Lesson 2.

1 PAS 1 - Presentation of Financial Statements

Philippine Accounting Standard (PAS 1) or IAS 1 prescribes the basis for the
presentation of general-purpose financial statements, guidelines for their structure
and minimum requirements for its content to ensure intra (same entity but of
different period) and inter (different entities in the same line of business)
comparability.
- Main components of financial statements:
o Statement of financial position
o Statement of profit or loss and other comprehensive income
o Statement of changes in equity
o Statement of cash flows
o Notes to the financial statements

- General features of financial statements:

o Fair presentation and compliance with PRFS
 Needs to make an explicit and unreserved statement of such
complain in the notes to financial statements.
 Permits departure from a PFRS requirement if the relevant
regulatory framework requires or allows such departure. The
entity needs to disclose such PFRS departure, its effects and
regulatory body which allows it (e.g., Bangko Sentral ng
Pilipinas, etc.).
 Requires proper selection and application of accounting
policies, presentation and disclosures. Note that inappropriate
accounting policies cannot be rectified by mere disclosures.

o Going concern as mentioned in Lesson 1 unless the entity has an

intention to liquidate.
o Accrual basis of accounting
o Materiality and aggregation
o Offsetting
o Frequency of reporting, which should at least be annually. However,
if the entity changes its reporting period, disclosures are needed as to:
 The new accounting periods
 Reason
 Fact that amounts presented in the financial statements are not
entirely comparable.
o Comparative information of at least two periods
o Consistency of presentation

- Structure and content of financial statements

o Name of reporting entity
o Whether the statements are for the individual entity or for a group of
entities.
o The date of the end of the reporting period or for the period covered
o Presentation currency
o Level of rounding off used

- The management’s responsibilities over financial statements are expressly

stated in the Statement of Management’s Responsibility for Financial
Statements signed by the chairman of the board, chief executive officer and
chief financial officer or their equivalents and attached in the financial
statements as a cover letter. Such responsibilities are:
o Preparation and fair presentation in accordance with PFRSs
o Internal control over financial reporting
o Going concern assessment
o Oversight over the financial reporting process
o Review and approval

Statement of Financial Position

- Statement of financial position shows the financial condition as at a certain
date although it does not prescribe the order or format as to how it should be
presented.
- The entity may also modify its descriptions to suit the nature of the entity and
its transactions. It does not prescribe the order or format as to how it should
be presented.
- It may be presented as classified (which shows distinction between current
and non-current, applying the 12-month rule), unclassified (based on liquidity
only normally used by financial institutions) and mixed (or combination of
both).
- It includes the following line items:
o Property, plant and equipment
o Investment property
o Intangible assets
o Financial assets (excluding item just below this, trade and other
receivables and cash and cash equivalents
o Investments accounted for using the equity method
o Biological assets
o Inventories
o Trade and other receivables
o Cash and cash equivalents
o Assets held for sale, including disposal groups
o Trade and other payables
o Provisions
o Financial liabilities excluding the 2 items above this
o Current tax liabilities and current tax assets
o Deferred tax liabilities and deferred tax assets
o Liabilities included in disposal groups
o Non-controlling interests
o Issued capital and reserves attributable to owners of the parent

- Refinancing (replacement of an existing debt with a new one but with

different terms) agreement of a non-current liability:
o Previously reported long-term obligation maturing is 12 months after
the reporting period is classified as current liability (applying the 12-
month rule)
o If refinancing agreement to reschedule payments for more than one
year is completed after the reporting period, but before the financial
statements are authorized for issue, it is still classified at current
liability.
o If refinancing agreement to reschedule payments for more than one
year is completed before the reporting period, it is still classified at
non-current liability.
o If the entity has the discretion to refinance it on a long-term basis
under an existing loan facility, it is classified as non-current liability
 o If the entity has no discretion to refinance it on a long-term basis (no
arrangement for refinancing), it is classified as current liability
o Similar rule applies in case of breached of condition of its loan
agreement:

 It is classified as current liability if any of the conditions is not

met.
 If lender agrees not to enforce payment after the end of the
reporting period and before financial statements are authorized
for issue, it is still classified as current liability.
 If lender agreed on or before the end of the reporting period to
provide a grace period of at least 12 months to rectify the
breach, the lender cannot demand payment, the liability is
classified as non-current.

Statement of Profit or Loss and Other Comprehensive Income

- It is the most significant indicator of the financial performance of the entity.
PAS/IAS 1 stipulates that all items of income and expense shall be included
in the statement.
- Income and expense items can be presented either
o In a single statement of profit or loss and other comprehensive
income
o In two statements:
 Statement of profit or loss
 Statement of other comprehensive income

- Line items in the profit or loss section:

o Revenue, presenting separately interest revenue
o Finance costs
o Gains and losses arising from derecognition of financial assets
measured at amortized cost
o Impairment losses and impairment gains on financial assets
o Gains and losses on reclassifications of financial assets from
amortized cost or fair value through other comprehensive income
through fair value through profit or loss
o Share in the profit or loss of associates and joint ventures
o Tax expense
o Results of discontinued operations
 - Methods of presentation of expenses
o Nature of expense method
o Function of expense or cost of sales method

- Components of other comprehensive income

o Changes in revaluation surplus
o Remeasurements of the net defined benefit liability (asset)
o Gains and losses on investments designated or measured at fair value
through other comprehensive income (FVOCI)
o Gains or losses arising from translating the financial statements of a
foreign corporation
o Effective portion of gains or losses on hedging instruments in a cash
flow hedge
o Changes in fair value of a financial liability designated at fair value
through profit or loss (FVPL) that are attributable to changes in credit
risk
o Changes in the time value of option when the option’s intrinsic value
and time value are separated and only the change in intrinsic value is
designated as the hedging instrument

