CONCEPTUAL FRAMEWORK AND ACCOUNTING c.
The entity perspective
STANDARDS
MODULE 1
DEVELOPMENT OF FINANCIAL REPORTING
FRAMEWORK AND STANDARD SETTING BODIES
FINANCIAL ACCOUNTING
- process that culminates in the preparation of
financial reports on the enterprise for use by
both internal and external parties.
FINANCIAL STATEMENTS
- are the principal means through which a
company communicates its financial information
to those outside it.
- financial statements most frequently provided
are:
1) the statement of financial position,
2) the income statement or statement of
comprehensive income,
3) the statement of cash flows, and
4) the statement of changes in equity.
- Note disclosures are an integral part of each
financial statement.
- Other means of financial reporting include the
president’s letter or supplementary schedules in
the corporate annual report, prospectuses, and
reports filed with government agencies.
The major standard-setters of the world, coupled
with regulatory authorities, now recognize that capital
formation and investor understanding is enhanced if a
single set of highquality accounting standards is
developed.
OBJECTIVE OF FINANCIAL REPORTING
The objective of general-purpose financial
reporting is to provide financial information about the
reporting entity that is useful to present and potential
equity investors, lenders, and other creditors in making
decisions about providing resources to the entity.
a. General-purpose financial statements
- provide at the least cost the most useful
information possible to a wide variety of users.
b. Equity investors and creditors
- the primary user groups and have the most
critical and immediate needs for information in
the financial statements.
- Investors and creditors need this information to
assess a company’s ability to generate net cash
inflows and to understand management’s ability
to protect and enhance the assets of a company.
- means that the company is viewed as being
separate and distinct from its investors (both
shareholders and creditors).
- Therefore, the assets of the company belong to
the company, not a specific creditor or
shareholder.
- Financial reporting focused only on the needs of
the shareholder—the proprietary perspective—
is not considered appropriate.
d. Decision-usefulness
- means that information contained in the
financial statements should help investors assess
the amounts, timing, and uncertainty of
prospective cash inflows from dividends or
interest, and the proceeds from the sale,
redemption, or maturity of securities or loans.
- For investors to make these assessments, the
financial statements and related explanations
must provide information about the company’s
economic resources, the claims to those
resources, and the changes in them.
To facilitate efficient capital allocation, investors need
relevant information and a faithful representation of that
information to enable them to make comparisons across
borders. A single, widely accepted set of high-quality
accounting standards is a necessity to ensure adequate
comparability. In order to achieve this goal the following
element must be present:
a. A single set of high-quality accounting standards
established by a single standardsetting body.
b. Consistency in application and interpretation.
c. Common disclosures.
d. Common high-quality auditing standards and
practices.
e. A common approach to regulatory review and
enforcement.
f. Education and training of market participants.
g. Common delivery systems (e.g., extensible
Business Reporting Language—XBRL).
h. A common approach to corporate governance
and legal frameworks around the world.
BRANCHES OF ACCOUNTING
Financial Accounting
- focused on the recording of business
transactions and the periodic preparation of
reports on financial position and results of
operations.
- Financial accountants accord importance to
existing accounting standards.
Management Accounting
- a profession that involves partnering in
management decision making, devising planning
and performance management systems, and
providing expertise in financial reporting and
control to assist management in the formulation
 and implementation of organization’s strategy.
[as defined by Institute of Management
Accountants (IMA)]
Cost Accounting
- deals with the collection, allocation and control
of the cost of producing specific goods and
services.
Auditing
- an independent examination that ensures the
fairness and reliability of the reports that
management submits to users outside the
business entity.
Government Accounting
- concerned with the identification of the sources
and uses of government funds
Tax Accounting
- includes preparation of tax returns and the
consideration of tax consequences of proposed
business transactions.
Accounting Education
- employs accountants either as researchers,
professors or reviewers
- They guarantee the continued development of
the profession.
STANDARD-SETTING ORGANIZATIONS
International Accounting Standards Board (IASB)
- main international standard setting organization
- based in London, United Kingdom
International Financial Reporting Standards (IFRS)
- used by most foreign exchanges.
- Issued by IASB
Two organizations that have a role in international
standard-setting:
1. International Organization of Securities
Commissions (IOSCO)
2. International Accounting Standards Board (IASB)
International Organization of Securities Commissions
(IOSCO)
- IOSCO does not set accounting standards
- it is dedicated to ensuring that the global
markets can operate in an efficient and effective
basis.
- The member agencies have agreed to:
o Cooperate to promote high standards of
regulation in order to maintain just,
efficient, and sound markets.
o Exchange information on their
respective experiences in order to
promote the development of domestic
markets.
o Unite their efforts to establish standards
and an effective surveillance of
international securities transactions.
o Provide mutual assistance to promote
the integrity of the markets by a rigorous
application of the standards and by
effective enforcement against offenses.
IOSCO recommends that its members allow
multinational issuers to use IFRS in cross-folder offerings
and listings, as supplemented by reconciliation,
disclosure, and interpretation where necessary, to
address outstanding substantive issues at a national or
regional level.
The international standard-setting structure is composed
of the following four organizations:
a. The IFRS foundation (22 trustees) provides
oversight to the IASB, IFRS Advisory Council, and
IFRS Interpretations Committee. It appoints
members, reviews effectiveness, and helps in
fundraising efforts for these organizations.
b. The International Accounting Standards Board
(IASB) consisting of 16 members, develops in the
public interest, a single set of high-quality,
enforceable, and global international financial
reporting standards for general-purpose
financial statements.
c. The IFRS Advisory Council (30 or more members)
provides advice and council to the IASB on major
policies and technical issues.
d. The IFRS Interpretations Committee (22
members) assists the IASB through the timely
identification, discussion, and resolution of
financial reporting issues within the framework
of IFRS.
In addition, as part of the governance structure, a
Monitoring Board was created. It establishes a link
between accounting standard-setters and those public
authorities that generally oversee them (e.g. IOSCO). It
also provides political legitimacy to the overall
organization.
The IASB has a thorough, open and transparent due
process in establishing financial accounting standards. It
consists of the following elements:
a. An independent standard-setting board
overseen by geographically and professionally
diverse body of trustees.
b. A thorough and systematic process for
developing standards.
c. Engagement with investors, regulators, business
leaders, and the global accountancy profession
at every stage of the process.
d. Collaborative efforts with the worldwide
standard-setting community.
To implement its due process, the IASB follows
specific steps to develop a typical IFRS.
 a. Topics are identified and placed on the Board’s
agenda.
b. Research and analysis are conducted, and
preliminary views of pros and cons are issued.
c. Public hearings are held on the proposed
standard.
d. The Board evaluates research and public
responses and issues an exposure draft.
e. The Board evaluates the responses and changes
the exposure draft, if necessary. Then the final
standard is issued.
The following characteristics of the IASB are meant to
reinforce the importance of an open, transparent, and
independent due process.
a. Membership: The Board consists of 16 well-paid
members, from different countries, serving 5-
year renewable terms.
b. Autonomy: The IASB is not part of any
professional organization. It is appointed by and
answerable only to the IFRS Foundation.
c. Independence: Full-time IASB members must
sever all ties with their former employer.
Members are selected for their expertise in
standard-setting rather than to represent a given
country.
d. Voting: Nine of 16 votes are needed to issue a
new IFRS.
The IASB issues three major types of pronouncements:
a. International Financial Reporting Standards: To
date the IASB has issued 13 standards. In
addition, the previous international standard-
setting body, the International Accounting
Standards Committee (IASC) issued 41
International Accounting Standards (IAS). Those
that have not been amended or superseded are
considered under the umbrella of IFRS.
b. Conceptual Framework for Financial Reporting:
The IASB issued the Framework for the
Preparation and Presentation of Financial
Statements (referred to as the Framework) with
the intent to create a conceptual framework that
would serve as a tool for solving existing and
emerging problems in a consistent manner.
However, the Framework is not an IFRS and does
not define standards for any measurement or
disclosure issue. Nothing in the Framework
overrides any specific IFRS.
c. International Financial Reporting
Interpretations: Interpretations are issued by the
IFRS Interpretations Committee and are
considered authoritative and must be followed.
Twenty have been issued to date. These
interpretations cover (1) newly identified
financial reporting issues not specifically dealt
with in IFRS, and (2) issues where unsatisfactory
or conflicting interpretations have developed, or
seem likely to develop, in the absence of
authoritative guidance.
The IASB has no regulatory mandate and no
enforcement mechanism. It relies on other regulators to
enforce the use of its standards.
Financial Reporting Challenges
Although IFRS are developed by using sound
research and a conceptual framework that has its
foundation in economic reality, a certain amount of
pressure and influence is brought to bear by groups
interested in or affected by IFRS. The IASB does not exist
in a vacuum, and politics and special-interest pressure
remain a part of the standard-setting process.
The expectations gap is the difference between
what the public thinks accountants should do and what
accountants think they can do. It has been highlighted by
the many accounting scandals that have occurred. In
order to meet the needs of society with highly
transparent, clean, and reliable systems, considerable
costs will be incurred.
The significant financial reporting challenges facing
the accounting profession are:
a. Non-financial measurements such as customer
satisfaction indexes, backlog information, and
reject rates on goods purchased.
b. Forward-looking information.
c. Soft assets (intangibles).
d. Timeliness
In accounting, ethical dilemmas are encountered
frequently. The whole process of ethical sensitivity and
selection among alternatives can be complicated by
pressures that may take the form of time pressure, job
pressures, client pressures, personal pressures, and peer
pressures. And, there is no comprehensive ethical system
to provide guidelines.
Convergence to a single set of high-quality global
financial reporting standards is a real possibility. For
example, the IASB and the FASB (of the United States)
have spent the last 12 years working to converge their
standards.
In addition, U.S. and European regulators have
agreed to recognize each other’s standards for listing on
the various world securities exchanges. As a result, costly
reconciliation requirements have been eliminated and
hopefully will lead to greater comparability and
transparency.
Why the need for high-quality standards?
1. To facilitate efficient capital allocation.
2. In order to ensure adequate comparability across
borders, a single, widely accepted set of high-
quality accounting standards is a necessity.
3. In order to ensure adequate comparability across
borders, a single, widely accepted set of high-
quality accounting standards is a necessity.
a. A single set of high-quality accounting
standards established by a single
standard-setting body.
b. Consistency in application and
interpretation.
c. Common disclosures.
 d. Common high-quality auditing standards
and practices.
e. Common approach to regulatory review
and enforcement.
f. Education and training of market
participants.
g. Common delivery systems.
h. Common approach to corporate
governance and legal frameworks
around the world.
