Conceptual Framework and Accounting Standards 1 1 1 2

DON HONORIOVENTURA STATEUNIVERSITY
VilladeBacolor,Cabambangan,Bacolor,Pampanga
CONCEPTUAL FRAMEWORK AND

ACCOUNTING STANDARDS
DR. ANA LIZA TONGOL-SITCHON

University Vision
A lead university in producing quality individuals with competent capacities to generate knowledge and technology
and enhance professional practices for sustainable national and global competitiveness through continuous
innovation.
University Mission
DHVSU commits itself to provide an environment conducive to continuous creation of knowledge and technology
towards the transformation of students into globally competitive professionals through the synergy of appropriate
teaching, research, service and productivity functions.
Core Values
Professionalism
Good Governance
Excellence
Gender Sensitivity and Responsiveness
Disaster Resiliency
CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS
Accounting – is the process of identifying, measuring, and communicating economic information to permit informed
judgments and decisions by users of the information.
Three important activities:
1. Identifying
2. Measuring
3. Communicating
1. Identifying – is the process of analyzing events and transactions to determine whether or not they will be recognized.
Recognition- refers to the process of including the effects of an accountable event in the statement of financial
position or the statement of comprehensive income through a journal entry.
Journal entries sample
On-Line Selling of merchandise ( AIS Gen. Mdse)
Feb. 01 Cash on Hand 100,000.00
◦ Sales 100,000.00
◦ Received cash payment from customers
Feb. 03 Electricity expense 8000.00
Cash 8000.00
paid electricity expense for the month of feb. 2024 in cash
Feb. 08 Office Equipment - Computer 45,000.00
Accounts Payable 45,000.00
Purchased office equipment - computer in credit
Feb. 12 Supplies and Materials- inks, pens, bondpaper, marker 5,000.00
Cash 5,000.00
Purchased supplies and materials in cash
Feb. 15 Salaries 30,000.00
Cash 30,000.00
Paid salaries in cash
Accounting – is the process of identifying, measuring, and communicating economic
information to permit informed judgments and decisions by users of the information.
1. Identifying – is the process of analyzing events and transactions to determine whether or not they will
be recognized.
Accountable Event – is one that affects the assets, liabilities, equity, income or expenses of an entity. Also
known as, Economic Activity, the subject matter of accounting. Sociological and psychological matters are
not recognized.
What is an entity? Particularly a business entity is an organization that's formed to conduct business.
Non-accountable events are not recognized but disclosed in the notes, if they have accounting relevance,
and of they have, they may be recorded through a memorandum entry.
Give examples of economic activities
Sales, credits, purchases
1. Identifying
Types of events or transactions
A. External events – are events that involve an entity and another external party.
Types if External events
i. Exchange (Reciprocal Transfer) – an event wherein there is a reciprocal giving and receiving of
economic resources or discharging of economic obligations between an entity and an external party.
Examples: sale, purchase, payment of liabilities, receipt of notes receivable in exchange for accounts receivables.
ii. Non-reciprocal transfer – is a “one way” transaction in that the party giving something does not
receive anything in return, while the party receiving does not give anything in exchange.
Examples: donations, gifts or charitable contributions, payment of taxes, imposition of fines, theft, provision of
capital by owners, distribution to owners and the like.
iii. External event other than transfer – an event that involves changes in the economic resources or
obligations of an entity caused by an external party or external source but does not involve transfers of
resources or obligations.
Examples: Technological changes, obsolescence, vandalism, price levels
1. Identifying
Types of events or transactions
B. Internal Events – events that do not involve an external party. (meaning, within the organization or
the company).
i. Production – the process by which resources are transformed into finished goods.
Examples: Raw materials to finished goods. Milk to cheese. Ask samples
ii. Casualty – an unanticipated loss from disasters or other similar events.
Examples: fire, earthquake, flood.
2. Measuring – involves assigning numbers, normally in monetary terms to the economic transactions
and events.
Measurement – historical cost, fair value, present value, realizable value, current cost, replacement cost,
and inflation-adjusted costs.
Historical cost – cost of an asset at the time of purchase.
Fair value - agreed price between buyer and seller
Present value- current value of money you expect from future income
Example: Companies use PV to assess the profitability of potential projects. For instance, if a company is
considering purchasing new machinery, they calculate the PV of expected future cash flows (such as cost
savings or increased revenue) to determine if the investment is financially sound.
Realizable value- amount of cash or cash equivalents that could be obtained by selling an asset in the
normal course of business.
Example: Sale of an asset.. Land..less commission, some taxes…so it is the net amount after deductions
of all possible costs.
2. Measuring – involves assigning numbers, normally in monetary terms to the economic transactions
and events.
Measurement – historical cost, fair value, present value, realizable value, current cost, replacement cost,
and inflation-adjusted costs.
Current cost- the cost of something at the present time, rather than the time it was originally bought or
made.
Replacement cost – amount that a company pays to replace an essential asset that is priced at the same
or equal value.
Inflation-adjusted cost- refers to the real value of an expense or investment after accounting of inflation.
Example: a stock rose at 30/stock, the inflation is 3 %, if you will less the inflation rate at 30, the real
value is 27
2. Measuring – involves assigning numbers, normally in monetary terms to the economic transactions and
events.
Valuation by fact or opinion
By the use of estimates. What is estimates?a guess, assessment..basically not a fact, when we use estimates
we value the measurement as an OPINION.
Examples: estimates of uncollectible amounts of receivables- if you are a seller, of course yung mga nangutang
hindi naman lahat yan magbabayad..so mag estimate ka ng mga pautang na hindi na mababayaran.
Depreciation
Estimated Liablities
By the use of FACT – the items or the economic activity is not affected by estimates, therefore it is valued by
FACT.
Examples: Ordinary share capital valued at pat value- what is par value? also known as nominal or original
value , face value of a bond or the value of a stock certificate
Land stated at acquisition cost - also referred to as the cost of acquisition, is the total cost that a company
recognizes on its books for property or equipment after adjusting for discounts, incentives, closing costs and
other necessary expenditures, but before sales taxes
2. Measuring – involves assigning numbers, normally in monetary terms to the economic transactions and events.
The acquisition cost is calculated by summing up all the costs directly associated with acquiring an asset or making a purchase. Here’s how
it’s typically calculated:
Purchase Price: Start with the actual price paid to acquire the asset. This includes the base cost before any adjustments or discounts.
Additional Costs: Add any additional costs incurred during the acquisition process. These may include:
Shipping and Handling Fees: If applicable, the cost of transporting the asset to its intended location.
Installation Costs: Expenses related to setting up or installing the asset.
Legal and Administrative Fees: Fees for legal documentation, contracts, and administrative work.
Brokerage Fees: If a broker was involved in the transaction, their fees.
Customs Duties and Taxes: If the asset is imported, any customs duties or taxes paid.
Discounts and Incentives: Subtract any discounts, rebates, or incentives received. For example:
Trade Discounts: Reductions in price due to trade agreements or bulk purchases.
Cash Discounts: Discounts for paying in cash or within a specified time frame.
Rebates: Amounts refunded after the purchase.
Closing Costs: Include any costs associated with finalizing the acquisition. These might involve legal fees, title transfer fees, or other closing
expenses.
Net Acquisition Cost: Calculate the net acquisition cost by subtracting the discounts and incentives from the total costs.
3. Communicating - the process of transforming economic data into useful accounting information, such as financial statements
and other accounting reports, for dissemination to users.
Financial Statements - are written records that convey the financial activities of a company.
Financial statements provide crucial insights into a company’s financial health and performance
Balance Sheet (Statement of Financial Position):

The balance sheet offers an overview of a company’s assets, liabilities, and shareholders’ equity at a specific point in time.
It provides a snapshot of what the company owns (assets) and what it owes (liabilities).
Key components include:
Assets: These include cash, accounts receivable, inventory, property, and equipment.
Liabilities: These encompass debts, accounts payable, and other obligations.
Shareholders’ Equity: Represents the residual interest in the company after deducting liabilities from assets.
Income Statement (Profit and Loss Report):

The income statement focuses on a company’s revenues and expenses during a specific period (e.g., a quarter or a year).
It calculates the company’s profit figure, known as net income, by subtracting expenses from revenues.
Key components include:
Revenues: Income generated from sales, services, or other business activities.
Expenses: Costs incurred in running the business (e.g., salaries, rent, marketing expenses).
3. Communicating - the process of transforming economic data into useful accounting information, such as
financial statements and other accounting reports, for dissemination to users.
Cash Flow Statement:
The cash flow statement tracks how a company uses its cash to pay debts, fund operations, and invest.
It categorizes cash flows into three main sections:
Operating Activities: Cash generated or used in day-to-day operations.
Investing Activities: Cash related to buying or selling assets (e.g., property, equipment).
Financing Activities: Cash from borrowing, issuing stock, or paying dividends.
Statement of Changes in Equity (Shareholder Contribution Report):

This statement outlines changes in shareholders’ equity over a specific period.
It includes details about stock issuances, dividends, and other equity-related transactions.
Remember that these financial statements are essential tools for investors, analysts, and creditors to assess
a company’s financial well-being and earnings potential. They provide a comprehensive view of a
company’s financial position and performance
3. Communicating - the process of transforming economic data into useful accounting information, such
as financial statements and other accounting reports, for dissemination to users.
Three aspects in communicating
1. Recording – process of systematically committing into writing the identified and measured
accountable events in the journal through journal entries.
2. Classifying – involves the grouping of similar and interrelated items into their respective classes
through postings in the ledger.
What is ledger - Ledger in accounting records and processes a firm’s financial data, taken from journal
entries. This becomes an important financial record for future reference. It is used for creating financial
statements. It is also known as the second book of entry.
What is ledger - Ledger in accounting records and processes a firm’s financial data, taken from journal
entries. This becomes an important financial record for future reference. It is used for creating financial
statements. It is also known as the second book of entry.
3. Summarizing – putting together or expressing in condensed form the recorded and classified
transactions and events. This includes the preparation of financial statements and other accounting
reports.
Interpreting the processed information involves the computation of financial ratios.
BASIC PURPOSE OF ACCOUNTING – provide information that is useful in making economic decisions.
Examples of Economic Decisions- additional investments, investments, application for loan, purchase of
properties, expansion,.
Economic Entity – is a separately identifiable combination of persons and property that uses or controls
Economic resources to achieve certain goals or objectives.
1. Not-for-Profit entity – one that carries out some socially desirable needs of the community or its
members and whose activities are not directed towards marking profit.
Samples: Charitable institutions, foundations, NGO’s
2. Business Entity – one that operates primarily for profit.
Economic activities samples:Production, exchange, consumption, income distribution, savings,
investment
Types of Information provided of accounting

1. Quantitative Information – information expressed in numbers, quantities, or units.
2. Qualitative Information – information expressed in words or descriptive form. These are found in the
notes to the financial statements.
3. Financial Information – information expressed in money. It is also a quantitative information.
Types of accounting information classified as to user’s needs.

