PAS 1 Presentation of Financial Statements

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 different entities.

Comparability requires consistency in the adoption and application of accounting policies and in
the presentation of financial statements, e.g., the use of line-item descriptions and account
titles, either within a single entity from one period to another or across different entities.

PAS 1 applies to the preparation and presentation of general purpose financial

statements. The recognition, measurement and disclosure requirements for specific transactions
and other events are set out in other PFRSs.

The terminology used in PAS 1 is suitable for profit oriented entities. If non-profit
organizations apply PAS 1, they may need to amend the line-item and financial statement
descriptions.

Financial Statements

Financial statements are the "structured representation of an entity's financial position and
results of its operations." (PAS 1.9)

Financial statements are the end product of the financial reporting process and the
means by which the information gathered and processed is periodically communicated to users.
The financial statements of an entity pertain only to that entity and not to the industry where the
entity belongs or the economy as a whole.

General purpose financial statements ('financial statements') are "those intended to

meet the needs of users who are not in a position to require an entity to prepare reports tailored
to their particular information needs." (PAS 1.7)
General purpose financial statements cater to most of the common needs of a wide
range of external users. General purpose financial statements are the subject matter of the
Conceptual Framework and the PFRSs.

PURPOSE OF FINANCIAL STATEMENTS

1. Primary objective:
►To provide information about the financial position, financial performance, and
cash flows of an entity that is useful to a wide range of users in making economic
decisions.

2. Secondary objective:
►To show the results of management's stewardship over the entity’s resources.

To meet the objective, financial statements provide information about an entity's: a.

Assets (economic resources);

b. Liabilities (economic obligations);

c. Equity;

d. Income;

e. Expenses;

f. Contributions by, and distributions to, owners; and

g. Cash flows.

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

COMPLETE SET OF FINANCIAL STATEMENTS

A complete set of financial statements consist of:

1. Statement of financial position;

2. Statement of profit or loss and other comprehensive income;

3. Statement of changes in equity;

4. Statement of cash flows;

5. Notes;

(5a) Comparative information; and

6. Additional statement of financial position (required only when certain instances occur).
An entity may use other titles for the statements. For example, an entity may use the title
"balance sheet" in lieu of "statement of financial position" or "statement of comprehensive
income" instead of "statement of profit or loss and other comprehensive income."

However, an "income statement" is different from a "statement of profit or loss and other
comprehensive income" or a "statement of comprehensive income." We will elaborate on this
later.

Reports that are presented outside of the financial statements, such as financial reviews
by management, environmental reports and value added statements, are outside the scope of
PFRSs.

GENERAL FEATURES OF FINANCIAL STATEMENTS

1. Fair Presentation and Compliance with PFRSs

Fair presentation is faithfully representing, in the financial statements, the effects of transactions
and other events in accordance with the definitions and recognition criteria for assets, liabilities,
income and expenses set out in the Conceptual Framework.

Compliance with the PFRSS is presumed to result in fairly presented financial

statements.

Fair presentation also requires the proper selection and application of accounting
policies, proper presentation of information, and provision of additional disclosures whenever
relevant to the understanding of the financial statements.

Inappropriate accounting policies cannot be rectified by mere disclosure.

PAS 1 requires an entity whose financial statements comply with PFRSS to make an
explicit and unreserved statement of such compliance in the notes. However, an entity shall not
make such statement unless it complies with all the requirements of PFRSs.

Illustration: Excerpt from a note to financial statement:

Statement of Compliance with Philippine Financial Reporting Standards

The financial statements of the Bank have been prepared in accordance with Philippine
Financial Reporting Standards (PFRSs), which are adopted by the Financial Reporting
Standards Council (FRSC) from the pronouncements issued by the International Accounting
Standards Board (IASB).

There may be cases wherein an entity's management concludes that compliance with a
PFRS requirement is misleading.

