PAS 1 Presentation of

Financial Statements
Chapter 3
Introduction
Philippine Accounting Standards (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 (dimensional) – refers to the comparability of
financial statements between different entities.
 Comparability requires consistency in the adoption and application
of accounting policies and in the presentation of financial statements,
e.g., the use of line-item descriptions 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 terminology 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 processed
is periodically communicated to users. The financial statements of an
entity pertain 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 Framework and the
PFRSs.
Purpose of Financial Statements
1. Primary objective: 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.
2. Secondary objective: To show the results of management’s
stewardship over the entity’s resources.
To meet the objective, 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; and
g. Cash flows.

This information, along with other information in the notes, helps

users assess the entity’s prospects for future net cash inflows.
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;
a. Comparative information; and
6. Additional statement of financial position (required only when
certain instances occur).
 An entity may use other titles for the statements. For example, an
entity may use the title “balance sheet” in lieu of “statement of financial
position” or “statement of comprehensive income” instead of “statement
of profit or loss and other comprehensive income.”
However, an “income statement” is different from a “statement of
profit or loss and other comprehensive income” or a “statement of
comprehensive income.”
 Reports that are presented outside of the financial statements, such as
financial reviews by management, environmental reports and value
added statements, are outside the scope of PFRSs.
General Features of Financial Statements
1. Fair Presentation and Compliance with PFRSs.
Fair presentation is faithfully representing, in the financial
statements, the effects of transactions and other events in accordance
with the definitions and recognition criteria for assets, liabilities, income
and expenses set out in the Conceptual Framework.
Compliance with the PFRSs is presumed to result in fairly presented
financial statements.
 Fair presentation also requires the proper selection and application of
accounting policies, proper presentation of information, and provision
of additional disclosures whenever relevant to the understanding of the
financial statements.
Inappropriate accounting policies cannot be rectified by mere
disclosure.
 PAS 1 requires an entity whose financial statements comply with
PFRSs to make an explicit and unreserved statement of such compliance
in the notes. However, an entity shall not make such statement unless it
complies with all the requirements of PFRSs.
Illustration: Excerpt from a note to financial
statement:
Statement of Compliance with Philippine Financial Reporting
Standards
The financial statements of the Bank have been prepared in accordance
with Philippine Financial Reporting Standards (PFRSs), which are
adopted by the Financial Reporting Standards Council (FRSC) from the
pronouncements issued by the International Accounting Standards
Board (IASB).
 There may be cases wherein an entity’s management concludes that
compliance with a PFRS requirement is misleading. In such cases, PAS
1 permits a departure from a PFRS requirement if the relevant
regulatory framework requires or allows such a departure.
Relevant Regulatory Framework
Refers to the accounting principles and other financial reporting
requirements prescribed by a government regulatory body. For example,
banks in the Philippines are regulated by the Bangko Sentral ng
Pilipinas (BSP). Therefore, in addition to the PFRSs, banks must also
comply with the requirements of the BSP. Accounting principles
prescribed by a regulatory body are sometimes referred to as Regulatory
Accounting Principles (RAP). In practice, banks commonly refer to the
financial reporting required by the BSP as FRP or Financial Reporting
Package.
 When an entity departs from a PFRS requirement, it shall disclose
the management’s conclusion as to the fair presentation of the financial
statements; that all other requirements of the PFRSs are complied with;
the title of the PFRS from which the entity has departed; and the
financial effect of the departure.
2. Going concern
Financial statements are normally prepared on a going concern basis
unless the entity has an intention to liquidate or has no other alternative
but to do so.
When preparing financial statements, management shall assess the
entity’s ability to continue as a going concern, taking into account all
available information about the future, which is at least, but not limited
to, 12 months from the reporting date.
 If the entity has a history of profitable operations and ready access to
financial resources, management may conclude that the entity is a going
concern without detailed analysis.
If there are material uncertainties on the entity’s ability to continue
as a going concern, those uncertainties shall be disclosed.
 If the entity is not a going concern, its financial statements shall be