Major standard-setters and regulatory
authorities around the world recognize that capital
formation and investor understanding will be enhanced
by a single set of high-quality accounting standards.
ACCOUNTING STANDARDS IN THE PHILIPPINES
On November 18, 1981, the Philippine Institute
of Certified Public Accountants (PICPA) created the
Accounting Standards Council (ASC) to establish and
improve accounting standards that will be generally
accepted in the Philippines.
The standards would generally be based on the
following: existing practices in the Philippines, research
or studies by the Council; locally or internationally
available literature on the topic or subject; and
statements, recommendations, studies or standards
issued by other standard-setting bodies such as the
International Accounting Standards Board (LASB) and the
Financial Accounting Standards Board (FASB).
The statements and interpretations issued by the
Council represented represent generally accepted
accounting principles in the Philippines. Accounting
principles become generally accepted if they have
substantial authoritative support from the relevant
parties interested in the financial statements-the
preparers and users, auditors and regulatory agencies.
Financial Reporting Standards Council
When created per Section 9(A) of the Rules and
Regulations Implementing Republic Act No. 9298
otherwise known as the Philippine Accountancy Act of
2004, the Financial Reporting Standards Council (FRSC)
shall be the new accounting standard setting body.
The FRSC shall be composed of fifteen (15)
members with a Chairman, who had been or presently a
senior accounting practitioner in any of the scope of
accounting practice and fourteen (14) representatives
from the following: one each from the BOA, SEC, BSP, BIR,
COA and a major organization composed of preparers
and users of financial statements, and two
representatives each from the accredited national
professional organization of CPAs in public practice,
commerce and industry, education/academe and
government.
MODULE 2
CONCEPTUAL FRAMEWORK FOR FINANCIAL
REPORTING
CONCEPTUAL FRAMEWORK
- a system of ideas and objectives that lead to the
creation of a consistent set of rules and
standards.
- Specifically, in accounting, the rule and standards
set the nature, function and limits of financial
accounting and financial statements.
The main reasons for developing an agreed
conceptual framework are that it provides:
• a framework for setting accounting standards;
• a basis for resolving accounting disputes; and
• fundamental principles which then do not have
to be repeated in accounting standards.
Having a fixed set of definitions of each line item,
hence, becomes useful and rather indispensable to
ensure conceptual consistency amongst the audience of
the report. It also helps the potential investor better
gauge and compare the performances of target
companies, regardless of their physical location and
differences in business models.
The International Accounting Standards Board
(Board) issued the revised Conceptual Framework for
Financial Reporting (Conceptual Framework), a
comprehensive set of concepts for financial reporting, in
March 2018. It sets out:
• the objective of financial reporting
• the qualitative characteristics of useful financial
information
• a description of the reporting entity and its
boundary
• definitions of an asset, a liability, equity, income
and expenses
• criteria for including assets and liabilities in
financial statements (recognition) and guidance
on when to remove them (derecognition)
• measurement bases and guidance on when to
use them
• and concepts and guidance on presentation and
disclosure.
STATUS AND PURPOSE OF THE CONCEPTUAL
FRAMEWORK
CFAS describes the objective of, and the concepts
for, general purpose financial reporting. The purpose of
the Conceptual Framework is to:
a. assist the International Accounting Standards
Board (Board) to develop IFRS Standards
(Standards) that are based on consistent
concepts;
b. assist preparers to develop consistent accounting
policies when no Standard applies to a particular
transaction or other event, or when a Standard
allows a choice of accounting policy; and
 c. assist all parties to understand and interpret the
Standards.
The Conceptual Framework is not a Standard.
Nothing in the Conceptual Framework overrides any
Standard or any requirement in a Standard. To meet the
objective of generalpurpose financial reporting, the
Board may sometimes specify requirements that depart
from aspects of the Conceptual Framework. If the Board
does so, it will explain the departure in the Basis for
Conclusions on that Standard.
Objective, usefulness and limitations of general-
purpose financial reporting
The objective of general-purpose financial
reporting forms the foundation of the Conceptual
Framework. Other aspects of the Conceptual
Framework—the qualitative characteristics of, and the
cost constraint on, useful financial information, a
reporting entity concept, elements of financial
statements, recognition and derecognition,
measurement, presentation and disclosure—flow
logically from the objective.
The objective of general-purpose financial
reporting is to provide financial information about the
reporting entity that is useful to existing and potential
investors, lenders and other creditors in making decisions
relating to providing resources to the entity. Those
decisions involve decisions about:
a. buying, selling or holding equity and debt
instruments;
b. providing or settling loans and other forms of
credit; or
c. exercising rights to vote on, or otherwise
influence, management’s actions that affect the
use of the entity’s economic resources.
The decisions described depend on the returns that
existing and potential investors, lenders and other
creditors expect, for example, dividends, principal and
interest payments or market price increases. Investors’,
lenders’ and other creditors’ expectations about returns
depend on their assessment of the amount, timing and
uncertainty of (the prospects for) future net cash inflows
to the entity and on their assessment of management’s
stewardship of the entity’s economic resources. Existing
and potential investors, lenders and other creditors need
information to help them make those assessments. To
make the assessments described in paragraph 1.3,
existing and potential investors, lenders and other
creditors need information about:
a. the economic resources of the entity, claims
against the entity and changes in those resources
and claims; and
b. how efficiently and effectively the entity’s
management and governing board have
discharged their responsibilities to use the
entity’s economic resources.
provide information directly to them and must rely on
general purpose financial reports for much of the
financial information they need. Consequently, they are
the primary users to whom general purpose financial
reports are directed. To a large extent, financial reports
are based on estimates, judgements and models rather
than exact depictions. The Conceptual Framework
establishes the concepts that underlie those estimates,
judgements and models. The concepts are the goal
towards which the Board and preparers of financial
reports strive. As with most goals, the Conceptual
Framework’s vision of ideal financial reporting is unlikely
to be achieved in full, at least not in the short term,
because it takes time to understand, accept and
implement new ways of analyzing transactions and other
events. Nevertheless, establishing a goal towards which
to strive is essential if financial reporting is to evolve to
improve its usefulness.
Economic resources and claims
Information about the nature and amounts of a
reporting entity’s economic resources and claims can
help users to identify the reporting entity’s financial
strengths and weaknesses. That information can help
users to assess the reporting entity’s liquidity and
solvency, its needs for additional financing and how
successful it is likely to be in obtaining that financing.
That information can also help users to assess
management’s stewardship of the entity’s economic
resources. Information about priorities and payment
requirements of existing claims helps users to predict
how future cash flows will be distributed among those
with a claim against the reporting entity.
Changes in economic resources and claims
Changes in a reporting entity’s economic
resources and claims result from that entity’s financial
performance and from other events or transactions such
as issuing debt or equity instruments. To properly assess
both the prospects for future net cash inflows to the
reporting entity and management’s stewardship of the
entity’s economic resources, users need to be able to
identify those two types of changes.
Financial performance reflected by accrual accounting
Accrual accounting depicts the effects of
transactions and other events and circumstances on a
reporting entity’s economic resources and claims in the
periods in which those effects occur, even if the resulting
cash receipts and payments occur in a different period.
This is important because information about a reporting
entity’s economic resources and claims and changes in its
economic resources and claims during a period provides
a better basis for assessing the entity’s past and future
performance than information solely about cash receipts
and payments during that period.

Many existing and potential investors, lenders and

other creditors cannot require reporting entities to
QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL
INFORMATION
• Financial reports provide information about the
reporting entity’s economic resources, claims
against the reporting entity and the effects of
transactions and other events and conditions
that change those resources and claims.
• Some financial reports also include explanatory
material about management’s expectations and
strategies for the reporting entity, and other
types of forward-looking information. If financial
information is to be useful, it must be relevant
and faithfully represent what it purports to
represent.
• The usefulness of financial information is
enhanced if it is comparable, verifiable, timely
and understandable.
Fundamental qualitative characteristics
Relevance
Relevant financial information can make a
difference in the decisions made by users. Information
may be capable of making a difference in a decision even
if some users choose not to take advantage of it or are
already aware of it from other sources. Financial
information can make a difference in decisions if it has
predictive value, confirmatory value or both.
Faithful representation
Financial reports represent economic
phenomena in words and numbers. To be useful,
financial information must not only represent relevant
phenomena, but it must also faithfully represent the
substance of the phenomena that it purports to
represent. In many circumstances, the substance of an
economic phenomenon and its legal form are the same.
If they are not the same, providing information only
about the legal form would not faithfully represent the
economic phenomenon. To be a perfectly faithful
representation, a depiction would have three
characteristics. It would be complete, neutral and free
from error. Of course, perfection is seldom, if ever,
achievable. The Board’s objective is to maximize those
qualities to the extent possible.
Enhancing qualitative characteristics
Comparability, verifiability, timeliness and
understandability are qualitative characteristics that
enhance the usefulness of information that both is
relevant and provides a faithful representation of what it
purports to represent. The enhancing qualitative
characteristics may also help determine which of two
ways should be used to depict a phenomenon if both are
considered to provide equally relevant information and
an equally faithful representation of that phenomenon.
Comparability
Users’ decisions involve choosing between
alternatives, for example, selling or holding an
investment, or investing in one reporting entity or
another. Consequently, information about a reporting
entity is more useful if it can be compared with similar
information about other entities and with similar
information about the same entity for another period or
another date. Comparability is the qualitative
characteristic that enables users to identify and
understand similarities in, and differences among, items.
Unlike the other qualitative characteristics, comparability
does not relate to a single item. A comparison requires at
least two items.
Verifiability
Verifiability helps assure users that information
faithfully represents the economic phenomena it
purports to represent. Verifiability means that different
knowledgeable and independent observers could reach
consensus, although not necessarily complete
agreement, that a depiction is a faithful representation.
Quantified information need not be a single point
estimate to be verifiable. A range of possible amounts
and the related probabilities can also be verified.
Timeliness
Timeliness means having information available
to decision-makers in time to be capable of influencing
their decisions. Generally, the older the information is
the less useful it is. However, some information may
continue to be timely long after the end of a reporting
period because, for example, some users may need to
identify and assess trends.
Understandability
Classifying, characterizing and presenting
information clearly and concisely makes it
understandable. Financial reports are prepared for users
who have a reasonable knowledge of business and
economic activities and who review and analyze the
information diligently. At times, even well-informed and
diligent users may need to seek the aid of an adviser to
understand information about complex economic
phenomena.