4. General Purpose accounting information –designed to meet the common needs or most statement
users.
5. Special Purpose accounting information – designed to meet the specific needs of particular
statement users.
Accounting Concepts – refer to the principles upon which the process of accounting is based
1. Accounting assumptions (Accounting postulates)- are the fundamental concepts or principles and
basic notions that provide the foundation of the accounting process. Accounting postulates are
assumptions based on historical practice that form the basis of accounting standards. They are also
know as the basic accounting concepts.
Four Accounting Postulates
1. Entity Postulates
2. Going Concern Postulate
3. Money Measurement Postulate
4. Time Period Postulate
Accounting Concepts – refer to the principles upon which the process of accounting is based
2. Accounting Theory – is logical reasoning in the form of a set of broad principles that provide a general
frame of reference by which accounting practice can be evaluated and guide the development of new
practices and procedures. It is the organized set of of concepts and related principles that explains and
guide the accountant’s action in identifying, measuring, communicating accounting information.
Accounting Concepts:
1. Double-entry system- each accountable event is recorded in two parts, the debit and credit
2. Going concern assumption- the entity is assumed to carry on its operations for an indefinite period
of time. Being measured on a mixture of costs and values. As if may “forever”.
Liquidating Concern- realizable value is the appropriate measurement.
3. Separate entity – also known as the Accounting Entity, Business Entity Concept and Entity Concept
- the entity is viewed separately from its owners.
4. Stable Monetary Unit (Monetary Unit Assumption)
- assets, liabilities, equity, income and expenses are stated in terms of common unit of measure.
- the purchasing power of the peso is regarded as stable or constant.
5. Time Period (Periodicity/Accounting Period)- the life of the entity is divided into series of reporting
periods. An accounting period is usually 12 months.
Calendar Year – starts on January 1 and ends on Dec 31 of the same year.
Fiscal Year – starts on a date other than Jan 1.
6.Materiality Concept – if its omission or misstatement could influence economic decisions.
7. Cost-benefit (Cost constraint/Reasonable Assurance) – the cost of should not exceed the benefit.
8. Accrual Basis of Accounting - income is recognized when earned regardless of cash collection and
expenses are recognized when incurred regardless of cash payment.
9. Historical Cost ( Cost principle) – the value of an asset is determined on the basis of acquisition cost.
10. Concept of Articulation- all the components of a complete set of financial statements are
interrelated.
11. Full Disclosure Principle – recognizes that the nature and amount of information included in the
financial statements reflect a series of judgmental trade-offs.
12. Consistency Concept – the financial statements are prepared on the basis of accounting principles
that are applied consistently from one period to the next.
13. Matching ( Association of cost and effect) – costs are recognized as expenses when the related
revenue is recognized.
14. Entity Theory – proper income determination. Proper matching of costs against revenues.
15. Proprietary Theory – proper valuation of assets.
16. Residual Equity Theory – applicable when there are two classes of shares issued.
Preferred Shareholders – higher ranking shareholders
Ordinary Shareholders- ordinary investors
Equation – Assets-Liabilities-preferred shareholders=ordinary shareholders.
17. Fund Theory – use in government accounting. Custody and administration of funds.
18. Realization – the process of converting non-cash assets into cash or claims for cash. Realization occurs
when goods are sold for cash or in exchange for accounts receivable or notes receivable.
19. Prudence ( Conservatism) do not overestimate revenue and do not underestimate expenses.
20 Matching Concept – costs that are directly related to the earning of revenue are recognized as
expenses in the same period the related revenue is recognized.
21. Systematic and rational allocation – costs that are not directly related to the earnings of revenue are
initially recognized as assets and recognized as expenses over the periods their economic benefits are
consumed, using some method of allocation.
22. Immediate Recognition – recognized expenses when it was incurred. These are the fixed expenses…
utilities for example.
Common Branches of Accounting

1. Financial Accounting – focuses on general purpose financial statements.
General Purpose Financial Statements – cater to the common needs of external users. Potential
investors, lenders and other creditors. External users are those who are not involved in
managing the entity.
Financial Reporting – highlights the milestone of the company. Year-end Review. Audit Report
Complete set of Financial Statements- Balance Sheet, Income Statement, Statement of Cash
`Flows, Statement of Retained Earnings.
2. Management Accounting- refers to the accumulation and communication of information for use by
internal users or management.
3. Cost Accounting- systematic recording and analysis of the cost of materials, labor, and overhead
incident to production.
4. Auditing – is the process of evaluating the correspondence of certain assertions with established
criteria and expressing opinion thereon.
Common Branches of Accounting

5. Tax Accounting – the preparation of tax returns and rendering of tax advise.
6. Government Accounting – refers to the accounting for the government and its instrumentalities,
placing emphasis on the custody of public funds.
7. Fiduciary Accounting- refers to the handling of accounts managed by a person entrusted with the
custody and management of property for the benefit of another.
8. Estate Accounting – refers to the handling of accounts for fiduciaries who wind up the affairs of a
deceased person.
9. Social Accounting - the process of communicating the social and environmental effects of an entity’s
economic actions to the society.
10. Institutional Accounting – accounting for non-profit entities other than the government.
11. Accounting Systems – installation of accounting procedures for the accumulation of financial data
and designing of accounting forms to be used in data gathering.
12. Accounting Research – pertains to the careful analysis of economic events and other variables to
understand their impact on decisions.
Bookkeeping – refers to the process of recording the accounts or transactions of an entity.

Accountancy – refers to the profession.
Public Practice- does not involve an employer-employee relationship.
Private Practice- involves an employer-employee relationship.
Four Sectors in the practice of Accountancy
1. Practice of Public Accountancy- rendering of audit or accounting related services to more than one
client on a fee basis.
2. Practice in Commerce and Industry – refers to employment in the private sector which involves
decision making.
3. Practice in Education/Academe – employment in educational institution which involves teaching in
accounting, auditing, management, tax, law.
4. Practice in the Government – employment or appointment in the government.
Philippine Financial Reporting Standards (PFRS’s) – standards adopted by the Financial and Sustainability
Reporting Standards Council ( FSRSC) – the official accounting standard-setting body in the Philippines from
the International Financial Reporting Standards. The IFRSs consist of the following:
a. IFRS Accounting Standards
i. International Financial Reporting Standards (IFRSs);
ii. International Accounting Standards (IASs);and
iii. Interpretations
b. IFRS for SMEs Accounting Standard; and
c. IFRS Sustainability Disclosure Standards
The need for reporting standards – financial statements should be prepared using reporting standards that
are generally acceptable to be useful.
Generally acceptable – standards has been established by an authoritative accounting rule-making body.
The principle has gained general acceptance due to practice overtime and has been proven to be more
useful.
Hierarchy of Reporting Standards

1. PFRS Accounting Standards
2. In the absence of a PFRS, management shall use its judgment in developing and applying an accounting
policy.- The proper application of accounting principles is most dependent upon the professional
judgment of the accountant.
Judgment Making:
1. Management shall refer to and consider the applicability of the following resources in
descending order:
a. Requirements in PFRSs dealing with similar and related issues;
B. Conceptual Framework.
2. Management may also consider the following:
a. Pronouncements of other standard-setting bodies
b. Accounting literature and accepted industry practices
Accounting standard setting bodies and other relevant organizations

1. Financial and Sustainability Reporting Standards Council (FSRSC) – the official accounting standard
setting body in the Philippines created under the Philippine Accountancy Act of 2004 (R.A. No. 9298)
2. Philippine Interpretations Committee (PIC) – a committee formed by the Accounting Standards
Council (ASC) – review the interpretations of the International Financial Reporting
3. Board of Accountancy (BOA) – is the professional regulatory board created under R.A. No. 9298 to
supervise the registration, licensure and practice of accountancy in the Philippines.
4. Securities and Exchange Commission (SEC) – government agency tasked in regulating corporations and
partnerships, capital and investment markets, and the investing public.
5. Bureau of Internal Revenue (BIR) – administers the provisions of the National Internal Revenue Code.
They influence the choice of accounting methods and procedures.
6. Bangko Sentral ng Pilipinas (BSP) – influences the selection and application of accounting policies by
banks and other entities performing banking functions.
7. Cooperative Development Authority (CDA) – influences the selection and application of accounting
policies by cooperatives
International Accounting Standards Board (IASB) – accounting standard-setting body of the IFRS
Foundation with the main objectives of developing and promoting global accounting standards.
Other Relevant International Organizations
1. International Financial Reporting Interpretations Committee (IFRIC) – a committee that prepares
interpretations of how specific issues should be accounted for under the application of IFRS
2. IFRS Advisory Council – group of organizations and individuals with an interest in international
financial reporting.
3. International Federations of Accountants (IFAC) – non-profit, non-governmental, non-political
organization of accountancy bodies that represents the worldwide accountancy profession.
4. International Organization of Securities Commissions (IOSCO)- an international body of security
commissions.
CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING
Purposes of the Conceptual Framework
The Conceptual Framework prescribes the concepts for general purpose financial reporting. Its purpose is
to:
a. assist the International Accounting Standards Board (IASB) in developing Standards that are based on
consistent concepts;
b. assist preparers in developing consistent accounting policies when no Standard applies to a particular
transaction or when a Standard allows a choice of accounting policy; and
c. assist all parties in understanding and interpreting the Standards.
Standards should :
a. Promote transparency by enhancing the international comparability and quality of financial
information.
b. Strengthen accountability by reducing the information gap between providers of capital and the
entity’s management.
c. Contribute to economic efficiency by identifying the opportunities and risks around the world.
Status of the Conceptual Framework
The Conceptual Framework is not a PFRS. When there is a conflict between the Conceptual Framework and
a PFRS, the PFRS will prevail.
In the absence of a standard, management shall consider the Conceptual Framework in making its
judgment in developing and applying an accounting policy that results in useful information.
Scope of the Conceptual Framework
The Conceptual Framework is concerned with general purpose financial reporting. General purpose financial reporting involves the
preparation of general purpose financial statements. The Conceptual Framework provides the concepts regarding the following:
1. The objective of financial reporting
2. Qualitative characteristics of useful financial information
3. Financial statements and the reporting entity
4. The elements of financial statements
5. Recognition and derecognition
6. Measurement
7. Presentation and disclosure
8. Concepts of capital and capital maintenance