prepared using another basis. This fact shall be disclosed, including the
basis used, and the reason why the entity is not regarded as a going
concern.
3. Accrual Basis of Accounting
All financial statements shall be prepared using the accrual basis of
accounting except for the statement of cash flows which is prepared
using cash basis.
4. Materiality and Aggregation
Each material class of similar items is presented separately. A class
of similar items is called a “line item.” Dissimilar items are presented
separately unless they are immaterial. Individually immaterial items are
aggregated with other items.
5. Offsetting
Assets and liabilities or income and expenses are presented
separately and are not offset, unless offsetting is required or permitted
by a PFRS.
Offsetting is permitted when it reflects the substance of the
transaction. Examples of offsetting:
a. Presenting gains and losses from sales of assets net of the related
selling expenses.
b. Presenting at net amount the unrealized gains and losses arising
from trading securities and from translation of foreign currency
denominated assets and liabilities, except if they are material.
c. Presenting a loss from a provision net of a reimbursement from a
third party.
 Measuring assets net of valuation allowances is not offsetting. For
example, deducting allowance for doubtful accounts from accounts
receivables or deducting accumulated depreciation from a building
account is not offsetting.
6. Frequency of reporting
Financial statements are prepared at least manually. If an entity
changes its reporting period to a period longer or shorter than one year,
it shall disclose the following:
a. The period covered by the financial statements;
b. The reason for using a longer or shorter period; and
c. The fact that amounts presented in the financial statements are not
entirely comparable.
7. Comparative information
PAS 1 requires an entity to present comparative information in
respect of the preceding period for all amounts reported in the current
period’s financial statements, unless another PFRS requires otherwise.
As a minimum, an entity presents two of each of the statements and
related notes. For example, when an entity presents its 2020 current year
financial statements, the 2019 preceding year financial statements shall
also be presented as comparative information.
 PAS 1 permits entities to provide comparative information in
addition to the minimum requirement. For example, an entity may
provide a third statement of comprehensive income. In this case,
however, the entity need not provide a third statement for the other
financial statements, but must to provide the related notes for that
additional statement of comprehensive income.
Additional Statement of Financial Position
As mentioned earlier, a complete set of financial statements includes
an additional statement of financial position when certain instances
occur. Those instances are as follows:
a. The entity applies an accounting policy retrospectively, makes a
retrospective restatement of items in its financial statements, or
reclassifies items in its financial statements; and
b. The instance in (a) has a material effect on the information in the
statement of financial position at the beginning of the preceding
period.
For example, if any of the instances above occur, the entity shall
present three statements of financial positon as follows:
 Statement of Financial Position Date
1. Current year As at December 31, 2020
2. Preceding year (comparative
As at December 31, 2019
information)
3. Additional As at January 1, 2019
 The opening (additional) statement of financial position dated as at
the beginning of the preceding period even if the entity presents
comparative information for earlier periods. The entity need not present
the related notes to the opening statement of financial position.
8. Consistency of presentation
The presentation and classification of items in the financial
statements is retained from one period to the next unless a change in
presentation:
a. Is required by a PFRS; or
b. Results in information that is reliable and more relevant.
 A change in presentation requires the reclassification of items in the
comparative information. If the effect of a reclassification is material,
the entity shall provide the “additional statement of financial position”
discussed earlier.
Structure and Content of Financial
Statements
Each of the financial statements shall be presented with equal
prominence and shall be clearly identified and distinguished from other
information in the same published document. For example, financial
statements are usually included in an annual report, which also contains
other information. The PFRSs apply only to the financial statements and
not necessarily to the other information.
The following information shall be displayed prominently and
repeatedly whenever relevant to the understanding of the information
presented:
a. The name o 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 currency
e. The level of rounding used (e.g., thousands, millions, etc.)
 Illustration: Heading for a financial statement
Name of the
ABC Group reporting entity
indicating that the
Statement of Financial Position financial
statement pertains
Date at the end of the
As of December 31, 2020 to a group.
reporting period. (in thousands of Philippine Pesos)