The cost constraint on useful financial reporting
Cost is a pervasive constraint on the information
that can be provided by financial reporting. Reporting
financial information imposes costs, and it is important
that those costs are justified by the benefits of reporting
that information. There are several types of costs and
benefits to consider.
Financial Statements
• provide information about economic resources
of the reporting entity, claims against the entity,
and changes in those resources and claims, that
meet the definitions of the elements of financial
statements.
• to provide financial information about the
reporting entity’s assets, liabilities, equity,
income and expenses that is useful to users of
financial statements in assessing the prospects
for future net cash inflows to the reporting entity
and in assessing management’s stewardship of
the entity’s economic resource. That information
is provided:
a) in the statement of financial position, by
recognizing assets, liabilities and equity;
b) in the statement(s) of financial
performance, by recognizing income and
expenses; and
c) in other statements and notes, by
presenting and disclosing information
about:
i. recognized assets, liabilities,
equity, income and expenses,
including information about
their nature and about the risks
arising from those recognized
assets and liabilities;
ii. assets and liabilities that have
not been recognized, including
information about their nature
and about the risks arising from
them;
iii. cash flows;
iv. contributions from holders of
equity claims and distributions
to them; and
v. the methods, assumptions and
judgements used in estimating
the amounts presented or
disclosed, and changes in those
methods, assumptions and
judgements.
Reporting period
FS are prepared for a specified period of time
(reporting period) and provide information about:
a. assets and liabilities—including unrecognized
assets and liabilities—and equity that existed at
the end of the reporting period, or during the
reporting period; and
b. income and expenses for the reporting period.
To help users of financial statements to identify and
assess changes and trends, financial statements also
provide comparative information for at least one
preceding reporting period.
Going concern assumption
Financial statements are normally prepared on
the assumption that the reporting entity is a going
concern and will continue in operation for the
foreseeable future. Hence, it is assumed that the entity
has neither the intention nor the need to enter
liquidation or to cease trading. If such an intention or
need exists, the financial statements may have to be
prepared on a different basis. If so, the financial
statements describe the basis used.
THE ELEMENTS OF FINANCIAL STATEMENTS
Economic Asset A present economic resource
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.
Claim Liability A present obligation of the
entity to transfer an economic
resource as a result of past
events.
Equity The residual interest in the
assets of the entity after
deducting all its liabilities.
Changes in Income Increases in assets, or
economic decreases in liabilities, that
resource & result in increases in equity
claims, other than those relating to
reflecting contributions from holders of
financial equity claims.
performance Expenses Decreases in assets, or
increases in liabilities, that
result in decreases in equity,
other than those relating to
distributions to holders of
equity claims.
Other - Contributions from holders of
changes in equity claims, and
economic distributions to them.
resources and - Exchanges of assets or
claims liabilities that do not result in
increases or decreases in
equity.
An asset is a present economic resource
controlled by the entity as a result of past events. An
economic resource is a right that has the potential to
produce economic benefits. This section discusses three
aspects of those definitions:
a) right;
b) potential to produce economic benefits; and
c) control.
A liability is a present obligation of the entity to
transfer an economic resource as a result of past events.
For a liability to exist, three criteria must all be satisfied:
a) the entity has an obligation;
b) the obligation is to transfer an economic
resource; and
c) the obligation is a present obligation that exists
as a result of past events.
Equity is the residual interest in the assets of the
entity after deducting all its liabilities. Equity claims are
claims on the residual interest in the assets of the entity
after deducting all its liabilities. In other words, they are
claims against the entity that do not meet the definition
of a liability. Such claims may be established by contract,
legislation or similar means, and include, to the extent
that they do not meet the definition of a liability:
a) shares of various types, issued by the entity; and
b) some obligations of the entity to issue another
equity claim.
Income is increases in assets, or decreases in
liabilities, that result in increases in equity, other than
those relating to contributions from holders of equity
claims.
Expenses are decreases in assets, or increases in
liabilities, that result in decreases in equity, other than
those relating to distributions to holders of equity claims.
Income and expenses are the elements of financial
statements that relate to an entity’s financial
performance. Users of financial statements need
information about both an entity’s financial position and
its financial performance. Hence, although income and
expenses are defined in terms of changes in assets and
liabilities, information about income and expenses is just
as important as information about assets and liabilities.
THE RECOGNITION PROCESS
Recognition
- process of capturing for inclusion in the
statement of financial position or the
statement(s) of financial performance an item
that meets the definition of one of the elements
of financial statements—an asset, a liability,
equity, income or expenses
- involves depicting the item in one of those
statements—either alone or in aggregation with
other items—in words and by a monetary
amount and including that amount in one or
more totals in that statement.
- The amount at which an asset, a liability or equity
is recognized in the statement of financial
position is referred to as its ‘carrying amount’.
- The statement of financial position and
statement(s) of financial performance depict an
entity’s recognized assets, liabilities, equity,
income and expenses in structured summaries
that are designed to make financial information
comparable and understandable.
- An important feature of the structures of those
summaries is that the amounts recognized in a
statement are included in the totals and, if
applicable, subtotals that link the items
recognized in the statement.
Recognition links the elements; the statement of
financial position and the statement(s) of financial
performance as follows:
a. in the statement of financial position at the
beginning and end of the reporting period, total
assets minus total liabilities equal total equity;
and
b. recognized changes in equity during the
reporting period comprise:
i. income minus expenses
recognized in the statement(s)
of financial performance; plus
ii. contributions from holders of
equity claims, minus
distributions to holders of equity
claims.
The statements are linked because the
recognition of one item (or a change in its carrying
amount) requires the recognition or derecognition of one
or more other items (or changes in the carrying amount
of one or more other items). For example:
a. the recognition of income occurs at the same
time as:
i. the initial recognition of an
asset, or an increase in the
carrying amount of an asset; or
ii. the derecognition of a liability,
or a decrease in the carrying
amount of a liability.
b. the recognition of expenses occurs at the same
time as:
i. the initial recognition of a
liability, or an increase in the
carrying amount of a liability; or
ii. the derecognition of an asset, or
a decrease in the carrying
amount of an asset.
How recognition links the elements of financial
statements
Recognition criteria
- Only items that meet the definition of an asset, a
liability or equity are recognized in the statement
of financial position. Similarly, only items that
meet the definition of income or expenses are
recognized in the statement(s) of financial
performance.
- However, not all items that meet the definition
of one of those elements are recognized. Not
recognizing an item that meets the definition of
one of the elements makes the statement of
financial position and the statement(s) of
financial performance less complete and can
 exclude useful information from financial
statements.
- On the other hand, in some circumstances,
recognizing some items that meet the definition
of one of the elements would not provide useful
information. An asset or liability is recognized
only if recognition of that asset or liability and of
any resulting income, expenses or changes in
equity provides users of financial statements
with information that is useful.
Derecognition
- the removal of all or part of a recognized asset or
liability from an entity’s statement of financial
position.
- normally occurs when that item no longer meets
the definition of an asset or of a liability:
a. for an asset, derecognition
normally occurs when the entity
loses control of all or part of the
recognized asset; and
b. for a liability, derecognition
normally occurs when the entity
no longer has a present
obligation for all or part of the
recognized liability.
MEASUREMENT BASES
- Elements recognized in financial statements are
quantified in monetary terms.
- This requires the selection of a measurement
basis.
- A measurement basis is an identified feature—
for example, historical cost, fair value or
fulfilment value—of an item being measured.
- Applying a measurement basis to an asset or
liability creates a measure for that asset or
liability and for related income and expenses.
Historical cost
- Historical cost measures provide monetary
information about assets, liabilities and related
income and expenses, using information derived,
at least in part, from the price of the transaction
or other event that gave rise to them.
- Unlike current value, historical cost does not
reflect changes in values, except to the extent
that those changes relate to impairment of an
asset or a liability becoming onerous.
Current value
- Current value measures provide monetary
information about assets, liabilities and related
income and expenses, using information
updated to reflect conditions at the
measurement date.
- Because of the updating, current values of assets
and liabilities reflect changes, since the previous
measurement date, in estimates of cash flows
and other factors reflected in those current
values.
- Unlike historical cost, the current value of an
asset or liability is not derived, even in part, from
the price of the transaction or other event that
gave rise to the asset or liability.
- . Current value measurement bases include:
o fair value;
o value in use and fulfilment value for
liabilities; and
o current cost
Measurement of equity
- The total carrying amount of equity (total equity)
is not measured directly.
- It equals the total of the carrying amounts of all
recognized assets less the total of the carrying
amounts of all recognized liabilities.
Presentation and disclosure as communication tools
- A reporting entity communicates information
about its assets, liabilities, equity, income and
expenses by presenting and disclosing
information in its financial statements.
- Effective communication of information in
financial statements makes that information
more relevant and contributes to a faithful
representation of an entity’s assets, liabilities,
equity, income and expenses.
- It also enhances the understandability and
comparability of information in financial
statements.
- Just as cost constrains other financial reporting
decisions, it also constrains decisions about
presentation and disclosure. Hence, in making
decisions about presentation and disclosure, it is
important to consider whether the benefits
provided to users of financial statements by
presenting or disclosing particular information
are likely to justify the costs of providing and
using that information.
Classification
- the sorting of assets, liabilities, equity, income or
expenses based on shared characteristics for
presentation and disclosure purposes.
- Such characteristics include— but are not limited
to—the nature of the item, its role (or function)
within the business activities conducted by the
entity, and how it is measured.
Classification of assets and liabilities
- Classification is applied to the unit of account
selected for an asset or liability.
- However, it may sometimes be appropriate to
separate an asset or liability into components
 that have different characteristics and to classify
those components separately.
- That would be appropriate when classifying
those components separately would enhance
the usefulness of the resulting financial
information. For example, it could be appropriate
to separate an asset or liability into current and
non-current components and to classify those
components separately.
Offsetting
- occurs when an entity recognizes and measures
both an asset and liability as separate units of
account, but groups them into a single net
amount in the statement of financial position
- Offsetting classifies dissimilar items together and
therefore is generally not appropriate.
Classification of equity
To provide useful information, it may be
necessary to classify equity claims separately if those
equity claims have different characteristics.
Classification of income and expenses
Classification is applied to:
a) income and expenses resulting from the unit of
account selected for an asset or liability; or
b) components of such income and expenses if
those components have different characteristics
and are identified separately. For example, a
change in the current value of an asset can
include the effects of value changes and the
accrual of interest. It would be appropriate to
classify those components separately if doing so
would enhance the usefulness of the resulting
financial information.
