face of the income statement or the statement of comprehensive income or in the notes.
PAS 1 paragraph 82, Income statement and statement of comprehensive income line items.
A. Revenue
B. Gain and loss from the derecognition of financial asset measured at amortized cost as required by PFRS 9
C. Finance Cost
D. Share in income or loss of associate and joint ventures accounted for using equity method
E. Income tax expense
F. A single amount comprising discontinued operations
G. Profit or loss for the Period
H. Total Other Comprehensive income
I. Comprehensive income for the period being the total of profit or loss and other comprehensive income.

The following items shall be disclosed on the face of the income statement and statement of comprehensive
income:

A. profit or loss for the period attributable to noncontrolling interest and owners of the parent

B. total comprehensive income for the period attributable to noncontrolling interest and owners of
the parent.

FORMS OF INCOME STATEMENT

PAS 1 paragraph 99. An entity shall present an analysis of expenses recognized in profit or loss using in
classification based on either the function of expenses or their nature within the entity, whichever provides
information that is more reliable and more relevant.

2 ways to present an income statement

1. FUNCTIONAL PRESENTATION/COST OF SALES METHOD

This form classifies expenses according to their function as part of cost of sales , distribution costs,
administrative activities and other activities.

2. NATURAL PRESENTATION/NATURE OF EXPENSE METHOD

Expenses are aggregated according to their nature and not allocated among the various functions within the
entity.

PAS 1 paragraph 105

Because each presentation has merit for different types of entities, management is required to
select the presentation that is reliable and more relevant.

STATEMENT OF RETAINED EARNINGS

Shows the changes affecting directly the retained earnings of an entity and relates the income
statement to the statement of financial position.

Should be disclosed in the statement of retained earnings:

A. Profit or loss for the period
B. Prior period errors
C. Dividends declared and paid to shareholders
D. Effect of change in accounting policy
E. Appropriation of retained earnings
D. PAS 2 INVENTORIES

Inventories include assets held for sale in the ordinary course of business (finished goods), assets in the
production process for sale in the ordinary course of business (work in process), and materials and
supplies that are consumed in production (raw materials).

However, PAS 2 excludes certain inventories from its scope:

 work in process arising under construction contracts (see PAS 11)
 financial instruments (see PAS 39)
 biological assets related to agricultural activity and agricultural produce at the point of harvest
(see PAS 41).
Also, while the following are within the scope of the standard, PAS 2 does not apply to the measurement of
inventories held by:
 producers of agricultural and forest products, agricultural produce after harvest, and minerals and
mineral products, to the extent that they are measured at net realisable value (above or below
cost) in accordance with well-established practices in those industries. When such inventories are
measured at net realisable value, changes in that value are recognized in profit or loss in the
period of the change.
 commodity brokers and dealers who measure their inventories at fair value less costs to sell. When
such inventories are measured at fair value less costs to sell, changes in fair value less costs to
sell are recognized in profit or loss in the period of the change.

Fundamental Principle of PAS 2

Inventories are required to be stated at the lower of cost and net realizable value (NRV).

Measurement of Inventories
Cost should include all:
 costs of purchase (including taxes, transport, and handling) net of trade discounts received
 costs of conversion (including fixed and variable manufacturing overheads) and
 other costs incurred in bringing the inventories to their present location and condition

Inventory cost should not include:

 abnormal waste
 storage costs
 administrative overheads unrelated to production
 selling costs
 foreign exchange differences arising directly on the recent acquisition of inventories invoiced in
a foreign currency
 interest cost when inventories are purchased with deferred settlement terms.

The standard cost and retail methods may be used for the measurement of cost, provided that the results
approximate actual cost.

For inventory items that are not interchangeable, specific costs are attributed to the specific individual items
of inventory.
For items that are interchangeable, PAS 2 allows the FIFO or weighted average cost formulas. The
LIFO formula, which had been allowed prior to the 2003 revision of PAS 2, is no longer allowed.

