CHAPTER 6 – RECOGNITION AND
MEASUREMENT
Recognition – is the process of capturing for
inclusion in the financial statements an item
that meets the definition of an asset, liability,
equity, income or expense.
- Reported as carrying amount in the
statement of financial position.
- Links the elements to the statement of
financial position and statement of
financial performance.
- An item in one statement requires the
recognition of the same item in another
statement.
Example: the recognition of an income happens
simultaneously with the recognition of an
increase in asset or decrease in liability.
Expense – decrease in asset or increase in
liability.
Items are recognized only when their
recognition provides users of financial
statements with information that is both
relevant and faithfully represented.
Recognition does not focus anymore on how
probable economic benefits will flow to or from
the entity and that the cost can be measured
reliably.
An asset or liability and any corresponding
income or expense can exist even if the
probability of inflow or outflow of the benefits is
low.
Point of sale income recognition
- Income shall be recognized when earned.
(accrual)
- With respect to sale of goods in the
ordinary course of business, point of sale is
the point of income recognition.
- Under certain conditions, income may be
recognized at the point of production,
during production and at the point of
collection.
Expense recognition
- Expenses are recognized when incurred.
- Application of the matching principle.
Matching principle – requires that cost and
expenses incurred in earning a revenue shall be
reported in the same period.
Applications:
1. Cause and effect association
2. Systematic and rational allocation
3. Immediate recognition
Cause and effect association (strict matching
concept)
- The expense is recognized when the
revenue is already recognized.
- Commonly referred to as the matching of
cost with revenue, involves the
simultaneous or combined recognition of
revenue and expenses that result directly
and jointly from the same transaction or
events.
Examples: cost of merchandise inventory,
doubtful accounts, warranty expense and sales
commissions.
Such cost is considered as an asset in the
meantime that the merchandise is on hand.
When the merchandise is sold, the cost is
expensed in the form of cost of goods sold
because at such time revenue can now be
recognized.
Systematic and rational allocation
- Some costs are expensed by simply
allocating them over the periods benefitted.
- The cost incurred will benefit future periods
and that there is absence of a direct and
clear association of expense and specific
revenue.
When economic benefits are expected to arise
over several accounting periods and the
association with income can only be broadly or
indirectly determined, expenses are recognized
on the basis of systematic and allocation
procedures.
Examples: depreciation of PPE, amortization of
intangibles, prepayments.
Immediate recognition - cost incurred is
expense outright because of uncertainty of
future economic benefits or difficulty of
reliability associating certain costs with future
revenue. You recognize an expense when you
incur it.
An expense is recognized immediately:
a. When an expenditure produces no
future economic benefit.
b. When cost incurred does not qualify or
ceases to qualify for recognition as an
asset.
Examples: officers’ salaries, and most
administrative expenses, advertising and most
selling expenses, amount to settle lawsuit and
worthless intangibles.
DERECOGNITION – the removal of all or part of
a recognized asset or liability from the
statement of financial position. It normally
occurs when an item no longer meets the
definition of an asset or a liability.
Derecognition of an asset occurs when the
entity loses control of all or part of the asset.
Derecognition of a liability occurs when the
entity no longer has a present obligation for all
or part of the liability.
MEASUREMENT is defined as a quantifying in
monetary terms the elements in the financial
statements.
1. Historical cost
2. Current value
HISTORICAL COST (entry price or entry value) –
an application of the historical cost
measurement is to measure financial asset and
financial liability at amortized cost. The
amortized cost reflects the estimate of future
cash flows discounted at a rate determined at
initial recognition.
The historical or original acquisition of an asset
comprising the consideration paid plus
transaction cost.
The historical cost of a liability is the
consideration received to incur the liability
minus transaction cost.
(Historical cost is the measurement basis)
Historical cost updated.
1. Historical cost of an asset is updated
because of:
a. Depreciation and amortization
b. Payment received as a result of
disposing part or all of the asset.
c. Impairment
d. Accrual of interest to reflect any
financing component of the asset
e. Amortized cost measurement of
financial asset
2. Historical cost of a liability is updated
because of:
a. Payment made or satisfying an
obligation to deliver goods
b. Increase in value of the obligation to
transfer economic resources such that
the liability becomes onerous
c. Accrual of interest to reflect any
financing component of the liability
d. Amortized cost measurement of
financial liability
CURRENT VALUE includes:
a. Fair value
b. Value in use for asset
c. Fulfillment value for liability
 d. Current cost Similar to historical cost, current cost is also
based on the entry price or entry value but
Fair value (exit price or exit value)
reflects market conditions on measurement
Fair value of an asset is the price that would be date.
received to sell an asset in an orderly
Selecting a measurement basis.
transaction between market participants at
measurement date. In selecting a measurement basis for an asset or
a liability and for the related income and
Fair value of a liability is the price that would be
expense, it is necessary to consider the nature
paid to transfer a liability in an orderly
of the information that the measurement basis
transaction between market participants at
will produce.
measurement date.
In most cases, no single factor will determine
Fair value can be observed directly using market
which measurement basis should be selected.
price of the asset or liability in active market.
The relative importance of each factor will
In cases where fair value cannot be directly
depend on facts and circumstances.
measured, an entity can use present value of
cash flows. The information produced by the measurement
basis must be useful to the users of financial
Fair value is not adjusted for transaction cost.
statements.
Value in use (exit price or exit value) – is the
To achieve this, the information must be both
present value of the cash flows that an entity
relevant and faithfully represented.
expects to derive from the use of an asset and
from ultimate disposal. Historical cost is the measurement basis most
commonly adopted in preparing financial
It does not include transaction cost on acquiring
statements.
the asset but includes transaction cost on the
disposal of the asset. In many situations, it is simpler and less costly
to measure historical cost than it is to measure a
Fulfillment value (exit price or exit value) – is
current value.
the present value of cash that an entity expects
to transfer in paying or settling a liability. In addition, historical cost is generally well
understood and verifiable.
It does not include transaction cost on incurring
a liability but includes transaction cost on
fulfillment of a liability.