Level of rounding-off
and presentation
currency.
 The statement of financial position is dated as at the end of the
reporting period while the 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 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;
d. Oversight over the financial reporting process; and
e. Review and approval of financial statements.
 The responsibilities are expressly stated in a document called
“Statement of Management’s Responsibility for Financial Statements,”
which is attached to the financial statements as a cover letter. This
document is signed by the entity’s
a. Chairman of the Board (or equivalent),
b. Chief Executive Officer (or equivalent),
c. Chief Financial Officer (or equivalent).
Statement of Financial Position
The statement of financial position shows the entity’s financial
condition (i.e., status of assets, liabilities, and equity) as at a certain
date. It includes line items that present the following amounts:
a. Property, plant and equipment;
b. Investment property;
c. Intangible assets;
d. Financial assets (excluding (e), (h) and (i));
e. Investments accounted for using the equity method;
f. Biological assets;
g. Inventories;
h. Trade and other receivables;
i. Cash and cash equivalents;
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 interests; and
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 sufficiently 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/non-current classification and others in
order of liquidity. This may be appropriate when the entity has diverse
operations.
 Whichever method 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
Current Assets
• Expected to be realized, sold, or consumed in the entity’s normal
operating cycle;
• Held primarily for trading;
• Expected to be realized within 12 months after the reporting period; or
• Cash or cash equivalent, unless restricted from being exchanged or
used to settle a liability for at least 12 months after the reporting
period.
Current Liabilities
• Expected to be settled in the entity’s normal operating cycle;
• Held primarily for trading;
• Due to be settled within 12 months after the reporting period; or
• The entity does not have an unconditional right to defer settlement of
the liability for at least 12 months after the reporting period.
 All other assets and liabilities are classified as noncurrent.
The operating cycle of an entity is the time between the acquisition
of assets for processing and their realization in cash or cash equivalents.
When the entity’s normal operating cycle is not clearly identifiable, it is
assumed to be 12 months.
 Assets and liabilities that are realized or settled as part of the entity’s
normal operating cycle (e.g., trade receivables, inventory, trade
payables, and some accruals for employee and other operating costs) are
presented as current, even if they are expected to be realized or settled
beyond 12 months after the reporting period.
 Assets and liabilities that do not form part of the entity’s normal
operating cycle (e.g., non-operating assets and liabilities) are presented
as current only when they are expected to be realized or settled within
12 months after the reporting period.
Deferred tax assets and liabilities are always presented as noncurrent
items in a classified statement of financial position, regardless of their
expected dates of reversal.
Examples

Current Assets Current Liabilities

• Cash and cash equivalents
• Accounts receivable
• Non-trade receivable collectible
within 12 months
• Held for trading securities
• Inventory
• Prepaid assets
• Accounts payable
• Salaries payable
• Dividends payable
• Income (current) tax payable
• Unearned revenue
• Portion of notes/loans/bonds payable
due within 12 months
 Noncurrent Assets Noncurrent Liabilities
• Property, plant and equipment • Portion of notes/loans/bonds payable
• Non-trade receivable collectible due beyond 12 months
beyond 12 months • Deferred tax liability
• Investment in associate
• Investment property
• Intangible assets
• Deferred tax asset
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 but before the financial statements are authorized for
issue.
However, the obligation is classified as noncurrent if the entity
expects, and has the discretion, to refinance it on a long term basis
under an existing loan facility.
 If the refinancing is not at the discretion of the entity (for example,
there is no arrangement for refinancing), the financial liability is 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
Entity A’s current reporting date is December 31, 2019. A bank loan
taken 10 years ago is maturing on October 31, 2020.

