TOPIC -3 : PRESENTATION OF FINANCIAL STATEMENTS

Introduction
Philippine Accounting Standard (PAS)1 Presentation of Financial
Statements prescribes the basis for the presentation of general
purpose financial statements, the guidelines for their structure, and
the minimum requirements for their content to ensure comparability.
Types of comparability
a. Intra-comparability (horizontal or inter-period) – refers to the
comparability of financial statements of the same entity but
from one period to another.
b. Inter-comparability – refers to the comparability of financial
statements between different entities.
Comparability
Requires consistency in the adoption and application of accounting
polices and in the presentation of financial statements ,e.g. the use of
line-description and account titles, either within a single entity from
one period to another or across different entities.
.
PAS 1 applies to the preparation and presentation of general purpose
financial statements.
The recognition, measurement and disclosure requirements for
specific transactions and other events are set out in other PFRSs.
The terminologies used in PAS 1 is suitable for profit-oriented
entities.
If non-profit organizations apply PAS 1, they may need to amend the
line-item and financial statement descriptions.
Financial Statements
Financial statements are the “structured representation of an entity’s
financial position and results of its operations”.
Financial statements are the end product of the financial reporting
process and the means by which the information gathered and process
is periodically communicated to users.
 The financial statements of an entity pertains only to that entity
and not to the industry where the entity belongs or the economy as a
whole.
General purpose financial statements are those 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.
General purpose financial statements cater to most of the common
needs of a wide range of external users.
General purpose financial statements are the subject matter of the
Conceptual frame works and the PFRSs.
Financial statements are the principal means through which a
company communicates its financial information to those outside it.
These statements provide a company’s history quantified in money
terms. They are a particular form of financial reports that provide
information about the reporting entity’s assets, liabilities ,equity
income and expenses.
A Reporting Entity is an entity that chooses or required to prepare
financial statements and is not necessarily a legal entity.
It could take many form, e.g., portion of an entity.
If a reporting entity does not have typical legal form, the boundary of
reporting is determine by the information that is relevant and
representationally faithful.
Financial Statements may be presented in any of the following forms:
a. Consolidated financial statements.
Provide information about assets, liabilities, equity, income, and
expenses of both parent and its subsidiary as a single reporting
entity.
b. Unconsolidated financial statements.
Provide information about assets, liabilities, equity, income and
expenses of the parent only.
c. Combined financial statements.
Provide information about assets, liabilities, equity, income and
expenses of two or more entities that are not all linked by parent-
subsidiary relationship.
Financial statements are the means by which the information
accumulation and processed in financial accounting is periodically
communicated to the users.
The objective of financial statements is 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. Financial statements shall be presented at least annually.
Financial statements provide information about an entity’s:
a. Assets (economic resources)
b. Liabilities ( economic obligations)
c. Equity
d. Income
e. Expenses
f. contributions by, and distributions to owners
g. Cash flows
Complete set of financial statements
A complete set of financial statements consist of:
1. Statement of financial position
2. Statement of profit or loss and other comprehensive income
3. Statement of changes in equity
4. Statement of cash flows
5. Notes to financial statements
5.a Comparative information; and
6. Additional statement of financial position ( required only
when certain instances occur).
Structure and content of financial statements
The following information shall be displayed prominently and
repeatedly whenever relevant to the understanding of information
presented:
a. The name of the reporting entity
b. Whether the statements are for the individual entity or for a
group of entities
c. The date of the end of the reporting period or the period covered
by the financial statements
d. The presentation of currency
e. The level of rounding used (e.g., thousands, millions, etc.)
Example - heading of a balance sheet
ABC Group
Statement of Financial Position
As of December 31, 2019
(in thousands of Philippine Pesos)
Name of the reporting entity, Name of statement
financial statement pertains to Date of the end of the reporting
period a group
Level of rounding off
and presentation currency
The statement of financial position is dated as at the end of the
reporting period while other financial statements are dated for the
period that they cover.
PAS 1 requires particular disclosures to be presented either in the
notes or on the face of the of the other financial statements
(e.g., footnote disclosures).
Other disclosures are addressed by other PFRSs.
Management’s Responsibility over Financial Statements
The management is responsible for an entity's financial statements.
The responsibility encompasses:
a. the preparation and fair presentation of financial statements
in accordance with PFRSs.;
b. internal control over financial reporting;
 c. going concern assessment; A going concern is an accounting term for a
business that is assumed will meet its financial obligations when they become
due
d. oversight over the financing reporting process; and
e. review and approval of financial statements.

