CFAS (CHAPTERS 4 TO 5)
liabilities, equity, income and expenses of
Chapter 4: FINANCIAL STATEMENTS AND
REPORTING ENTITY UNDERLYING ASSUMPTIONS
General Objective of Financial Statements
Financial Statements provide financial
information about an entity’s assets, liabilities,
equity, income and expenses useful to users of
financial statements in:
Financial Statements is a way to measure if
an investor will invest in a company
Assessing future cash flows to the reporting
entity
 The life of an entity is dependent on
its present and future cash flows
 If the company is profitable, the
users will be able to check whether
to invest in a company
Assessing management stewardship of the
entity’s economic resources
The financial information is provided in the
following:
Statement of Financial Position –
recognizing assets, liability and owner’s
equity
Income Statement – recognizes income and
expenses
Statement of Cash Flows – reflects the cash
flows from operating, investing, and
financing activities
Statement of Changes in Equity – reflecting
the contributions from equity holders and
the distributions to equity holders
Notes to Financial Statements – recognize
the appropriate disclosures required by the
accounting standards
Types of Financial Statements
1. Consolidated Financial Statements
2. Unconsolidated Financial Statements
3. Combined Financial Statements
Consolidated Financial Statements
Provide information about the assets,
both the parent and its subsidiaries as a
single reporting entity
o Usually, makikita mo ang
transactions of the parent and
subsidiaries w/ other parties
o Eliminating the related party
transactions (tinutukoy dito is yung
subsidiaries nung parent company)
o Reflects transactions w/ third parties
(suppliers and customers) other than
yung subsidiary ng parent
o Example: Ayala Corporation
(Subsidiaries: BPI, Ayala Land, Globe)
Consolidated FS are not designed to provide
separate information about the assets,
liabilities, equity, income and expenses of a
particular subsidiary. A subsidiary’s own
financial statements are designed to
provide such information
o Financial Statement of a subsidiary
are being consolidated in the
financial statement of the parent
o Separate financial statement of a
subsidiary is not being disclosed in
consolidated fs
o It’s being aggregated lang sa FS ng
parent. So if you want to see the
information of a subsidiary, you
should look for its own FS
Unconsolidated Financial Statements
Are designed to provide information about
the parent’s assets, liabilities, income and
expenses and not about those subsidiaries
o Basically, it only relates to the
information of the parent alone
Information provided in unconsolidated
financial statements is typically not
sufficient to meet the requirement needs of
primary users
o Because if a potential investor wants
to invest to the parent and its
 subsidiaries, they must look for its
consolidated fs
Accordingly, when consolidated financial
statements are required, unconsolidated
financial statements cannot serve as
substitute for consolidated financial
statements
Combined Financial Statements
This happens when the reporting entity
comprises two or more entities that are not
linked by a parent and subsidiary
relationship
o For example, a company and the FS
of its employee benefits (meron
kasing FS lang for employee benefits
solely) that statements are required
to be reflected sa company’s
financial statement
Parent-Subsidiary Relationship
If the company bought more than 50% of
your shares, you are already a subsidiary of that
company
o Meaning, may control na yung
company sayo
Reporting Entity
A reporting entity is an entity that is
required or chooses to prepare financial
statements
It can be a single entity or a portion of an
entity, or compromise more than one entity
It is not necessarily a legal entity
Accordingly, the following can be
considered a reporting entity
o Individual corporation, partnership
or proprietorship
o The parent alone
o Parent and its subsidiaries as a single
entity
o Two or more entities without a
parent and subsidiary relationship as
a single reporting entity
o A reportable business segment of an
entity
Reporting Period
Is a period when financial statements are
prepared for general purpose financial reporting
FS may be prepared on interim basis
o Interim FS are not required but
optional
o For example, 3 months, 6 months, 9
months
o Kadalasan ang nagrereport on
interim basis are publicly listed
entities or multinational corporation
FS must be prepared on an annual basis or a
period of 12 months
To help users of FS identify and assess
change in trends, FS also provide comparative
information of the previous reporting period
o One of the purposes in reporting FS
is for the users to be able to have a
comparative info from the prev.