Analysis: A currently maturing obligation (i.e., due within 12 months

after the reporting date) is classified as current event even if that
obligation used to be noncurrent. Therefore, the loan is presented as a
current liability in Entity A’s December 31, 2019 statement of financial
position.
 On January 15, 2020, Entity A enters into a refinancing agreement to
extend the maturity date of the loan to October 31, 2025. Entity A’s
financial statements are authorized for issue on March 31, 2020.
Analysis: Continuing with 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.
 Under the original terms of the loan agreement, Entity A has the
unilateral right to defer (postpone) the payment of the loan up to a
maximum period of 5 years from the original maturity date. Entity A
expects to exercise this right after the reporting date but before the
financial statements are authorized for issue.
Analysis: Entity A has the discretion (i.e., unilateral right) to refinance
the obligation on a long term basis under an existing loan facility (i.e.,
the unilateral right is included in the original terms of the loan
agreement). Accordingly, the loan is classified as noncurrent.
In this scenario, Entity A has an unconditional right to defer the
settlement of the loan for at least 12 months after the reporting period.
Therefore, condition (d) for current classification is inapplicable.
Liabilities Payable on Demand
Liabilities that are payable upon the 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 is because the entity does not have an unconditional right
to defer settlement of the liability for at least 12 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 12 months after the reporting period, within
which the entity can rectify the breach and during which the lender
cannot demand immediate repayment.
Illustration
In 2019, Entity A took a long term loan from bank. The loan
agreement requires Entity A to maintain a current ratio of 2:1. If the
current ratio falls below 2:1, the loan becomes payable on demand. On
December 31, 2019 (reporting date), Entity A’s current ratio was 1.8:1.
below the agreed level. Entity A’s financial statements were authorized
for issue on March 31, 2020.
Case 1
On January 5, 2020, the bank gives Entity A a chance to rectify the
breach of loan agreement within the next 12 months and promises not to
demand immediate repayment within this period.

Analysis: The loan is classified as current liability because the grace

period is received after the reporting date.
Case 2
On December 31, 2019, the bank gives Entity A a chance to rectify
the breach of loan agreement within the next 12 months and promises
not to demand immediate repayment within this period.

Analysis: The loan is classified as noncurrent liability because the grace

period is received by the reporting date.
Statement of Profit or Loss and Other
Comprehensive Income
Income and expenses for the period may be presented in either:
a. 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.
Single Statement Presentation
Statement of Profit or Loss and Other Comprehensive Income

Revenues P100
Expenses (80)
Profit or loss P20
Other comprehensive income 10
Comprehensive income P30
Two-Statement Presentation
Statement of Profit or Loss / Income Statement

Revenues P100
Expenses (80)
Profit or loss P20
 Statement of Other Comprehensive Income

Profit or Loss P20

Other comprehensive income 10
Comprehensive Income P30
PAS 1 requires an entity to present information on the following:
a. Profit or loss;
b. Other comprehensive income; and
c. Comprehensive income
 Presenting a separate income statement is allowed as long as a
separate statement showing comprehensive income is also presented
(i.e., two statement presentation). Presenting only an income statement
is prohibited.
Profit or Loss
Profit or loss is income less expenses, excluding the components of
other comprehensive income. The excess of income over expenses is
profit; while the deficiency is loss. This method of computing for profit
or loss is called the transaction approach.
 Income and expenses are usually recognized in profit or loss unless:
a. They are items of other comprehensive income; or
b. They are required by other PFRSs to be recognized outside of profit
or loss.
Not Included in Determining the Profit or
Loss for the Period
Transaction Accounting
1. Correction of prior period Direct adjustment to the beginning
error balance of retained earnings. The
adjustment is presented in the statement of
changes in equity.
2. Change in accounting Similar treatment to correction of prior
policy period error.
Not Included in Determining the Profit or
Loss for the Period
Transaction Accounting
3. Other comprehensive Changes during the period are presented
income in the other comprehensive income
section of the statement of comprehensive
income. Cumulative balances are
presented in the equity section of the
statement of financial position.
Not Included in Determining the Profit or
Loss for the Period
Transaction Accounting
4. Transactions with owners Recognized directly in equity.
(e.g., issuance of share Transactions during the period are
capital, declaration of presented in the statement of changes in
dividends, and the like) equity.
The profit or loss section shows line items that present the following
amounts for the period:
a. Revenue, presenting separately interest revenue;
b. Finance costs;
c. Gains and losses arising from the derecognition of financial assets
measured at amortized cost;
d. Impairment losses and impairment gains on financial assets;
e. Gains and losses on reclassification of financial assets from
amortized cost or fair value through other comprehensive income to
fair value through profit or loss;
f. Share in the profit or loss of associates and joint ventures;
g. Tax expenses; and
h. Result of discontinued operations.
 Additional line items shall be presented whenever relevant to the
understanding of the entity’s financial performance. The nature and
amount of material items of income or expense shall be disclosed
separately.
Circumstances that would give rise to the separate disclosure of
items of income and expense include:
a. Write-downs of inventories to net realizable value or of property,
plant and equipment to recoverable amount, as well as reversals of
such write-downs;
b. Restructuring of the activities of an entity and reversals of any
provisions for restructuring costs;
c. Disposals of items of property, plant and equipment;
d. Disposals of investments;
e. Discontinued operations;
f. Litigation settlements; and
g. Other reversals of provisions.