Current cost (entry price or entry value)

Current cost of an asset is the cost of an

equivalent asset at measurement date
comprising the consideration paid and
transaction cost.

Current cost of a liability is the consideration

that would be received less any transaction cost
at measurement date.
CHAPTER 7 – PRESENTATION AND DISCLOSURE
CONCEPTS OF CAPITAL
PRESENTATION AND DISCLOSURE (classification
and aggregation)– can be an effective
communication tool about the information in
financial statements.
Effective communication of information makes
the information more:
1. Relevant;
2. Contributes to a faithful
representation of an entity’s assets,
liabilities, income, and expenses.
3. Enhances the understandability, and
4. Comparability of financial statements
Effective communication in financial statements
is supported by not duplicating information in
different parts of the financial statements.
CLASSIFICATION - is the sorting of assets,
liabilities, equity, income, and other expenses
on the basis of shared or similar characteristics.
Classifying dissimilar assets, liabilities, equity,
income and expenses can obscure relevant
information, reduce understandability and
comparability and may not provide a faithful
representation of financial information.
It may be necessary to classify components of
equity separately if such components are
subject to legal, regulatory and other
requirements.
Thus, ordinary share capital, preference share
capital, share premium and retained earnings
should be disclosed separately.
Statement of financial performance – refers to
income statement together with the statement
presenting other comprehensive income.
Income statement or statement of profit or
loss – is the primary source of information
about an entity’s financial performance for the
reporting period.
All income and expenses should be
appropriately classified and included in the
income statement.
However, there are certain items of income and
expenses that are presented outside of profit or
loss but included in other comprehensive
income.
The components of other comprehensive
income are recycled or reclassified either to
profit or loss or retained earnings.
Aggregation is the adding together of assets,
liabilities, equity, income, and expense that
have similar or shared characteristics and are
included in the same classification.
Aggregation makes information more useful by
summarizing a large volume of detail. However,
aggregation may conceal some of the details.
CAPITAL MAINTENANCE
The financial performance of an entity is
determined by using two approaches, namely
transaction approach and capital maintenance
approach.
1. Transaction approach – is the traditional
preparation of an income statement
2. Capital maintenance approach – means
that net income occurs only after the capital
used from the beginning of the period is
maintained.
Net income is the amount an entity can
distribute to its owners and be as “well-off” at
the end of the years as at the beginning.
Shareholders invest in entity to earn a return on
capital or an amount in excess of their original
investment.
Return of capital is an erosion of the capital
invested in the entity.
Two concepts of capital maintenance or well-
offness
1. Financial capital
2. Physical capital
Financial capital – under this concept, such as
invested money or invested purchasing power;
capital is synonymous with net assets or equity
of the entity. (net assets approach)
- It is the monetary amount of the net assets
contributed by shareholders and the
amount of the increase in net assets
resulting from earnings retained by the
entity.
- It is the traditional concept based on
historical cost and adopted by most entities.
Net income occurs when the nominal amount of
the net assets at the end of the year exceeds
the nominal amount of the net assets at the
beginning of the period, after excluding
distributions to and contributions by owners
during the period.
Physical capital – is the quantitative measure of
the physical productive capacity to produce
goods and services.
- May be based on, for example, units of
output per day or physical capacity of