In such cases, PAS 1 permits a departure from a PFRS requirement if the relevant regulatory
framework requires or allows such a departure.
Relevant regulatory framework refers to the accounting principles and other financial
reporting requirements prescribed by a government regulatory body. For example, banks in the
Philippines are regulated by the Bangko Sentral ng Pilipinas (BSP). Therefore, in addition to the
PFRSs, banks must also comply with the requirements of the BSP. Accounting principles
prescribed by a regulatory body are sometimes referred to as "Regulatory Accounting
Principles" (RAP). In practice, banks commonly refer to the financial reporting required by the
BSP as "FRP" or Financial Reporting Package.

When an entity departs from a PFRS requirement, it shall disclose the management's
conclusion as to the fair presentation of the financial statements; that all other requirements of
the PFRSs are complied with; the title of the PFRS from which the entity has departed; and the
financial effect of the departure. Can you identify these disclosures in the excerpt below?

Illustration: Departure from a PFRS requirement

Statement of Compliance

The financial statements of the Bank have been prepared in compliance with Philippine
Financial Reporting Standards (PFRS), except for the deferral of losses on sale of
nonperforming assets (NPAs) to special purpose vehicles (SPVS), non-recognition of allowance
for credit losses on subordinated notes issued by the SPV, and the non-consolidation of the
SPV that acquired the NPAs sold in 20x5, and 20x4, as discussed in Note 8.

PFRS 9 Financial Instruments and the Conceptual Framework require that the losses be
charged to current operations and that the accounts of SPVS be consolidated into the Bank's
accounts. Had the losses on the sale of NPAs been charged to current operations, equity as of
December 31, 20x5 and 20x4 would have decreased by 186,6 million and P87.3 million,
respectively, and profits for the years ended December 30, 20x5 and 20x4 would have
decreased by 171.3 million, P72.3 million, respectively.

In accordance with the BSP Memorandum dated February 16, 20x4, Accounting Guidelines on
the Sale on NPAs to Special Purpose Vehicles, the allowance for credit losses previously
provided for the NPAs sold to SPVS was released to cover additional allowance for credit losses
required for other existing NPAs and other risk assets of the Bank.

All other requirements of the PFRSs have been complied with except those described above.
Management concludes that the financial statements present fairly the Bank's financial position,
financial performance and cash flows

2. Going Concern

Financial statements are normally prepared on a going concern basis unless the entity has an
intention to liquidate or has no other alternative but to do so.
When preparing financial statements, management shall assess the entity's ability to
continue as a going concern, taking into account all available information about the future, which
is at least, but not limited to, 12 months from the reporting date.

If the entity has a history of profitable operations and ready access to financial
resources, management may conclude that the entity is a going concern without detailed
analysis.

If there are material uncertainties on the entity's ability to continue as a going concern,
those uncertainties shall be disclosed.

If the entity is not a going concern, its financial statements shall be prepared using
another basis. This fact shall be disclosed, including the basis used, and the reason why the
entity is not regarded as a going concern.

3. Accrual Basis of Accounting

All financial statements shall be prepared using the accrual basis of accounting except for the
statement of cash flows, which is prepared using cash basis.

4. Materiality and Aggregation

Each material class of similar items is presented separately. A class of similar items is called a
"line item." Dissimilar items are presented separately unless they are immaterial. Individually
immaterial items are aggregated with other items.

5. Offsetting

Assets and liabilities or income and expenses are presented separately and are not offset,
unless offsetting is required or permitted by a PFRS.

Offsetting is permitted when it reflects the substance of the transaction. Examples of

offsetting:

a. Presenting gains 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. For example, deducting
allowance for doubtful accounts from accounts receivables or deducting accumulated
depreciation from a building account is not offsetting.
6. Frequency of reporting

Financial statements are prepared at least 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. For
example, when an entity presents its 20x2 current year financial statements, the 20x1 preceding
year financial statements shall also be presented as comparative information.

PAS 1 permits entities to provide comparative information in addition to the minimum

requirement. For example, an entity may provide a third statement of comprehensive income. In
this case, however, the entity need not provide a third statement for the other financial
statements, but must to provide the related notes for that additional statement of comprehensive
income.

ADDITIONAL STATEMENT OF FINANCIAL POSITION

As mentioned earlier, a complete set of financial statements includes an additional statement

of financial position when certain instances occur. Those instances are as follows:

a. The entity applies an accounting policy retrospectively, makes a retrospective

restatement of items in its financial statements, or reclassifies items in its financial
statements; and

b. The instance in (a) has a material effect on the information in the statement of
financial position at the beginning of the preceding period.