Profit or loss and other comprehensive income
Income and expenses are classified and included either:
a) in the statement of profit or loss; or
b) outside the statement of profit or loss, in other
comprehensive income.
Statement of Profit or Loss
- the primary source of information about an
entity’s financial performance for the reporting
period.
- contains a total for profit or loss that provides a
highly summarized depiction of the entity’s
financial performance for the period.
- Many users of financial statements incorporate
that total in their analysis either as a starting
point for that analysis or as the main indicator of
the entity’s financial performance for the period.
- Nevertheless, understanding an entity’s financial
performance for the period requires an analysis
of all recognized income and expenses—
including income and expenses included in other
comprehensive income—as well as an analysis of
other information included in the financial
statements.
Aggregation
- the adding together of assets, liabilities, equity,
income or expenses that have shared
characteristics and are included in the same
classification.
- makes information more useful by summarizing
a large volume of detail.
- However, aggregation conceals some of that
detail. Hence, a balance needs to be found so
that relevant information is not obscured either
by a large amount of insignificant detail or by
excessive aggregation.
CONCEPTS OF CAPITAL
- A financial concept of capital is adopted by most
entities in preparing their financial statements.
- Under a financial concept of capital, such as
invested money or invested purchasing power,
capital is synonymous with the net assets or
equity of the entity.
- Under a physical concept of capital, such as
operating capability, capital is regarded as the
productive capacity of the entity based on, for
example, units of output per day.
Concepts of capital maintenance and the determination
of profit
The concepts of capital in paragraph 8.1 give rise to the
following concepts of capital maintenance:
a) Financial capital maintenance concept
o 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 net assets at the
beginning of the period, after excluding
any distributions to, and contributions
from, owners during the period.
o can be measured in either nominal
monetary units or units of constant
purchasing power.
o does not require the use of a basis of
measurement. Selection of the basis
under this concept is dependent on the
type of financial capital that the entity is
seeking to maintain.
o Under the concept of financial capital
maintenance where capital is defined in
terms of nominal monetary units, profit
represents the increase in nominal
money capital over the period. Thus,
increases in the prices of assets held over
 the period, conventionally referred to as
holding gains, are, conceptually, profits.
They may not be recognized as such,
however, until the assets are disposed of
in an exchange transaction.
o When the concept of financial capital
maintenance is defined in terms of
constant purchasing power units, profit
represents the increase in invested
purchasing power over the period. Thus,
only that part of the increase in the
prices of assets that exceeds the increase
in the general level of prices is regarded
as profit. The rest of the increase is
treated as a capital maintenance
adjustment and, hence, as part of equity.
b) Physical capital maintenance concept
o 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.
o requires the adoption of the current cost
basis of measurement.
o Under the concept of physical capital
maintenance when capital is defined in
terms of the physical productive
capacity, profit represents the increase
in that capital over the period. All price
changes affecting the assets and
liabilities of the entity are viewed as
changes in the measurement of the
physical productive capacity of the
entity; hence, they are treated as capital
maintenance adjustments that are part
of equity and not as profit.
Concept of Capital Maintenance
- concerned with how an entity defines the capital
that it seeks to maintain.
- provides the linkage between the concepts of
capital and the concepts of profit because it
provides the point of reference by which profit is
measured
- it is a prerequisite for distinguishing between an
entity’s return on capital and its return of capital
- only inflows of assets in excess of amounts
needed to maintain capital may be regarded as
profit and therefore as a return on capital.
- Hence, profit is the residual amount that remains
after expenses (including capital maintenance
adjustments, where appropriate) have been
deducted from income. If expenses exceed
income the residual amount is a loss.
MODULE 3
REVIEW OF ACCOUTING PROCESS
Accounting Process
- also known as accounting cycle
- a series of steps to be completed during an
accounting period or reporting period.
- a set of steps that are repeated in the same order
every reporting period and demonstrates the
purpose of financial accounting–to create useful
financial information in the form of financial
statements.
- The end results of the accounting process is the
financial statements
- For some entities, financial statements are
prepared on a monthly, quarterly, and / or
annually depending on the purpose of reporting.
- Financial statements are the main source of
financial information for most decision by the
management. That is why financial accounting
and reporting places such a high emphasis on the
accuracy, reliability, and relevance of the
information on these financial statements.
The steps in accounting process includes:
1. Business events/ Transactions are documented.
2. Analyze the transactions, and for record in the
journal.
3. Post journal entries to applicable ledger accounts
4. Trial Balance is prepared
5. Adjusting entries are journalized and posted
6. Preparation of Adjusted Trial Balance
7. Preparation of Financial Statements
8. Preparation of closing entries
9. Preparation of Post Closing Trial Balance
10. Reversing entries are journalized and posted
Business events/ Transactions are documented
- This cycle starts with a business event or simply
called transactions.
- Verifiability of transactions must be supported by
underlying business documents such as sales
receipts, sales invoice, purchase invoice, check
vouchers among others.
- These source documents will be the basis for
recording of transactions.
Analyzation of the Transactions and for Record in the
Journal
- Accounting journals are often called the book of
original entry.
- It is a record of business transactions and events
for a specific account in chronological order
- For the transactions to be recorded it must
influence the elements of financial statements
and meet the criteria of recognition identified in
the framework of accounting:
 o There is a future economic benefit
associated with the item that flow to the
entity
o There is monetary amount at which the
elements are to be recognized and
reported.
Double Entry Accounting System
- accounting system that requires every business
transactions or event to be recorded in at least
two accounts
- same concept behind the accounting equation
- Every debit that is recorded must be matched
with a credit and must be equal in every
accounting transaction in their total
- There are two general classification of journal,
the General Journal and the Special Journal
- The general journal is often used by small entity
with only few transactions and also called two
column journals.
- For an entity with numerous transactions, special
journals are being used in addition to general
journal that are used to help divide and organize
business transactions. Here’s a list of the special
accounting journals used:
o Cash Receipts Journal - contains all of the
cash sale transactions
o Cash Disbursements Journal - cash
purchases transactions
o Purchases Journal - used for all credit
purchase
o Sales Journal - contains all the
transactions for credit sales.
- All other transactions such as adjusting and
closing, and reversing entries are recorded in the
general journal. The use of special journal the
help management organize and analyze
accounting information.
Post journal entries to applicable ledger accounts
- Ledger is a complete listing of all the accounts
use in the chart of accounts.
- Each journal entry is transferred from the journal
to the corresponding ledger accounts.
- debits are always transferred to the left side and
the credits are always transferred to the right
side of the ledger.
- account balances of each account are calculated
at the bottom and get its total. This process is
called pencil footing.
- Notice that these are account balances—not
column balances. The total difference between
the debit and credit columns will be displayed on
the bottom of the corresponding side.
- The purpose is to show the effects of
transactions on the elements of FS.
- The use of special journals facilitates the posting
process and only the total are entered in the
ledger. However, the general journal is posted
individually. For controlling account in the ledger,
the entity has subsidiary ledger for accounts with
various details.
- Most entities have computerized accounting
systems that update ledger accounts as soon as
the journal entries are input into the accounting
system. Manual accounting systems are usually
posted weekly or monthly. Just like journalizing,
posting entries is done throughout each
accounting period.
Trial Balance is prepared
- determined the equality of debits and credits in
the ledger but does not give assurance of error
free during journalizing and posting process
- total amount indicated in the Trial Balance
summarizes the effect of the transactions on
each account of the ledger for a accounting
period.
- Accounts are usually listed in order of their
account number.
- Most charts of accounts are numbered and
presented in the order starting with the assets,
liabilities, equity accounts and ending with
income and expense accounts.
- total balances of the accounts are not yet
updated and may require adjustments.
Adjusting entries are journalized and posted
- also called adjusting journal entries
- made at the end of accounting period before the
FS are prepared.
- most used in accordance with the matching
principle - to match revenue and expenses in the
period in which they occur.
- also necessary for revenues from which cash are
not yet collected and for expenses incurred but
not yet been paid these commonly called
accruals.
- While accounts recorded cash receipts from
which revenue have not yet been earned and for
recorded cash payments for which expenses that
are not yet incurred are called deferrals.
- Adjustments for financial assets like receivables
are needed to reflect its impairment.
- The adjusting entries affects the real account also
known as permanent account and nominal
account also known as temporary accounts.
- Real accounts are assets, liabilities and equity
from which its balances are being carried
forward to the next accounting period while
nominal accounts such as income, expenses,
income summary and drawings are brought to
zero.
- 3 different types of adjusting journal entries as
follows:
o Prepayments
o Accruals
o Non-cash expenses (Asset Depreciation
and amortization, Impairment of Asset)
- Each one of these entries adjusts income or
expenses to match the current accounting period
 usage. This concept is based on the time period
principles which states that accounting records
and activities can be divided into separate time
periods.
- In this process, we are separating the income and
expenses into the amounts that were used in the
current accounting period and deferring the
amounts that are going to be used in future
periods.
Prepayments
- Prepaid expenses are goods or services used in
Non-cash expenses
the operations of the entity that have been paid
for but have not been consumed at the end of
accounting period.
- Upon purchase the amount is initially recorded
either asset or expense account.
- As the time passes its operations, it is necessary
to determine the portion of used up during the
current period and the unused portion for use to
subsequent period.
- If the prepayment was originally recorded to
expense account, the year end adjustment
recognizes the asset portion or the unused
balance. While if the prepayment was originally
recorded as an asset, the year end adjustment
recognizes the expense and recognizes the
expenses or used portion.
- Both instances needed adjusting entries for the
asset account would represent the unused
portion while the expense account reports the
balance representing the used portion during the
accounting period.
- On the other hand, unearned revenues consist
of income received from customers, but no
goods or services have yet been provided to
them.
- the entity owes the customers a good or service
and must record the liability in the current period
until the goods or services are provided.
- The entity that received cash before the sale of
goods and services may record the collection
with the option of recording using the revenue
method or the liability method.
- At the end of accounting period, the portion of
amount collected that is not yet earned and for
deliver on future date, the account originally
credited represents mixed account- revenue and
liability. This needed adjustment before
preparing the financial statements to adjust the
mixed account and identify revenue earned in
the current period and the amount deferred for
future period.
Accruals
- Some expenses accrue from day to day, but the
company ordinarily records them only when they
are paid.
- Accrued expenses incurred but are not yet paid
at the end of the fiscal period.
- They are both an expense and a liability. Hence,
they are referred to as accrued liability, accrued
payable, or accrued expense.