PAS 1 prohibits the presentation of extraordinary items in the

statement of profit or loss and other comprehensive income or in the
notes.
Presentation of Expenses
Expenses may be presented using either of the following methods:
a. Nature of expense method – Under this method, expenses are
aggregated according to their nature (e.g., depreciation, purchases of
materials, transport costs, employee benefits and advertising costs)
and are not reallocated according to their functions within the entity.
b. Function of expense method (Cost of sales method) – Under this
method, an entity classifies expenses according to their function
(e.g., cost of sales, distribution costs, administrative expenses, and
other functional classifications). At a minimum, cost of sales shall be
presented separately from other expenses.
 The nature of expense method is simpler to apply because it
eliminates considerable judgment needed in reallocating expenses
according to their function. However, an entity shall choose whichever
method it deems will provide information that is reliable and more
relevant, taking into account historical and industry factors and the
entity’s nature.
 If the function of expense method is used, additional disclosures on
the nature of expenses shall be provided, including depreciation and
amortization expense and employee benefits expense. This information
is useful in predicting future cash flows.
Nature of Expense Method
Revenue xx
Other income xx
Changes in inventories of finished goods and work in progress 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
Function of Expense Method
Revenue xx
Cost of sales (xx)
Gross profit xx
Other income xx
Distribution costs (xx)
Administrative expenses (xx)
Finance costs (xx)
Other expenses (xx)
Profit before tax xx
Income tax expense (xx)
Profit after tax xx
Other Comprehensive Income (OCI)
Other comprehensive income comprises items of income and
expense (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 (asset);
c. Gains and losses on investments 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 fair value
through profit or loss (FVPL) that are attributable to changes in
credit risk;
g. Changes in the time value of option when the option’s intrinsic value
and time value are separated and only the changes in the intrinsic
value is designated as the hedging instrument; and
h. Changes in the value of the forward elements of forward contracts
when separating the forward element and spot element of a forward
contract and designating as the hedging instrument only the changes
in the spot element, and changes in the value of the foreign currency
basis spread of a financial instrument when excluding it from the
designation of that financial instrument as the hedging instrument.
 Amounts recognized in OCI are usually accumulated as separate
components of equity. For example, cumulative changes in revaluation
surplus are accumulated in a Revaluation surplus account, which is
presented as a separate component of equity; cumulative gains and
losses from investments in FVOCI and from translation of foreign
operation are also accumulated in separate equity accounts.
Reclassification Adjustments
Items of OCI include reclassification adjustments.