1. Objective Financial Reporting
The objective of general purpose financial reporting is to provide financial information about the reporting
entity that is useful to existing and potential investors, lenders and other creditors in making decisions
about providing resources to the entity.
Reporting entity - any business entity that is engaging in Financial Reporting according to some Financial
Reporting Standards.
The objective of general purpose financial reporting forms the foundation of the Conceptual Framework.
Primary users – are those who cannot demand information directly from reporting entities. The primary
users are:
(a) Existing and potential investors
(b) Lenders – those who extends loans (banks) while other creditors are those who extend other forms of
credit (supplier)
Only the common needs of primary users are met by the financial statements. General purpose financial
reports do not and cannot provide all the information needs of primary users.
- General purpose financial reports do not directly show the value of the reporting entity, rather they
provide information by the use of estimates on the value of the entity.
- Primary users cannot have the detailed report about the entity.
Decisions about providing resources to the entity.
1. Buying, selling or holding investments – existing and potential investors- if they will invest or make an
additional investment, it depends on the financial standing they obtained on the general financial
reports.
2. Providing or settling loans and other forms of credit – for creditors and lenders, if they will extend or
lend loans or not, depends on the financial standing of the reporting entity.
3. Exercising voting or similar rights that could influence management’s actions relating to the use of the
entity’s economic resources – Votes of investors.
Information on Economic Resources, Claims, and Changes
4. Financial Position – information on economic resources (assets) and claims against the reporting entity
(liabilities and equity)
5. Changes in economic resources and claims – information on financial performance ( income and
expenses) and other transactions and events that lead to changes in financial position.
Economic Resources and Claims
Entity’s assessment as to the nature and amount of information
1. Liquidity and Solvency -Liquidity refers to both an enterprise's ability to pay short-term bills and debts
and a company's capability to sell assets quickly to raise cash. Solvency refers to a company's ability to
meet long-term debts and continue operating into the future.
2. Needs for additional financing and how successful it is likely to be in obtaining that financing.
3. Management’s stewardship on the use of economic resources.
Stewardship - the careful and responsible management of something entrusted to one's care.
Changes in economic resources and claims
4. Financial Performance (income and expenses) – helps users assess the entity’s ability to produce
return from its economic resources. Ex… If the investment has a greater return.
5. Other events and transactions
Qualitative Characteristics – identify the types of information that are likely to be most useful to the primary users in making decisions using an entity’s
financial report.
I. Fundamental qualitative characteristics
(1) Relevance- if it can male a difference in the decisions of users.
(a) Predictive Value – the information can help users in making predictions about future outcomes. These 2 are interrelated
(b) Confirmatory Value (Feedback Value) – the information can help users in confirming their previous predictions.
Materiality – information is material if omitting (excluding) , misstating (incorrect information) or obscuring( not clear) could reasonably be expected to
influence decisions.
(2) Faithful representation – the information provides a true, correct and complete depiction of the economic phenomena that it purports to
represent
Characteristics of Faithful representation
(a) Completeness – provides all information which the users need.
(b) Neutrality – information is selected or presented without bias.
(c) Free from error – there are no errors in the description and in the process by which the information is selected and applied.
II. Enhancing qualitative characteristics
(1) Comparability – helps the users identify similarities and differences between different sets of information.
(2) Verifiability –different users could reach a general agreement as to what the information claim to represent.
(3) Timeliness – if its available to users in time to be able to influence their decisions.
(4) Understandability – if presented in a clear and concise manner. Concise-simple and clear.
Fundamental vs. Enhancing
The fundamental qualitative characteristics are the characteristics that make information useful to users.
The enhancing qualitative characteristics are the characteristics that enhance the usefulness of information
Enhance- strengthen
Financial statements and the Reporting entity
Reporting period
Financial statements are prepared for a specific period of time (i.e., the reporting period) and include
comparative information for at least one preceding reporting period.
Going concern
Financial statements are normally prepared on the assumption that the reporting entity is a going concern,
meaning the entity has neither the intention nor the need to end its operations in the foreseeable future.
Financial statements and the Reporting entity
Reporting entity
A reporting entity is one that is required, or chooses, to prepare financial statements, and is not necessarily
a legal entity. It can be a single entity or a group or combination of two or more entities.
Elements of Financial Statements
The elements of financial statements are:

1. Assets
2. Liabilities These relate to the entity’s financial positions
3. Equity
4. Income These relate to the entity’s financial performance
5. Expenses
Asset
Asset is “a present economic resource controlled by the entity as a result of past events. An economic
resource is a right that has the potential to produce economic benefits.”
Three aspects in the definition of an asset
Right –Asset is an economic resource, and an economic resource is a right that has the potential to produce
economic benefits. The right to receive cash, goods or services, right to exchange economic resources with
another party, and the right to benefit from an obligation of another party to transfer economic resources. The
right over physical objects and the right to use intellectual property ( patent, trademark, copyright)
Potential to produce economic benefits – the right has a potential to produce economic benefits for the entity
that are beyond the benefits available to all others. Such potential need not be certain or even likely – what is
important is that the right already exists and that, in at least one circumstance, it would produce economic
benefits for the entity. Ex. Sold, lease, transfer..refer to book
Control – means the entity has the exclusive right over the benefits of an asset and the ability to prevent
others from accessing those benefits.
Liability
Liability is “a present obligation of the entity to transfer an economic resource as a result of past events.”
Three aspects in the definition of a liability
Obligation – An obligation is “a duty or responsibility that an entity has no practical ability to avoid.”
An obligation can be either legal obligation or constructive obligation.
Legal Obligation – an obligation that results from a contract, legislation or other operation of law.
Transfer of an economic resource – the obligation has the potential to require the transfer of an economic
resource to another party. Such potential need not be certain or even likely – what is important is that the
obligation already exists and that, in at least one circumstance, it would require the
transfer of an economic resource.
Present obligation as a result of past events – A present obligation exists as a result of past events if:
the entity has already obtained economic benefits or taken an action; and as a consequence, the entity will
or may have to transfer an economic resource that it would not otherwise have had to transfer.
Executory contracts
An executory contract “is a contract that is equally unperformed –neither party has fulfilled any of its
obligations, or both parties have partially fulfilled their obligations to an equal extent.” (CF 4.56)
An executory contract establishes a combined right and obligation to exchange economic resources.
The contract ceases to be executory when one party performs its obligation.
If the entity performs first, the entity’s combined right and obligation changes to an asset.
If the other party performs first, the entity’s combined right and obligation changes to a liability.
Equity
“Equity is the residual interest in the assets of the entity after deducting all its liabilities.” (Conceptual
Framework 4.63)
Equity equals Assets minus Liabilities

Income and Expenses
Income
Income is “increases in assets, or decreases in liabilities, that result in increases in equity, other than those
relating to contributions from holders of equity claims.” (Conceptual Framework 4.68)
Expenses
Expenses are “decreases in assets, or increases in liabilities, that result in decreases in equity, other than
those relating to distributions to holders of equity claims.”
Recognition & Derecognition
The recognition process
Recognition is the process of including in the statement of financial position or the statement(s) of financial
performance an item that meets the definition of one of the financial statement elements (i.e.,
asset, liability, equity, income or expense). This involves recording the item in words and in monetary
amount and including that amount in the totals of either of those statements.
Recognition criteria
An item is recognized if:
it meets the definition of an asset, liability, equity, income or expense; and

recognizing it would provide useful information, i.e., relevant and faithfully represented information.
Relevance
The recognition of an item may not provide relevant information if,

for example:
it is uncertain whether an asset or liability exists; or an asset or liability exists, but the probability of an
inflow or outflow of economic benefits is low. (Conceptual Framework 5.12)
However, the presence of one or both of the foregoing does not automatically lead to the non-recognition
of an item. Other factors should also be considered.
Faithful representation
The level of measurement uncertainty and other factors can affect an item’s faithful representation, but not
necessarily its relevance.
Measurement uncertainty
Measurement uncertainty exists if the asset or liability needs to be estimated. A high level of measurement
uncertainty does not necessarily lead to the non-recognition of an asset or liability if the estimate provides
relevant information and is clearly and accurately described and explained.
However, measurement uncertainty can lead to the non-recognition of an asset or a liability if making an
estimate is exceptionally difficult or exceptionally subjective.
Derecognition
Derecognition is the removal of a previously recognized asset or iability from the entity’s statement of
financial position.
Derecognition occurs when the item ceases to meet the definition of an asset or liability.
Measurement bases
Historical cost
Current value
Fair value
Value in use and fulfilment value
Current cost
Historical cost
The historical cost of:
an asset is the consideration paid to acquire the asset plus transaction costs.
a liability is the consideration received to incur the liability minus

transaction costs.
Historical cost is updated over time to depict the following:
Depreciation, amortization, or impairment of assets
Collections or payments that extinguish part or all of the asset or