- accrued revenues are revenues earned but not
yet received at the end of the period.
- An example of this type of adjustment would be
services that have been performed but have not
been billed or collected. To present an accurate
picture of the affairs of the business, the revenue
earned must be recognized on the income
statement and the asset on the balance sheet.
- Adjusting journal entries are also used to record
expenses like depreciation, amortization, and
depletion.
- These expenses are often recorded at the end of
accounting period because they are usually
calculated on a period basis.
- For example, depreciation is usually calculated
on an annual basis. Thus, it is recorded at the end
of the year. This also relates to the matching
principle where the assets are used during the
year and written off after they are used.
- Property Plant and Equipment (PPE) and
Intangible asset (IA) accounts are assets of the
entities that are being used for its operations and
recorded that must be also adjusted to reflect its
value.
- The recognition of depreciation for PPE and
amortization of IA applies the recognition
principle of systematic and rational allocation.
- Depreciation is the systematic allocation of
expense on the life or usefulness of the asset.
The adjustment recognizes the Depreciation
Expense and the decrease is recorded by
crediting the contra asset account –
Accumulated Depreciation.
- For intangible assets (IA), the charge to
operation for its utilization is recorded by
crediting Accumulated Amortization.
- amortization is the systematic and rational
allocation of cost of the intangible assets over its
economic benefits.
- The cost of these assets is initially recognized as
an asset and systematically spread the expense
portion over its period of benefit or usefulness.
- For impairment of asset, accounts such as loans
and receivables should be appropriately
reported at net realizable value.
- The significant portion of credit sales regardless
the entities effort of its collection, there is always
a probability of not being collected at its full
amount.
- At the end of accounting period the
unrecoverable amount is recognized as
impairment loss or also known as Bad debts or
Uncollectibles.
- Based on this, an adjusting entry is made by debit
to Uncollectible Accounts Expense and credit the
contra asset account Allowance for Uncollectible
(if using the allowance method).
 - As to inventories, there are two methods of
inventory systems – the Perpetual Inventory and
Periodic Inventory system.
- When the entity uses periodic (physical system)
in recording inventory, an adjustment is
necessary to set-up the ending inventory. Before
the end of accounting period adjustments, the
inventory account still reflects its beginning
balances since the purchases of merchandise are
recorded using Purchases account. Thus, the
amount of ending inventory are cannot be
determined unless a physical count is made for
the period.
- The adjustment of inventory is accompanied by
recognizing the Cost of Goods Sold using the
function expense method for presentation for
operating expenses in the Statement of Income
and Expenses. The other alternative of the entity
to record the adjustment for inventory that does
not establish the Cost of Goods Sold in the
accounts but merely adjust the Inventory
account is in the Closing entry using the
temporary account Income Summary.
- When perpetual inventory records are
maintained, the Inventory and the Cost of Goods
Sold balance that appears in the ledger reflects
the updated amounts and does not need to
require further adjusting entry
- Inventories are required to be stated at lower of
cost or market and reduced to net realizable
value.
- An entity should account for the tax
consequences of each transaction and other
events in the same way it accounts for other
events or transactions. For proper measurement
of the profit or loss of an entity, adjustments for
income taxes must be made.
- Income taxes may not be paid within the same
accounting period, but this represents liability for
the current period.
- Normally the adjusting entries for income taxes
is prepared after all the accounts have been
adjusted and the profit and loss are computed.
The computed tax expense is to be debited to
Income Tax Expense and credited to Income Tax
Payable.
- Additional adjusting entries for the recognition
of deferred tax asset and deferred tax liability
coming from the existence of taxable temporary
differences and deductible temporary
differences.
In general, recording adjusting journal entries is quite
simple and involves these three main steps as follows:
1. Determine current account balance
2. Determine what current balance should be
3. Record adjusting entry
These adjustments are then made in journals and
carried over to the account ledgers and accounting
worksheet. This accounting worksheet is a tool and
optional in the process but will help the preparation of
the financial reports.
After the balances on the unadjusted trial balance,
the entity can then make end of period adjustments like
depreciation expense and expense accruals. These
adjusted journal entries are posted to the trial balance
turning it into an adjusted trial balance.
Preparation of Adjusted Trial balance
- An adjusted trial balance is a listing of all
company accounts that will appear on the
financial statements after year-end adjusting
journal entries have been made.
- Both the debit and credit columns are calculated
at the bottom of a trial balance and these debit
and credit totals must always be equal. If they
aren’t equal, the trial balance was prepared
incorrectly, or the journal entries weren’t
transferred to the ledger accounts accurately.
- included in the preparation of worksheet have
been done.
- accounting worksheet is essentially a
spreadsheet that tracks each step of the
accounting cycle.
- typically having five sets of columns that start
with the unadjusted trial balance accounts and
end with the financial statements. In other
words, an accounting worksheet is basically a
spreadsheet that shows all of the major steps in
the accounting cycle side by side.
Preparation of Financial Statements
- FS are the end results of the accounting process.
- These presents the effects of transactions
completed by the entity during the accounting
period.
- The concept financial reporting and the process
of the accounting cycle are focused on providing
external users with useful information in the
form of financial statements.
- The financial statements prepared by the entity
include:
o a statement of financial position as at the
end of the period;
o a statement of profit or loss and other
comprehensive income for the period;
o a statement of changes in equity for the
period;
o a statement of cash flows for the period;
o notes, comprising significant accounting
policies and other explanatory
information
IAS 1 sets out framework and overall
requirements for the preparation and presentation of
financial statements. These guidelines are for their
structure and minimum requirements of the content of
financial statements. The requirement for an entity to
present a complete set of financial statements Summary,
Profit and Loss Summary, or Expenses and Revenue
Summary which summarizes the net effect of total
income and expenses. The balance of these accounts
represents the profit or loss for the period. If the result is
credit balance there is profit, if debit balance there is loss.
Preparation of closing entries
- In the closing process, each account affects the
computation of the profit or loss for the period is
to be debited or credited for the amount that will
result in zero balance, such account is the
Income Summary account.
- The Income Summary account and the Dividends
account are finally transferred to Retained
Earnings account.
- At the end of the year, all the temporary accounts
are closed and only nominal (temporary)
accounts are being carried for the next
accounting period.
Preparation of Post Closing Trial Balance
- post closing trial balance is a list of all accounts
and their balances after the closing entries have
been journalized and posted to the ledger.
- The purpose of preparing the post closing trial
balance is to verify that all temporary accounts
have been closed properly.
- The only accounts in the post closing trial
balance are the accounts that found in the
statement of financial position.
- These accounts are the real (permanent)
accounts which represents the asset, liabilities
and equity accounts for the next accounting
period.
Preparation of Reversing Entries
- Reversing entries, or reversing journal entries,
are journal entries made at the beginning of the
next accounting period to reverse or cancel out
adjusting journal entries made at the end of the
previous accounting period.
- made because previous year accruals and
prepayments will be paid off or used during the
new accounting period and no longer needed to
be recorded as liabilities and assets.
- These entries are optional depending on
whether or not there are adjusting entries that
need to be reversed.
- Not all adjusting entries need to be reversed,
only these type of adjustments as follows:
o For accruals – Accrued Income, Accrued
Expenses
o For deferrals– Only that create and asset
or liability and are originally entered in
nominal accounts such as:
▪ Prepaid Expenses using the
expense method
▪ Unearned income using the
income method
When the adjusting entries made for accrued
income or expense account, a reversing entry must be
made to eliminate the need for monitoring their
respected balances of the receivable and payable which
are created during the adjusting entries. The collection
and payment in the ensuing period are recorded in the
usual revenue and expense account.
MODULE 4
PRESENTATION OF FINANCIAL STATEMENTS
Financial statements
- a structured representation of the financial
position and financial performance of an entity.
- General purpose financial statements (referred
to as ‘financial statements’)
- intended to meet the needs of users who are not
in a position to require an entity to prepare
reports tailored to their particular information
needs.
- IAS 1 sets out overall requirements for the
presentation of financial statements, guidelines
for their structure and minimum requirements
for their content.
- requires an entity to present a complete set of
financial statements at least annually, with
comparative amounts for the preceding year
(including comparative amounts in the notes).
- An entity whose financial statements comply
with IFRS Standards must make an explicit and
unreserved statement of such compliance in the
notes.
- An entity must not describe financial statements
as complying with IFRS Standards unless they
comply with all the requirements of the
Standards. The application of IFRS Standards,
with additional disclosure when necessary, is
presumed to result in financial statements that
achieve a fair presentation
- IAS 1 also deals with going concern issues,
offsetting and changes in presentation or
classification.
OBJECTIVE OF THE 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.
- FS also show the results of the management’s
stewardship of the resources entrusted to it.
To meet this objective, financial statements provide
information about an entity’s:
• assets;
• liabilities;
• equity;
• income and expenses, including gains and losses;
• contributions by and distributions to owners in
their capacity as owners; and
• cash flows.
That information, along with other information in the
notes, assists users of financial statements in predicting
the entity's future cash flows and their timing and
certainty.
COMPONENTS OF FINANCIAL STATEMENTS
A complete set of financial statements
comprises:
• a statement of financial position as at the end of
the period;
• a statement of profit or loss and other
comprehensive income for the period;
• a statement of changes in equity for the period;
• a statement of cash flows for the period;
• notes, comprising significant accounting policies
and other explanatory information;
• comparative information in respect of the
preceding period
• a statement of financial position as at the
beginning of the preceding period when an
entity applies an accounting policy
retrospectively or makes a retrospective
restatement of items in its financial statements,
or when it reclassifies items in its financial
statements
Statement of Financial Position
- presents the assets, liabilities, and equity
Assets
An entity must normally present a classified
statement of financial position, separating current and
noncurrent assets and liabilities. Only if a presentation
based on liquidity provides information that is reliable
and more relevant may the current/noncurrent split be
omitted. An entity shall classify an asset as current when:
• It expects to realize the asset, or intends to sell
or consume it, in its normal operating cycle
• It holds the asset primarily for the purpose of
trading
• It expects to realize the asset within twelve
months after the reporting period
• The asset is cash or a cash equivalent (as defined
in IAS 7) unless the asset is restricted from being
exchanged or used to settle a liability for at least
twelve months after the reporting period
Normal Operating Cycle – The time between the
acquisition of assets for processing and their realization
cash or cash equivalents. When the entity’s normal
operating cycle is not clearly identifiable, its duration is
assumed to be twelve months.
