“REPORTING

FINANCIAL
BSA
2103 PERFORMANCE”
AQUINO, MARK CRISTIAN A.
DADOR, AIMEE B.
SALDO, LAWRENZ
IAS 8 ACCOUNTING POLICIES, CHANGES IN
ACCOUNTING ESTIMATES AND ERRORS

 ACCOUNTING POLICIES – specific principles, bases,

conventions, rules and practices adopted by an entity in
preparing and presenting financial statements.
 CHANGE IN ACCOUNTING ESTIMATES – an
adjustment of the carrying amount of an asset or a liability.
IAS 8 ACCOUNTING POLICIES, CHANGES IN
ACCOUNTING ESTIMATES AND ERRORS

 MATERIAL – misstatements could individually or

collectively influence the economic decision that users
make on the basis of the financial statements.
 PRIOR PERIOD ERRORS – omissions from, and
misstatements in, the entity’s financial statement for one
or more prior periods.
IAS 8 ACCOUNTING POLICIES, CHANGES IN
ACCOUNTING ESTIMATES AND ERRORS

 RETROSPECTIVE APPLICATION – applying new

accounting policy to transactions and other events and
conditions.
 RETROSPECTIVE RESTATEMENTS – correcting the
recognition, measurement, and disclosure of amounts of
elements of financial statements.
IAS 8 ACCOUNTING POLICIES, CHANGES IN
ACCOUNTING ESTIMATES AND ERRORS

 PROSPECTIVE APPLICATION – applying the new

accounting policy and recognizing the effect of the
change.
 IMPRACTICABLE – impossible in practice to do or carry
out.
CHANGES IN ACCOUNTING POLICIES

The same accounting policies are usually

adopted from period to period to allow
users to analyze trends over time in
profit, cash flows, and financial position.
Two types of event which do not
constitute changes in accounting policy:
CHANGES IN ACCOUNTING POLICIES

1. Adopting an accounting policy for new

type of transaction or event not dealt with
previously by the entity.
2. Adopting a ne accounting policy for a
transaction or event which has not occurred
in the past or which was not material.
 Illustration:

A company has always valued inventory

on a FIFO (First In, First Out) basis. In
2019, it decided to switch to the weighted
average method of valuation.
Illustration:
Revenue P869,000
Cost of Sales:
Beginning Inventory P135,000
Purchases 246,000
Ending Inventory (174,000) (207,000)
Gross Profit P662,000
 Illustration:

It is established that beginning inventory

for 2018 based on the weighted average
method would be P122,000, and ending
inventory would be P143,000.
Illustration:
Revenue P869,000
Cost of Sales:
Beginning Inventory P122,000
Purchases 246,000
Ending Inventory (143,000) (225,000)
Gross Profit P644,000
 DISCLOSURE
 Certain disclosures are required when a change in
accounting policy has a material effect on the current
period or any prior period presented, or when it may
have a material effect in subsequent periods.
 It is important to maintain the principle of
comparability.
CHANGES IN ACCOUNTING
ESTIMATES

 Estimates arise in relation to business activities

because of the uncertainties inherent within them.
Judgements are made based on the most up to
date information and the use of such estimates is a
necessary part of the preparation of financial
statements.
CHANGES IN ACCOUNTING
ESTIMATES

 The effect of a change in an accounting

estimate should be included in the
determination of net profit or loss in one of:
a.The period of the change
b.The period of the change and future periods
 ERRORS
Errors discovered during a current period which
relate to a prior period may arise through:
a.Mathematical mistakes
b.Mistakes in the application of accounting policies
c.Misinterpretation of facts
d.Oversights
e.Fraud
ACCOUNTING TREATMENT

a.Restating the comparative amounts for the

prior period(s) in which the error occurred.
b.When the error occurred before the earliest
prior period presented, restating the opening
balance sheet of assets, liabilities, and equity
for that period.
Illustration:
During 2017, Saladin discovered that
certain items had been included in
inventory at Dec. 31, 2016, valued at
P4,200,000, which had in fact been sold
before the year end.
Illustration:
2016 2017
Sales P47,400,000 P67,200,000
Cost of goods sold (34,570,000) (55,800,000)
Profit before taxation 12,830,000 11,400,000
Income taxes (3,880,000) (3,400,000)
Profit for the period P8,950,000 P8,000,000
Illustration:
2016 2017
Sales P47,400,000 P67,200,000
Cost of goods sold (38,770,000) (51,600,000)
Profit before taxation 8,630,000 15,600,000
Income taxes (2,620,000) (4,660,000)
Profit for the period P6,010,000 P10,940,000
RETAINED EARNINGS
2016 2017
Opening retained earnings P0 P0
As previously reported
(13,000+8,950) 13,000,000 21,950,000
Correction of prior period
error (4,200-1,260) - (2,940,000)
As restated P13,000,000 P19,010,000
Profit for the year 6,010,000 10,940,000
Closing retained earnings P19,010,000 P29,950,000
 SCHEDULE:
2016 2017
Cost of goods sold
As stated P34,570,000 P55,800,000
Inventory Adjustment 4,200,000 (4,200,000)
P38,770,000 P51,600,000