For example, if any of the instances above occur, the entity shall present three
statements of financial position as follows:

Statement of financial position Date

1. CURRENT YEAR As at December 31, 20x2
2. PRECEDING YEAR (comparative info.) As at December 31, 20x1
3. Additional As at January 1, 20x1
The opening (additional) statement of financial position is dated as at the beginning of
the preceding period even if the entity presents comparative information for earlier periods.
The entity need not present the related notes to the opening statement of financial position.

8. Consistency of presentation

The presentation and classification of items in the financial statements is retained from one
period to the next unless a change in presentation:

a. is required by a PFRS; or

b. results in information that is reliable and more relevant.

A change in presentation requires the reclassification of items in the comparative

information. If the effect of a reclassification is material, the entity shall provide the "additional
statement of financial position" discussed earlier.

Summary: General Features

1. Fair presentation & Compliance with PFRSs 5. Offsetting

2. Going Concern 6. Frequency of reporting period

3. Accrual Basis 7. Comparative information

4. Materiality & aggregation 8. Consistency of presentation

Structure and content of financial statements

Each of the financial statements shall be presented with equal prominence and shall be clearly
identified and distinguished from other information in the same published document. For
example, financial statements are usually included in an annual report, which also contains
other information. The PFRSS apply only to the financial statements and not necessarily to the
other information.

The following information shall be displayed prominently and repeatedly whenever

relevant to the understanding of the information presented:

a. The name of the reporting entity

b. Whether the statements are for the individual entity or for a group of entities

c. The date of the end of the reporting period or the period covered by the financial statements

d. The presentation currency

e. The level of rounding used (e.g., thousands, millions, etc.)

Illustration: A heading for a financial statement is shown below:

ABC Group
Statement of financial positon
As of December 31, 20x2
(date of the end of the reporting period)
(in thousands of Philippine Pesos)

The statement of financial position is dated as at the end of the reporting period while
the other financial statements are dated for the period that they cover.

PAS 1 requires particular disclosures to be presented either in the notes or on the face
of the other financial statements (e.g., footnote disclosures). Other disclosures are addressed by
other PFRSs.

MANAGEMENT'S RESPONSIBILITY OVER FINANCIAL STATEMENTS

The management is responsible for an entity's financial statements. The responsibility

encompasses:

a. the preparation and fair presentation of financial statements in accordance with PFRSs.;

b. internal control over financial reporting;

c. going concern assessment

d. oversight over the financial reporting process; and

e. review and approval of financial statements.

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

Management's Responsibility for Financial Statements," which is attached to the financial
statements as a cover letter. This document is signed by the entity's

a. Chairman of the Board (or equivalent),

b. Chief Executive Officer (or equivalent), and

c. Chief Financial Officer (or equivalent)

STATEMENT OF FINANCIAL POSITION

The statement of financial position shows the entity's financial condition (i.e., status of assets,
liabilities and equity) as at a certain date. It includes line items that present the following
amounts:

a. Property, plant and equipment;

b. Investment property;

c. Intangible assets;
d. Financial assets (excluding (e), (h) and (i));

e. Investments accounted for using the equity method;

f. Biological assets; g. Inventories;

h. Trade and other receivables;

i. Cash and cash equivalents; j. Assets held for sale, including disposal groups;

k. Trade and other payables;

l. Provisions;

m. Financial liabilities (excluding (k) and (1));

n. Current tax liabilities and current tax assets;

o. Deferred tax liabilities and deferred tax assets;

p. Liabilities included in disposal groups;

q. Non-controlling interests; and

r. Issued capital and reserves attributable to owners of the parent.

PAS 1 does not prescribe the order or format of presenting items in the statement of
financial position. The foregoing is simply a list of items that are sufficiently different in nature or
function to warrant separate presentation.

Accordingly, an entity may modify the descriptions used and the sequence of their
presentation to suit the nature of the entity and its transactions. Moreover, additional line items
may be presented whenever relevant to the understanding of the entity's financial position.