Line items under current assets are:
• Cash and cash equivalents
• Trade and other receivables
• Financial asset at Fair Value through Profit of Loss
• Inventories
• Prepaid expenses
The caption “noncurrent assets” is a residual definition.
PAS 1 provides that an entity shall classify all other assets
as non-current. The following are examples of non-
current assets:
• Property, plant, and equipment
• Intangible assets
• Investment property
• Financial assets that are not expected to be
realized in cash in the entity’s normal operating
cycle or within twelve months after the reporting
period
Liabilities
An entity shall classify a liability as current when:
• It expects to settle the liability in its normal
operating cycle
• It holds the liability primarily for the purpose of
trading
• The liability is due to be settled within twelve
months after the reporting period
• The entity does not have an unconditional right
to defer settlement of the liability for at least
twelve months after the reporting period
Current liabilities include:
• Trade and other payables
• Current provisions
• Short-term borrowings
• Current portion of long-term debt
• Current tax liability
An entity shall classify all other liabilities as non-current,
such as:
• Long term notes payable that are due beyond 12
months from the end of the reporting period
• Bonds payable that are due beyond twelve
months after the reporting period
• Long-term notes payable that are due within
twelve months after the reporting period, but
which terms is extended on a long-term basis
and negotiation has been competed before the
end of the reporting period.
An entity classifies its financial liabilities as current when
they are due to be settled within twelve months after the
end of the reporting period, even if:
• The original term was for a period longer than
twelve months; and
• The intention is supported by an agreement to
refinance, or reschedule the payments, on a
long-term basis is completed after the end of the
reporting period and completed before the
financial statements are authorized for issue.
• If the entity has the discretion to refinance, or to
roll over the obligation for at least twelve months
after the end of the reporting period under an
existing loan facility, it classifies the obligation as
non-current, even if it would be due within a
shorter period.
• If a liability has become payable on demand
because an entity has breached an undertaking
under a long-term loan agreement on or before
the end of the reporting period, the liability is
current, even if the lender has agreed, after the
end of the reporting period and before the
 authorization of the financial statements for
issue, not to demand payment as a consequence
of the breach. However, the liability is classified
as non-current if the lender agreed by the end of
the reporting period to provide a period of grace
ending at least 12 months after the end of the
reporting period, within which the entity can
rectify the breach and during which the lender
cannot demand immediate repayment.
Equity
- the residual interest in the assets of the entity
after deducting all the liabilities.
- equity means net asset or total assets minus total
liabilities.
The account name in reporting the equity of an entity
depends on the form of the business organization:
Sole Proprietorship Owner's Equity
Partnership Partner’s Equity
Corporation Stockholder’s/Shareholder’s
Equity
Forms of the Statement of Financial Position
A statement of financial position may be prepared using
any of the following formats:
• Account form, which looks like a T account,
where assets are listed on the left side of the
statement while liabilities and equity are listed
on the right side
• Report form presents the assets, liabilities, and
equity in a continuous format. Liabilities are
presented after total assets and equity accounts
are listed after the liabilities section
• Financial position form emphasizes working
capital of the firm. In this format, net assets are
equal to the equity.
Statement of Comprehensive Income
- the change of equity during a period other than
changes resulting from transactions with owners
in their capacity as such.
- includes profit or loss and other comprehensive
income.
- Profit and Loss is the total income less expenses
excluding the components of other
comprehensive income.
It shall include line items that present the following
amounts for the period:
• revenue, presenting separately interest revenue
calculated using the effective interest method
and insurance revenue
• gains and losses arising from the derecognition
of financial assets measured at amortized cost
• insurance service expenses from contracts issued
within the scope of IFRS 17
• income or expenses from reinsurance contracts
held
• finance costs
• impairment losses (including reversals of
impairment losses or impairment gains)
determined in accordance with Section 5.5 of
IFRS 9
• insurance finance income or expenses from
contracts issued within the scope of IFRS 17
• finance income or expenses from reinsurance
contracts held
• share of the profit or loss of associates and joint
ventures accounted for using the equity method
• if a financial asset is reclassified out of the
amortized cost measurement category so that it
is measured at fair value through profit or loss,
any gain or loss arising from a difference
between the previous amortized cost of the
financial asset and its fair value at the
reclassification date (as defined in IFRS 9)
• if a financial asset is reclassified out of the fair
value through other comprehensive income
measurement category so that it is measured at
fair value through profit or loss, any cumulative
gain or loss previously recognized in other
comprehensive income that is reclassified to
profit or loss;
• tax expense
• a single amount for the total of discontinued
operations
Other comprehensive income comprises Items of
income and expenses including reclassification
adjustments that are not included in Profit and Loss as
required by a standard or interpretation. There are two
types of OCI items, those that are reclassified to profit or
loss and those that are reclassified to Retained Earnings.
OCI includes the following Components of OCI that will
be reclassified subsequently to profit, or loss include the
following:
• Unrealized gain or loss on debt investments
measured at fair value through other
comprehensive income
• Unrealized gain or loss from derivative contracts
designated as cash flow hedge
• Translation gains and losses of foreign operations
Components of OCI that will be reclassified
subsequently to retained earnings include the following:
• Unrealized gain or loss on equity investments
measured at fair value through other
comprehensive income
• Change in Revaluation Surplus
• Remeasurement gains and losses for defined
benefit plans
• Change in fair value arising from credit risk for
financial liabilities measured at fair value through
profit or loss
An entity shall disclose the following items in the
statement of comprehensive income as allocations of
profit or loss for the period:
 • Profit or loss for the period attributable to
Minority interest and Owners of the parent.
• Total comprehensive income for the period
attributable to Minority interest and Owners of
the parent.
Statement of comprehensive income present income
and expense for a given reporting period. An entity shall
present all items of income and expense recognized in a
period:
• In a single statement of comprehensive income,
or
• In two statements: a statement displaying
components of profit or loss (separate income
statement) and a second statement beginning
with profit or loss and displaying components of
other comprehensive income (statement of
comprehensive income).
An entity shall present either an analysis of expenses
using a classification based on either the nature of
expenses or their function within the entity, whichever
provides information that is reliable and more relevant.
Nature of expense method – Expenses are aggregated in
the income statement according to their nature and are
not reallocated among various functions within the entity
Function of expense or cost of sales method – Classifies
expenses according to their function as part of cost of
sales or, for example, the cost of distribution or
administrative activities.
An entity classifying expenses by function shall
disclose additional information on the nature of
expenses, including depreciation and amortization
expense and employee benefits expense. An entity shall
not present any items of income and expense as
extraordinary items, either on the face of the income
statement or in the notes.
Statement of Changes in Equity
An entity shall present a statement of changes in
equity showing in the statement:
• Total comprehensive income for the period,
showing separately the total amounts
attributable to owners of the parent and to
non-controlling interests
• For each component of equity, the effects of
retrospective application or retrospective
restatement recognized in accordance with PAS 8
• For each component of equity, a reconciliation
between the carrying amount at the beginning
and the end of the period, separately (as a
minimum) disclosing changes resulting from:
o profit or loss;
o other comprehensive income; and
o transactions with owners in their
capacity as owners, showing separately
contributions by and distributions to
owners and changes in ownership
interests in subsidiaries that do not
result in a loss of control.
An entity shall present, either in the statement of
changes in equity or in the notes, the amount of
dividends recognized as distributions to owners during
the period, and the related amount per share.
Statement of Cash Flows
- provides users of financial statements with a
basis to assess the ability of the entity to
generate cash and cash equivalents and the
needs of the entity to utilize those cash flows.
Classification
- SCF presents information on the inflows and
outflows of cash and cash equivalent classified
into operating activities, investing activities, and
financing activities.
Cash flows from operating activities are primarily
derived from the principal revenue-producing activities
of the entity. Examples of cash flows from operating
activities are:
• cash receipts from the sale of goods and the
rendering of services;
• cash receipts from royalties, fees, commissions
and other revenue;
• cash payments to suppliers for goods and
services;
• cash payments to and on behalf of employees;
• cash payments or refunds of income taxes unless
they can be specifically identified with financing
and investing activities; and
• cash receipts and payments from contracts held
for dealing or trading purposes.
An entity may hold securities and loans for dealing or
trading purposes, in which case they are similar to
inventory acquired specifically for resale. Therefore, cash
flows arising from the purchase and sale of dealing or
trading securities are classified as operating activities.
Similarly, cash advances and loans made by financial
institutions are usually classified as operating activities
since they relate to the main revenue-producing activity
of that entity.
 Investing activities are the cash flows derived from - Each shall be classified in a consistent manner
the acquisition and disposal of longterm assets and other from period to period as either operating,
investment not included in cash equivalents. Only investing or financing activities.
expenditures that result in a recognized asset in the - Interest paid and interest and dividends received
statement of financial position are eligible for may be classified as operating cash flows
classification as investing activities. Examples of cash because they enter into the determination of
flows arising from investing activities are: profit or loss. Alternatively, interest paid and
interest and dividends received may be classified
• cash payments to acquire property, plant and
as financing cash flows and investing cash flows
equipment, intangibles and other long-term
respectively, because they are costs of obtaining
assets. These payments include those relating to
financial resources or returns on investments.
capitalized development costs and
- Dividends paid may be classified as a financing
self-constructed property, plant and equipment;
cash flow because they are a cost of obtaining
• cash receipts from sales of property, plant and financial resources. Alternatively, dividends paid
equipment, intangibles and other long-term may be classified as a component of cash flows
assets; from operating activities in order to assist users
• cash payments to acquire equity or debt to determine the ability of an entity to pay
instruments of other entities and interests in dividends out of operating cash flows.
joint ventures (other than payments for those
instruments considered to be cash equivalents or
those held for dealing or trading purposes);
• cash receipts from sales of equity or debt
instruments of other entities and interests in
joint ventures (other than receipts for those Taxes on income
instruments considered to be cash equivalents
- Cash flows arising from taxes on income shall be
and those held for dealing or trading purposes);
separately disclosed and shall be classified as
• cash advances and loans made to other parties
cash flows from operating activities unless they
(other than advances and loans made by a
can be specifically identified with financing and
financial institution);
investing activities.