• 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.
 Reclassification adjustments arise, for example, on disposal of a
foreign operation, derecognition of debt instruments measured at
FVOCI, or when a cash flow hedge becomes ineffective or affects profit
or loss.
On derecognition (or when the cash flow hedge becomes
ineffective), the cumulative gains and losses that were accumulated in
equity on these items are reclassified from OCI to profit or loss. The
amount reclassified is called the reclassification adjustment.
 A reclassification adjustment for a gain is a deduction in OCI and an
addition to profit or loss. This is to avoid double inclusion in total
comprehensive income. On the other hand, a reclassification adjustment
for a loss is an addition to OCI and a deduction from profit or loss.
Reclassification adjustments do not arise on changes in revaluation
surplus, derecognition of equity instruments designated at FVOCI, and
remeasurements of the net defined benefit liability (asset).
 On derecognition, the cumulative gains and losses that were
accumulated in equity on these items are transferred directly to retained
earnings, rather than to profit or loss as a reclassification adjustment.
Presentation of OCI
The other comprehensive income section shall group items of OCI into
the following:
a. Those for which reclassification adjustment is allowed; and
b. Those for which reclassification adjustment is not allowed.
 The entity’s share in the OCI of an associate or joint venture
accounted for under the equity method shall also be presented separately
and also grouped according to the classifications above.
 Type of Other Comprehensive Income Reclassification adjustment
a. Changes in revaluation surplus No
b. Remeasurements of the net defined benefit liability
(asset) No
c. Fair value changes in FVOCI
- equity instrument (election) No
- Debt instrument (mandatory) Yes
d. Translation differences on foreign operations Yes
e. Effective portion of cash flow hedges Yes
 Items of OCI, including reclassification adjustments, may be
presented at either net of tax or gross of tax.
Total Comprehensive Income
Total comprehensive income is the change in equity during a period
resulting from transactions and other events, other than those changes
resulting from transactions with owners in their capacity as owners.
Total comprehensive income is the sum of profit or loss and other
comprehensive income. It comprises all non-owner changes in equity.
Presenting information on comprehensive income, and not just profit or
loss, helps users better assess the overall financial performance of the
entity.
Statement of Changes in Equity
The statement of changes in equity shows the following information:
a. Effects of change in accounting policy (retrospective application) or
correction of prior period error (retrospective restatement);
b. Total comprehensive income for the period; and
c. 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:
i. Profit or loss;
ii. Other comprehensive income; and
iii. Transactions with owners, e.g., contributions by and distributions to
owners.
 Retrospective adjustments and retrospective restatements are
presented in the statement of changes in equity as adjustments to the
opening balance of retained earnings rather than as changes in equity
during the period.
Components of equity include, for example, each class of
contributed equity, the accumulated balance of each class of other
comprehensive income and retained earnings.
 PAS 1 allows the disclosure of dividends, and the related amount per
share, either in the statement of changes in equity or in the notes.
Note
Non-owner changes in equity are presented in the statement of
comprehensive income while owner changes (e.g., contributions by and
distributions to owners) are presented in the statement of changes in
equity. This is to provide better information by aggregating items with
shared characteristics and separating items with different characteristics.
Statement of Cash Flows
PAS 1 refers the discussion and presentation of statement of cash
flows to PAS 7 Statement of Cash Flows.
Notes
The notes provides information in addition to those presented in the
other financial statements. It is an integral part of a complete set of
financial statements. All the other financial statements are intended to be
read in conjunction with the notes. Accordingly, information in the other
financial statements shall be cross-referenced to the notes.
PAS 1 requires an entity to present the notes in a systematic manner.
Notes are normally structured as follows:
1. General information of the reporting entity.
This includes the domicile and legal form of the entity, its country of
incorporation and the address of its registered office (or principal place
of business, if different from the registered office) and a description of
the nature of the entity’s operations and its principal activities.
2. Statement of compliance with the PFRSs and Basis of preparation of
financial statements.
3. Summary of significant accounting policies.
This includes narrative descriptions of the line items in the other
