CHAPTER 14 FINANCIAL STATEMENTS

Learning Objectives

State the general principles in the presentation

of financial statements.

Prepare a complete set of general purpose

financial statements of a government entity,
including a partial note to the financial
statements.

Describe the accounting and disclosure

requirements for events after the reporting date,
changes in accounting policies, changes in
accounting estimates, and correction of errors.

State the “other reports” prepared by

government entities.

General Purpose Financial Statements

 General Purpose Financial Statements are those intended to meet the needs of
users who are not in a position to demand reports tailored to meet their particular
information needs. (PPSAS 1.3)

Objectives of General Purpose Financial Statements

 a. To provide information about the entity’s financial position, financial performance,
and cash flows that is useful to a wide range of users in making economic
decisions; and

b. To demonstrate the accountability of the entity for the resources entrusted to it.

Responsibility for Financial Statements

 The responsibility over financial statements rests with the entity’s management,
particularly the Head of the Entity jointly with the Head of Finance/Accounting.

Components of General Purpose Financial Statements

1. Statement of Financial Position;

2. Statement of Financial Performance;

3. Statement of Changes in Net Assets/Equity;

4. Statement of Cash Flows;

5. Statement of Comparison of Budget and Actual Amounts; and

6. Notes to the Financial Statements, comprising a summary of significant

accounting policies and other explanatory notes.

General Principles

 Fair Presentation  Consistency of Presentation

 Compliance with PPSASs  Materiality and Aggregation

 Departure from PPSAS  Offsetting

 Going Concern  Comparative Information

Identification of the Financial Statements

 The following information shall be displayed prominently and repeatedly:

a. Name of the reporting entity;

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b. Whether the financial statements cover the individual entity or a group of

entity;

c. The reporting date or the period covered by the financial statements,

whichever is appropriate to that component of the financial statements;

d. Name of fund cluster;

e. The reporting currency; and

f. The level of rounding-off of amounts. (PPSAS 1.61)

Reporting Period

 Financial statements shall be presented at least annually.

Statement of Financial Position

 The statement of financial position is presented in comparative, condensed and

detailed formats.

1. Condensed Statement of Financial Position – presents only line items.

2. Detailed Statement of Financial Position – presents all the asset, liability

and equity accounts in the Revised Chart of Accounts.

Current vs. Noncurrent

 The statement of financial position shall show distinctions between current and
noncurrent assets and liabilities.

Current Assets Current Liabilities

a. Expected to be realized in, or is b. Expected to be settled in the

held for sale or consumption in, the entity’s normal operating cycle
entity’s normal operating cycle.

b. Held primarily for trading. c. Held primarily for trading.

c. Expected to be realized within 12 d. Due to be settled within 12 months

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months after the reporting date. after the reporting date.

d. It is cash or a cash equivalent, e. The entity does not have an

unless it is restricted from being unconditional right to defer
exchanged or used to settle a settlement of the liability for at
liability for at least 12 months after least 12 months after the reporting
the reporting date. date.

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Statement of Financial Performance

 Generally, revenue and expenses are recognized in surplus or deficit, except for
the following which are recognized directly in equity:

a. Correction of prior period errors;

b. Effect of changes in accounting policies; and

c. Gains or losses on remeasuring available-for-sale financial assets.

Presentation of Expenses

 Expenses may be presented according to their function or nature, whichever is

more relevant.

 If expenses are classified by function, additional disclosures shall be made on

the nature of expenses, including depreciation, amortization and employee
benefits expenses.

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Statement of Changes in Net Assets/Equity

 The statement of changes in net assets/equity shows the increase or decrease in

the entity’s net assets during the period resulting from the following:

a. Surplus or deficit for the period;

b. Items of revenue and expense that are recognized directly in equity;

c. Effects of changes in accounting policies and corrections of errors; and

d. The balance of accumulated surpluses or deficits at the beginning of the

period and at the reporting date, and the changes during the period.

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Statement of Cash Flows

 The statement of cash flows shows the sources and utilizations of cash and cash
equivalents during the period according to the following activities:

1. Operating activities – presented using the Direct Method only.

2. Investing activities

3. Financing activities

Examples of Operating Activities

1. Receipt of NCA and reversion of unused NCA

2. Receipt or provision of assistance and subsidy to other entities

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3. Collection of income and receivables

4. Payments of expenses, cash advances and payables

5. Inter or intra-entity transfers of funds

Examples of Investing Activities

1. Acquisition and disposal of PPE, investment property, intangible assets and other
noncurrent assets

2. Acquisition and disposal of investment securities and derivatives

3. Collection and provision of long-term loans

Examples of Financing Activities

1. Issuing of notes, loans, and bonds payable, and their repayments

2. Finance lease payments pertaining to the reduction of the outstanding finance

lease liability

Effects of Foreign Exchange Rates

1. Cash flows denominated in a foreign currency are translated using the spot
exchange rate at the date of the cash flow.