• cash receipts from the repayment of advances
and loans made to other parties (other than
advances and loans of a financial institution); Presentation of Cash Flows
• cash payments for futures contracts, forward
An entity shall report cash flows from operating
contracts, option contracts and swap contracts
activities using either:
except when the contracts are held for dealing or
trading purposes, or the payments are classified • the direct method, whereby major classes of
as financing activities; and gross cash receipts and gross cash payments are
• cash receipts from futures contracts, forward disclosed; or
contracts, option contracts and swap contracts • the indirect method whereby profit or loss is
except when the contracts are held for dealing or adjusted for the effects of transactions of a
trading purposes, or the receipts are classified as non-cash nature, any deferrals or accruals of past
financing activities. or future operating cash receipts or payments,
and items of income or expense associated with
investing or financing cash flows
Financing activities include cash transactions
affecting non-trade liabilities, and shareholders’ equity.
Under the direct method, information about major
Examples of cash flows arising from financing activities
classes of gross cash receipts and gross cash payments
are:
may be obtained either:
• cash proceeds from issuing shares or other
• from the accounting records of the entity; or
equity instruments;
• by adjusting sales, cost of sales (interest and
• cash payments to owners to acquire or redeem
similar income and interest expense and similar
the entity’s shares;
charges for a financial institution) and other
• cash proceeds from issuing debentures, loans,
items in the statement of comprehensive income
notes, bonds, mortgages and other short-term or
for:
long-term borrowings;
o changes during the period in inventories
• cash repayments of amounts borrowed; and
and operating receivables and payables;
• cash payments by a lessee for the reduction of
o other non-cash items; and
the outstanding liability relating to a lease.
o other items for which the cash effects
are investing or financing cash flows.

Interest and dividends Under the indirect method, the net cash flow
from operating activities is determined by adjusting
- Cash flows from interest and dividends received profit or loss for the effects of:
and paid shall each be disclosed separately.
 • changes during the period in inventories and
operating receivables and payables;
• non-cash items such as depreciation, provisions,
deferred taxes, unrealized foreign currency gains
and losses, and undistributed profits of
associates; and
• all other items for which the cash effects are
investing or financing cash flows.
Based on the foregoing, the following guidelines may
be used in adjusting accrual basis net income to the cash
basis net income under the indirect method:
Investing and financing activities are presented
using direct method, separating major classes of gross
cash receipts and gross cash payments arising from these
activities.
Notes to the Financial Statements
The notes must:
• Present information about the basis of
preparation of the financial statements and the
specific accounting policies used;
• Disclose any information required by PFRSs that
is not presented on the face of the statement of
financial position, income statement, statement
of changes in equity, or statement of cash flows
• Provide additional information that is not
presented on the face of the statement of
financial position, income statement, statement
of changes in equity, or statement of cash flows
that is deemed relevant to an understanding of
any of them.
Notes should be cross-referenced from the face of
the financial statements to the relevant note. The notes
should normally be presented in the following order:
• A statement of compliance with PFRSs
• A summary of significant accounting policies
applied, including:
o The measurement basis (or bases) used
in preparing the financial statements;
and
o The other accounting policies used that
are relevant to an understanding of the
financial statements.
• Supporting information for items presented on
the face of the statement of financial position,
income statement, statement of changes in
equity, and statement of ash flows, in the order
in which each statement and each line item is
presented.
• Other disclosures, including:
o Contingent liabilities and unrecognized
contractual commitments
o Non-financial disclosures, such as the
entity's financial risk management
objectives and policies.
Disclosure of judgments - an entity must disclose, in the
summary of significant accounting policies or other
notes, the judgments, apart from those involving
estimations, that management has made in the process
of applying the entity's accounting policies that have the
most significant effect on the amounts recognized in the
financial statements.
HIERARCHY IN THE FORMATION OF ACCOUNTING
POLICIES
When an IFRS specifically applies to a
transaction, other event or condition, the accounting
policy or policies applied to that item 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, free from bias;
o are prudent; and
o are complete in all material respects.
In making the judgement described above,
management shall refer to, and consider the applicability
of, the following sources in descending order:
• the requirements in IFRSs dealing with similar
and related issues; and
• the definitions, recognition criteria and
measurement concepts for assets, liabilities,
income and expenses in the Conceptual
Framework for Financial Reporting (Conceptual
Framework).
Management may also consider the most recent
pronouncements of other standard-setting bodies that
use a similar conceptual framework to develop
accounting standards, other accounting literature and
accepted industry practices, to the extent that these do
not conflict with the sources mentioned above.
GENERAL FEATURES IN THE PRESENTATION OF THE
FINANCIAL STATEMENTS
Fair presentation and compliance with PFRS
 - FS shall present fairly the financial position,
financial performance and cash flows of an
entity.
- In virtually all circumstances, an entity achieves a
fair presentation by compliance with applicable
IFRSs.
- An entity whose FS comply with IFRSs shall make
an explicit and unreserved statement of such
compliance in the notes.
- An entity shall not describe FS as complying with
IFRSs unless they comply with all the
requirements of IFRSs
Fair presentation requires the faithful representation
of the effects of transactions, other events and
conditions in accordance with the definitions and
recognition criteria for assets, liabilities, income and
expenses set out in the Conceptual Framework for
Financial Reporting (Conceptual Framework). A fair
presentation also requires an entity:
• to select and apply accounting policies in
accordance with IAS 8 Accounting Policies,
Changes in Accounting Estimates and Errors. IAS
8 sets out a hierarchy of authoritative guidance
that management considers in the absence of an
IFRS that specifically applies to an item.
• to present information, including accounting
policies, in a manner that provides relevant,
reliable, comparable and understandable
information.
• to provide additional disclosures when
compliance with the specific requirements in
IFRSs is insufficient to enable users to understand
the impact of particular transactions, other
events and conditions on the entity’s financial
position and financial performance.
An entity cannot rectify inappropriate accounting
policies either by disclosure of the accounting policies
used or by notes or explanatory material.
PAS 1 acknowledges that, in extremely rare
circumstances, management may conclude that
compliance with an PFRS requirement would be so
misleading that it would conflict with the objective of
financial statements set out in the Framework. In such a
case, the entity is required to depart from the PFRS
requirement, with detailed disclosure of the nature,
reasons, and impact of the departure.
Going concern
- An entity shall prepare FS on a going concern
basis unless management either intends to
liquidate the entity or to cease trading or has no
realistic alternative but to do so.
- An entity preparing PFRS financial statements is
presumed to be a going concern.
- Going concern means that the accounting entity
is viewed as continuing in operation indefinitely
in the absence of evidence to the contrary.
- When management is aware, in making its
assessment, of material uncertainties related to
events or conditions that may cast significant
doubt upon the entity’s ability to continue as a
going concern, the entity shall disclose those
uncertainties.
- When an entity does not prepare financial
statements on a going concern basis, it shall
disclose that fact, together with the basis on
which it prepared the financial statements and
the reason why the entity is not regarded as a
going concern.
Accrual basis
- An entity shall prepare its financial statements,
except for cash flow information, using the
accrual basis of accounting.
- When the accrual basis of accounting is used, an
entity recognizes items as assets, liabilities,
equity, income and expenses (the elements of
financial statements) when they satisfy the
definitions and recognition criteria for those
elements in the Conceptual Framework.
Materiality and Aggregation
- An entity shall present separately each material
class of similar items.
- An entity shall present separately items of a
dissimilar nature or function unless they are
immaterial.
- If a line item is not individually material, it is
aggregated with other items either in those
statements or in the notes.
- An item that is not sufficiently material to
warrant separate presentation in those
statements may warrant separate presentation
in the notes. But if the resulting disclosure is not
material, an entity need not provide a specific
disclosure even if required by PFRS.
Offsetting
- An entity shall not offset assets and liabilities or
income and expenses, unless required or
permitted by an IFRS.
- An entity reports separately both assets and
liabilities, and income and expenses.
- Measuring assets net of valuation allowances—
for example, obsolescence allowances on
inventories and doubtful debts allowances on
receivables—is not offsetting.
Frequency of reporting
- An entity shall present a complete set of financial
statements (including comparative information)
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, in addition to the period covered
by the financial statements:
 o the reason for using a longer or shorter
period, and
o the fact that amounts presented in the
financial statements are not entirely
comparable.
- Normally, an entity consistently prepares
financial statements for a one-year period.
However, for practical reasons, some entities
prefer to report, for example, for a 52-week
period. This Standard does not preclude this
practice.
Comparative Information
Minimum Comparative Information
- Except when IFRSs permit or require otherwise,
an entity shall present comparative information
in respect of the preceding period for all amounts
reported in the current period’s financial
statements.
- An entity shall present, as a minimum, two
statements of financial position, two statements
of profit or loss and other comprehensive
income, two separate statements of profit or loss
(if presented), two statements of cash flows and
two statements of changes in equity, and related
notes.
- An entity shall include comparative information
for narrative and descriptive information if it is
relevant to understanding the current period’s
financial statements.
- In some cases, narrative information provided in
the financial statements for the preceding
period(s) continues to be relevant in the current
period. For example, an entity discloses in the
current period details of a legal dispute, the
outcome of which was uncertain at the end of
the preceding period and is yet to be resolved.
Users may benefit from the disclosure of
information that the uncertainty existed at the
end of the preceding period and from the
disclosure of information about the steps that
have been taken during the period to resolve the
uncertainty.
Additional comparative information
- An entity may present comparative information
may consist of one or more statements but need
not comprise a complete set of financial
statements
- For example, an entity may present a third
statement of profit or loss and other
comprehensive income (thereby presenting the
current period, the preceding period and one
additional comparative period). However, the
entity is not required to present a third
statement of financial position, a third statement
of cash flows or a third statement of changes in
equity (i.e. an additional financial statement
comparative).
- The entity is required to present, in the notes to
the financial statements, the comparative
information related to that additional statement
of profit or loss and other comprehensive
income.
When third statement of financial position is required
- An entity shall present a third statement of
financial position as at the beginning of the
preceding period in addition to the minimum
comparative financial statements if:
o it applies an accounting policy
retrospectively, makes a retrospective
restatement of items in its financial
statements or reclassifies items in its
financial statements; and
o the retrospective application,
retrospective restatement or
o the reclassification has a material effect
on the information in the statement of
financial position at the beginning of the
preceding period.
- Under these circumstances, an entity shall
present three statements of financial position as
at:
o the end of the current period;
o the end of the preceding period; and
o the beginning of the preceding period.
Consistency of presentation
- An entity shall retain the presentation and
classification of items in the financial statements
from one accounting period to the next.
- Change is allowed under the following
circumstances:
o it is apparent, following a significant
change in the nature of the entity’s
operations or a review of its financial
statements, that another presentation
or classification would be more
appropriate having regard to the criteria
for the selection and application of
accounting policies in IAS 8; or
o an IFRS requires a change in
presentation.