reporting period
FS may include information about
transaction and other events that occurred after
the end of the reporting period if the information is
significant and material
o Disclosures after the reporting
period
Underlying Assumptions
 Are the basic notions or fundamental
premises on which the accounting process is based
o Are building blocks in accounting
The Conceptual Framework for financial
reporting mentions only one assumption, Going
Concern. However, implicit in accounting are the
basic assumptions of Accounting Entity, Time
Period, and Monetary Unit
Going Concern
The Going Concern or continuity
assumption means that in the absence of evidence
to the contrary, the accounting entity is viewed as
continuing in operation indefinitely
o If the company isn’t having liquidity
issues, the it is viewed to be
continuing in operations indefinitely
in the future
It is the very foundation of cost principle
If there is evidence that the entity would
experience large and persistent losses or that the
entity’s operations are to be terminated, the going
concern assumption is abandoned
o Recognizes assets at its disposal cost
In this case, the users of the statements will
have a great interest in the amount of cash that will
be generated from the entity’s assets in the short
term
Things that the management should consider in
evaluating whether the company will continue to
operate in the future:
1. Entity’s current financial condition including
its liquidity sources
2. Entity’s conditional and unconditional
obligations, due or anticipated within the
assessment period regardless on whether
they are recognized in the entity’s financial
statements
3. Funds necessary to maintain the entity’s
operation, considering its current financial
condition, obligation, and other expected
cash flows within the assessment period
4. Other conditions and events
Examples of adverse conditions and events that
may raise substantial doubt about an entity’s
ability to continue on going concern:
a. Negative Financial Trends (such as return
operating losses, working capital deficiency,
negative cash flows, and other adverse key
financial ratios)
b. Other indicators of possible financial
difficulties (such as default of loans, arrears
in dividends, denials of usual trade credit
from suppliers, need to restructure debt to
avoid default, non-compliance with
statutory capital requirements and a need
to seek new resources methods of financing
or the dispose of a substantial assets)
c. Forecasted debt covenant violations during
the assessment period even if no violation
has yet incurred
d. Internal Matters
e. External Matters (such as legal proceedings
– parang yung sa ABS-CBN)
Accounting Entity
Is a specific business organization, which
may be a proprietorship, partnership or
corporation
Under this assumption, the entity is
separate from owners, managers, and employees
who constitute the entity
o Accordingly, the transactions of the
entity shall not be merged with the
transactions of the owners
However, where parent and subsidiary
relationship exists, consolidated financial
statements for the affiliates are usually made
because for practical and economic purpose, the
parent and the subsidiary are a single economic
entity
Time Period
 Requires that the indefinite life of an entity
is subdivided into accounting periods which are
usually of equal length for the purpose of preparing
financial reports on Financial Position, Performance
Cash Flows
By convention, the accounting period or
fiscal period is 12 months or one year
The accounting period may be a calendar
year or a natural business year (Fiscal Year)
o Calendar Year – ends on December
31
o Natural Business Year (Fiscal) –
ends on any month when the
business is at its slack season
Monetary Unit
It has two aspects, namely Quantifiability
and Stability of Peso
Quantifiability Aspect means that the
assets, liabilities, equity, income and expenses
should be stated in terms of a unit of measure
which is the peso in the Philippines
o Hindi pwedeng ang company ay
local tapos nakapresent in other
currency
The Stability of Peso means that the
purchasing power of the peso is stable or constant
and that its instability is insignificant and therefore
may be ignored
The accounting function is to account for
nominal pesos only and not for constant peso or
changes in purchasing power
CHAPTER 5: ELEMENTS OF FINANCIAL
STATEMENTS
Elements of financial statements refer to
the quantitative information reported in the
statement of financial position and income
statement
o Basically, we have 5 elements
The elements of financial statements are
the building blocks from which financial statements
are constructed
The elements directly related to the
measurement of financial position are:
Asset
Liability
Equity
The elements directly related to the
measurement of financial performance are:
Income
Expense
Assets
Under the revised conceptual framework,
an asset is defined as a present economic resource
controlled by the entity as a result of past events
An economic resource is a right that has the
potential to produce economic benefits
Essential characteristics of assets:
The asset is a present economic resource
 The entity has a right and control
over that specific asset
The economic resource is a right that has
the potential to produce economic benefits
 If you have a right over that
economic resource, then, that
economic resource has to have a
potential to produce economic
benefits in the future
The economic resource is controlled by the
entity as a result of past events
 Example: you cannot consider
insurance policy as an asset unless
mamatay yung insurer
Rights
Rights that have the potential to produce
economic benefits may take the following forms:
Rights that correspond to an obligation of
another entity
  Receivables: deliver of goods
 Right to receive cash
 Right to receive goods or services
 Right to exchange economic
resources with another party on
favorable terms (such as Options
Contract)
 Right to benefit from an obligation