2. Exchange differences are not cash flows but a reconciliation of the cash and
cash equivalents at the beginning and end of the period. Exchange differences
are reported in the statement of cash flows separately from the operating,
investing and financing activities.

Statement of Comparison of Budget and Actual Amounts

 The statement of comparison of budget and actual amounts shows the

differences (variances) between budgeted amounts and actual results for a given
reporting period.

Definitions

 Original Budget – is the initially approved budget for the period, usually the
GAA.

 Final Budget – is the original budget adjusted for all reserves, carry-over
amounts, realignments, transfers, allocations and other authorized legislative
or similar authority changes applicable to the period.

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 Actual amounts on a comparable basis – represent the actual disbursements

made during the period. Since the ‘actual amounts on a comparable basis’ to
the budgeted amounts are on a ‘cash basis’, they may not always be equal to
the amounts presented in the other financial statements, which are on
‘accrual basis’.

 The differences between the ‘actual amounts on comparable basis’ and

amounts presented in the other components of financial statements are
classified as follows:

1. Basis Differences – occur when the approved budget is prepared on a

basis other than the accounting basis;

2. Timing Differences – occur when the budget period differs from the
reporting period reflected in the financial statements; and

3. Entity Differences – occur when the budget omits program or entities that
are part of the entity for which the financial statements are prepared.
(GAM for NGAs, Chapter 3, Sec. 28)

Notes to Financial Statements

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 The notes shall be structured in a systematic and logical manner to show the
following:

1. General information on the reporting entity.

2. Statement of compliance with the PPSAS and Basis of preparation of

financial statements.

3. Summary of significant accounting policies.

4. Disaggregation (breakdowns) and other supporting information for the line

items in the other financial statements.

5. Other disclosures required by PPSAS, such as:

 Explanations for the differences between budgeted and actual
amounts;
 Events after the reporting date, if material;
 Changes in accounting policies and accounting estimates and prior
period errors;
 Contingent liabilities, contingent assets, and unrecognized
contractual commitments;
 Related party disclosure; and
 Non-financial disclosures, e.g., the entity’s financial risk
management objectives and policies.
6. Other disclosures not required by PPSAS but the management deems
relevant to the understanding of the financial statements.

Events After the Reporting Date

1. Adjusting events – those that provide evidence of conditions that existed at the
reporting date; and

2. Non-adjusting events – those that are indicative of conditions that arose after the
reporting date.

Examples of Adjusting Events

a. Settlement of a court case that evidences a present obligation at the reporting

date.

b. Bankruptcy of a debtor that evidences an impairment of a receivable at the

reporting date.

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c. Sale of inventories that evidences the correct NRV of inventories at the reporting
date.

d. Determination of the amount of revenue pursuant to a revenue sharing

agreement with another entity.

Changes in Accounting Policies

 A change in accounting policy is accounted for as follows:

1. Using the transitional provision, if any;

2. In the absence of a transitional provision, by retrospective application; or

3. If retrospective application is impracticable, by prospective application.

Changes in Accounting Estimates

 A change in accounting estimate is accounted for by prospective application.

Errors

 Material prior period errors are corrected by retrospective restatement.

Interim Financial Statements

 Government entities prepare interim financial statements on a quarterly basis

using the same accounting policies used in annual reports.

Other Reports

 In addition to the financial statements, government entities are also required to

prepare and submit the following reports:

1. Trial balances (Pre-closing and Post-closing)

2. Other schedules:

a. Regional Breakdown of Income

b. Regional Breakdown of Expenses

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To know more information about CHAPTER 14- FINANCIAL STATEMENTS- PLEASE

CLICK THE LINK: https://www.youtube.com/watch?v=myNAkXT9XgY

To know more information about CHAPTER 14- Introduction to financial statements-

PLEASE CLICK THE LINK: https://www.youtube.com/watch?v=4sGEtZcLdx8

Reference:

Accounting for Government and Non-profit Organization by Zeus Vernon B.

Millan

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