Income Tax
As stated P3,880,000 P3,400,000
Inventory adjustment
(4,200x30%) (1,260,000) 1,260,000
P2,620,000 P4,660,000
IFRS 5: NON-CURRENT ASSETS HELD FOR
SALE AND DISCONTINUED OPERATIONS

 “PFRS 5, paragraph 6, provides that a non-

current asset or disposal group is classified as
held for sale if the carrying amount will be
recovered principally through a sale transaction
rather than through continuing use.”
IFRS 5: NON-CURRENT ASSETS HELD FOR
SALE AND DISCONTINUED OPERATIONS

 This simply means that the entity does not

intend to use the asset as part of the operations
of the business but intends to sell it and recover
the carrying amount principally through sale.
IFRS 5/PFRS 5 do not apply to certain assets
covered by other accounting standards:

a.Deferred tax assets (IAS 12)

b.Assets arising from employee benefits (IAS 19)
c.Financial assets (IFRS 9)
d.Investment properties accounted for in
accordance with fair value model (IAS 40)
e.Agricultural and biological assets (IAS 41)
f.Insurance contracts (IFRS 4)
CONDITIONS FOR CLASSIFICATION AS
HELD FOR SALE

A non-current asset or disposal group shall be classified as held

for sale if the following conditions are present:
1.The asset or disposal group should be available for
immediate sale in the present condition.
2.The sale must be highly probable.
For sale to be highly probable, the following must apply:
CONDITIONS FOR CLASSIFICATION AS
HELD FOR SALE

a.Management must be committed to a plan to sell the

asset or disposal group
b.An active program to locate a buyer and complete
the plan must have initiated
c.The sale is expected to be a “completed sale” within
one year from the date of classification as held for sale
CONDITIONS FOR CLASSIFICATION AS
HELD FOR SALE

d. The asset or disposal group must be actively

marketed for sale at a price that is reasonable in
relation to the fair value
e. Actions required to complete the plan indicate that it is
unlikely that the plan will be significantly changed or
withdrawn.
 Note:
An asset or disposal group can still be classified as held for sale
even if the sale has not actually taken place within one year.
However, the delay must have been caused by events or
circumstances beyond the entity’s control and must have
sufficient evidence that the entity is still committed to sell the
asset or disposal group. Otherwise, the entity must cease to
classify the asset as held for sale.
 Note:
If an entity acquires a disposal group exclusively with a
view to its subsequent disposal, it can classify the asset
as held for sale if the sale is expected to take place within
one year and it is highly possible that all other criteria will
be made within a short period of time (normally three
months).
An asset that is to be abandoned should not be classified
as held for sale. This is because its carrying amount will
be recovered principally through continuing use.
However, a disposal group to be abandoned may meet
the definition of a discontinued operation and therefore
separate disclosure may be required.
 Example:
On December 1, 2019, a company became committed to a
plan to sell a manufacturing facility and has already found a
potential buyer. The company does not intend to discontinue
the operations currently carried out in the facility. At
December 31, 2019, there is a backlog of uncompleted
customer orders. The company will not be able to transfer the
facility to the buyer until after it ceases to operate the facility
and has eliminated the backlog of uncompleted customer
orders.
 Question:

Can the manufacturing facility be classified

as “held for sale” at December 31, 2019?
MEASUREMENT OF ASSETS HELD
FOR SALE

 PFRS 5, paragraph 15, provides that an entity

shall measure a non-current asset or disposal
group classified as held for sale at the lower
of carrying amount of fair value less cost of
disposal.
MEASUREMENT OF ASSETS HELD
FOR SALE

 PFRS 5, paragraph 25, further provides that a

non-current assets classified as held for sale
shall not be depreciated.
(fair market value – cost of disposal = net
realizable value)
 MEASUREMENT OF ASSETS HELD
FOR SALE

 Fair value – the price tat would be received to sell an

asset or paid to transfer a liability in an orderly
transaction between parties or market participants.
 Cost of disposal – the cost directly attributed to the
disposal of an asset excluding finance cost and income
tax expense. (ex: attorney fees, permits, payments
associated with preparing the asset for sale).
MEASUREMENT OF ASSETS HELD
FOR SALE

 Recoverable amount – is the greater of an asset’s

fair value less cost of disposal, or its value in use.
 Value in use refers to the present value of future
cash flows expected to be derived from an asset.
Thus, the concept focuses on the greatest value
that can be obtained from an asset by either sale or
using it.
 MEASUREMENT OF ASSETS HELD
FOR SALE