The same cost formula should be used for all inventories with similar characteristics as to their nature and
use to the entity. For groups of inventories that have different characteristics, different cost formulas may
be justified.
Write-Down to Net Realizable Value

NRV is the estimated selling price in the ordinary course of business, less the estimated cost of completion
and the estimated costs necessary to make the sale. Any write-down to NRV should be recognized as an
expense in the period in which the write-down occurs. Any reversal should be recognized in the income
statement in the period in which the reversal occurs.

Expense Recognition

PAS 18 Revenue addresses revenue recognition for the sale of goods. When inventories are sold and
revenue is recognized, the carrying amount of those inventories is recognized as an expense (often called
cost-of- goods-sold). Any write-down to NRV and any inventory losses are also recognized as an expense
when they occur.

Whose Inventory is it?

a. Goods in transit

Shipping terms determine when title to goods passes to the purchaser.

 FOB (free on board) shipping point—title passes to the buyer with the loading of goods at the point
of shipment.
 FOB destination—legal title does not pass until the goods are received by the buyer.

Goods shipped FOB shipping point belong to the buyer while they are in transit and should normally be
included in the buyer’s inventory while in transit.

Goods shipped FOB destination belong to the seller while in transit and are normally included in the seller’s
inventory.

b. Goods on consignment

 Goods held by the dealer (consignee) for which title is held by the shipper (consignor).

 Consigned goods are included in the inventory of the consignor.

c. Conditional sales, installment sales, and repurchase agreements

 If title to the goods is retained by the seller, the seller may report as an asset the cost of the goods less
the purchaser’s equity in the goods such as established by collections.
 Generally however, in the usual case where the possibilities of default or return are low, the seller, in
anticipation of contract completion and ultimate passing of title, will recognize the transaction as a
regular sale and remove the goods from reported inventory at the time of sale.
 Repurchase agreements result in no sale being recorded; the inventory is thus not removed from the
books, and instead the “seller” records a liability for the proceeds of the “sale”, which more accurately
in substance is a short-term loan secured by inventory as collateral.
Inventory Cost Formulas

The purpose of an inventory valuation method is to allocate the total inventory cost of good available for sale
during the period between cost of goods sold and ending inventory.
a. Specific Identification

Required for inventories that are not ordinarily interchangeable and goods or services produced and
segregated for specific projects.

 The original cost of each item is identified, resulting in actual costs being accumulated for the specific
items on hand and sold.

 This method is consistent with the physical flow of goods (though note, it is not required that one has
to choose a cost-flow method which corresponds to the actual, underlying physical flow of goods).

 Though theoretically attractive and useful when each inventory item is unique and has a high cost, it is
frequently not economically feasible (even if taking into account advances in technology), particularly
where inventory is composed of a great many items or identical items acquired at different times and at
different prices.

 It is subject to manipulation, as seller has the flexibility of selectively choosing specific items of
higher/lower-costing inventory depending on particular income goals at the time of sale.

 It is the least common method observed in practice.

b. Average Cost Method

 This method assigns the same average cost to each unit.

 Based on the assumption that goods sold should be charged at an average cost, with the average
being weighted by the number of units acquired at each price.

 It provides the same cost for similar items of equal utility.

 It does not permit profit manipulation.

 Its limitation is that inventory values may lag significantly behind current prices in periods of rapidly
rising or falling prices.

c. First-in, first-out method (FIFO)

The first goods purchased are the first goods sold.

 Using the FIFO method, the accountant computes the cost of goods sold and ending inventory as if
the first items purchased are the first to be sold, leaving the most recently purchased items in
inventory.

 This often matches the physical flow of goods.

 FIFO affords little opportunity for profit manipulation.

 FIFO best approximates the current replacement value of ending inventory.

E. PAS 7 STATEMENT OF CASH FLOWS

All entities that prepare financial statements in conformity with IFRSs are required to present a statement of
cash flows.