liability
Unwinding of discount or premium when the asset or liability is

measured at amortized cost
Fair value
Fair value is “the price that would be received to sell an asset, or paid to transfer a liability, in an orderly
transaction between market participants at the measurement date.” (Conceptual Framework 6.12)
Value in use and fulfilment value
Value in use is “the present value of the cash flows, or other

economic benefits, that an entity expects to derive from the use of an asset and from its ultimate disposal.”
(Conceptual Framework 6.17)
Fulfilment value is “the present value of the cash, or other economic resources, that an entity expects to be
obliged to transfer as it fulfils a liability.” (Conceptual Framework 6.17)
Current cost
The current cost of: an asset is “the cost of an equivalent asset at the measurement date, comprising the
consideration that would be paid at the measurement date plus the transaction costs that would be
incurred at that date.”
a liability is “the consideration that would be received for an equivalent liability at the measurement date
minus the transaction costs that would be incurred at that date.”
Entry values vs. Exit values
Current cost and historical cost are entry values (i.e., they reflect prices in acquiring an asset or incurring a
liability), whereas fair value, value in use and fulfilment value are exit values (i.e., they reflect prices in
selling or using an asset or transferring or fulfilling a liability).
Considerations when selecting a measurement basis
When selecting a measurement basis, it is important to consider the following:
The nature of information provided by a particular measurement basis (e.g., measuring an asset at
historical cost may lead to the subsequent recognition of depreciation or impairment, while measuring that
asset at fair value would lead to the subsequent recognition of gain or loss from changes in fair value).
The qualitative characteristics, the cost-constraint, and other factors (e.g., a particular measurement basis
may be more verifiable or more costly to apply than the other measurement bases).
Measurement of Equity
Total equity is not measured directly. It is simply equal to difference between the total assets and total
liabilities.
Because different measurement bases are used for different assets and liabilities, total equity cannot be
expected to be equal to the entity’s market value nor the amount that can be raised from either selling or
liquidating the entity.
Equity is generally positive, although some of its components can be negative. In some cases, even total
equity can be negative such as when total liabilities exceed total assets.
Presentation and Disclosure
Information is communicated through presentation and disclosure in the financial statements.
Effective communication makes information more useful. Effective communication requires: focusing on
presentation and disclosure objectives and principles rather than on rules.
classifying information by grouping similar items and separating dissimilar items.
aggregating information in a manner that it is not obscured either by excessive detail or by excessive
summarization.
Presentation and disclosure objectives and principles
The objectives are specified in the Standards.
The principles include:
the use of entity-specific information is more useful that standardized descriptions, and duplication of
information is usually unnecessary.
Classification
Classifying means combining similar items and separating dissimilar items.
Offsetting of assets and liabilities is generally not appropriate.
Classification of income and expenses
Income and expenses are classified as recognized either in: profit or loss; or
other comprehensive income.

Aggregation
Aggregation is “the adding together of assets, liabilities, equity, income or expenses that have shared
characteristics and are included in the same classification.” (Conceptual Framework 7.20)
Concepts of Capital and Capital Maintenance
Financial concept of capital – capital is regarded as the invested money or invested purchasing power.
Capital is synonymous with equity, net assets, and net worth.
Physical concept of capital – capital is regarded as the entity’s productive capacity, e.g., units of output per
day.
PAS 1 Presentation of Financial Statements – terminologies used in PAS 1 is suitable for profit oriented
entities
Learning Objectives
Enumerate and describe the general features of financial statement presentation.
Enumerate and describe the components of a complete set of financial statements.
State the acceptable methods of presenting items of income and expenses.
Differentiate between the statement of profit or loss and other comprehensive income and the statement
of changes in equity.
State the relationship of the notes with the other components of a complete set of financial statements.
Objective of PAS 1
PAS 1 prescribes the basis for presentation of general purpose financial statements, the guidelines for their
structure, and the minimum requirements for their content to ensure comparability. (
the degree to which accounting standards and policies are consistently applied from one period to
another.)
Types of comparability:
1. Intra-comparability ( horizontal-or inter-period) comparability of financial statements of the same
entity but from one period to another.
2. Inter-comparability ( dimensional) –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 accros entities.
Complete set of financial statements - are the structured representation of an entity’s financial position and results of
its operations. They are also the end product of the financial reporting process and the means by which the
information gathered and process is periodically communicated to users
Purpose of Financial statements

1. To provide information about the financial position, (balance sheet), financial performance (income statement),
and cash flows(cash flow statement) of an entity that is useful to a wide range of users in making economic decisions.
2. To show the result’s of management stewardship over the entity’s resources.
Complete set of financial statements

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 (5a) comparative information in respect of the preceding period; and
6. Additional statement of financial position (required only when certain instances occur)e.g..merging of two companies.
General features
1. Fair Presentation and Compliance with PFRSs – fair presentation is faithfully representing and in
accordance with Conceptual frameworks.
- Proper selection and application of accounting policies, proper presentation of information and provision
of additional disclosures(the timely release of all information about a company that may influence an
investor's decision. It reveals both positive and negative news, data, and operational details that impact its
business) whenever relevant to the understanding of F/S.
2. Going concern - when preparing F?S, management shall assess the entity’s ability to continue as a going
concern, taking into account all available information about the future. At least, but not limited to , 12
months from the reporting date.
The assessment of going concern is at least 12 months.
General features (Continuation)
3. Accrual Basis of Accounting – all F/S shall be prepared using the accrual basis of accounting except for the
statement of cash flows, which is prepared using cash basis.
4. Materiality & Aggregation - Each material class of similar items must be presented separately in the
financial statements. A class of similar item is called a “line item” ex. Of line item, sales revenue, service
revenue, interest income, or any other sources of income for the entity.
5. Offsetting - Assets and liabilities, and income and expenses, shall not be offset unless required or permitted
by a PFRS.
Measuring assets net of valuation allowances, for example, obsolescence allowances on inventories,
allowances for doubtful accounts on receivables, and accumulated depreciation on property, plant, and
equipment are not offsetting.
6. Frequency of reporting – An entity shall present a complete set of financial statements (including
comparative information) at least annually.
When an entity changes the end of its reporting period and presents financial statements for a period
longer or shorter than one year, an entity shall disclose the following:
1. The period covered by the financial statements,
2. The reason for using a longer or shorter period, and
3. The fact that amounts presented in the financial statements are not entirely comparable.
7. Comparative Information
An entity shall present comparative information in respect of the preceding (prior) period for all amounts
reported in the current period’s financial statements, unless other standards permit or require otherwise.
8. Consistency of presentation - An entity shall retain the presentation and classification of items in the
financial statements from one period to the next unless:
1. Required by the PFRS, or
2. Results in information that is reliable and more relevant.
Additional Statement of financial position
An additional statement of financial position is presented as at the beginning of the preceding period when
an entity:
Applies an accounting policy retrospectively, or
Makes a retrospective restatement of items in its financial statements, or
reclassifies items in its financial statements.
…..and the effect of the event to the statement of financial position as

at the beginning of the preceding period is material.
Structure and content of F/S
1. The name of the reporting entity
2. Whether the statements are for the individual entity of for a group of entites
3. The date of the end of the reporting period of the period covered by the F/S
4. The presentation currency
5. The level of rounding used ( thousands, million..etc)
ABC Group
Statement of Financial Position or Balance Sheet
As of December 31, 2023
(In thousands of Philippine Peso)
Management’s responsibility over F/S
1. Preparation and fair presentation of F/S in accordance with PFRSs
2. Internal control over financial reporting – F/S are reliable because of the strict preparation
3. Going concern assessment
4. Oversight over the financial reporting process, and
5. Review and approval of F/S
Signed by authority
Prepared by, noted by, recommending approval, approved by
Statement of financial position
The statement of financial position shows the entity’s financial condition (status of assets, liabilities and
equity) as at certain dates. It includes the following line items.
1. Property, plant and equipment;
2.Investment property;
3. Intangible assets;
4. Financial assets (excluding amounts shown under (5), (8) and (9);
5.Investments accounted for using the equity method;
6.Biological assets;
7.Inventories;
8.. Trade and other receivables;
9. Cash and cash equivalents;
10. Assets (or disposal groups) classified as held for sale in accordance
Minimum line items (Continuation)
11. Trade and other payables;

12. Provisions;
13. Financial liabilities (excluding amounts shown under (k) and (l));
14. Liabilities and assets for current tax, as defined in PAS 12 Income Taxes;
15. Deferred tax liabilities and deferred tax assets, as defined in PAS 12;
16.Liabilities included in disposal groups classified as held for sale in accordance with PFRS 5;
17.Non-controlling interests, presented within equity; and
18.Issued capital and reserves attributable to owners of the parent
Presentation of statement of financial position
1. Classified presentation – distinction between current and non-current assets and current and non
current liabilities.
- It highlights an entity’s working capital and facilitates the computation of liquidity and
solvency ratios
Working Capital = Current assets – current liabilities
2. Unclassified presentation – no distinction between current and non current items.
Current Assets
An entity shall classify an asset as current when:

1. it expects to realize the asset or intends to sell or consume it, in its normal operating cycle;
2.it holds the asset primarily for the purpose of trading;
3.it expects to realize the asset within twelve months after the reporting period; or
4. the asset is cash or a cash equivalent unless the asset is restricted from being exchanged or used to settle
a liability for at least twelve months after the reporting period.
Current Liabilities
An entity shall classify a liability as current when:

1 .it expects to settle the liability in its normal operating cycle;
2 .it holds the liability primarily for the purpose of trading;
3 . the liability is due to be settled within twelve months after the reporting period; or
4 . the entity does not have the right at the end of the reporting period to defer settlement of the liability
for at least twelve months after the reporting period.
Operating cycle – time between the acquisition of assets for processing and their realization in cash or cash
equivalents.
Deferred tax assets and liabilities are always presented as non current items. E.g carryover of losses.
A deferred tax asset is a business tax credit for future taxes, and a deferred tax liability means the business
has a tax debt that will need to be paid in the future
Examples of current assets:
1. Cash and cash equivalents
2. Accounts receivable
3. Non-Trade receivable collectible within 12 months (example, the company loans an employee money for a travel
advance or a company borrows money from another company.)
4. Held for trading securities-an equity investment bought with the intention to sell within a short period. (stocks, bonds
and shares)
5. Inventory
6. Prepaid assets - a financial resource that a business has paid for in full, although the full benefit of that resource will
not be used until a future date.
Examples of Current Liabiilities
7. Accounts payable
8. Salaries payable
9. Dividends payable
10. Income tax payable
11. Unearned revenue - money received by an individual or company for a service or product that has yet to be provided
or delivered/bonds payable due in 12 months
Examples of non current assets:
1. Property, plant and equipment
2. Non-trade receivable collectible beyond 12 months
3. Investments in associate
4. Investment property
5. Intangible assets – copyright, patent, trademarks
6. Deferred tax asset
Examples of non current liabilities

7. Portion of notes/loans/bonds payable due beyond 12 months
8. Deferred tax liability.
Currently maturing long-term liabilities
General rule: Currently maturing long term liabilities are presented as current liabilities.
Exception: The entity has the right, at the end of the reporting period, to roll over the obligation for at least
twelve months after the reporting period under an existing loan facility – non-current
liability
Breach of loan agreement
General rule: A liability that is payable on demand is a current liability.
Exception: It is presented as non-current liability if the lender provides the entity, on or before the balance
sheet date, a grace period ending at least 12 months after the balance sheet date to rectify a breach of loan
covenant.
Statement of profit or loss and other comprehensive income
An entity shall present all items of income and expense recognized in a period:
in a single statement of profit or loss and other comprehensive

income; or
in two statements: (1) a statement displaying the profit or loss section only (separate ‘statement of profit or
loss’ or ‘income statement’) and
(2) a second statement beginning with profit or loss and displaying components of other comprehensive
income.
Extraordinay items are prohibited in the presentation on the statement of profit or loss and other
comprehensive income or in the notes
Presentation of expenses
1. Nature of expense method- expenses are aggregated according to their nature ( e.g., depreciation,
purchases of materials, transport cost, employee benefits and advertising costs) are not reallocated
according to their functions within the entity.
2. Functions of expense method (Cost of sales method) – expenses are classified according to their
functions (e.g. cost of sales, distribution costs, administrative expenses, and other functional
classifications)
Other comprehensive income – comprises of items of income and expense (including reclassification and
adjustments) that are recognized in profit or loss.
1. Changes in revaluation surplus

2. Remeasurements of the net defined benefit liability (asset)
4.Gains and losses on investments designated or measured at fair value through other comprehensive
income ( FVOCI)
5. Gains and losses arising from translating the financial statements of a foreign operation
6. Effective portion of gains and losses on hedging instruments in a cash flow hedge
7. 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
OCI may be presented either (a) net of tax or (b) gross of tax.2.
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.
Statement of Changes in Equity
1. Effects of change in accounting policy or correction of prior period error.
2. Total comprehensive income for the period
3. 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:
a. profit or loss
b. other comprehensive income
c. transactions which owners, e.g. contributions by and distributions to owners
Disclosure of dividends
Dividends declared by an entity are disclosed either in the (a) notes

or (b) statement of changes in equity.
Notes – provides information in addition to those presented in the other financial statements.. It is an
integral part of the complete set of financial statements.
Structure of Notes
1. General information on the reporting entity.
2. Statement of compliance with the PFRSs and basis of preparation of financial statements
3. Summary of material accounting policy information
4. Disaggregation (breakdowns)
5. Other disclosures required by PFRSs
PAS 2 Inventories – accounting treatment of inventories
Learning Objectives
1. Define inventories.
2. Measure inventories and apply the cost formulas.
3. State the accounting for inventory write-down and the reversal thereof.
Inventories
Inventories are assets:

1. Held for sale in the ordinary course of business (Finished Goods);
2. In the process of production for such sale (Work In Process); or
3. 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:
1. Merchandise purchased by a trading entity and held for resale
2. Land and other property held for sale in the ordinary course of business
3. Finished goods, goods undergoing production, and raw materials and supplies awaiting use in the
production process by a manufacturing entity.
Financial statement presentation
All items that meet the definition of inventory are presented on the statement of financial position as one
line item under the caption “Inventories.” The breakdown of this line item (as finished goods, WIP and
Raw materials) is disclosed in the notes.
Inventories are normally presented in a classified statement of financial position as current assets.
Measurement
Inventories are measured at the lower of cost and net realizable value (NRV).
Cost
The cost of inventories comprise of the following
1. Purchase cost – includes the purchase price(net of trade discounts and other rebates), import duties,
non-refundable or non-recoverable purchases taxes, and transport, handling and other costs directly
attributable to the acquisition of the inventory.
2. Conversion costs – costs necessary to converting raw materials into finished goods, includes the costs
of direct labor and production overhead.
3. Other costs incurred in bringing the inventories to their present location and condition (shipping)
Costs that are EXPENSED when incurred
1. Abnormal amounts of wasted materials, labor or other production costs.
2. Selling costs, for example, advertising and promotion costs and delivery expense or freight out.
3. Administrative overheads that do not contribute to bringing inventories to their present location and
condition.
4. 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 finished goods are expensed).
Cost Formulas – deal with the computation of cost of inventories that are charged as expense when the
related revenue is recognized (cost of sales or cost of goods sold)
1. Specific identification - shall be used for inventories that are not ordinarily interchangeable (i.e., used for
inventories that are unique). Cost of sales is the cost of the specific inventory that was sold.
2. FIFO – cost of sales is based on the cost of inventories that were purchased first. Consequently, ending
inventory represents the cost of the latest purchases.
3. Weighted average – cost of sales is based on the weighted average cost of beginning inventory and all
inventories purchased during the period.
Net realizable value (NRV) is the estimated selling price in the ordinary course of business less the
estimated costs of completion and the estimated costs necessary to make the sale.
- Refers to the net amount that an entity expects to realize from the sale of inventory in the ordinary course
of business.
Write down of inventories - A write down is technique that accountants use to reduce the value of an asset
to offset a loss or an expense
Inventories are usually written down to net realizable value on an item by item basis.
If the cost of an inventory exceeds its NRV, the inventory is written down to NRV, the lower amount. The
excess of cost over NRV represents the amount of write-down.
Reversal of write-downs
The amount of reversal to be recognized should not exceed the amount of the original write-down
previously recognized.
PAS 7 Statement of Cash Flows
Learning Objectives
Describe the statement of cash flows.
Differentiate between the following:

(1) Operating activities,
(2) Investing activities, and
(3) Financing activities.
State the classifications of the following in a statement of cash

flows: (a) dividends received, (b) dividends paid, (c) interest
paid and (d) interest received.
Statement of Cash Flows- may also provide information on the quality of earnings of an entity. Prepared on
a cash basis not accrual basis of accounting.
The statement of cash flows provides information about the sources and utilization (i.e., historical changes)
of cash and cash equivalents during the period.
Cash- cash on hand and cash in bank
Cash equivalents – short- term, highly liquid investments that are readily convertible to known amounts of
cash and which are subject to an insignificant risk of changes in value.
Cash Flow- include inflows (resources) and outflow (uses) of cash and cash equivalents.
Classification of Cash Flows
1. Operating activities – derived from the principal revenue-producing activities of the entity.
- include cash inflows and outflows on items of income and expenses, or those that enter into the determination of profit or loss ( included in the
income statement).
Example: a. cash receipts from the sale of goods, rendering of services, or other forms of income.
b. cash payments for purchases of goods and services.
c. cash payments for operating expenses, such as employee benefits, insurance, payments for refunds of income taxes.
d. cash receipts and payments from contracts held for dealing or trading purposes
2. Investing activities – involve the acquisition and disposal of non-current assets and other investments.
Example: a. Cash receipts and cash payments in the acquisition and disposal of property, plant and equipment, investment
property, intangible assets and other non current assets.
b. cash receipts and cash payments in the acquisition and sale of equity or debt instruments of other entities ( other than those
that are classified as cash equivalents or held for trading)
c. cash receipts and cash payments on derivative assets and liabilities (other than those that are held for trading or classified as
financing activities)
d. loans to other parties and collections thereof.
3. Financing activities- activities which affect the entity’s borrowings and contributed equity.
Examples: a. cash receipts fro issuing shares or other equity instruments and cash payments to redeem them.
b. cash receipts from issuing notes, loans, bonds and mortgage payable and other sort-term or long-term borrowings, and their repayments
c. cash payments by a lessee for the reduction of the outstanding liability relating to a lease.
Operating Activities – affect profit or loss

Investing Activities – affect non-current assets and other investments
Financing Activities – affect borrowings and equity
Presentation of cash flows from operating activities
1. Direct method - shows each major class of gross cash receipts and gross cash payments.
2. Indirect method - profit or loss for the effects of non-cash items and changes in operating assets and
liabilities.
PAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
Learning Objectives
Define the following and give examples:
(1) Change in accounting policy,
(2) Change in accounting estimate, and
(3) Error.
Differentiate between the accounting treatments of the following:

1. change in accounting policy,
2. change in accounting estimate, and
3. correction of prior period error.
Objective and Scope
PAS 8 prescribes the criteria for selecting, applying, and changing accounting policies and the accounting
and disclosure of changes in accounting policies, changes in accounting estimates and correction of prior
period errors.
Accounting policies
Accounting policies are “the specific principles, bases, conventions, rules and practices applied by an entity
in preparing and presenting financial statements.” (PAS 8.5)
Accounting policies are the relevant PFRSs adopted by an entity in preparing and presenting its financial
statements.
Hierarchy of reporting standards.
1. PFRSs
2. Judgment
When making the judgment-management shall consider the following:
a. Requirements in other PFRSs dealing with similar transactions
b. Conceptual Framework
Management may consider the following:
a. Pronouncements issued by other standard-setting bodies
b. Other accounting literature and industry practices.
PFRSs
Philippine Financial Reporting Standards (PFRSs) are Standards and Interpretations adopted by the
Financial Reporting Standards Council (FRSC). They comprise the following:
1. Philippine Financial Reporting Standards (PFRSs);
2. Philippine Accounting Standards (PASs); and
3. Interpretations
.
When it is difficult to distinguish a change in accounting policy from a change in accounting estimate, the change is
treated as a change in an accounting estimate.
An entity shall change an accounting policy only if the change:
is required by a PFRS; or
results to a more relevant and reliable information about an entity’s financial position, performance, and
cash flows.
. Examples of changes in accounting policy
1. Change from FIFO to the Weighted Average cost formula of inventories.