The responsibilities are expressly stated in a document called

“ Statement of Managements' Responsibility for Financial Statements”
which is attached to the financial statements as cover letter.
This document is signed by the entity’s
a. Chairman of the Board of the Board (or equivalent),
b. Chief Executive Officer (or equivalent), and
c. Chief Financial Officer (or equivalent)
Statement of Financial Position
The statement of financial position shows the entity’s financial
condition as at a certain date.
A statement of financial position (balance sheet) is a formal
statement showing the three elements comprising financial position
namely assets, liabilities and equity.
The statement of financial position as at certain point in time. This
statement shows the resources of a company (the assets), the
company’s obligations( the liabilities), and the net difference between
its assets and liabilities, which represents the equity of the owners.
 It includes line item that present the following amounts:
a. Property, plant and equipment
b. Investment property
c. Intangible assets
d. Financial assets (cash, stocks, bonds, mutual funds, and bank deposits)
e. Investments accounted for using the equity method
f. Biological assets (Livestock - cows, poultry, mango trees, vineyards)
g. Inventories
h. Trade and other receivables
i. Cash and cash equivalent (T-bills, Treasury notes, Commercial paper)
j. Assets held for sale, including disposal groups;
k. Trade and other payables
l. Provisions
m. Financial liabilities (excluding (k) and (l)
n. Current tax liabilities and current tax assets
o. Deferred tax liabilities and deferred tax assets
p. Liabilities included in disposal groups
q. Non-controlling interest
r. Issued capital and reserves attributable to owners of the parent
PAS 1 does not prescribe the order or format of presenting items in
the statement of financial position.
The foregoing is simply a list of items that are sufficient different in
nature or function to warrant separate presentation.
Accordingly, an entity may modify the descriptions used and the
sequence of their presentation to suit the nature of the entity and its
transactions.
Moreover, additional line items may be presented whenever relevant
to the understanding of the entity’s financial position.
Presentation of statement of financial position
A statement of financial position may be presented in a classified or
an unclassified manner.
a. A classified presentation shows distinctions between current
and noncurrent assets and current and noncurrent liabilities.
b. An unclassified presentation (also called based on liquidity)
shows no distinction between current and noncurrent items.
A classified presentation shall be used except when an unclassified
presentation provides information that is reliable and more relevant.
When that exception applies, assets and liabilities are presented in
order of liquidity (this is normally the case for banks and other
financial institutions).
PAS 1 also permits a mixed presentation, i.e., presenting some assets
and liabilities using a current/noncurrent classification and others in
order of liquidity.
This may be appropriate when the entity has diverse operation.
Whichever is used, PAS 1 requires the disclosure of items that are
expected to be recovered or settled (a) within 12 months and
(b) beyond 12 months, after the reporting period.
A classified presentation highlights an entity’s working capital and
facilitates the computation of liquidity and solvency ratios.
Working capital = Current assets – current liabilities
Assets
An assets are resources controlled by the entity as a result of past
events and from which future economic benefits are expected to

flow to the entity.