productive assets to produce goods and
services.
- Requires productive assets be measured at
current cost.
- Equal to the net assets of the entity
expressed in terms of current cost.
This concept should be adopted if the main
concern of the users is the operating capability
of the entity, meaning, the resource fund
needed to achieve that operating capability or
capacity.
Productive assets – include inventories and
PPE’s.
- Current cost must be maintained in order
that physical capital is also maintained.
Under physical capital concept, net income
occurs when the physical productive capital of
the entity at the end of the year exceeds the
physical productive capital at the beginning of
the period, also after excluding distributions to
and contributions from owners during the
period.
CHAPTER 8 – PRESENTATION OF
FINACIAL STATEMENTS – STATEMENT
OF FINANCIAL POSITION
Financial statements – are the means by which
the information accumulated and processed in
financial accounting is periodically
communicated to the users.
- the end product or main output of the
financial accounting process.
General purpose financial statements
- simply referred to as financial statements
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.
- directed to all common users and not to
specific users.
Components of financial statements
A complete set of financial statements
comprises the following components:
1. Statement of financial position
2. Income statement
3. Statement of comprehensive income
4. Statement of changes in equity
5. Statement of cash flows
6. Notes, comprising a summary of
significant accounting policies and other
explanatory notes.
Objective of financial statements evaluate such factors as liquidity, solvency and
the need of the entity for additional financing.
- to provide information about the financial
position, financial performance and cash Classification of assets
flows of an entity that is useful to a wide
1. Current assets
range of users in making economic
2. Noncurrent assets
decisions.
- show the results of the management's Operating cycle - is the time between the
stewardship of the resources entrusted to it. acquisition of assets and their realization in
cash.
To meet this objective, financial statements
provide information about the following: When the entity's normal operating cycle is not
clearly identifiable, the duration is assumed to
a. Assets
be twelve months.
b. Liabilities
c. Equity Current assets
d. Income and expenses, including gains
and losses PAS 1, paragraph 66, provides that an entity
e. Contributions by and distributions to shall classify an asset as current when:
owners in their capacity as owners. a. The asset is cash or cash equivalent unless
f. Cash flows the asset is restricted to settle a liability for
Frequency of reporting more than twelve months after the reporting
period.
Financial statements shall be presented at least
annually. b. The entity holds the asset primarily for the
purpose of trading.
When an entity's end of reporting period
changes and financial statements are presented c. The entity expects to realize the asset within
for a period longer or shorter than one year, an twelve months after the reporting period.
entity shall disclose: d. The entity expects to realize the asset or
a. The period covered by the financial intends to sell or consume it within the entity's
statements. normal operating cycle.
b. The reason for using a longer or shorter Noncurrent assets
period. financial
c. The fact that amounts presented in the PAS 1, paragraph 66, simply states that an entity
statements are not entirely comparable. shall classify all other assets not classified as
current as noncurrent.
Statement of financial position
a. Property, plant and equipment
A statement of financial position is a formal b. Long-term investments
statement showing the three elements c. Intangible assets
comprising financial position, namely assets, d. Deferred tax assets
liabilities and equity. e. Other noncurrent assets
Investors, creditors and other statement users
analyze the statement of financial position to
Long-term investments Noncurrent liabilities