2. Change from the cost model to the fair value model of measuring investment property.
3. Change from the cost model to the revaluation model of measuring property, plant, and equipment and
intangible assets.
4. Change in business model for classifying financial assets
5. Change in the method of recognizing revenue from long-term construction contracts.
6. Change for a new policy resulting from the requirement of a new PFRS,
7. Change in financial reporting framework, such as from PFRS for SMEs to full PFRSs
. Accounting for Changes in Accounting Policies.
1. Transitional provision in a PFRS – apply from the date of application
2. Retrospective application – adjusting the opening balance of each affected component of the equity.
3. Prospective application – from the earliest date practicable.
. Change in Accounting Estimates
Accounting Estimates – monetary amounts in financial statements that are subject to measurement uncertainty.
Examples of changes in accounting estimates:

1. Change in the depreciation or amortization method, the useful life or the residual value of an asset.
2. Change in the required balance of allowance for uncollectible accounts or impairment losses
3. Change in estimated warranty obligations and other obligations
4. Change in the net realizable value of inventory
5. Change in the estimate of fair value
. Accounting for Change in Accounting Estimates
1. The period of change

2. The period of change and future periods
. Errors
Errors include misapplication of accounting policies, mathematical mistakes, oversights

or misinterpretations of facts and fraud.
Material errors – are those that cause the financial statements to be misstated
Intentional errors are fraud
Error of Commission - doing something wrong
Error of Omission – not doing something that should have been done.
Type of errors according to the period of occurrence:

1. Current period errors- are errors in the current period of after the current period
but before the financial statements were authorized for issue.
2. Prior period errors – are errors in one or more prior periods that were only
discovered either during the current period or after the current period but before
the F/S were authorized for issue.
. PAS 10 Events after the Reporting Period
Learning Objectives
Define events after the reporting period.
State the accounting requirements for events after the reporting period.
. Events after the Reporting Period
Events after the reporting period are “those events, favorable or unfavorable, that occur between the end of the reporting
period and the date that the financial statements are authorized for issue.” (PAS 10)
Date of Authorization of the Financial Statements – is the date when management authorizes the financial statements for
issue regardless of whether such authorization is final or subject to further approval.
. Two types of events after the reporting period
Adjusting events after the reporting period – are those that provide evidence of conditions that existed at the
end of the reporting period.
Non-adjusting events after the reporting period – those that are indicative of conditions that arose after the
reporting period
. Examples of adjusting events after the reporting period
1. The settlement after the reporting period of a court case that confirms that the entity has a present obligation at
the end of reporting period.
2. The receipt of information after the reporting period indicating that an asset was impaired at the end of
reporting period. For example:
a. The bankruptcy of a customer that occurs after the reporting period may indicate that the carrying
amount of a trade receivable at the end of reporting period is impaired.
b. The sale of inventories after the reporting period may give evidence to their net realizable value at the
end of reporting period
3. The determination after the reporting period of the cost of asset purchased, or the proceeds from asset sold,
before the end of reporting period.
4. The determination after the reporting period of the amount of profit sharing or bonus payments, if the entity
had a present legal or constructive obligation at the end of reporting period to make such payments.
5. The discovery of fraud or errors that indicate that the financial statements are incorrect.
Examples of non-adjusting events normally requiring disclosures:
1. Changes in fair values, foreign exchange rates, interest rates or market prices after the reporting period.
2. Casualty losses (e.g., fire, storm, or earthquake) occurring after the reporting period but before the
financial statements were authorized for issue.
3. Litigation arising solely from events occurring after the reporting period.
4. Significant commitments or contingent liabilities entered after the reporting period, e.g. significant
guarantees.
5. Major ordinary share transactions and potential ordinary share transactions after the reporting period.
6. Major business combination after the reporting period.
7. Announcing, or commencing the implementation of, a major restructuring after the reporting period.
8. Announcing a plan to discontinue an operation after the reporting period.
9. Change in tax rate enacted after the reporting period.
10. Declaration of dividends after the reporting period
Dividends declared after the reporting period are not recognized as liability a the end of reporting period
because no present obligation exists at the end of reporting period.
Going Concern
PAS 10 prohibits the preparation of F/S on a going concern basis if management determines after the
reporting period either that it intends to liquidate the entity or to cease trading, or that it has no realistic
alternative to do so.
PAS 12 Income Taxes
Learning Objectives
Understand the scope and the fundamental principle of PAS 12.
Interpret the terminology used in the accounting for current and deferred taxes.
State the recognition, measurement and presentation of current and deferred taxes.
Income Taxes – refer to taxes that are based in taxable profits.
The income tax expense reported in the statement of comprehensive income may be different from the
amount of income tax required to be paid to the Bureau of Internal Revenue (BIR). This is because the
income tax expense in the statement of comprehensive income is computed using PFRSs while the current
tax expense in the income tax return (ITR) is computed using Philippine Tax Laws, and the PFRSs and tax
laws have different accounting treatments for some economic activities.
Some items are appropriately recognized as income (expense) under financial reporting but are either (a)
non-taxable (non-deductible) or (b) taxable (deductible) only at some other periods under Philippine tax
laws. These varying treatments result to permanent and temporary differences. PAS 12 addresses the
accounting, presentation and reconciliation of these differences.
Example.
Entity A accrues bad debts expense of P100 for financial reporting. For taxation however, the amount is tax deductible only when it is
deemed worthless. The difference is analyzed below:
Financial reporting Taxation Difference
Profit before bad 1000 1000 0
debts
Bad debts (100) 0 (100)
Accounting/Taxable 900 1000 (100)
profit
Tax rate 30% 30%
Income/current tax 270 300 (30)
expense
270 – amount of income tax expense presented in the statement of comprehensive income
300 – amount of current tax expense to be paid the BIR
30 - Difference to be reconciled in the notes
Accounting profit and Taxable profit
1. Accounting profit is a profit or loss for a period before deducting tax expense
2. Taxable profit (tax loss) is profit (loss) for a period, determined in accordance with the rules established
by the taxation authorities, upon which income taxes are payable (recoverable)
Accounting profit or loss Taxable profit (Tax loss)
- Computed using PFRSs - Computed using tax laws
- Total income less total expenses, - Taxable income less tax deductible
excluding tax expenses expenses
Income tax expense and current tax expense
Tax expense or income tax expense (tax income) – is the total amount included in the determination of
profit or loss for the period. It comprises current tax expense (current tax income) and deferred tax
expense (deferred tax income)
Current tax or current tax expense – is the mount of income taxes payable (recoverable) in respect of the
taxable profit (tax loss) for the period.
Deferred tax expense (income or benefit) – is the sum of the net changes in deferred tax assets and
deferred tax liabilities.
- if the increase in deferred tax liability exceeds the increase in deferred tax asset, the difference is
deferred tax expense.
- if the increase in deferred tax asset exceeds the increase in deferred tax liability, the difference is
deferred tax income or benefit
Example in continuation of the one cited: for Entity A
Tax rate
Accounting profit 900 30% Income tax expense 270
Temporary difference 100 30% Deferred tax(expense) benefit 30
Taxable profit 1000 30% Current tax expense 300
Using the definition above, we can reconcile the income tax expense as follows:
Income tax expense= Current tax expense + Deferred tax expense/-Deferred tax benefit
Income tax expense= 300 computed using tax laws – 30 determined using PFRSs= 270 amount presented in
the statement of comprehensive income
Or
Income tax expense 270 (squeeze)
Deferred tax (expense) benefit 30
Current tax expense 300 (start)
Permanent differences
Permanent differences arise when income and expenses enter in the computation of either accounting profit or taxable profit but not
both. If an item is included in the computation of one, it will never enter in the computation of the other.
- usually arise from non-taxable and non-deductible expenses and those that have already been subjected to final taxes, these
items are excluded from the income tax return.
Examples:
1. Interest income on government bonds and treasury bills
2. Interest income on bank deposits
3. Dividend income
4. Fines, surcharges, and penalties arising from violation of law
5. Life insurance premium on employees where the entity is the irrevocable beneficiary
Temporary differences
Temporary differences are differences between the carrying amount of an asset or liability in the statement
of financial position and its tax base.
Temporary differences are either:
1. Taxable temporary differences – those that result to future taxable amounts when the carrying
amount of the asset or liability is recovered or settled: or
2. Deductible temporary differences - those that result to future deductible amounts when the carrying
amount of the asset or liability is recovered or settled.
Taxable temporary differences result to deferred tax liabilities while deductible temporary differences result
to deferred tax assets.
Deferred taxes
If the increase in deferred tax liability exceeds the increase in deferred tax asset, the difference is deferred
tax expense. If it is the opposite, the difference is deferred tax income or benefit.
A deferred tax asset is recognized only to the extent that it is realizable.
Deferred taxes are measured using enacted or substantially enacted tax rates that are applicable to the
periods of their expected reversals.
Deferred tax assets and liabilities are not discounted.
Deferred tax asset and liabilities are presented as non-current.