An economic resource is a right that has the potential to produce
economic benefits.
Assets are anything valuable that your company owns, whether it’s
equipment, land, buildings, or intellectual property.
Essential characteristics of an asset:
a. The asset is controlled by the entity
b. The asset is the result of a past transaction or event
c. The asset provides future economic benefits
d. The cost of the asset can be measured reliably
Example : Now, let’s say a company got a loan of P100,000, and went
out and bought a new oven. But not the company bought the latest and
greatest model. The company bought just any oven the Bakemaster X
Series 3000.
Let’s see if the new Bakemaster fits the requirements of an asset.
1. Something the entity have control over?
The company paid for it. It can keep it, it can sell it, can even
use for baking.
It’s in company control.
2. As a result of a past event?
In this case, going to the store and handing over the cash will
constitute a past event.
 3. Has a future economic benefit?
With the new Bakemaster, the company is going to be baking
some serious cream cakes which customers are going to pay for it.
That’s definitely a future economic benefit.
Because the new oven meets three requirements, it’s an asset.
Classification of assets
1. Current assets
An entity shall classify an asset as current when:
a. The asset is cash or a cash equivalent unless the asset is
restricted to settle a liability for more than twelve months
after the reporting period.
b. The entity holds the asset primarily for the purpose of
trading.
 c. The entity expects to realize the asset within twelve months
after the reporting period or intends to sell or consumed it,
in its normal operating cycle.
d. Cash or cash equivalent, unless restricted from being
exchanged or used to settle a liability for at least 12 months
after the reporting period.
The operating cycle of an entity is the time between the acquisition
of assets for processing and their realization in cash or cash
equivalent.
When the entity’s normal operating cycle is not identifiable, it is
assumed to be 12 months.
 Examples of current assets:
● Cash and cash equivalents
● Accounts receivable
● Non-trade receivable collectible with in 12 months
● Held for trading securities
● Inventory
● Prepaid assets
Cash and cash equivalents – includes cash on hand, petty cash fund,
cash in bank and any cash equivalent. Examples of cash equivalents
a. Three-month BSP treasury bill
b. Three-year BSP treasury bill purchased three months before
maturity date
c. Three-month time deposit
d. Three - month money market instrument
Therefore, an investment normally qualifies as a cash equivalent only
when it has a short maturity of three months or less from the date of
acquisition.
Held for trading – example debt and equity securities that are
purchase with the intent of selling them in the near term or very soon
in order to generate short-term gains or profits.
Expected to be realized within twelve months – example short-term
nontrade receivables.
Realized ,sold or consumed – refers to trade receivables, inventories
and prepayments.
2. Noncurrent assets is the residual definition , in other words what
is not included in the definition of current assets is deemed
excluded. All others are classified as noncurrent assets. Noncurrent
assets include the following:
a. Property, plant and equipment
b. Long-term investments
c. Intangible assets
d. Other noncurrent assets
Examples of PP and E – Land, Building, Machinery, Furniture and
fixtures and office equipment
Examples of long-term investments – investments in shares, bonds
and other debt instrument, investment in subsidiaries.
Examples of intangibles – patent, franchise, copyright, trademark,
and computer software.
 3. Other noncurrent assets – Long –term advances to officers,
directors, shareholders and employees.
Liabilities
A liability is a present obligation of an entity arising from past event,
the settlement of which is expected to result in an outflow from the
entity of resources embodying economic benefits.
Liabilities mean everything that the company owes to other people.
Current liabilities – an entity shall classify liability as current when:
a. The entity expects to settle the liability within the entity’s
normal operating cycle.
b. The entity holds the liability primarily for the purpose of trading
c. The liability is due to be settled within twelve months after the
reporting period.
d. The entity does not have an unconditional right to defer
settlement of the liability for at least twelve months after the
reporting period.
Examples- trade payables, and accruals for employee and other
operating costs, financial liability, dividend payable, income
taxes and current portion of noncurrent financial liabilities.
Presentation of current liabilities
a. Trade and other payables
b. Current provisions
c. Short-term borrowing
d. Current portion of long-term debt
e. Current tax liability
Noncurrent liabilities – all liabilities not classified as current are
classified as noncurrent liabilities.

Examples:
a. Noncurrent portion of long-term debt
b. Lease liability
c. Deferred tax liability
d. Long-term obligations to entity officers
e. long-term deferred revenue
Refinancing agreement
A long-term obligation that is maturing within 12 months after the
reporting period is classified as current, even if a refinancing
agreement to reschedule payments on a long-term basis is completed
after the reporting period and before the financial statements are
authorized for issue.
However, the obligation is classified as noncurrent if the entity has
the right, at the end of the reporting period, to roll over the obligation
for at least twelve months after the reporting period under an existing
loan facility.
Without such right, the entity does not consider the potential to
refinance the obligation and classifies the obligation as current.
Refinancing refers to the replacement of an existing debt with a
new one but with different terms, e.g., an extended maturity date
or a revised payment schedule.
Refinancing normally entails a fee or penalty.
A refinancing where the debtor is under financial distress is called
“ troubled debt restructuring “. Loan facility refers to a credit line.
Illustration:
Fact pattern:
Entity A’s current reporting date is December 31, 20x1. A bank loan
taken 10 years ago is maturing on October 31, 20x2.
Analysis: A current maturing obligation (i.e., due with 12 months
after the reporting date) is classified as current even if that
obligation used to be noncurrent. Therefore the loan is presented as
as a current liability in Entity A’s December 31, 20x1 statement of
financial position.
 Case 1: No right to defer settlement
On January 15, 20x2, Entity A enters into a refinancing agreement to
extend the maturing date of the, loan to October 13, 20x7.
Entity A financial statements are authorized for issue on March 31,
20x 2.
Analysis: Continuing the general rule, a currently maturing
obligation is classified as current even if a refinancing agreement,
on a long term basis, is completed after the reporting period and
before the financial statements are authorized for issue.
Accordingly, the loan is nevertheless presented as a current
liability.stop a 8/23
Case 2: With right to defer settlement
On January 15, 20x2, Entity A enters into a refinancing agreement
with the bank to roll over the loan for another four year.
Entity A has the option to roll over the loan under existing loan
contract and, as of December 31, 20x1, Entity A has complied with
all the conditions for roll over.
Analysis: The loan is presented as a noncurrent liability in Entity
A’s December 31, 20x1 statement of financial position because
Entity A has the right as December 31, 20x1, to roll over the
obligation for at least twelve months after the reporting period
under existing loan agreement.
Liabilities payable on demand
Liabilities that are payable upon demand of the lender are classified
as current.
A long-term obligation may become payable on demand as a result
of a breach of a loan provision.
Such an obligation is classified as current even if the lender agreed,
after the reporting period and before the authorization of the financial
statements for issue, not to demand payment.
This because the entity does not have an unconditional right to defer
settlement of the liability for at least twelve months after the
reporting period.
However, the liability is noncurrent if the lender provides the entity
by the end of the reporting period (e.g., on or before December 31)
a grace period ending at least twelve months after the reporting
period, within which the entity can rectify the breach and during
which the lender cannot demand payment immediate repayment.
Illustration: In 20x1, entity A took a long-term loan from a bank.
The loan agreement requires Entity A to maintain a current ratio 2:1.
If the current ratio falls below 2:1, the loan becomes payable on
demand. On December 31, 20x1 (reporting date), Entity A’s current
ratio was 1.8:1, below the agreed level.
Entity A’s financial statement were authorized for issue March 31,
20x2.
Case 1:On January 5, 20x2, the bank gives Entity A a chance to
rectify the breach of loan agreement with in the next 12 months and
promise not to demand immediate repayment within this period.
Analysis: The loan is classified as a current liability because the
grace period is received after the reporting date. Stop b 8/23
Illustration: In 20x1, entity A took a long-term loan from a bank.
The bank agreement requires Entity A to maintain a current ratio 2:1.
If the current ratio falls below 2:1, the loan becomes payable on
demand. On December 31, 20x1 (reporting date), Entity A’s current
ratio was 1.8:1, below the agreed level. Entity A’s financial statement
were authorized for issue March 31, 20x2.
Case 2: On December 31, 20x1, the bank gives Entity A a chance to
rectify the breach of loan agreement within the next 12 months and
promise not to demand immediate repayment within the this period.
Analysis: The loan is classified as noncurrent liability because the
grace period is received by the reporting date.
Equity is the residual interest in the assets of the entity after
deducting all of the liabilities.
Elements constituting shareholders’ equity are:
Common stock
Preferred stock
Share capital is the portion of the paid in capital representing the
total par or stated value of the shares issued.
Subscribed share capital is the portion of the authorized share
capital that has been subscribed but not yet fully paid and
therefore still unissued.
Subscription receivable shall be preferably be reflected as a
deduction from the related subscribed share capital.
Share premium is the capital contributed by the shareholders in
excess of the par or stated value of the subscribed and issued.
Retained earning represents the cumulative balance of periodic net
income or loss, dividend distributions.
Retained Earning / Accumulated profits or losses
This represents the accumulated net income earned from the
inception of the corporation and not (yet) paid to shareholders as
dividends. Two subcategories of retained earnings are:
a. Unappropriated retained earning represent that portion w/c is
free and can be declared as dividends to the shareholders.
b. Appropriated retained earnings represent that portion w/c is
restricted and therefore not available for any dividend
declaration.
Treasury shares are an entity’s own shares that have been issued
and then reacquired but not canceled.
Forms of statement of financial position
a. Report form – this form sets forth the three major sections in a
downward sequence of assets, labilities and equity.