financial statements, their recognition criteria, measurement bases,
derecognition, transitional provisions, and other relevant information.
4. Disaggregation (breakdowns) of the line items in the other financial
statements and other supporting information.
5. Other disclosures required by PFRSs, such as (the list is not
exhaustive):
a. Contingent liabilities and unrecognized contractual commitments.
b. Non-financial disclosures, e.g., the entity’s financial risk
management objectives and policies.
c. Events after the reporting date, if material.
d. Changes in accounting policies and accounting estimates and
corrections of prior period errors.
e. Related party disclosure.
f. Judgments and estimations.
g. Capital management.
h. Dividends declared after the reporting period but before the financial
statements were authorized for issue, and the related amount per
share.
i. The amount of any cumulative preference dividends not recognized.
6. Other disclosures not required by PFRSs but the management deems
relevant to the understanding of the financial statements.
PAS 2 Inventories
Chapter 4
Introduction
PAS 2 prescribes the accounting treatment for inventories. PAS 2
recognizes that a primary issue in the accounting for inventories is the
determination of cost to be recognized as asset and carried forward until
it is expensed. Accordingly, PAS 2 provides guidance in the
determination of cost of inventories, including the use of cost formulas,
and their subsequent measurement and recognition as expense.
PAS 2 applies to all inventories except for the following:
• Assets accounted for under other standards
a. Financial instruments (PAS 32 and PFRS 9); and
b. Biological assets and agricultural produce at the point of harvest.
• Assets not measured under the lower of cost or net realizable value
(NRV) under PAS 2
a. Inventories of producers of agricultural, forest, and mineral products
measured at net realizable value in accordance with well-established
practices in those industries.
b. Inventories of commodity broker-traders measured at fair value less
costs to sell.
Inventories
Inventories are as assets:
a. Held for sale in the ordinary course of business (finished goods);
b. In the process of production for such sale (work in process); or
c. In the form of materials or supplies to be consumed in the
production process or in the rendering of services (raw materials and
manufacturing supplies).
Examples of Inventories
a. Merchandise purchased by a trading entity and held for resale.
b. Land and other property held for sale in the ordinary course of
business.
c. Finished goods, goods undergoing production, and raw materials
and supplies awaiting use in the production process by
manufacturing entity.
Ordinary course of business refers to the necessary, normal or usual
business activities of an entity.
Measurement
Inventories are measured at the lower of cost and net realizable value.
Cost
The cost of inventories comprises the following:
a. Purchase cost – this includes the purchase price (net of trade
discounts and other rebates), import duties, non-refundable or non-
recoverable purchase taxes, and transport, handling and other costs
directly attributable to the acquisition of the inventory.
b. Conversion costs – these refer to the costs necessary in converting
the raw materials into finished goods. Conversion costs include the
costs of direct labor and production overhead.
c. Other costs – necessary in bringing the inventories to their present
location and condition.
The following are excluded from the cost of inventories and are
expensed in the period in which they are incurred:
a. Abnormal amounts of wasted materials, labor or other production
costs;
b. Storage costs, unless those costs are necessary in the production
process before a further production stage (e.g., the storage costs of
partly finished goods may be capitalized as cost of inventory, but the
storage costs of completed goods are expensed);
c. Administrative overheads that do not contribute to bringing
inventories to their present location and condition; and
d. Selling costs.
 When a purchase transaction effectively contains a financing
element, such as when payment of the purchase price is deferred, the
difference between the purchase price for normal credit terms and the
amount paid is recognized as interest expense over the period of
financing.
Cost Formulas
The cost formulas deal with the computation of cost of inventories
that are charged as expense when the related revenue is recognized as
well as the cost of unsold inventories at the end of the period that are
recognized as asset. PAS 2 provides the following cost formulas:
1. Specific identification – this shall be used for inventories that are not
ordinarily interchangeable and those that are segregated for specific
projects.
Under this formula, specific costs are attributed to identified items of
inventory. Accordingly, cost of sales represents the actual costs of the
specific items sold while ending inventory represents the actual cost of
the specific items on hand.
 In this regard, records should be maintained that enables the entity to