Taxable temporary differences arise when:
a. Financial income (accounting profit0 is greater than the taxable income (taxable profit)
b. The carrying amount of an asset is greater than its tax base
c. The carrying amount of a liability is less than its tax base
Examples:
d. Revenue is recognized in full under financial reporting but is taxable only when collected
e. A prepayment is capitalized and amortized to expense under financial reporting but is tax deductible in
full upon payment.
f. An asset is revalued upward and no equivalent adjustment is made for tax purposes
g. Depreciation recognized under financial reporting is lower than the depreciation recognized for
taxation purposes
Taxable temporary difference multiplied by the tax rate results to deferred tax liability.
Deferred tax liabilities- amounts of income taxes payable in future periods in respect of taxable temporary
differences.
Deductible temporary differences arise when:
a. Financial income (accounting profit) is less than the taxable income (taxable profit)
b. The carrying amount of an asset is less than its tax base
c. The carrying amount of a liability is greater than its tax base
Examples:
d. Rent received in advance is treated as unearned income (liability) under financial reporting but is taxable in full
upon receipt of cash.
e. Bad debts expense is recognized for financial reporting when the collectability of accounts receivable becomes
doubtful while it is tax deductible only when the accounts receivable is deemed worthless.
f. Warranty obligation is recognized as expense when a product is sold under financial reporting but is tax deductible
only when actually paid.
g. Depreciation recognized under financial reporting is higher than the depreciation recognized for taxation purposes.
h. Losses and tax credits that can be carried forward and deducted from future taxable profits.
Deductible temporary difference multiplies by the tax rate results to deferred tax asset
Deferred tax assets are the mounts of income taxes recoverable in future periods in respect of: (a) deductible
temporary differences; (b) the carryforward of unused tax losses, and (c) the carryforward of unused tax credits.
Taxable temporary differences Deductible temporary differences
- Financial income greater than taxable income - Financial income less than taxable income
- Carrying amount of asset greater than tax base - Carrying amount of asset less than tax base
- If multiplied by the tax rate, it results to deferred tax If multiplied by the tax rate, it results to deferred tax
liability asset
- When the reverse in a future period, it results to higher - When it reverses in a future period, it results to lower
tax payment tax payment
Accounting for Deferred Taxes
PAS 12 requires the use of the asset-liability method (also called “balance sheet liability method” in
accounting for deferred taxes
◦ - a comprehensive approach in accounting for deferred taxes in that it accounts both (a)timing difference and
(b)difference between the carrying amounts and tax bases of assets and liabilities.
◦ Timing Differences – are differences between accounting profit and taxable profit that originate in one period and
reverse in one or more subsequent periods.
◦ Temporary Differences- are differences between the carrying amount of an asset or liability in the statement of
financial position and its tax base.
◦ Tax Base – the amount attributed to that asset or liability for tax purposes.
◦ Tax base of an asset – the amount that will be deductible for tax purposes against any taxable economic benefits that
will flow to an entity when it recovers the carrying amount of the asset.
◦ Tax base of a liability – carrying amount, less any amount that will be deductible for tax purposes in respect of that
liability in future periods.
◦ Recognition
◦ - an entity shall, with certain limited exceptions, recognize a deferred tax liability(asset) whenever recovery or settlement of
the carrying amount of an asset or liability would make future tax payments larger(smaller) than they would be if such
recovery or settlement were to have no tax consequences.
Deferred tax liability is recognized for all taxable temporary differences except those that arise from the following:
◦ A. Initial recognition of goodwill
◦ B. Initial recognition of an asset or liability in a transaction which is not a business combination. At the time of the
transaction, affects neither accounting profit nor taxable profit (loss) and at the time of the transactions, does not give rise to
equal taxable and deductible temporary differences.
◦ C. Investments in subsidiaries, branches, and associates, and interests in joint arrangement to the extent that the entity is
able to control the timing of the reversal of the differences and it is probable that the reversal will not occur in the
foreseeable future.
Deferred Tax asset is recognized for all deductible temporary differences, including unused tax losses and unused tax credits, to
the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be
utilized, unless the deferred tax asset arises from the initial recognition of an asset or liability in a transaction that is not a
business combination, at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss), and at the
time of the transaction, does not give rise to equal taxable and deductible temporary differences.
PAS 16 Property, Plant and Equipment
Learning Objectives
1. State the recognition criteria, initial measurement, and subsequent measurement of PPE.
2. Apply the principles of PAS 16 in basic computations of a PPE’s cost, depreciation, carrying amount, and
revaluation surplus as well as the gain or loss on its disposal.
PAS 16 Property, Plant and Equipment
PAS 16 applies to all items of PPE except to the following for which other standards apply:
a. Assets classified as held for sale (PFRS 5 Non-current assets held for sale and discontinued operations)
b. Biological assets other than bearer plants
c. The recognition and measurement of exploration and evaluation assets.
d. Mineral rights and mineral reserves such as oilm natural gas and similar nin-regenerative resources.
Characteristics of PPE
Tangible assets – items of PPE have physical substance
Used in normal operations – items of PPE are used in the production or supply of goods or services, for
rental, or for administrative purposes
Long-term in nature – items of PPE are expected to be used from more than a year
Examples of items of PPE
Land used in business
Land held for future plant site
Building used in business
Equipment used in the production of goods
Equipment held for environmental and safety reasons
Equipment held for rentals
Major spare parts and long-lived stand-by equipment
Furniture and fixture
Bearer plants
Recognition
The cost of an item of property, plant and equipment shall be recognized as an asset only if:
1. it is probable that future economic benefits associated with the item will flow to the entity; and
2. the cost of the item can be measured reliably.

Initial measurement
An item of PPE is initially measured at its cost.
Elements of Cost
1. Purchase price, including non-refundable purchase taxes, after deducting trade discounts and rebates.
2. Costs directly attributable to bringing the asset to the location and condition necessary for it to be
capable of operating in the manner intended by the management.
3. Present value of decommissioning and restoration costs to the extent that they are recognized as
obligation
Examples of directly attributable costs
Costs of employee benefits arising directly from the construction or acquisition of PPE;
Costs of site preparation;
Initial delivery and handling costs (e.g., freight costs);
Installation and assembly costs;
Testing costs, GROSS* of disposal proceeds of samples generated during testing; and
Professional fees.
* (the proceeds, and the cost of the samples are recognized in profit or loss)
Cessation of capitalizing costs to PPE
Recognition of costs in the carrying amount of an item of PPE ceases when the item is in the location and
condition necessary for it to be capable of operating in the manner intended by management.
Measurement of Cost
The cost of an item of PPE is the cash price equivalent at the recognition date. If payment is deferred
beyond normal credit terms, the difference between the cash price equivalent and the totalpayment is
recognized as interest over the period of credit unless such interest is capitalized in accordance with PAS 23
Borrowing Costs.
Acquisition through exchange
If the exchange has commercial substance, the asset received from

the exchange is measured using the following order of priority:
Fair value of asset Given up
Fair value of asset Received
Carrying amount of asset Given up
If the exchange lacks commercial substance, the asset received from

the exchange is measured at (c) above.
Conceptual Framework & Acctg.

Subsequent measurement
Subsequent to initial recognition, an entity shall choose

either:
(a) the cost model or
(b) the revaluation model
as its accounting policy and shall apply that policy to an

entire class of PPE.
Cost Model
After recognition, an item of PPE is measured at its cost less any accumulated depreciation and any
accumulated impairment losses.
Depreciation
Depreciation is the systematic allocation of the depreciable amount of an asset over its estimated useful
life.
When computing for depreciation, each part of an item of PPE with a cost that is significant in relation to
the total cost of the item shall be depreciated separately.
Depreciation - continuation
Depreciation begins when the asset is available for use, i.e., when it is in the location and condition
necessary for it to be capable of operating in the manner intended by management.
Depreciation ceases when the asset is derecognized or when it is classified as “held for sale” under PFRS
5, whichever comes earlier.
Selection of depreciation method
There are various methods of depreciation. The entity shall select the method that most closely reflects
the expected pattern of consumption of the future economic benefits embodied in the asset.
However, a depreciation method that is based on revenue that is generated by an activity that includes
the use of an asset is not appropriate.
The Straight-line method of Depreciation
Straight line method – depreciation is recognized evenly over the life of the asset by dividing the
depreciable amount by the estimated useful life.
Depreciation = (Historical cost – Residual value) ÷ Estimated useful life

The Straight-line method of Depreciation
Example: On January 1,20x1, Entity A acquires equipment for a total cost of P 1,000,000.00. The equipment is
estimated to have a useful life of 5 years and a residual value of P50,000.00
The annual depreciation is computed as follows:

Cost 1,000,000.00
Less: Residual Value (50,000.00)
Depreciated amount 950,000.00
Divide by: Useful life 5
Annual depreciation 190,000.00
The carrying amount of the equipment at the end of 20x1 is computed as follows:
Cost 1,000,000.00
Accumulated depreciation (190,000x1 year) (190,000.00)
Carrying amount- 12/31/20x1 810,000.00
Changes in depreciation method, useful life, and residual value
A change in depreciation method, useful life, or residual value is a change in accounting estimate
accounted for prospectively.
Prospective accounting means the change affects only the current period and/or future periods. The
change does not affect past periods.
Revaluation Model
After recognition as an asset, an item of PPE whose fair value can be measured reliably shall be carried at a
revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated
depreciation and subsequent accumulated impairment losses.
Revaluation surplus
Fair value*
xx
Less: Carrying amount

(xx)
Revaluation surplus – gross of tax

xx
*The fair value is determined using an appropriate valuation technique,

taking into account the principles set forth under PFRS 13.
Frequency of revaluation
For items with significant and volatile changes in fair value, annual revaluation is necessary. For items
with insignificant changes in fair value, revaluation may be made every 3 or 5 years.
Revaluation applied to all assets in a class
If an item of PPE is revalued, the entire class of PPE to which that asset belongs shall be revalued.
The items within a class of PPE are revalued simultaneously to avoid selective revaluation of assets and
the reporting of amounts in the financial statements that are a mixture of costs and values as at different
dates.
Subsequent accounting for revaluation surplus
Revaluation is initially recognized in other comprehensive income unless the revaluation represents
impairment loss or reversal of impairment loss, in which case it is recognized in profit or loss.
Subsequently, the revaluation surplus is accounted for as follows:
If the revalued asset is non-depreciable, the revaluation surplus accumulated in equity is transferred
directly to retained earnings when the asset is derecognized.
If the revalued asset is depreciable, a portion of the revaluation surplus may be transferred periodically to
retained earnings as the asset is being used.
Derecognition
The carrying amount of an item or PPE shall be derecognized:
on disposal; or
when no future economic benefits are expected from its use or disposal
PAS 19 Employee Benefits
Learning Competencies
Differentiate between the four classifications of employee benefits under PAS 19.
State the timing of the recognition of employee benefits.
Differentiate between a defined contribution plan and a defined benefit plan.
State the accounting procedures for defined benefit plans.
Employee benefits
Employee benefits are “all forms of consideration given by an entity in exchange for service rendered by employees.” (PAS
19.8)
Four categories of employee benefits under PAS 19
1. Short-term employee benefits
2. Post-employment benefits
3.Other long-term employee benefits
4. Termination benefits.
Short-term employee benefits