b. Account form – the assets are shown on the left side and liabilities
and equity on the right side of the statement of financial position
Balance sheet-report form
ABC company
Statement of Financial Position
December 31, 2017
ASSETS
Notes
Current Assets :
Cash and cash equivalent 698,020
Trade and other receivables 500,000
Inventories 400,000
Total current assets 1,598,020
Noncurrent assets
Property, plant and equipment 2,750,000
Intangible assets 600,000
Total noncurrent assets 3,350,000
Total assets 4 ,948,020
LIABIITIES and EQUITY
Current liabilities
Trade and other payables 287,500
Current tax payable 69,960
Current portion of long-term debt 40,000
Provisions 6,000
Total current liabilities 403,460
Noncurrent liabilities
Long-term debt 120,000
Deferred tax liability 70,000
Total noncurrent liabilities 190,000
Total liabilities 593,460
Equity
Share capital 2,000,000
Retained earnings 2,354,560
Total equity 4,354,560
Total Liabilities and Equity 4,948,020
Account form – balance sheet (statement of financial position)

ABC company
Statement of Financial Position
December 31, 2017
ASSETS LIABIITIES and EQUITY
Notes Notes
Current Assets :
Cash and cash equivalent 698,020 Current liabilities
Trade and other receivables 500,000 Trade and other payables 287,500
Inventories 400,000 Current tax payable 69,960
Total current assets 1,598,020 Current portion of long-term debt 40,000
Provisions 6,000
Total current liabilities 403,460
Noncurrent assets
Property, plant and equipment 2,750,000 Noncurrent liabilities
Intangible assets 600,000 Long-term debt 120,000
Total noncurrent assets 3,350,000 Deferred tax liability 70,000
Total noncurrent liabilities 190,000
Total liabilities 593,460
Equity
Share capital 2,000,000
Retained earnings 2,354,560
Total equity 4,354,560
Total assets 4,948,020 Total Liabilities and Equity 4,948,020
NOTES TO FINANCIAL STATEMENTS
Notes to financial statements provide narrative description or
disaggregation of items presented in the financial statements and
information about items that do not qualify for recognition.
Notes contain information in addition to that presented in the
statement of financial position, income statement, statement of
comprehensive income, statement of changes in equity and statement
of cash flows.
The purpose of notes to financial statements is to provide the
necessary disclosure required by the Philippine Financial
Reporting Standards (PFRS)
Order of presenting the notes
a. Statement of compliance with PFRS
b. Summary of significant accounting policies used
c. Supporting information or computation for line items
presented in the financial statements
d. Other disclosure, such contingent liabilities, unrecognized
contractual commitments and nonfinancial disclosures.
A statement of profit or loss and other comprehensive income
is a formal statement showing the financial performance of an entity
for a given period of time.
The financial performance of an entity is primarily measured in
terms of the level of income earned by the entity through the effective
and efficient utilization of its resources.
Income and expenses for the period may be presented in either :
a. Single statement of profit or loss and other comprehensive
income (statement of comprehensive income); or
b. Two statements – (1) a statement of profit or loss (income
statement) and (2) a statement presenting comprehensive
income.
PAS 1
Sources of income
a. Sales of merchandise
b. Rendering of services
c. Use of entity resources (interest, rent, royalty, dividend income)
d. Disposal of resource other than products
Other Comprehensive Income – comprises items of income and
expenses that are not recognized in profit or loss as required or
permitted by other PFRS.
Components of expense
a. Cost of goods sold or cost of sales
b. Distribution costs or selling expenses
 c. Administrative expenses
d. Other expenses
e. Income tax expense

Cost of goods sold of merchandising concern

Beginning inventory 500,000
Net purchases 2,000,000
Goods available for sale 2,500,000
Ending inventory (300,000)
Cost of goods sold 2,200,000
Classifications of expenses
1. Distribution costs constitute costs w/c are directly related to
selling , advertising and delivery of goods to customers.