 Non-current assets held for sale should not be

depreciated even if they are still being used by the
entity. However, any impairment (arising for
instance from increase in costs of disposal) is
recognized and charged to profit or loss. An
impairment cost should be recognized whenever
fair value less of cost of disposal is lower than the
carrying amount of the asset or disposal group.
MEASUREMENT OF ASSETS HELD
FOR SALE

A non-current asset or disposal group that is no longer classified as

held for sale (for example, because sale has not taken place within
one year) is measured at the lower of:
a.Its carrying amount before it was classified as held for sale,
adjusted for any depreciation that would have been charged had
the asset not been held for sale.
b.It recoverable amount at the date of the decision not to sell.
 Illustration:
On January 1, 2019, DKNAMHL Corp. acquired an equipment
at a cost of P5,000,000 to be used in the ordinary course of
business. The equipment has an estimated useful life of 10
years and a residual value of P500,000.
On January 1, 2022, the equipment was classified as held for
sale. On such date, the fair value less cost of disposal as
estimated at P1,900,000. On June 30, 2022, the equipment
was sold for P1,500,000.
 Illustration:
1.To remove the equipment from P.P.E. and classified as held for sale
on Jan. 1, 2022.

Equipment held for sale P3,650,000

Accumulated Depreciation – Equipment 1,350,000
Equipment P5,000,000

Cost of equipment P5,000,000

Accu. Depn.
(5,000,000-500,000/10x3) (1,350,000)
Carrying amount P3,650,000
Jan. 1, 2022
 Illustration:
2.To measure the equipment held for sale at the lower of carrying
amount and fair value less cost of disposal on Jan. 1, 2022.

Impairment loss P1,750,000

Equipment held for sale P1,750,000

Carrying amount P3,650,000

Fair value less cost
of disposal (1,900,000)
Impairment loss P1,750,000
3.To record the sale of equipment on June 30, 2022.

Cash P1,500,000
Loss on sale of equipment 400,000
Equipment held for sale P1,900,000

Note: The equipment held for sale is no longer depreciated

form January 1 to June 30, 2022.
PRESENTATION OF DISPOSAL GROUP
CLASSIFIED AS HELD FOR SALE

Non-current assets and disposal groups classified as held

for sale should be presented separately from other assets
in the statement of financial position as well as liabilities of
a disposal group.
a.Assets and liabilities held for sale should not be offset.
PRESENTATION OF DISPOSAL GROUP
CLASSIFIED AS HELD FOR SALE

b. The major classes of assets and liabilities held for

sale should be separately disclosed either in the face of
the statement of financial position or in notes.
c. IFRS 5 requires non-current assets or disposal
groups held for sale to be shown as a separate
component of current assets/current liabilities.
b. The major classes of assets and liabilities held for
sale should be separately disclosed either in the face of
the statement of financial position or in notes.
c. IFRS 5 requires non-current assets or disposal
groups held for sale to be shown as a separate
component of current assets/current liabilities.
PRESENTING DISCONTINUED
OPERATIONS
 PFRS 5, paragraph 12, prohibits the retroactive
classification as a discontinued operation when the
discontinued criteria are met after the end of the
reporting period.
 Discontinued operation – is a component of an entity
that has either been disposed or is classified as held for
sale, and:
PRESENTING DISCONTINUED
OPERATIONS

a.Represents a separate major line of business or

geographical area of operations.
b.Is a part of a single coordinated plan to dispose a major
line of business or geographical area of operations, or
c.Is a subsidiary acquired exclusively with a view to resale.
Examples of discontinued operations:

1.Selling by a diversified entity of a major

division that represents the entity’s only
activities in the electronics industry.
2.Selling by a meat packing entity of controlling
interest in a furniture entity. All other operations
of the entity are in the meat packing business.
Examples of discontinued operations:
3. Selling by a communications entity of all its radio
stations. The entity’s remaining activities are
television stations and publishing house.
4. A conglomerate is engaged in commodity
business, real estate, and manufacturing and
construction business.
Selling one of those four business is a discontinued
operation.
Examples which are not discontinued
operations:

1.Phasing out of product line within a product

group.
2.Shifting of production or marketing activities
for a particular line of business from one
location to another.
3.Closing of a facility, factory or branch.
 INCOME STATEMENT
PRESENTATION

 PFRS 5, paragraph 33, provides that an entity

shall disclose a single amount comprising the
total of post-tax-profit or loss of the discontinued
operation and the post-tax gain or loss
recognized on the measurement to fair value less
to cost of disposal or on the disposal of the
assets or disposal group constituting the
discounted operation.
INCOME STATEMENT
PRESENTATION

 Simply stated, the income or loss from

discounted operation, net of tax shall be
presented as a single amount in the income
statement below the income from continuing
operations.
INCLUDED IN DISCONTINUED
OPERATIONS

a.The amount of revenue, expense and income or loss

attributable to the discounted operation during the current
period and the related income tax.
b.An impairment loss is recognized when the fair value less
cost of disposal of the discounted operation is lower than the
carrying amount of the net assets. If the fair value less cost
of disposal is higher than the carrying amount, the difference
is not recognized.
INCLUDED IN DISCONTINUED
OPERATIONS

c. Any gain or loss from the actual disposal of

the assets and settlement of the liabilities of a
discounted operation.
d. The termination cost of employees and other
costs which are directly incurred as a result of
the discontinuance.
FOREIGN CURRENCY
TRANSACTIONS

Transactions involving foreign currency

are very common in practice. IAS 21 sets
out the accounting treatment for foreign
currency transactions.
FOREIGN CURRENCY
TRANSACTIONS
 If a company trades overseas, it will buy or sell
assets in foreign currencies.
 A company might have a subsidiary abroad, and the
subsidiary will trade in its own local currency.
 In foreign currency exchange rates remained
constant, there would be no accounting problem.
Definitions given by IAS 21:
 FOREIGN CURRENCY. A currency other than the functional
currency of the entity.
 FUNCTIONAL CURRENCY. The currency of the primary
economic environment in which the entity operates.
 PRESENTATION CURRENCY. The currency in which financial
statements are presented.
 EXCHANGE RATE. The ratio of exchange for two currencies.
Definitions given by IAS 21:
 EXCHANGE DIFFERENCE. The difference resulting from
translating a given number of units of one currency into another
currency at the different exchange rates.
 CLOSING RATE. The spot exchange rate at the year-end date.
 SPOT EXCHANGE RATE. The exchange rate is immediate
delivery.
 MONETARY ITEMS. Units of currency held and assets and
liabilities to be received or paid in a fixed or determinable number
of units of currency.
FUNCTIONAL CURRENCY

Each entity-whether an individual company, a parent of a

group, or an operation within a group (such as a subsidiary,
associate or branch) - should determine its functional
currency and measure its results and financial position in that
currency. For most individual companies, the functional
currency will be the currency of the country in which they are
located and in which they carry out most of their
transactions.
FACTORS GIVEN BY IAS 21
a. The currency that mainly influences sales prices for goods and
services.
b. The currency of the country whose competitive forces and
regulations mainly determine the sale prices of its goods and
services.
c. The currency that mainly influences labor, material and other costs
providing goods and services.
FACTORS GIVEN BY IAS 21
Sometimes the functional currency of an entity is not
immediately obvious. Management mist then exercise
judgement and my also need to consider:
 
a. The currency in which funds from financing activities are
generated.
b. The currency in which receipts from operating activities
are usually retained.
TYPES OF FOREIGN
CURRENCY
CONVERSION
 is the process of exchanging amounts of one
foreign currency for another.
 Profits (or losses) on conversion would be
included in profit or loss for the year in which
conversion (whether payment pr receipt)
takes place.
TYPES OF FOREIGN
CURRENCY

TRANSLATION
 does not involve the act of exchanging one
currency for another.
 Required at the end of an accounting period when
a company still holds assets or liabilities in its
statement of financial position which were obtained
or incurred in a foreign currency.
TYPES OF FOREIGN
CURRENCY

These assets or liabilities might consist of:

a. An individual home company holding individual
assets or liabilities originating in a foreign currency
"deal".
b. An individual home company with a separate
branch of the business operating abroad which keeps
its own books of account in the local currency.
INITIAL RECOGNITION

IAS 21 states that foreign currency transactions

should be recorded, on initial recognition in the
function currency, by applying the exchange rate
between the reporting currency and the foreign
currency at the date of the transaction to the foreign
currency amount. An average rate of a period may be
used if exchange rates do not fluctuate significantly.
REPORTING AT SUBSEQUENT
YEAR ENDS

a. Report foreign currency monetary items using the closing rate.

b. Report non-monetary items which are carried at historical cost in a
foreign currency using the exchange rate at the date of transaction.
c. Report non-monetary items which are carried at fair value in a
foreign currency using the exchange rates that existed when the
values were measured.
RECOGNITION OF EXCHANGE
DIFFERENCES

Exchange differences arising on the settlement of monetary

items or on translating an entity's monetary items at rates
different from those at which they were translated initially, or
reported in previous financial statements, should be
recognized in profit loss in the period in which they arise.
SITUATIONS TO CONSIDER:

1. The transaction is settled in the same period

as that in which it occurred: All the exchange
difference is recognized in that period.
SITUATIONS TO CONSIDER:

2. The transaction is settled in a subsequent

accounting period: The exchange difference
recognized in each intervening period up to the period
of settlement is determined by the change in
exchange rates during that period.
BSA
2103
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