Changes in the value of the forward elements of a forward contract when separating
the forward element and spot element of a forward contract
- Presentation of other comprehensive income:
o Reclassification adjustment is allowed
 Gains and losses on investments of debt instrument designated
or measured at fair value through other comprehensive income
(FVOCI)
 Gains or losses arising from translating the financial
statements of a foreign corporation
 Effective portion of gains or losses on hedging instruments in
a cash flow hedge
 May be presented either at net or gross of tax.
o Reclassification adjustment is not allowed
 Changes in revaluation surplus
 Remeasurements of the net defined benefit liability (asset)
 Gains and losses on investments of equity instrument
designated or measured at fair value through other
comprehensive income (FVOCI)
 - Reclassification adjustments are amounts reclassified to profit or loss in the
current period that were recognized in other comprehensive income in the
current or previous periods.

Statement of Changes in Equity

- Shows the following:
o Effects of changes in accounting policy or correction of prior period
error.
o Total comprehensive income for the period
o For each component of equity, a reconciliation between the carrying
amount at the beginning and the end of the period showing separately
changes resulting from:
 Profit or loss
 Other comprehensive income
 Transactions with owners (contributions by and distributions
to owners)

Notes to Financial Statements

- It is an integral part of a complete set of financial statements which financial
information should be cross-referenced to the notes as it will amplify
information shown therein:
o More detailed analysis or breakdowns of figures in the statements
o Narrative information explaining figures in the statements
o Additional information (e.g., contingent liabilities and commitments)

- Functions of notes to financial statements:

o Present information about the basis on which the financial statements
were prepared and which specific accounting policies were chosen
and applied to significant transactions/events.
o Disclose any information not shown elsewhere in the financial
statements which is required by PFRSs
o Show any additional information that is relevant to understanding
which is not shown elsewhere in the financial statements.

- Order as suggested by PAS 1:

 o Statement of compliance with PFRSs
o Statement of measurement bases and accounting policies applied
o Supporting information for items presented in each financial
statement in the same order as each line item and each financial
statement is presented.
o Other disclosures:
 Contingent liabilities, commitments and other financial
disclosures
 Non-financial disclosures
- Disclosures of accounting policies
o The measurement basis used
o Other accounting policies used

- Other disclosures:
o The amount of dividends proposed or declared before the financial
statements were authorized for issue but not recognized as a
distribution to owners during the period and the amount per share.
o The amount of any cumulative preference dividends not recognized

- Specific disclosures which will always be required

o The domicile and legal form of the entity, its country of incorporation
and the address of the registered office.
o A description of the nature of the entity’s operations and its principal
activities
o The name of the parent entity and the ultimate parent entity of the
group.

Lesson 2.2 PAS 2 - Inventories

This lays out the required accounting treatment for inventories. Inventories
are assets held for sale in the ordinary course of business, in the process of
production for such sale or in the form of materials or supplies to be consumed in the
production process or in the rendering of services.
- Inventories include
o Goods purchased and held for resale
o Finished goods produced
o Work in progress being produced
o Materials and supplies awaiting use in the production process
- Inventories should be measured at the lower of cost and net realizable value.
 Net realizable value (NRV) is the estimated selling price in
the ordinary course of business less the estimated costs of
completion and the estimated costs necessary to make the sale.
 Costs may exceed the NRV (obsolete or damaged goods),
which should be written down to NRV, which is recognized as
expense.
 If NRV subsequently increases, the previous write-down
should be reversed provided it will not exceed the original
write-down.
 Write-downs of inventories are usually carried out on an item-
by-item basis
 Raw materials inventory is not written down below cost if
finished goods in which they will be a part of are expected to
be sold at or above cost. Otherwise, the raw materials are
written down to NRV or its replacement cost.

- Cost of inventories will consist of:

o All costs of purchase (purchase price, import duties and other taxes,
transport, handling and other cost directly attributable to the
acquisition of finished goods, services and materials net of discounts,
rebates and other similar amounts)
o Cost of conversion (cost directly related to the units of production like
direct materials and direct labor and fixed and variable production
overhead)
o Other costs incurred in bringing the inventories to their present
location and condition.

- The following costs are excluded from the cost of inventories and are
expensed outright
o Abnormal amounts of wasted materials, labor or production costs
o Storage costs unless it is necessary in the production process.
o Administrative overhead
o Selling costs

- Cost formulas deal with the computation of cost of inventories

o Specific identification – used for inventories that are not ordinarily
interchangeable.
o First-in, First-out – it is assumed that inventories that were purchased
or produced first are sold first.
 o Weighted average – determined on the weighted average cost of
beginning inventory and all inventories purchased or produced during
the period.

- Techniques for the measurement of cost which approximate to cost which

may be used for convenience:
o Standard costs – are set up to take account of normal production
values which are reviewed and revised on a regular basis.
o Retail method – is often used in the retail industry where there is a
large turnover of inventory items which have similar profit margins

- Disclosures
o Accounting policies adopted in measuring inventories including the
cost formula used
o Total carrying amount of inventories and the carrying amount in
classifications appropriate to the entity
o Carrying amount of inventories carried at fair value less cost to sell
o Amount of inventories recognized as an expense during the period
o Amount of any write-down recognized as an expense in the period
o Amount of any reversal of write-down that is recognized as a
reduction in the amount of inventories recognized as expense in the
period
o Circumstances or events that led to the reversal of a write-down of
inventories
o Carrying amount of inventories pledged as security for liabilities.