a. Salesmen’s salaries
b. Salesmen’s commission
c. Travelling and marketing expenses
d. Advertising and publicity
e. Freight out
f. Depreciation of delivery equipment and store equipment
2. Administrative expenses constitute cost of administering the
business
a. Doubtful accounts
b. Office salaries
c. Expenses of general executives
d. Office supplies used
e. Certain taxes
f. Depreciation of office building and office equipment
Other expenses are those expenses w/c are not directly related to the
selling and administrative function.
Examples :
a. Loss on sale of trading investments
b. Loss on disposal of property, plant and equipment
c. Loss on sale of noncurrent investment
d. Casualty loos – floods, earthquake, fire

Forms of income statement

The income statement may be presented into ways, namely functional
and natural.
Functional presentation (function of expense method) – classifies
expenses to their function as part of cost of goods sold, distribution
costs, administrative expenses and other expenses.
The functional presentation is also known as the cost of goods sold
method.
Natural presentation (nature of expense method )– under this form,
expenses are aggregated according to their nature and not allocated
among the various functions within the entity.
Also referred as the nature of expense method.
For example, depreciation, purchases of raw materials, transport costs,
employee benefit costs and advertising costs are presented separately.
Functional income statement
ABC Company
Income Statement
Year ended December 31, 2017
Notes
Net sales (1) 9,000,000
Cost of goods sold (2) (5,400,000)
Gross income 3,600,000
Other income (3) 900,000
Investment income (4) 500,000
Total income 5,000,000
Expenses :
Distribution costs (5) 1,350,000
Administrative expenses (6) 1,000,000
Other expenses (7) 320,000
Finance cost (8) 200,000 2,870,000
Income before tax 2,130,000
Income tax expense (580,000)
Net income 1,550,000
Note 1 – Net sales
Gross sales 9,300,000
Sales return and allowances (100,000)
Sales discounts (200,000)
Net sales 9,000,000
Nature of Expense Method

Revenue XX
Other income XX
Changes in inventories of finished goods and work in process XX
Raw materials and consumables used XX
Employee benefits expense XX
Depreciation and amortization expense XX
Other expenses XX
Total expenses (XX)
Profit before tax XX
Income tax expense (XX)
Profit after tax XX
 Other Comprehensive Income compromises items of income and
expenses ( including reclassification adjustments ) that are not
recognized in profit or loss as required or permitted by other PFRSs.
The components of other comprehensive income include the
following:
a. Changes in revaluation surplus
b. Remeasurements of the net defined benefit liability
c. Gains and losses on investment designated or measured at fair
value through other comprehensive income (FVOCI)
d. Gains and losses arising from translating the financial statements
of a foreign operation
e. Effective portion of gains and losses on hedging instruments in a
cash flow hedge
f. Changes in fair value of a financial liability designated at
face value through profit or loss (FVPL) that are
 f. Changes in fair value of a financial liability designated at face
value through profit or loss (FVPL) that are attributable
to the changes in credit risk
Presentation of OCI
The OCI section shall group items of OCI into the following:
a. Those for w/c reclassification adjustment is allowed
b. Those for w/c reclassification adjustment is not allowed
Total comprehensive Income is the change in equity during a period
resulting from transitions and other events, other than those change
resulting from transactions with the owners in their capacity as
owners.
Total comprehensive income is the sum of profit or loss and OCI.
Illustration: Statement of Comprehensive Income
(Single –statement presentation/ Function of Expense Method)

ABC Company
Statement of profit or loss and other comprehensive income
For the year ended December 31, 2019
(amounts in Philippine peso)
Notes
Revenue 700,000
Cost of sales (200,000)
Gross profit 500,000
Other income 22,000
Distribution costs (48,000)
Administrative expenses (92,000)
Impairment of property and equipment (10,000)
Other expenses (6,000)
Financial costs (15,000)
Share in the profit of associates 35,000
Profit before tax 386,000
Income tax expense (86,000)
Profit for the year 300,000
Other Comprehensive Income, after tax:
Remeasuments of defined benefit plan (1,000)
Gain on translation of foreign operations 53,000
Cash flow hedges ( 2,000)
Other Comprehensive Income for the year 50,000
Total Comprehensive Income for the year 350,000
*** END OF PRESENTATION ***