The statement of cash flows analyses changes in cash and cash equivalents during a period. Cash and
cash equivalents comprise cash on hand and demand deposits, together with short-term, highly liquid
investments that are readily convertible to a known amount of cash, and that are subject to an insignificant
risk of changes in value. Guidance notes indicate that an investment normally meets the definition of a cash
equivalent when it has a maturity of three months or less from the date of acquisition. Equity investments
are normally excluded, unless they are in substance a cash equivalent (e.g. preferred shares acquired
within three months of their specified redemption date). Bank overdrafts which are repayable on demand
and which form an integral part of an entity's cash management are also included as a component of cash
and cash equivalents.

Presentation of the Statement of Cash Flows

Cash flows must be analyzed between operating, investing and financing activities. Key principles specified
by PAS 7 for the preparation of a statement of cash flows are as follows:
 operating activities are the main revenue-producing activities of the entity that are not investing or
financing activities, so operating cash flows include cash received from customers and cash paid to
suppliers and employees.
 investing activities are the acquisition and disposal of long-term assets and other investments that are
not considered to be cash equivalents.
 financing activities are activities that alter the equity capital and borrowing structure of the entity.
 and paid may be classified as operating, investing, or financing cash flows, provided that they are
classified consistently from period to period.
 cash flows arising from taxes on income are normally classified as operating, unless they can be
specifically identified with financing or investing activities.
 for operating cash flows, the direct method of presentation is encouraged, but the indirect method
is acceptable.
The direct method shows each major class of gross cash receipts and gross cash payments. The
operating cash flows section of the statement of cash flows under the direct method would appear something
like this:
The indirect method adjusts accrual basis net profit or loss for the effects of non-cash transactions. The
operating cash flows section of the statement of cash flows under the indirect method would appear
something like this:

Investing and financing transactions which do not require the use of cash should be excluded from the
statement of cash flows, but they should be separately disclosed elsewhere in the financial statements.

F. PAS 8 ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS

Definitions

Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in
preparing and presenting financial statements.

Accounting Estimates refer to a change in an accounting estimate is an adjustment of the carrying amount
of an asset or liability, or related expense or the amount of the periodic consumption of an asset, resulting
from reassessing the present status of expected future benefits and obligations associated with the asset
or liability.

Errors refer to prior period errors which are omissions from, and misstatements in, an entity’s financial
statements for one or more prior periods arising from failure to use/or from misuse of reliable information:
1. that was available when the financial statements for that period were issued; and
 2. could have been reasonably expected to be taken into account in in the preparation
and presentation of those financial statements

Material Omissions or misstatements are items which are material if they could, individually or
collectively, influence the economic decisions that users make based on the financial statements.

Materiality depends on the size and nature of the omission or misstatement judged in the surrounding
circumstances. The size or nature of the item, or a combination of both, could be the determining factor.

Retrospective application is applying a new accounting policy to transactions, other events and conditions as
if that policy had always been applied.

Retrospective restatement is correcting the recognition, measurement and disclosure of amounts of

elements of financial statements as if a prior period error had never occurred.

Impracticable means the entity cannot apply it after making every reasonable effort to do so. For a particular
prior period, it is impracticable to apply a change in an accounting policy retrospectively or to make a
retrospective restatement to correct an error if:

 the effects of the retrospective application or retrospective restatement are not determinable;

 the retrospective application or retrospective restatement requires assumptions about

what management’s intent would have been in that period; or

 the retrospective application or retrospective restatement requires significant estimates of amounts

and it is impossible to distinguish objectively information about those estimates that:

 provides evidence of circumstances that existed on the date(s) as at which those amounts are to
be recognized, measured or disclosed; and

 would have been available when the financial statements for that prior period were authorized for
issue from other information.

Prospective application of a change in accounting policy and of recognizing the effect of a change
in an accounting estimate, respectively, are:

 applying the new accounting policy to transactions, other events and conditions occurring after the
date as at which the policy is changed; and

 recognising the effect of the change in the accounting estimate in the current and future periods
affected by the change.
Accounting policies

Selection and application:

When an IFRS specifically applies to a transaction, event or condition, the policy shall be determined by
applying the IFRS.