The International Accounting Standards PAS 1, paragraph 69, provides that all liabilities
Committee defines investment as "an asset held not classified as current are classified as
by an entity for the accretion of wealth through noncurrent.
capital distribution, such as interest, royalties,
a. Noncurrent portion of long-term debt
dividends and rentals, for capital appreciation
b. Finance lease liability
or for other benefits to the investing entity such
c. Deferred tax liability
as those obtained through trading
d. Long-term obligations to company officers
relationships".
e. Long-term deferred revenue
Intangible assets
Definition of equity
An intangible asset is simply defined as an
The term equity is the residual interest in the
identifiable nonmonetary asset without physical
assets of the entity after deducting all of its
substance.
liabilities. Simply stated, equity means "net
- Identifiable intangible assets - franchise, assets" or total assets minus liabilities.
copyright, lease right, trademark and
The terms used in reporting the equity of an
computer software.
entity depending on the form of the business
- Unidentifiable intangible asset - goodwill.
organization are:
Other noncurrent assets
a. Owner's equity in a proprietorship
Assets that do not fit into the definition of the b. Partners' equity in a partnership
previously mentioned noncurrent assets. c. Stockholders' equity or shareholders' equity
in a corporation
Examples: long-term to officers, directors,
shareholders and employees, or abandoned Currently maturing long-term debt
property and long-term refundable deposit.
A liability which is due to be settled within
Classification of liabilities twelve months after the reporting period is
classified as current, even if:
1. Current liabilities
2. Noncurrent liabilities a. The original term was for a period longer than
twelve months.
PAS 1, paragraph 69, provides that an entity
shall classify a liability as current when: b. An agreement to refinance or to reschedule
payment on a long-term basis is completed
a. The entity expects to settle the liability within
after the reporting period and before the
the entity's normal operating cycle.
financial statements are authorized for issue.
b. The entity holds the liability primarily for the
However, if the refinancing on a long-term basis
purpose of trading.
is completed on or before the end of the
c. The liability is due to be settled within twelve reporting period, the refinancing is an adjusting
months after the reporting period. event and the obligation is classified as
noncurrent liability.
d. The entity does not have a right to defer
settlement of the liability for at least twelve
months after the reporting period.
Covenants CHAPTER 9 – PRESENTATION OF
- often attached to borrowing agreements FINACIAL STATEMENTS –
which represent undertakings by the INTRODUCTION TO INCOME
borrower.
STATEMENT
- restrictions on the borrower as to
undertaking further borrowings, paying Income statement – a formal statement
dividends, maintaining specified level of showing the financial performance of an entity
working capital and so forth. for a given period of time.
- if certain conditions relating to the
borrower's financial situation are breached, - Primarily measured in terms of the level of
the liability becomes payable on demand income earned by the entity through the
effective and efficient utilization of its
PAS 1, paragraph 74, provides that the liability is resources.
classified as current even if the lender has - Also known as the results of operations of
agreed, after the reporting period and before the entity.
the statements are authorized for issue, not to - Information about financial performance is
demand payment as a consequence of the useful in predicting future performance and
breach. ability to generate future cash flows.
However, Paragraph 75 provides that the Sources of income
liability is classified as noncurrent if the lender
has agreed on or before the end of reporting a. Sales of merchandise to customers
period to provide a grace period ending at least - Sales returns, allowances and discounts
twelve months after the end of reporting period. shall be deducted from gross sales to arrive
at net sales.
Shareholders' equity b. Rendering of services
- Professional fees, media advertising
- is the residual interest of owners in the net
commissions etc.
assets of a corporation measured by the
c. Use of entity resources
excess of assets over liabilities.
- Interest, rent, royalty, and dividend income.
Notes to financial statements d. Disposal of resources other than
products
- provides narrative description or
- Gain on sale of investments and gain on sale
disaggregation of items presented in the
of PPE.
financial statements and information about
items that do not qualify for recognition. Components of expense
- Used to report information that does not fit
a. COGS
into the body of the financial statements in
b. Distribution costs or selling expense
order to enhance the understandability of
c. Administrative expenses
the financial statements.
d. Other expenses
- To provide the necessary disclosures
e. Income tax expense
required by PFRS.
Classifications of expenses
Distribution cost constitute costs which are
directly related to selling, advertising and
delivery of goods to customers.
a. Salesmen's salaries
b. Salesmen's commissions
c. Traveling and marketing expenses
d. Advertising and publicity
e. Freight out
f. Depreciation of delivery equipment and
store equipment
Administrative expenses constitute cost of
administering the business.
a. Doubtful accounts
b. Office salaries
c. Expenses of general executives
d. Expenses of general accounting and credit
department
e. Office supplies used
f. Certain taxes
g. Contribution
h. Professional fees
i. Depreciation of office building and office
equipment
j. Amortization of intangible assets
Other expenses – are those expenses which are
not directly related to the selling and
administrative function.
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 loss flood, earthquake, fire
No more extraordinary items
PAS 1, paragraph 87, specifically mandates that
an entity shall not present any items of income
and expense as extraordinary either on the face
of the income statement or statement of
comprehensive income or in the notes.
The following items shall be disclosed on the
face of the income statement and statement of
comprehensive income:
a. Profit or loss for the period attributable to
noncontrolling interest and owners of the
parent
b. Total comprehensive income for the period
attributable to noncontrolling interest and
owners of the parent.
Forms of income statement
PAS 1. paragraph 99, provides that an entity
shall present an analysis of expenses using a
classification based on either the function of
expenses or their nature within the entity.
whichever provides information that is reliable
and more relevant.
Accordingly, the income statement may be
presented in two ways, namely functional and
natural.
Functional presentation – classifies expenses
according to their function as part of cost of
goods sold, distribution costs, administrative
expenses and other expenses.
- Also known as cost of goods sold method
- An entity classifying expenses by function
shall disclose additional information on the
nature of expenses, including depreciation,
amortization and employee benefit costs.
Natural presentation – referred to as the nature
of expense method.
- expenses are aggregated according to their
nature and not allocated among the various
functions within the entity.
- expenses are no longer classified as cost of
goods sold, distribution costs,
administrative expenses and other
expenses.
- The expenses which are of the same nature
are grouped or aggregated and presented as
one item.
- For example, depreciation, purchases of raw
materials, transport costs, employee benefit
costs and advertising costs are presented
separately.
Which form of income statement?
PAS 1 does not prescribe any format.
Paragraph 105 simply states that because each
method of presentation has merit for different
types of entities, management is required to
select the presentation that is reliable and more
relevant
Comprehensive income – is the change in
equity during a period resulting from
transactions and other events, other than
changes resulting from transactions with
owners in their capacity as owners.
Accordingly, comprehensive income includes:
a. Components of profit or loss or income and
expenses affecting net income
b. Components of other comprehensive
income
Profit or loss – is the total of income less
expenses, excluding the components of other
comprehensive income.
In other words, this is the bottom line in the
traditional income.
2. Unrealized gain or loss on debt investment
measured at fair value through other
comprehensive income.
3. Gain or loss from translation of the financial
statements of a foreign operation
4. Revaluation surplus during the year.
5. Unrealized gain or loss from derivative
contracts designated as cash flow hedge
6. Remeasurements of defined benefit plan,
including actuarial gain or loss
7. Change in fair value attributable to credit
risk of a financial liability designated at fair
value through profit or loss.
Statement of comprehensive income
In addition to the income statement, a
statement of comprehensive income is prepared
in order to show the total comprehensive
income.
The statement of comprehensive income starts
with the net income or loss as shown in the
income statement plus or minus the
components of other comprehensive.
The purpose of this statement is to provide a
more comprehensive information on financial
performance measured more broadly than the
income as traditionally computed.

An entity may use net income or net loss to

describe profit or loss.

Other comprehensive income (OCI) – comprises

items of income and expense that are not
recognized in profit or loss or not shown in the
traditional income statement.

The components of other comprehensive

income include the following:

1. Unrealized gain or loss on equity investment

measured at fair value through other
comprehensive income
CHAPTER 10 – STATEMENT OF CASH
FLOWS PAS 7
Statement of cash flows – is a component of
financial statements summarizing the operating,
investing and financing activities of an entity.
- provides information about the cash
receipts and cash payments of an entity
during a period.
- designed to provide information about the
change in an entity's cash and cash
equivalents.
Cash comprises cash on hand and demand
deposits.
Cash equivalents – are short-term highly liquid
investments that are readily convertible to
known amount of cash and which are subject to
an insignificant risk of change in value.
PAS 7, paragraph 7, provides that an investment
normally qualifies as a cash equivalent only
when it has a short maturity of three months or
less from date of acquisition. In other words,
the investment must be acquired three months
or less before the date of maturity.
Bank overdrafts which are repayable on
demand form an integral part of cash
management. In these circumstances, bank
overdrafts are included as component of cash
and cash equivalents.
A characteristic of such banking arrangement is
that the bank balance often fluctuates from
being positive to overdrawn.
Examples of cash equivalents
a. Three-month BSP treasury bill
b. Three-year BSP treasury bill purchased
three months before date of maturity
c. Three-month time deposit
d. Three-month money market instrument or
commercial paper
Classification of cash flows
- are inflows and outflows of cash and cash
equivalents.
- The statement of cash flows shall report
cash flows during the period classified as
operating, investing and financing
activities.
Operating activities – are the cash flows derived
primarily from the principal revenue producing
activities of the entity.
Simply worded, operating activities generally
result from transactions and other events that
enter into the determination of net income or
loss.
a. Cash receipts from sale of goods
b. Cash receipts from royalties, rental, fees,
commissions and other revenue or other
income.
c. Cash payments to suppliers for goods
purchase
d. Cash payments for selling, administrative
and other expenses
e. Cash receipts and payments for securities
held for trading
f. Cash payment or refund of income taxes
unless can be identified specifically with
financing and investing activities
Investing activities – are the cash flows derived
from acquisition and disposal of long-term
assets and other investments not included in
cash equivalent.
a. Cash payments to acquire property, plant
and equipment, intangible asset and other
long-term asset
b. Cash receipts from sale of property, plant
and equipment, intangible asset and other
long-term asset
c. Cash payments to acquire equity or debt
instruments of other entities (current and
long-term investments)
d. Cash receipts from sale of equity or debt
instruments of other entities
e. Cash advances and loans to other parties
other than advances and loans made by
financial institution
f. Cash receipts from repayment of advances
and loans made to other parties
Financing activities – are the cash flows derived
from the equity capital and borrowings of the
entity.
Otherwise stated, financing activities are the
cash flows that result from transactions:
a. Between the entity and the owners - equity
financing
b. Between the entity and the creditors - debt
financing
As a simple guide, financing activities include
the cash flows from transactions involving
nontrade liabilities and equity of an entity.
a. Cash receipts from issuance of ordinary and
preference shares
b. Cash payments to acquire treasury shares
c. Cash receipts from issuing bonds, loans,
notes, mortgages and other short or long
term borrowings
d. Cash payments for amounts borrowed
e. Cash payments by a lessee for the of the
outstanding principal lease liability
Noncash transactions
Noncash investing and financing transactions
shall be disclosed only either in the notes to
financial statements or in a separate schedule or
in a way that provides all relevant information
about these transactions.
The statement of cash flows is strictly a cash
concept.
Accordingly, the following noncash transactions
are disclosed separately:
a. Acquisition of asset by issuing share
capital
b. Acquisition of asset by issuing bonds
payable c. Conversion of bonds payable
into share capital
c. Conversion of preference shares into
ordinary shares
Interest paid and interest received
PAS 7, paragraph 33, provides that interest paid
and interest received shall be classified as
operating cash flow because such items enter
into the determination of net income or loss.
Alternatively, interest paid may be classified as
financing cash flow because it is a cost of
obtaining financial resources.
Alternatively, interest received may be
classified as investing cash flow because it is a
return on investment.
For a financial institution, interest paid and
interest received are usually classified as
operating cash flows.
Dividends received
PAS 7. paragraph 33, provides that dividend
received shall be classified as operating cash
flow because it enters into the determination of
net income.
Alternatively, dividend received may be
classified as investing cash flow because it is a
return on investment.
Dividends paid
PAS 7, paragraph 34, provides that dividend
paid shall be classified as financing cash flow
because it is a cost of obtaining financial
resources.
Alternatively, dividend paid may be classified as
operating cash flow in order to assist users to
determine the ability of the entity to pay
dividends out of operating cash flows.
CHAPTER 11 – ACCOUNTING
POLICIES, ESTIMATE AND
ERRORS PAS 8
Accounting policies – are the specific principles,
bases, conventions, rules and practices applied
by an entity in preparing and presenting
financial statements.
An entity is required to outline all significant