identify the cost and movement of each specific inventory.
Specific identification, however, is not appropriate when inventories
consist of large number of items that are ordinarily interchangeable. In
such case, the entity shall choose between:
2. First In, First Out (FIFO) – Under this formula, it is assumed that
inventories that were purchased or produced first are sold first, and
therefore unsold inventories at the end of the period are those most
recently purchased or produced.
Accordingly, cost of sales represents costs from earlier purchases
while the cost of ending inventory represents costs from the most recent
purchases.
3. Weighted Average – Under this formula, cost of sales and ending
inventory are determined based on the weighted average cost of
beginning inventory and all inventories purchased or produced
during the period. The average may be calculated on a periodic
basis, or as each additional purchase is made, depending upon the
circumstances of the entity.
 The cost formulas refer to cost flow assumptions, meaning they
pertain to the flow of costs and not necessarily to the actual physical
flow of inventories. Thus, the FIFO or Weighted Average can be used
regardless of which item of inventory is physically sold first.
Same cost formula shall be used for all inventories with similar
nature and use. Different cost formulas may be used for inventories with
different nature or use. However, a difference in geographical location
of inventories, by itself, is not sufficient to justify the use of different
cost formulas.
Net Realizable Value (NRV)
Net realizable value 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.
NRV is different from fair value. Net realizable value refers to the
net amount that an entity expects to realize from the sale of inventory in
the ordinary course of business. Fair value reflects the price at which an
orderly transaction to sell the same inventory in the principal market for
the inventory would take place between market participants
at the measurement date. The former is an entity-specific value the latter
is not. Net realizable value for inventories may not equal fair value less
costs to sell.
Measuring inventories at the lower of cost and NRV is in line with
the basic accounting concept that an asset shall not be carried at an
amount that exceeds its recoverable amount.
 The cost of an inventory may exceed its recoverable amount if, for
example, the inventory is damaged, because obsolete, prices have
declined, or the estimated costs to complete or to sell the inventory have
increased. In these circumstances, the cost of the inventory is written
down to NRV. The amount of write-down is recognized as expense.
 If the NRV subsequently increases, the previous write-down is
reversed. However, the amount of reversal shall not exceed the original
write-down. This is so that the new carrying amount is the lower of the
cost and the revised NRV.
Write-downs of inventories are usually carried out on an item by
item basis, although in some circumstances, it may be appropriate to
group similar items. It is not appropriate to write down inventories on
the basis of their classification.
 Raw materials inventory is not written down below cost if the
finished goods in which they will be incorporated are expected to be
sold at or above cost. If, however, this is not the case, the raw materials
are written down to their NRV. The best evidence of NRV for raw
materials is replacement cost.
Recognition as an Expense
The carrying amount of an inventory that is sold is charged as
expense in the period in which the related revenue is recognized.
Likewise, the write-down of inventories to NRV and all losses of
inventories are recognized as expense in the period the write-down or
loss occurs.
 The amount of any reversal of any write-down of inventories, arising
from an increase in net realizable value, shall be recognized as a
reduction in the amount of inventories recognized as an expense in the
period in which the reversal occurs.
 Inventories that are used in the construction of another asset is not
expensed but rather capitalized as cost of the constructed asset. For
example, some inventories may be used in constructing a building. The
cost of those inventories is capitalized as cost of the building and will be
included in the depreciation of that building.
Disclosures
a. Accounting policies adopted in measuring inventories, including the
cost formula used;
b. Total carrying amount of inventories and the carrying amount in
classifications appropriate to the entity;
c. Carrying amount of inventories carried at fair value less costs to sell;
d. Amount of inventories recognized as an expense during the period;
e. Amount of any write-down of inventories recognized as an expense
in the period;
f. Amount of any reversal of write-down that is recognized as a
reduction in the amount of inventories recognized as expense in the
period;
g. Circumstances or events that led to the reversal of a write-down of
inventories; and
h. Carrying amount of inventories pledged as security for liabilities.