In the absence of an IFRS that specifically applies to a transaction, other event or condition, management
shall use its judgement in developing and applying an accounting policy that results in information that is:

 relevant to the economic decision-making needs of users; and

 reliable, in that the financial statements:

o represent faithfully the financial position, financial performance and cash flows of the entity;
o reflect the economic substance of transactions, other events and conditions, and not
merely the legal form;
o are neutral, i.e. free from bias; and
o are prudent.

Consistency of accounting policies:

An entity shall apply its accounting policy consistently for similar transactions, other events or
conditions unless an IFRS states otherwise.

If an IFRS requires or permits such categorisation of terms, or which different policies may be appropriate, an
appropriate accounting policy shall be selected and applied consistently to each category.

The following are not changes in accounting policies:

 the application of an accounting policy for transactions, other events or conditions that differ in substance
from those previously occurring; and

 the application of a new accounting policy for transactions, other events or conditions that did not occur
previously or were immaterial.

Changes in accounting policies only

if:

(a) Required by IFRS; or

(b) Results in the financial statements providing reliable and more relevant information.
 Accounting policy changes
If the change is resulting from a Standard; an entity shall apply transitional provisions and if no specific
transitional provisions exist, an entity shall apply the change retrospectively.
When a change in accounting policy is applied retrospectively, the entity shall adjust the opening balance of
each affected component of equity for the earliest prior period presented and the other comparative amounts
disclosed for each prior period presented as if the new accounting policy had always been applied.

The Standard refers to limitations on retrospective application when it proves impracticable.

Accounting estimate changes

The change shall be recognized prospectively in profit and loss in the:

(a) period of change, if the change affects that period only or;
(b) period of change and future periods if the change affects both.

To the extent that a change in an accounting estimate gives rise to changes in assets and liabilities, or
relates to an item of equity, it shall be recognized by adjusting the carrying amount of the related asset,
liability or equity item in the period of the change.

Correction of errors

An entity shall correct material prior period errors respectively in the first set of financial statements
authorized for issue after their discovery by:

 restating the comparative amounts for prior period(s) in which error occurred, or
 If the error occurred before that date – restating the opening balance of assets, liabilities
and equity for earliest prior period presented.

G. PAS 10 EVENTS AFTER THE REPORTING PERIOD

Key Definitions

Event after the reporting period: An event, which could be favorable or unfavorable, that occurs between
the end of the reporting period and the date that the financial statements are authorized for issue.

Adjusting event: An event after the reporting period that provides further evidence of conditions that
existed at the end of the reporting period, including an event that indicates that the going concern
assumption in relation to the whole or part of the enterprise is not appropriate.

Non-adjusting event: An event after the reporting period that is indicative of a condition that arose after the
end of the reporting period.

Accounting
  Adjust financial statements for adjusting events - events after the balance sheet date that provide
further evidence of conditions that existed at the end of the reporting period, including events that
indicate that the going concern assumption in relation to the whole or part of the enterprise is not
appropriate.

 Do not adjust for non-adjusting events - events or conditions that arose after the end of the
reporting period.

 If an entity declares dividends after the reporting period, the entity shall not recognize those
dividends as a liability at the end of the reporting period. That is a non-adjusting event.

Going concern issues arising after end of the reporting period

An entity shall not prepare its financial statements on a going concern basis if management determines
after the end of 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.

Disclosure
Non-adjusting events should be disclosed if they are of such importance that non-disclosure would affect
the ability of users to make proper evaluations and decisions. The required disclosure is (a) the nature of
the event and (b) an estimate of its financial effect or a statement that a reasonable estimate of the effect
cannot be made.

A company should update disclosures that relate to conditions that existed at the end of the reporting period
to reflect any new information that it receives after the reporting period about those conditions.

Companies must disclose the date when the financial statements were authorized for issue and who gave
that authorization. If the enterprise's owners or others have the power to amend the financial statements
after issuance, the enterprise must disclose that fact.