accounting policies applied in preparing
financial statements.
The entity shall select and apply the same
accounting policies each period in order to
achieve comparability of financial statements or
to identify trends in the financial position,
performance and cash flows of the entity.
Change in accounting policy
Once selected, accounting policies must be
applied consistently for similar transactions and
events.
A change in accounting policy shall be made
only when:
a. Required by an accounting standard.
b. The change will result in more relevant and
faithfully represented information about the
financial position, financial performance
and cash flows of the entity.
Examples of change in accounting policy
A change in accounting policy arises when an
entity adopts a generally accepted accounting
principle which is different from the one
previously used by the entity.
Examples of change in accounting policy are:
a. Change in the method of inventory pricing
from the FIFO to weighted average method.
b. Change from cost model to revaluaton
model in measuring property, plant and
equipment.
c. Change from cost model to fair value model
in measuring investment property.
d. Change to a new policy resulting the
requirement of a new PFRS.
How to report a change in accounting policy
A change in accounting policy required by a
standard or an interpretation shall be applied in
accordance with the transitional provisions
therein.
If the standard or interpretation contains no
transitional provisions or if an accounting policy
is changed voluntarily, the change shall be
applied retrospectively or retroactively.
Retrospective application – means that any
resulting adjustment from the change in
accounting policy shall be reported as an
adjustment to the opening balance of retained
earnings.
The amount of the adjustment is determined as
of the beginning of the year of change.
If comparative information is presented, the
financial statements of the prior period
presented shall be restated to conform with the
new accounting policy.
ACCOUNTING ESTIMATE – is a normal recurring
correction or adjustment of an asset or liability
which is the natural result of the use of an
estimate.
- an estimate may need revision if changes
occur regarding the circumstances on which
the estimate was based or as result of now
information, more experience or
subsequent development.
- by very nature, the revision of the estimate
does not relate to prior periods and is not a
correction of an error.
Sometimes it is difficult to distinguish a change
in accounting estimate and a change in
accounting policy.
In such a case, the change is treated as a
change in accounting estimate with appropriate
disclosure.
As a result of the uncertainties in business
activities, many items in financial statements
cannot be measured with precision but can only
be estimated.
Estimates may be required for doubtful
accounts, inventory obsolescence, useful life
and residual value of asset, and warranty cost.
How to report change in accounting estimate
The effect of a change in accounting estimate
shall be recognized currently and prospectively
by including it in income or loss of:
a. The period of change if the change affects
that period only.
b. The period of change and future periods if
the affects both.
A change in an accounting estimate shall not be
accounted for by restating amounts reported in
financial statements of prior periods.
A change in accounting estimates are to be
handled currently and prospectively, if
necessary.
Prospective recognition of the effect of a
change in accounting estimate means that the
change is applied to transactions and other
events from the date of change in estimate.
Prior period errors – are omissions and
misstatements in the financial statements for
one or more periods arising from a failure to use
or misuse of reliable information.
How to treat prior period errors
Prior period errors shall be corrected
retrospectively by adjusting the opening
balances of retained earnings and affected
assets and liabilities.
If comparative statements are presented, the
financial statements of the prior period shall be
restated so as to reflect the retroactive
application of the prior period errors as a
retrospective restatement.
CHAPTER 12 – EVENTS AFTER
THE REPORTING PERIOD PAS 10
PAS 10, paragraph 3, defines events after the
reporting period on those events, whether
favorable or unfavorable, that occur between
the end of reporting period and the date on
which the financial statements are authorized
for issue.
Such events may require either adjustment or
disclosure.
Types of events after the reporting period
a. Adjusting events after the reporting period
are those that provide evidence of
conditions that exist at the end of reporting
period.
b. Nonadjusting events after reporting period
are those that are indicative of conditions
that arise after the end of reporting period.
Examples of adjusting events
1. Settlement after the reporting period of a
court case because it confirms that the
entity already had a present obligation at
the end of reporting period.
2. Bankruptcy of a customer which occurs
after the reporting period.
3. The determination after the reporting
period of the cost of asset purchased before
the end of reporting period.
4. The determination after the reporting
period of the profit sharing or bonus
payment if the entity has the present
obligation at the end of reporting period to
make such payment.
5. The discovery of fraud or errors showing
incorrect financial statements.
Examples of nonadjusting events
1. Business combination after the reporting
period
2. Plan to discontinue an operation
3. Major purchase and disposal of assot or
expropriation of major asset by government
4. Destruction of a major production plant by a
fire after the period
5. Major ordinary share transactions and
potential ordinary share transactions after
the reporting period
6. Announcing or commencing the
implementation of a major restructuring
7. Entering into significant commitments or
contingent liabilities, for example, by issuing
guarantees
8. Commencing major litigation arising solely
from events that occurred after the
reporting period.
Financial statements authorized for issue
Financial statements are authorized for issue