Short-term employee benefits are employee benefits (other than termination benefits) that are due to be
settled within 12 months after the end of the period in the employees render the related service.
Examples:
a. Salaries, wages, and SSS, Philhealth and Pag-ibig contributions.
b. Paid vacation leaves and sick leaves
c. Non-monetary benefits ( free goods or services)
Employee bene
Recognition and measurement
When an employee has rendered service to an entity during an accounting period, the entity shall
recognize the undiscounted amount of short-term employee benefits expected to be paid in exchange for
that service:
as a liability (accrued expense), after deducting any amount already paid.
as an asset (prepaid expense) if the amount paid is in excess of the undiscounted amount of the benefits
incurred; provided, the prepayment will lead to a reduction in future payments or a cash
refund; and
as an expense, unless the employee benefit forms part of the cost of an asset, e.g., as part of the cost of
inventories or property, plant and equipment.
Short-term paid absences
a. Accumulating compensated absences are those that are carried forward and can be used in future
periods if the current period’s entitlement is not used in full. Accumulating compensated absences
may either be
1. Vesting – wherein employees are entitled to a cash payment for unused entitlement on
leaving the entity ; or
2.Non-vesting - wherein employees are not entitled to a cash payment for unused entitlement on
leaving the entity
b. Non-accumulating compensated absences are those that are not carried forward. No liability or
expense is recognized until the absences occur, because employee service does not increase the amount
of the benefit.
Compensated absences are recognized as follows:
a. Accumulating and vesting – all unused entitlements are accrued and measured at the expected
amount to be paid when those entitlements are used or monetized in a future period.
b. Accumulating and non-vesting – only the unused entitlements that are expected to be utilized are
accrued, taking into account the possibility that employees may leave before they utilize those
entitlements.
c. Non-accumulating – unused entitlements are not accrued but recognized only when the absences
occur
Profit-sharing and bonus plans – are additional incentives given to eligible employees for a variety of
reasons- the most obvious is to motivate the employees to be more productive.
-they are recognized when (a) the entity has a present obligation to pay for them and (b) the cost can be
measured reliably.
Post-employment benefits
Post-employment benefits are employee benefits (other than termination benefits) that are payable after
the completion of employment.
Examples: Retirement benefits (lump sum payment and pensions)
Other post-employment benefits (post-employment life insurance or medical care)
Post-employment benefits can also be:
a. Contributory or Non-contributory
b. Funded or unfunded
Contributory Non-contributory
-both the employee and employer contribute to the -only the employer contributes to the retirement
retirement benefits fund of the employee benefits fund of the employee
Funded Unfunded
- The retirement fund is isolated from the - The employer manages any established fund and
employer’s control and is transferred to a trustee pays directly the retiring employees
(e.g. investment company) who undertakes to
manage the fund and pay directly the retiring
employees
Post-employment benefit plans are either:
1. Defined Contribution Plan
2. Defined benefit plans
Defined Contribution Plans Defined benefit plan
- The employer commits to make fixed contributions to a - The employer commits to pay a definite amount of
fund. The amount of benefits that an employee will retirement benefits. Such amount is independent of any
receive is dependent on the fund balance fund balance.
- The risk that the fund may be insufficient tgo meet the - The risk that the fund may be insufficient to pay for
expected benefits rest with the employee the promised benefits rests with the employer
Post-employment benefit plans illustration
Accounting for defined contribution plan
The accounting for defined contribution plans is straightforward because the reporting entity’s obligation
for each period is determined by the amounts to be contributed for that period.
Consequently, no actuarial assumptions are required to measure the obligation or the expense and there is
no possibility of any actuarial gain or loss.
Accounting for Defined benefit plan
The accounting for defined benefit plans is complex because actuarial assumptions are required to
measure the obligation and the expense and there is a possibility of actuarial gains and losses.
Obligations are measured on a discounted basis.

Accounting procedures for defined benefit plans
Step #1: Determine the deficit or surplus
(Deficit) Surplus = FVPA – PV of DBO
Step #2: Determine the Net defined benefit liability (asset)
If there is a deficit, the deficit is the Net defined benefit liability.
If there is a surplus, the Net defined benefit asset is the lower of the surplus and the asset ceiling.
The asset ceiling is the present value of any economic benefits available in the form of refunds from the
plan or reductions in future contributions to the plan.
Step #3: Determine the defined benefit cost
Definition of terms
1. Current service cost - is the increase in the present value of a defined benefit obligation resulting from
employee service in the current period.
2. Past service cost - is the change in the present value of the defined benefit obligation resulting from a
plan amendment or curtailment.
3. Gain or loss on settlement – the difference between the present value of the defined benefit
obligation and the settlement price.
Definition of terms (Continuation)
4. Interest cost on the defined benefit obligation – is the increase during a period in the present value of
a defined benefit obligation which arises because the benefits are one period closer to settlement.
5. Actuarial gains and losses – are changes in the present value of the defined benefit obligation resulting
from experience adjustments and the effects of changes in actuarial assumptions.
. Actuarial assumptions
Actuarial assumptions are an entity’s best estimates of the variables that will determine the ultimate cost
of providing post-employment benefits.
1. Demographic assumptions about the future characteristics of employees who are eligible for benefits.
Demographic assumptions deal with matters such as:
mortality, both during and after employment rates of employee turnover, disability and early retirement
the proportion of plan members with dependents who will be eligible for benefits claim rates under
medical plans
2. Financial assumptions, dealing with items such as: the discount rate future salary and benefit levels
future medical costs, if any, including cost of administering claims and payments the expected rate of
return on plan assets
Actuarial assumption – Discount rate
The rate used to discount post-employment benefit obligations shall be determined by reference to
market yields at the end of the reporting period on high quality corporate bonds.
In countries where there is no deep market in such bonds, the market yields at the end of the reporting
period on government bonds shall be used.
Other long-term employee benefits
Other long-term employee benefits are employee benefits (other than post-employment benefits and
termination benefits) that are due to be settled beyond 12 months after the end of the period in which
the employees render the related service.
Other long-term employee benefits are accounted for using the procedures applicable for a defined
benefit plan. However, all of the components of the net benefit cost are recognized in profit or loss.
Termination benefits
Termination benefits are employee benefits provided in exchange for the termination of an employee’s
employment as a result of either:
a. an entity’s decision to terminate an employee’s employment before the normal retirement date; or
b. an employee’s decision to accept an entity’s offer of benefits in exchange for the termination of
employment.
Measurement
Termination benefits are initially and subsequently recognized in accordance with the nature of the
employee benefit.
a. If the termination benefits are payable within 12 months, the entity shall account for the termination
benefits similarly with short-term employee benefits.
b. If the termination benefits are payable beyond 12 months, the entity shall account for the termination
benefits similarly with other long-term benefits.
c. If the termination benefits are, in substance, enhancement to post-employment benefits, the entity
shall account for the benefits as post-employment benefits.

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DON HONORIOVENTURA STATEUNIVERSITY

CONCEPTUAL FRAMEWORK AND

DR. ANA LIZA TONGOL-SITCHON

Balance Sheet (Statement of Financial Position):

Income Statement (Profit and Loss Report):

Statement of Changes in Equity (Shareholder Contribution Report):

Types of Information provided of accounting

Types of accounting information classified as to user’s needs.

Common Branches of Accounting

Common Branches of Accounting

Bookkeeping – refers to the process of recording the accounts or transactions of an entity.

Hierarchy of Reporting Standards

Accounting standard setting bodies and other relevant organizations

1. The objective of financial reporting

2. Qualitative characteristics of useful financial information

3. Financial statements and the reporting entity

4. The elements of financial statements

5. Recognition and derecognition

7. Presentation and disclosure

8. Concepts of capital and capital maintenance

The elements of financial statements are:

Equity equals Assets minus Liabilities

The recognition process

An item is recognized if:

it meets the definition of an asset, liability, equity, income or expense; and

The recognition of an item may not provide relevant information if,

Value in use and fulfilment value

The historical cost of:

a liability is the consideration received to incur the liability minus

Historical cost is updated over time to depict the following:

Depreciation, amortization, or impairment of assets

Collections or payments that extinguish part or all of the asset or

Unwinding of discount or premium when the asset or liability is

Value in use is “the present value of the cash flows, or other

When selecting a measurement basis, it is important to consider the following:

Information is communicated through presentation and disclosure in the financial statements.

classifying information by grouping similar items and separating dissimilar items.

The objectives are specified in the Standards.

The principles include:

Classifying means combining similar items and separating dissimilar items.

Offsetting of assets and liabilities is generally not appropriate.

Classification of income and expenses

other comprehensive income.

Enumerate and describe the components of a complete set of financial statements.

State the acceptable methods of presenting items of income and expenses.

Purpose of Financial statements

Complete set of financial statements

Applies an accounting policy retrospectively, or

Makes a retrospective restatement of items in its financial statements, or

reclassifies items in its financial statements.

…..and the effect of the event to the statement of financial position as

11. Trade and other payables;

An entity shall classify an asset as current when:

An entity shall classify a liability as current when:

Examples of non current liabilities

General rule: A liability that is payable on demand is a current liability.

in a single statement of profit or loss and other comprehensive

1. Changes in revaluation surplus

Dividends declared by an entity are disclosed either in the (a) notes

2. Measure inventories and apply the cost formulas.

Inventories are assets:

1. Abnormal amounts of wasted materials, labor or other production costs.

Describe the statement of cash flows.

Differentiate between the following: