Gwyn Lanzar, Ghandamra Burungawan, Penelope Flora Maria Mutya - ACF 1

Pas 1 notes

INTRODUCTION
Philippine Accounting Standard (PAS) 1 Presentation of Financial Statements
prescribes the basis for the presentation of general purpose financial
statements, the guidelines for their structure, and the minimum requirements for
their content to ensure comparability.

Types of comparability:
A. Intra-comparability (horizontal or inter-period) – refers to the comparability of financial
statements of the same entity but from one period to another.
B. Inter-comparability (dimensional) – refers to the comparability of financial statements
between entities.
Comparability requires consistency in the adoption and application of
accounting policies and in the presentation of financial statements.
PAS 1 applies to the preparation and presentation of general-purpose financial
statements.
The terminology used in PAS1 is suitable for profit-oriented organizations.

FINANCIAL STATEMENTS
Financial statements - “structured representation of an entity’s financial
position and results of its operations.” (PAS 19)
Financial statements are the end product of the financial reporting
process and the means by which the information gathered and processed
is periodically communicated to users.
General-purpose financial statements (‘financial statements’) - “those
intended to meet the needs of the users who are not in the position to require
an entity to prepare reports tailored to their particular information needs.”
(PAS 17)
General-purpose financial statements cater to most of the common needs
of a wide range of external users and are the subject matter of the
Conceptual Framework and the PFRSs.

PURPOSE OF FINANCIAL STATEMENTS

1. Primary objective: To provide information about the financial position, financial
performance, and cash flows of an entity that is useful to a wide range of users
making economic decisions.
2. Secondary objective: To show the results of management’s stewardship over the
entity’s resources.
Financial statements provide information about an entity’s:
a. Assets (economic resources);
b. Liabilities (economic obligations);
c. Equity
d. Income
e. Expenses
f. Contributions by, and distributions to, owners, and;
g. Cash flows

This information, along with other information in the notes, helps users assess the
entity’s prospects for future net cash inflows.

COMPLETE SET OF FINANCIAL STATEMENTS

1. Statement of Financial Position (balance sheet
2. Statement of profit or loss and other comprehensive income
(statement of comprehensive income);
3. Statement of changes in equity;
4. Statement of cash flows;
5. Notes; (5a) Comparative information; and
6. Additional statement of financial position (required only
when certain instances occur)

GENERAL FEATURES OF FINANCIAL STATEMENTS

1. Fair Presentation and Compliance with PFRSs
Fair presentation is faithfully representing, in the financial statements, the
effects of transactions and other events in accordance with the definitions
and recognition criteria for assets, liabilities, income and expenses set out
in the Conceptual Framework.
Fair presentation also requires proper selection and application of
accounting policies, proper presentation of information, and provision of
additional disclosures whenever relevant to the understanding of the
financial statements.
2. Going concern
Financial statements are prepared on a going concern basis unless the
entity has an intention to liquidate or has no other alternative but to do
so.
When preparing financial statements, management shall assess the
entity’s ability to continue as a going concern, taking into account all
available information about the future, which is at least, but not limited
to, 12 months from the reporting date.
If the entity is not a going concern, its financial statements shall be
prepared using another basis. This fact shall be disclosed, including the
basis used, and the reason why the entity is not regarded as a going
concern.
3. Accrual Basis of Accounting
All financial statements shall be prepared using the accrual basis of
accounting except for the statement of cash flows, which is prepared
using cash basis.
4. Materiality and Aggregation
Each material class of similar items is presented separately.
A class of similar items is called a “line item”.

5. Offsetting
Assets and liabilities or income and expenses are presented separately
and are not offset, unless offsetting is required or permitted by a PFRS.
Offsetting is permitted when it reflects the substance of the transaction.
Example of offsetting:
a. Presenting gains or losses from sales of assets net of the related
selling expenses.
b. Presenting at net amount the unrealized gains and losses arising
from trading securities and from translation of foreign currency
denominated assets and liabilities, except if they are material.
c. Presenting a loss from a provision net of a reimbursement from a
third party.

Measuring assets net of valuation allowances is not offsetting.

6. Frequency of reporting
Financial statements are prepared at least annually. If an entity changes
its reporting period to a period longer or shorter than one year, it shall
disclose the following:
a. The period covered by the financial statements:
b. The reason for using a longer or shorter period, and
c. The fact that amounts presented in the financial statements are not
entirely comparable.
7. Comparative information
PAS 1 requires an entity to present comparative information in respect of
the preceding period for all amounts reported in the current period’s
financial statements, unless another PFRS requires otherwise.
As a minimum, an entity presents two of each of the statements and
related notes
PAS 1 permits entities to provide comparative information in addition to
the minimum requirement.

Additional Statement of financial position

A complete set of financial statements includes an additional statement of
financial position when certain instances occur. Those instances are as
follows:
a. The entity applies an accounting policy retrospectively, makes a
retrospective restatement of items in its financial statements, or reclassifies
items in its financial statements; and
b. The instance in (a) has a material effect on the information in the
statement of financial position at the beginning of the preceding period.
If any of the instances above occur, the entity shall present three statements of
financial position as follows:

Statement of financial position Date

1. Current year > As at December 31, 20x2

2. Preceding year (comparative

> As at December 31, 20x2
information)

3. Additional > As at January 1, 20x1

8. Consistency of presentation
The presentation and classification of items in the financial statements
is retained from one period to the nest unless a change in presentation:
a. is required by a PFRS; or
b. results in information that is reliable and more relevant.
A change in presentation requires the reclassification of items in the
comparative information. If the effect of a reclassification is material, the
entity shall provide the “additional statement of financial position”.

STRUCTURE AND CONTENT OF FINANCIAL STATEMENTS

Each of the financial statements shall be presented with equal
prominence and shall be clearly identified and distinguished from other
information in the same published document (e.g. annual report).
The PFRSs apply only to the financial statements and not necessarily to the
other information.
The following information shall be displayed prominently and repeatedly
whenever relevant to the understanding of the information presented:
The name of the reporting entity
Whether the statements are for the individual entity or for a group of
entities
The date of the end of the reporting period or the period covered by
the financial statements
The presentation currency
The level of rounding used (e.g., thousands, millions, etc)

The statement of financial position is dated as at the end of the

reporting period while other financial statements are dated for the
period that they cover.
PAS 1 requires particular disclosures to be presented either in notes or on
the face of the other financial statements (e.g., footnotes disclosures).
Other disclosures are addressed by PFRSs.
MANAGEMENT’S RESPONSIBILITY OVER FINANCIAL STATEMENTS
The management is responsible for an entity’s financial statements.
The responsibility encompasses:
a. The preparation and fair presentation of financial statements in accordance
with PFRSs.;
b. Internal control over financial reporting;
c. Going concern assessment;
d. oversight over the financial reporting process; and
e. Review and approval of financial statements.

The responsibilities are expressly stated in a document called “Statement of

Management’s Responsibility for Financial Statements,” which is attached to the
financial statements as a cover letter. This document is signed by the entity’s:
a. Chairman of the Board (or equivalent),
b. Chief Executive Officer (or equivalent), and
c. Chief Financial Officer (or equivalent)

MANAGEMENT’S RESPONSIBILITY OVER FINANCIAL STATEMENTS

The statement of financial position shows the entity’s financial
condition (i.e., status of assets, liabilities, and equity) as at a certain date.
It includes line items that present the following amounts:
Property, plant, and equipment
Investment property
intangible assets
Financial assets
Investments accounted for using the equity method
Biological assets
Inventories
Trade and other receivables
Cash and Cash equivalent assets held for sale, including disposal groups
Trade and other payables
Provisions
Financial liabilities
Current tax liabilities and current tax assets
Deferred tax liabilities
Liabilities included in disposal groups
Non-controlling interests
Issued capital and reserves attributable to owners of the parent.

PAS 1 does not prescribe the order or format of presenting items in the
statement of financial position. It is simply a list of items that are
sufficiently different in nature or function to warrant separate
presentation.
an entity may modify the description used and the sequence of their
presentation to suit the nature of the entity transaction.
Presentation of statement of financial position
- A statement of financial position may be presented in a classified or an
unclassified manner.

A classified presentation shows distinctions between current and

noncurrent assets and current and noncurrent liabilities.
An unclassified presentation (also called ‘based on liquidity’) shows no
distinction between current and noncurrent items.

A classified presentation shall be used except when an unclassified

presentation provides information that is reliable and more relevant.
- when that exception applies, assets and liabilities are presented in
order of liquidity.
PAS 1 also permits a mixed presentation, i.e., presenting some assets and
liabilities using a current/non-current classification and others in order of
liquidity.
- this may be appropriate when the entity has diverse operations.
Whichever method is used, PAS 1 requires the disclosure of items that are
expected to be recovered or settled within 12 months and beyond 12
months, after the reporting period.
A classified presentation highlights an entity’s working capital and
facilitates the computation of liquidity and solvency ratios.

Working capital = Current assets - Current liabilities

Current Assets and Current Liabilities

Current Assets
Current assets are:
- Expected to be realized, sold, or consumed, in the entity’s normal
operating cycle.
- Held primarily for trading
- expected to be realized within 12 months after the reporting period
- cash or cash equivalent, unless restricted from being exchanged or used
to settle a liability for at least 12 months after the reporting period.

Current Liabilities
Are liabilities that are:
- Expected to be settled in the entity’s normal operating cycle
- Held primarily for trading
- Due to be settled within 12 months after the reporting period
- The entity does not have the right at the end of the reporting period to
defer settlement of the liability for at least 12 months after the reporting
period.

All other assets and liabilities are classified as non-current.

The operating cycle of an entity is the time between the acquisition of
assets for processing and their realization in cash or cash equivalents.

When the entity’s normal operating cycle is not clearly identifiable, it is

assumed to be 12 months.

assets and liabilities that are realized or settled as part of the entity’s
normal operating cycle are presented as current, even if they are
expected to be realized or settled beyond 12 months after the reporting
period.

Assets and liabilities that do not form part of the entity’s normal operating
cycle are presented as current only when they are expected to be realized
or settled within 12 months after the reporting period.
Deferred tax assets and liabilities are always presented as noncurrent
items in a classified statement of financial position regardless of their
expected dates of reversal.
Examples:

Current Assets Current Liabilities

Cash and cash equivalents Accounts payable

Accounts receivable Salaries payable
Non-trade receivable Dividends payable
collectible within 12 months Income (current) tax payable
Held for trading securities Unearned revenue
Inventory Portion of notes /loans/
Prepaid assets bonds payable due within 12
months

Noncurrent assets Noncurrent liabilities

Property, plant & equipment Portion of notes /loans/

Non-trade receivable bonds payable due beyond 12
collectible beyond 12 months
months Deferred tax liability
Investment in associate
Investment in property
Intangible assets
Deferred tax assets
Refinancing agreement
- A long-term obligation that is maturing within 12 months after the reporting
period is classified as current, even if a refinancing agreement to reschedule
payments on a long-term basis is completed after the reporting period and
before the financial statements are authorized for issue.
The obligation is classified as noncurrent if the entity has the right, at the
end of the reporting period, to roll over under an existing loan facility.
Without such right, the entity does not consider the potential to refinance
the obligation and classifies the obligation as current.

refinancing refers to the replacement of an existing debt with a new one

but with different terms.
Refinancing normally entails a fee or penalty.
A refinancing where the debtor is under financial
distress called “troubled debt restructuring”

Loans facility refers to a credit line.

Liabilities payable on demand

- Liabilities that are payable upon the demand of the lender are classified as
current.
A long-term obligation may become payable on demand as a result of
breach of a loan provision.
Such an obligation is classified as current even if the lender agreed,
after the reporting period and before the authorization of the
financial statements for the issue, not to demand payment.
This is because the entity does not have an unconditional right to
defer the settlement of the liability for at least 12 months after the
reporting period.
The liability is noncurrent if the lender provides the entity by the end of
the reporting period (on or before December 31) a grace period ending at
least 12 months after the reporting period, within which the entity can
rectify the breach and during which the lender cannot demand
immediate repayment.

STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

Income and expenses for the period may be presented in either:
a. A single statement of profit or loss and other comprehensive income
(statement of comprehensive income); or

b. Two statements - (1) statement of profit or loss (income statement)

and (2) a statement presenting comprehensive income.
These presentations have the ff basic formats:

Single Statement Presentation

Statement of Profit or loss and Other comprehensive income
Revenue ₱100
Expenses ₱(80)
Profit or loss 20
Profit other comprehensive income 10
Comprehensive income ₱ 30

Two-Statement Presentation
1.
Statement of Profit or loss / income statement
Revenue ₱100
Expenses (80)
Profit or loss ₱20

2.
Statement Of Other comprehensive income
Profit or loss ₱20
Other comprehensive income 10
Comprehensive income ₱30

PAS 1 requires entity to present information on the ff:

a. Profit or loss;
b. Other comprehensive income;
and
c. Comprehensive income
Presenting a separate income statement is allowed as long as a separate
statement showing comprehensive income is also presented (i.e., ‘Two-
statement presentation’). Presenting only an income statement is
prohibited.

PROFIT OR LOSS
- Profit or loss is income loss expenses, including the components of other
comprehensive income. The excess of income over expenses is profit. The
excess of income over expenses is profit; while deficiency is loss. The transaction
approach is the method of computing for profit or loss.
Income and expenses are usually recognized in profit or loss unless:
a. They are items of other comprehensive income; or
b. They are required by other PRFRSs to be recognized outside of profit
or loss.
The ff are not included in determining the profit or loss of the period:

Transaction Accounting

Direct adjustment to the

1. Correction or prior beginning balance of retained
period error earnings. The adjustment is
presented in the statement of
changes in equity.

Similar treatment to
2. Change in accounting
correction of prior period
policy
error.

Changes during the period

3. Other comprehensive
are presented in the “other
income
comprehensive income”.
Cumulative balances are
presented in the equity
section of the statement of
financial position.

4. Transactions with owners Recognized directly in equity.

(e.g., issuance of share capital, Transactions during the
declaration, declaration of period are presented in the
dividends, and the like) statement of changes in equity.

The profit or loss section shows line items that present the ff amounts for the period:
a. revenue, presenting separately interest revenue;
b. finance cost;
c. gains and losses arising from the derecognition of financial assets
measured at amortized cost;
d. impairment losses and impairment gains on financial assets;
e. gains and losses on reclassifications of financial assets from
amortized cost or fair value through other comprehensive income to fair
value through profit or loss;
f. share in the profit or loss of associates and joint ventures;
g. tax expense; and
h. result of discontinued operations.
Additional line items shall be presented whenever relevant to the
understanding of the entity's financial performances.
The nature and amount of material items of income or expense shall be
disclosed separately.

Circumstances that would give rise to the separate disclosure of items of income
and expense include:
a. write-downs of inventories to net realizable value or of property,
plant and equipment to recoverable amount, as well as reversals of
such write-downs;
b. restructurings of the activities of an entity and reversals of any
provisions for restructuring costs;
c. disposals of items of property, plant, and equipment;
d. disposals of investments;
e. discontinued operations;
f. litigation settlements; and
g. other reversals of provisions.

PAS 1 prohibits the presentation of extraordinary items in the statement

of profit or loss and other comprehensive income or in the notes.

PRESENTATION OF EXPENSES
Expenses may be presented using either of the ff methods:
A. Nature of expense method
- expenses are aggregated acc. to their nature(e.g., depreciation
purchases of materials, transport costs, employee benefits, and
advertising costs) and are not reallocated acc. to their functions within
the entity.

B. Function of expense method

- (Cost of sales method) - an entity classifies expenses acc. to their
function (e.g., cost of sales, distribution costs, administrative expenses,
and other functional classifications).

If the function of expense method is used, additional disclosures on the nature of

expenses shall be provided, including depreciation and amortization expense and
employee benefits expense. This information is useful in predicting future cash flows.
Nature of Expense Method
Revenue xx
Other Income xx
Changes in inventories of finished goods and work in progress xx
Raw materials and consumable used xx
Employee benefits expense xx
Depreciation and amortization expense xx
Other expense xx
Total expense (xx)
Profitable before tax xx
Income tax expense (xx)
Profit after tax xx

Nature of Expense Method

Revenue xx
Cost of Sales (xx)
Gross Profit xx
Other income xx
Employee benefits expense xx
Distribution costs (xx)
Administrative expenses (xx)
Finance costs (xx)
Other expenses (xx)
Profit before tax xx
Income tax expense xx
Profit after tax xx

Other Comprehensive Income

- comprises items of income and expense (including reclassification adjustments)
that are not recognized in profit and loss as required or permitted by other PFRSs.
The components of other comprehensive income include the following:
Changes in revelation surplus
Remeasurements of the net defined benefit liability (asset)
Gains and losses on investments designated or measured at fair value through
other comprehensive income
Gains and losses arising from translating the financial statements of a foreign
operation
the effective portion of gains and losses on hedging instruments in a cash flow
hedge
changes in fair value of a financial liability designated at fair value through profit
or loss that are attributable to changes in credit risk.
Changes in the time value of option when the option’s intrinsic value and time
value are separated and only the changes in the intrinsic value is designated as
the hedging instrument
Changes in the value of the forward elements of the forward contracts when
separating the forward element and spot element of a forward contract and
designating as the hedging instrument only the changes in the spot element, and
changes in the value of the foreing currency basis spread of a financial
instrument when excluding it from the designation of financial instrument as the
hedging instrument.
Amounts recognized in OCI are usually accumulated as separate
components of equity.

Reclassification Adjustments
Reclassification Adjustments are amounts reclassified to profit or loss in the
current period that were recognized to other comprehensive income in the
current or previous periods.

Presentation of OCI
The other comprehensive income section shall group items of OCI into the ff:
a. Those for which reclassification adjustments is allowed; and
b. Those for which reclassification adjustment is not allowed.

Type of other comprehensive income:

a. Changes in revaluation surplus (no ra)
b. Remeasurement of the net defined benefit liability (no ra)
c. Fair value changes in FVOCI
- equity instrument (election) - (no ra)
- debt instrument (mandatory) - (yes)
d. Translation differences on foreign operations - (yes)
e. Effective portion of cash flow hedges - (yes)
SUMMARY

The objective of PAS 1 is to prescribe the basis for the presentation of

general purpose financial statements to ensure comparability.
General-purpose financial statements are those statements that cater to the
common needs of a wide range of primary (external users).
The purpose of general-purpose financial statements is to provide
information about the financial position, financial performance, and cash
flows of an entity that is useful to a wide range of users in making economic
decisions.
A complete set of financial statements consists of the ff: (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, (6) additional statement of financial position when an entity makes a
retrospective application, retrospective restatement, or reclassifies items -
with new materials.
The statement of financial position may be presented either showing
current/non-current distinction (classified) or based on liquidity (unclassified).
PAS 1 encourages the classified presentation.
Deferred tax assets and deferred tax liabilities are presented as noncurrent
items in a classified statement of financial position.
PAS 1 does not prescribe the order or format in which an entity presents
items.
Income and expenses may be presented : (a) in a single statement of profit or
loss and other comprehensive income, or (b) in two statements - an income
statement and a statement presenting comprehensive income
Other comprehensive income (OCI) comprises items of income and expense
(including reclassification adjustments) that are not recognized in profit or
loss as required or permitted by other PFRSs. OCI include: (a) changes in
revaluation surplus, (b) remeasurements of the net defined benefit liability
(asset), unrealized gains and losses on FVOCI investments, (d) translation
gains and losses on foreign operation, and (e) effective portion and gains and
losses on hedging instruments in a cash flow hedge.
Reclassification adjustments are amounts reclassified from OCI to profit or
loss.
OCI may be presented net or gross of related taxes.
Total comprehensive income includes all non-owner changes in equity. It
comprises profit or loss and other comprehensive income.
Presenting extraordinary items in financial statements including the notes, is
prohibited.
Expenses may be presented using either the Nature of expenses or the
Function of expense method.
Dividends are disclosed either in the statement or changes in equity are
presented in the statement of comprehensive income.
Owner changes in equity are presented in the statement of changes in equity.
Non-owner changes in equity are presented in the statement of
comprehensive income.
The notes are an integral part of the financial statement. It presents (a)
information regarding the basis of preparation of financial statements, (b)
information required by the PFRSs and © other information not required by
PFRSs but is relevant to users of financial statements.

Group Discussion