H. PAS 12 INCOME TAXES

It is inherent in the recognition of an asset or liability that that asset or liability will be recovered or settled,
and this recovery or settlement may give rise to future tax consequences which should be recognized at the
same time as the asset or liability. An entity should account for the tax consequences of transactions and
other events in the same way it accounts for the transactions or other events themselves.

Key Definitions
Current tax

Current tax for the current and prior periods is recognized as a liability to the extent that it has not yet been
settled, and as an asset to the extent that the amounts already paid exceeds the amount due. The benefit
of a tax loss which can be carried back to recover current tax of a prior period is recognized as an asset.

Current tax assets and liabilities are measured at the amount expected to be paid to (recovered from)
taxation authorities, using the rates/laws that have been enacted or substantively enacted by the balance
sheet date.

Calculation of deferred taxes

Formula

Deferred tax assets and deferred tax liabilities can be calculated using the following formula:
Measurement of deferred tax

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period
when the asset is realized or the liability is settled, based on tax rates/laws that have been enacted or
substantively enacted by the end of the reporting period. The measurement reflects the entity's
expectations, at the end of the reporting period, as to the manner in which the carrying amount of its assets
and liabilities will be recovered or settled.

PAS 12 provides the following guidance on measuring deferred taxes:

 Where the tax rate or tax base is impacted by the manner in which the entity recovers its assets or
settles its liabilities (e.g. whether an asset is sold or used), the measurement of deferred taxes is
consistent with the way in which an asset is recovered or liability settled;

 Where deferred taxes arise from revalued non-depreciable assets (e.g. revalued land), deferred
taxes reflect the tax consequences of selling the asset;

 Deferred taxes arising from investment property measured at fair value under PAS 40 Investment
Property reflect the rebuttable presumption that the investment property will be recovered through
sale;
  If dividends are paid to shareholders, and this causes income taxes to be payable at a higher or
lower rate, or the entity pays additional taxes or receives a refund, deferred taxes are measured
using the tax rate applicable to undistributed profits.

Deferred tax assets and liabilities cannot be discounted.

I. PAS 16 PROPERTY, PLANT AND EQUIPMENT

PAS 16 applies to the accounting for property, plant and equipment, except where another standard
requires or permits differing accounting treatments, for example:
 assets classified as held for sale in accordance with PFRS 5
 biological assets related to agricultural activity accounted for under PAS 41
 exploration and evaluation assets recognized in accordance with PFRS 6
 mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative resources.

The standard does apply to property, plant, and equipment used to develop or maintain the last three
categories of assets.

Recognition

Items of property, plant, and equipment should be recognized as assets when it is probable that:
 it is probable that the future economic benefits associated with the asset will flow to the entity, and
 the cost of the asset can be measured reliably.

This recognition principle is applied to all property, plant, and equipment costs at the time they are incurred.
These costs include costs incurred initially to acquire or construct an item of property, plant and equipment
and costs incurred subsequently to add to, replace part of, or service it.

PAS 16 does not prescribe the unit of measure for recognition – what constitutes an item of property, plant,
and equipment. Note, however, that if the cost model is used (see below) each part of an item of property,
plant, and equipment with a cost that is significant in relation to the total cost of the item must be
depreciated separately.

PAS 16 recognizes that parts of some items of property, plant, and equipment may require replacement at
regular intervals. The carrying amount of an item of property, plant, and equipment will include the cost of
replacing the part of such an item when that cost is incurred if the recognition criteria (future benefits and
measurement reliability) are met. The carrying amount of those parts that are replaced is derecognized in
accordance with the derecognition provisions of PAS 16.67-72.

Also, continued operation of an item of property, plant, and equipment (for example, an aircraft) may
require regular major inspections for faults regardless of whether parts of the item are replaced. When each
major inspection is performed, its cost is recognized in the carrying amount of the item of property, plant,
and equipment as a replacement if the recognition criteria are satisfied. If necessary, the estimated cost of
a future similar inspection may be used as an indication of what the cost of the existing inspection
component was when the item was acquired or constructed.