LIMITATIONS OF THE FINANCIAL STATEMENTS
Common limitations on the use financial statements are:
• Use of different measurement bases. Elements
recognized in financial statements are quantified
in monetary terms. Consideration of the
qualitative characteristics of useful financial
information and of the cost constraint is likely to
result in the selection of different measurement
bases for different assets, liabilities, income and
expenses.
• Inflationary effects. Assets measured at
historical costs reflect the level of purchasing
power when those assets are acquired at
 different dates. Such purchase costs albeit at
different dates are the basis of the presentation
of these assets in the statement of financial
position and of the computation of depreciation
expenses in the statement of comprehensive
income. If the inflation rate is relatively high, the
amounts reported in the financial statements will
appear inordinately low since under the cost
model, the assets are not adjusted for inflation.
Hence, the amounts reflected in the financial
statements are mixture of pesos with different
levels of purchasing power.
• Measurement uncertainty. The use of
reasonable estimates is an essential part of the
preparation of financial information. In some
cases, the level of uncertainty involved in
estimating a measure of an asset or liability may
be so high that it may be questionable whether
the estimate would provide a sufficiently faithful
representation of that asset or liability and of any
resulting income, expenses or changes in equity.
• Now always comparable across companies.
Different companies may apply different
accounting policies and use different accounting
periods. While accounting policies are disclosed
in the financial statements, the users of financial
statements can hardly adjust the reported
figures in the financial statements for
comparability. Any one period may vary from the
normal operating results of a business due to
seasonality effects.
• Non-financial information is not reported. The
notes to financial statements provide textual
description of what was reported in the face of
the financial statements. However, the financial
statements do not report the level of corporate
governance of the company, the moral and
efficiency of company personnel or business
ethics, the effect of the business to the
environment, or the company’s contribution to
the local community. Financial statements may
report high net income but fail to indicate its
degrading effect to the environment.
• No predictive value. The financial statements
report past events, but they do not provide any
value that predict what will happen in the future.
A company may report billions of incomes in the
preceding years, yet a newly elected president of
the country cancels its contract on which it was
relying.
FUNCTION OF THE SECURITIES AND EXCHANGE
COMMISSIONS (SEC)
The Commission shall have the powers and
functions provided by the Securities Regulation Code,
Presidential Decree No. 902-A, as amended, the
Corporation Code, the Investment Houses Law, the
Financing Company Act, and other existing laws. Under
Section 5 of the Securities Regulation Code, Rep. Act.
8799, the Commission shall have, among others, the
following powers and functions:
a) Have jurisdiction and supervision over all
corporations, partnerships or associations who
are the grantees of primary franchises and/or a
license or permit issued by the Government;
b) Formulate policies and recommendations on
issues concerning the securities market, advise
Congress and other government agencies on all
aspects of the securities market and propose
legislation and amendments thereto;
c) Approve, reject, suspend, revoke or require
amendments to registration statements, and
registration and licensing applications;
d) Regulate, investigate or supervise the activities
of persons to ensure compliance;
e) Supervise, monitor, suspend or take over the
activities of exchanges, clearing agencies and
other SROs;
f) Impose sanctions for the violation of laws and
the rules, regulations and orders issued pursuant
thereto;
g) Prepare, approve, amend or repeal rules,
regulations and orders, and issue opinions and
provide guidance on and supervise compliance
with such rules, regulations and orders;
h) Enlist the aid and support of and/or deputize any
and all enforcement agencies of the
Government, civil or military as well as any
private institution, corporation, firm, association
or person in the implementation of its powers
and functions under this Code;
i) Issue cease and desist orders to prevent fraud or
injury to the investing public;
j) Punish for contempt of the Commission, both
direct and indirect, in accordance with the
pertinent provisions of and penalties prescribed
by the Rules of Court;
k) Compel the officers of any registered corporation
or association to call meetings of stockholders or
members thereof under its supervision;
l) Issue subpoena duces tecum and summon
witnesses to appear in any proceedings of the
Commission and in appropriate cases, order the
examination, search and seizure of all
documents, papers, files and records, tax
returns, and books of accounts of any entity or
person under investigation as may be necessary
for the proper disposition of the cases before it,
subject to the provisions of existing laws;
m) Suspend, or revoke, after proper notice and
hearing the franchise or certificate of registration
of corporations, partnerships or associations,
upon any of the grounds provided by law; and
n) Exercise such other powers as may be provided
by law as well as those which may be implied
from, or which are necessary or incidental to the
carrying out of, the express powers granted the
Commission to achieve the objectives and
purposes of these laws.
Under Section 5.2 of the Securities Regulation Code,
the Commission’s jurisdiction over all cases enumerated
under Section 5 of PD 902-A has been transferred to the
Courts of general jurisdiction or the appropriate Regional
Trial Court. The Commission shall retain jurisdiction over
pending cases involving intra-corporate disputes
submitted for final resolution which should be resolved
within one (1) year from the enactment of the Code. The
Commission shall retain jurisdiction over pending
suspension of payments/rehabilitation cases filed as of
30 June 2000 until finally disposed.
Considering that only Sections 2, 4, and 8 of PD 902-
A, as amended, have been expressly repealed by the
Securities Regulation Code, the Commission retains the
powers enumerated in Section 6 of said Decree, unless
these are inconsistent with any provision of the Code.
PHILIPPINE FINANCIAL REPORTING FRAMEWORKS AND
THE REPORTING ENTITIES
Financial reporting frameworks applicable to different
reporting entities are as follows:
Large and/or publicly accountable entities
Large entities are those with total assets of more
than P350 million or total liabilities of more than P250
million. Public entities are those that meet any of the
following criteria:
• Holders of secondary licenses issues by
regulatory agencies
• Required to file financial statements under Part II
of SRC Rule 68
• In the process of filing their financial statements
for the purpose of issuing any class of instrument
in a public market
• Imbued with public interest as the SEC may
consider in the future
Large and/or public interest entities shall use the
PFRS, as adopted by the Commission, as their financial
reporting framework. However, a set of financial
reporting framework other than the full PFRS may be
allowed by the Commission for certain sub-class (e.g.,
banks, insurance companies) of these entities upon
consideration of the pronouncements or interpretations.
Medium-sized entities
Medium-sized entities are those that meet all of
the following criteria:
• Total assets of more than P100 million to P350
million or total liabilities of more than P100
million to P250 million. If the entity is a parent
company, the said amounts shall be based on the
consolidated figures.
• Not required to file financial statements under
Part II of SRC Rule 68
• Not in the process of filing their financial
statements for the purpose of issuing any class of
instrument in a public market
• Not holders of secondary licenses issues by
regulatory agencies
Medium-sized entities shall use as their financial
reporting framework the PFRS for SMEs as adopted by
the SEC. However, the following medium-sized entities
shall be exempt from the mandatory adoption of the
PFRS for SME’s and may instead apply, at their option, the
full PFRS:
• An SME which is a subsidiary of a foreign parent
company reporting under the full PFRS
• An SME which is a subsidiary of a foreign parent
company which will be moving towards
International Financial Reporting Standards
pursuant to the foreign country’s published
convergence plan
• An SME either as a significant joint venture or
associate, which is part of a group that is
reporting under the full PFRS
• An SME which is a branch office or regional
operating headquarter of a foreign company
reporting under the full PFRS
• An SME which has a subsidiary that is mandated
to report under the full PFRS
• An SME which has a short-term projection that
shows that it will breach the quantitative
thresholds set in the criteria for an SME. The
breach is expected to be significant and
continuing due to its long-term effect on the
company’s asset or liability size
• An SME which has c concrete plan to conduct an
initial public offering within the next two years
• An SME which has been preparing financial
statements using full PFRS and has decided to
liquidate
• Such other cases that the Commission may
consider as valid exceptions from the mandatory
adoption of PFRS for SMEs
Small entities
Small entities are those that meet all of the
following criteria:
• Total assets of between P3 million to P100
million or total liabilities between P3 million to
P100 million. If the entity is a parent company,
the said amounts shall be based on the
consolidated figures.
• Are not required to file financial statements
under Part II of SRC Rule 68
• Are not in the process of filing their financial
statements for the purpose of issuing any class of
instruments in a public market
• Are not holders of secondary licenses issues by
regulatory agencies
Small entities shall use their financial reporting
framework the PFRS for SEs as adopted by the
Commission. However, entities who have operations or
investments that are based or conducted in a different
country with different functional currency shall not apply
this framework and should instead apply the full PFRS or
PFRS for SMEs.
 The following small entities shall also be exempt from
the mandatory adoption of the PFRS for SEs and may
instead apply, as appropriate, the full PFRS or PFRS for
SMEs:

• A small entity which is a subsidiary of a foreign

parent company reporting under the full PFRS or
PFRS for SMEs
• A small entity which is a subsidiary of a foreign
parent company which will be moving towards
International Financial Reporting Standards or
IFRS for SMEs pursuant to the foreign country’s
published convergence plan
• A small entity either as a significant joint venture
or associate, which is part of a group that is
reporting under the full PFRS or PFRS for SMEs
• A small entity which is a branch office or regional
operating headquarter of a foreign company
reporting under the full PFRS or PFRS for SMEs
• A small entity which has a subsidiary that is
mandated to report under the full PFRS or PFRS
for SMEs
• A small entity which has a short-term projection
that shows that it will breach the quantitative
thresholds set in the criteria for a small entity.
The breach is expected to be significant and
continuing due to its long-term effect on the
company’s asset size
• A small entity which has been preparing financial
statements using full PFRS or PFRS for SMEs and
has decided to liquidate
• Such other cases that the Commission may
consider as valid exceptions from the mandatory
adoption of PFRS for SMs

Micro entities

Micro entities are those that meet all of the

following criteria:

• Total assets and liabilities are below P3 million

• Are not required to file financial statements
under Part II of SRC Rule 68
• Are not in the process of filing their financial
statements for the purpose of issuing any class of
instruments in a public market
• Are not holders of secondary licenses issues by
regulatory agencies

Micro entities have the option to use as their

financial reporting framework either the income tax basis
or PFRS for SEs, provided however, that the financial
statements shall at least consist of the Statement of
Management’s Responsibility (SMR), Auditor’s Report,
Statement of Financial Position, Statement of Income and
Notes to Financial Statements, all of which cover the 2-
year comparative periods, if applicable.

In the event where an entity breaches the prescribed

threshold in terms of total assets or total liabilities and
thus it falls within a different classification, the Audited
Financial Statements of said entity shall be prepared in
accordance with the higher framework.