of another party if a specified
uncertain future event occurs
(Insurance ang best example dito)
Rights that do not correspond to an
obligation of another entity
 Correspond to physical objects: PPE,
inventories, and right to intellectual
property
Rights established by contract or
legislation such as owning a debt
instrument or an equity instrument or
owning a registered patent
Potential to produce economic benefits
An essential characteristic of an asset to be
recognized as an asset
An economic resource is a right that has the
potential to produce economic benefits
For the potential to exist, it does not need
to be certain or even likely that the right will
produce economic benefits
o IMPORTANT: According to the
Conceptual Framework, hindi
kailangang certain ka before mo siya
irecognize sa libro. What’s important
is may potential siya to produce
economic benefits
o May be not certain or likely to occur,
but it has to have a potential to
produce economic benefits
A right can meet the definition of an
economic resource even if the probability that it
will produce economic benefit is low
An economic resource could produce
economic benefits if an entity is entitled:
To receive contractual cash flows
 Lending, Notes and Bonds
Receivable
To exchange economic resources with
another party on favorable terms
 Related sa options contract
To produce cash inflows or avoid cash
outflows
 PPE (sell or nagpoproduce ng
inventory), Buildings (pag
pinarentahan mo)
To receive cash by selling the economic
resource
 Kapag nagbenta ka ng asset
To extinguish a liability by transferring an
economic resource
 Example: Cash. It is considered an
asset because it has the ability to
extinguish a liability
Control of economic resource
An entity controls an asset if it has the
present ability to direct the use of the asset and
obtain the economic benefits that flow from it
o Example: if yung buildings or PPEs
(because you have title on these),
bawal siyang ipalease ng ibang
company (unless you have a
contract of sub-lease)
o Another example: inventory
Control also includes the ability to prevent
others from using the such asset
 o Example: if you have a title over the
goods, or if you have this special
right granted by the government
that prevents others from using that
specific asset
o If there are no legal rights, control
can still exist if an entity has other
means of insuring that no other y
can benefit from an asset (example:
if an entity has an access to a
technical know-how, and they know
how to keep this a secret)
Control may arise if an entity enforces legal
rights
Liability
A present obligation of an entity to transfer
an economic resource as a result of past event
The new definition clarifies that a liability is
the obligation to transfer an economic resource
and not the ultimate outflow of economic benefits
o Parang sa assets lang. In liability,
hindi essential na certain ka na
magkakaroon ng outflow ng
economic benefit to be considered
as a liability. It is sufficient that an
entity has current obligations
Essential characteristics of liability
The entity has an obligation
 This obligation can actually be
constructive (arise from normal
business practice) or legally
enforceable (involved ang
government/law)
The obligation to transfer an economic
resource
 Obligation to pay cash
 Obligation to deliver goods and non-
cash resources (example: nag
advance payment sayo yung
customer)
 Obligation to provide services at
some future time (hindi naman
goods, rather, services)
 Obligation to exchange economic
resources with another party on
unfavorable terms (kabaligtaran ng
options contact: POV nung
nagbebenta ng gold)
 Obligation to transfer an economic
resource if a specified uncertain
event occurs (POV: insurance
provider)
The obligation is a present obligation that
exists as a result of past event
 An obligation exist as a result of past
event if both criteria are satisfied: a.
an entity has already obtained
economic benefits from it ; b. An
entity must transfer economic
resource
Obligation
An obligation is a duty or responsibility that
an entity has no practical ability to avoid
Obligations can be legal or constructive
Transfer of an economic resource may
include:
Obligation to pay cash
Obligation to deliver goods or noncash
resources
Obligation to provide services at some
future time
Obligation to exchange economic resources
with another party on unfavorable terms
Obligation to transfer an economic resource
if specified uncertain future event occurs
Past event
An obligation exists as a result of past event
if both of the following conditions are satisfied:
An entity has already obtained economic
benefits
 An entity must transfer an economic Expenses encompasses losses as well as
resource those expenses that arise in the course of the
ordinary and regular activities
Income
o Expenses – relate to regular
Is defined as increases in assets or
activities ng business
decreases in liabilities that result in increases in
o Losses – not relating sa ordinary
equity, other than those relating to contributions
course ng business (casualties)
from equity holders
o Excluding to contribution ng equity
holders (example: purchase ng
stocks)
Income encompasses both revenue and
gains
o Revenue – this one arises sa normal
operations ng business (sale of
goods, interest, dividends, royalties
etc.)
o Gain – represent other items that
meet the definition of income but
they don’t arise on the regular
activity of an entity (example:
disposal of noncurrent assets,
unrealized gain on trading
investment
Statement of financial performance
Refers to the income statement and
statement presenting other comprehensive income
o Composed of two statements:
income statement (main activity ng
business) and statement presenting
other comprehensive income (not
related sa main activity or
operations ng business)
Expenses
Expense is defined as decreases in assets or
increases in liabilities that result in decreases in
equity, other than those relating to distributions to
equity holders