Initial measurement

An item of property, plant and equipment should initially be recorded at cost. Cost includes all costs
necessary to bring the asset to working condition for its intended use. This would include not only its
original purchase price but also costs of site preparation, delivery and handling, installation, related
professional fees for architects and engineers, and the estimated cost of dismantling and removing the
asset and restoring the site (see PAS 37).

If payment for an item of property, plant, and equipment is deferred, interest at a market rate must be
recognized or imputed.

If an asset is acquired in exchange for another asset (whether similar or dissimilar in nature), the cost will
be measured at the fair value unless (a) the exchange transaction lacks commercial substance or (b) the
fair value of neither the asset received nor the asset given up is reliably measurable. If the acquired item is
not measured at fair value, its cost is measured at the carrying amount of the asset given up.

Measurement subsequent to initial recognition

PAS 16 permits two accounting models:

 Cost model. The asset is carried at cost less accumulated depreciation and impairment.

 Revaluation model. The asset is carried at a revalued amount, being its fair value at the date of
revaluation less subsequent depreciation and impairment, provided that fair value can be measured
reliably.

The revaluation model

Under the revaluation model, revaluations should be carried out regularly, so that the carrying amount of an
asset does not differ materially from its fair value at the balance sheet date.

If an item is revalued, the entire class of assets to which that asset belongs should be

revalued. Revalued assets are depreciated in the same way as under the cost model.

If a revaluation results in an increase in value, it should be credited to other comprehensive income and
accumulated in equity under the heading "revaluation surplus" unless it represents the reversal of a
revaluation decrease of the same asset previously recognized as an expense, in which case it should be
recognized in profit or loss.]

A decrease arising as a result of a revaluation should be recognized as an expense to the extent that it
exceeds any amount previously credited to the revaluation surplus relating to the same asset.

When a revalued asset is disposed of, any revaluation surplus may be transferred directly to retained
earnings, or it may be left in equity under the heading revaluation surplus. The transfer to retained earnings
should not be made through profit or loss.

Depreciation (cost and revaluation models)

The depreciable amount (cost less residual value) should be allocated on a systematic basis over the
asset's useful life.

The residual value and the useful life of an asset should be reviewed at least at each financial year-end
and, if expectations differ from previous estimates, any change is accounted for prospectively as a change
in estimate under PAS 8.

The depreciation method used should reflect the pattern in which the asset's economic benefits are
consumed by the entity; a depreciation method that is based on revenue that is generated by an activity
that includes the use of an asset is not appropriate.
Note: The clarification regarding the revenue-based depreciation method was introduced by Clarification of
Acceptable Methods of Depreciation and Amortization , which applies to annual periods beginning on or
after 1 January 2016.

The depreciation method should be reviewed at least annually and, if the pattern of consumption of benefits
has changed, the depreciation method should be changed prospectively as a change in estimate under
PAS 8. [PAS 16.61] Expected future reductions in selling prices could be indicative of a higher rate of
consumption of the future economic benefits embodied in an asset.

Note: The guidance on expected future reductions in selling prices was introduced by Clarification of
Acceptable Methods of Depreciation and Amortization , which applies to annual periods beginning on or
after 1 January 2016.

Depreciation should be charged to profit or loss, unless it is included in the carrying amount of another asset

Depreciation begins when the asset is available for use and continues until the asset is derecognized, even
if it is idle.

Recoverability of the carrying amount

PAS 16 requires impairment testing and, if necessary, recognition for property, plant, and equipment. An
item of property, plant, or equipment shall not be carried at more than recoverable amount. Recoverable
amount is the higher of an asset's fair value less costs to sell and its value in use.

Any claim for compensation from third parties for impairment is included in profit or loss when the claim
becomes receivable.

Derecognition (retirements and disposals)

An asset should be removed from the statement of financial position on disposal or when it is withdrawn
from use and no future economic benefits are expected from its disposal. The gain or loss on disposal is
the difference between the proceeds and the carrying amount and should be recognized in profit and loss.

If an entity rents some assets and then ceases to rent them, the assets should be transferred to inventories
at their carrying amounts as they become held for sale in the ordinary course of business. [PAS 16.68A]