when the board of directors reviews the
financial statements and authorizes them issue.
In some cases, an entity is required to submit
the financial statements to the shareholders for
approval after the financial statements have
been issued.
In such cases, the financial statements are
authorized for issue on the date of issue by the
board of directors and not on the date when
shareholders approve the financial statements.
CHAPTER 13 – RELATED PARTY
DISCLOSURES PAS 24
Related party – parties are considered to be
related if one party has:
a. The ability to control the other party.
b. The ability to exercise significant influence
over the other party.
c. Joint control over the reporting entity.
Control in ownership directly or indirectly
through subsidiaries of more than half of the
voting power of an entity.
Significant influence may be gained by share
ownership of 20% or more.
Joint control in the contractually agreed sharing
of control over an economic activity.
Examples of related parties
1. Affiliates – meaning the parent, the
subsidiary and fellow subsidiaries.
If an investor owns more than 50% of an
investee, the investor is known as parent and
the investee is known as the subsidiary.
The subsidiary is related to the parent and the
fellow subsidiaries of one parent are also
related to each other.
2. Associates – meaning the entities over
which one party exercises significant
influence.
If an investor owns at least 20% of the investee,
the investee is known as associate. The
associate is related to the investor. The term
"associate" includes the subsidiary or
subsidiaries of the associate.
3. Venturers are related to the joint venture
because they have joint control of the
activities of the joint venture.
However, the fellow venturers are not related
to each other, unlike fellow subsidiaries.
Other related parties
1. Key management personnel
The key management personnel are the persons
with managerial positions, like the president,
vice-president, chief executive officer and other
officers with responsibility of controlling the
activities of entity.
2. Close family members of key management
personnel
a. The individual's spouse and children
b. Children of the individual's spouse
c. Dependents of the individual or the
individual's spouse
3. Individuals or shareholders owning at least
20% of the reporting entity.
The close family members of such individuals or
shareholders are also related to the reporting
entity.
4. Postemployment benefit plan for the
benefit of employees.
Normally, the retirement plan of an entity is
funded by contributions from the entity.
Such contributions constitute the trust fund
handled by a trustee. Such trust fund is related
to the reporting entity.
Related party transaction
A related party transaction is a transfer of
resources or obligations between related
parties, regardless of whether a price is
charged.
PAS 24, paragraph 20, provides the following
examples of related party transaction:
1. Purchase and sale of goods
2. Purchase and sale of property and other
asset
3. Rendering or receiving services
4. Leases
5. Transfer of research and development
6. agreement
7. Finance arrangements, including loans and
equity contributions in cash or in kind
8. Guarantee and collateral
9. Settlement of liabilities on behalf of the
entity or by the entity on behalf of another
party.
Related party disclosures
PAS 24, paragraph 12, requires disclosure of
related party relationships where control exists
irrespective of whether there have been
transactions between the related parties.
In other words, relationships between parent
and subsidiaries or investor and associates
shall be disclosed regardless of whether there
have been transactions between those related
parties.
An entity shall disclose the name of the entity's
parent and if different, the ultimate controlling
party.
If neither the entity's parent nor the ultimate
controlling party produces financial statements
available for public use, the name of the next
most senior parent that does so shall also be
disclosed.
Disclosures of related party transaction
PAS 24, paragraph 17, provides that if there
have been transactions between related parties,
an entity shall disclose the nature of the related
party relationship as well as information about
the transactions and outstanding balances
necessary for an of the financial statements.
As a minimum, the disclosures of related party
transaction shall include:
 a. The amount of the transaction.
b. The amount of outstanding balance, terms
and conditions, whether secured or
unsecured, and nature of consideration to UNRELATED PARTIES
be provided in settlement.
c. The allowance for doubtful accounts 1. Two entities simply because they have a
related to the outstanding balance. director or key management personnel in
d. The doubtful accounts expense recognized common
during the period in respect of amount 2. Providers of finance, banks, trade unions,
due from related parties. public utilities and government agencies in
the course of their normal dealings with the
Key management personnel compensation reporting entity
3. Customers and suppliers by virtue of their
PAS 24, paragraph 16, provides that an entity
normal dealings with the reporting entity.
shall disclose key management personnel
4. Fellow venturers are unrelated to each
compensation in total and for each of the
other but the venturers are related to the
following categories:
joint venture
a. Short-term employee benefits, for example,
salaries, bonuses and nonmonetary
benefits, such as medical care, housing, car
and free or subsidized goods
b. Postemployment benefits, for example,
retirement pensions
c. Other long-term benefits, such as long-term
paid absences and long-term disability
benefit
d. d. Termination benefits, such as separation
or severance pay
e. e. Share based payment transactions, for
example, share options

Related party disclosures not required

PAS 24, paragraph 3, requires disclosure of

related party transactions and outstanding
balances in the separate financial statements of
a parent, subsidiary, associate or venturer.

However, Paragraph 4 provides that intragroup

related party transactions and outstanding
balances are eliminated in the preparation of
consolidated financial statements of the group.