PRESENTATION OF STATEMENT OF FINANCIAL POSITION

A statement of financial position may be presented in a "classified" or an "unclassified" manner.

a. A classified presentation shows distinctions between current and noncurrent assets and
current and noncurrent liabilities.

b. An unclassified presentation (also called 'based on liquidity') shows no distinction

between current and noncurrent items.

A classified presentation shall be used except when an unclassified presentation

provides information that is reliable and more relevant. When that exception applies, assets and
liabilities are presented in order of liquidity (this is normally the case for banks and other
financial institutions).

PAS 1 also permits a mixed presentation, i.e., presenting some assets and liabilities
using a current/non-current classification and others in order of liquidity. This may be
appropriate when the entity has diverse operations.
Whichever method is used, PAS 1 requires the disclosure of items that are expected to
be recovered or settled (a) within 12 months and (b) beyond 12 months, after the reporting
period.

A classified presentation highlights an entity's working capital and facilitates the

computation of liquidity and solvency ratios.

► Working capital = Current Assets - Current Liabilities

CURRENT ASSETS AND CURRENT LIABILITIES

Current Assets Current Liabilities

- Are assets that are: - Are liabilities that are:

a. Expected to be realized, sold, or a. Expected to be settled in the entity’s

consumed in the entity’s normal operating normal operating cycle;
cycle; b. Held primarily for trading; b. Held primarily for trading;
c. Expected to be realized within 12 c. Due to be settled within 12 months
months after the reporting period; or after the reporting period; or
d. Cash or cash equivalent, unless d. The entity’s does not have an
restricted from being exchanged or used to unconditional right to defer settlement of the
settle a liability for at least 12 months after the liability for at least 12 months after the
reporting period. reporting period.

All other assets and liabilities are classified as noncurrent.

"The operating cycle of an entity is the time between the acquisition of assets for
processing and their realization in cash or cash equivalents. When the entity's normal operating
cycle is not clearly identifiable, it is assumed to be 12 months." (PAS 1.68)

Assets and liabilities that are realized or settled as part of the entity's normal operating
cycle (e.g., trade receivables, inventory, trade payables, and some accruals for employee and
other operating costs) are presented as current, even if they are expected to be realized or
settled beyond 12 months after the reporting period.

Assets and liabilities that do not form part of the entity's normal operating cycle (e.g.,
non-operating assets and liabilities) are presented as current only when they are expected to be
realized or settled within 12 months after the reporting period.

Deferred tax assets and liabilities are always presented as noncurrent items in a
classified statement of financial position, regardless of their expected dates of reversal.

Examples:
Current Assets Current Liabilities
• Cash and cash equivalents • Accounts payable
• Accounts receivable • Salaries payable
• Non-trade receivable collectible within • Dividends payable
12 months • Income (current) tax payable
• Held for trading securities • Unearned revenue
• Inventory • Portion of notes/loans/bonds payable
• Prepaid assets due within 12 months

Noncurrent Assets Noncurrent Liabilities

• • Property, plant and equipment Non- • Portion of notes/loans/bonds payable
trade receivable collectible due beyond 12 months
beyond 12 months Investment • Deferred tax liability
• • in associate
• Investment property
• Intangible assets
Deferred tax asset

REFINANCING AGREEMENT

A long-term obligation that is maturing within 12 months after the reporting period is classified as
current, even if a refinancing agreement to reschedule payments on a long-term basis is
completed after the reporting period but before the financial statements are authorized for issue.

However, the obligation is classified as noncurrent if the entity expects, and has the
discretion, to refinance it on a long term basis under an existing loan facility.

If the refinancing is not at the discretion of the entity (for example, there is no
arrangement for refinancing), the financial liability is current.

➢ Refinancing refers to the replacement of an existing debt with a new one but with
different terms, e.g., an extended maturity date or a revised payment schedule.
Refinancing normally entails a fee or penalty. A refinancing where the debtor is under
financial distress is called "troubled debt restructuring."

➢ Loan facility refers to a credit line.

Illustration:

Entity A's current reporting date is December 31, 20x1. A bank loan taken 10 years ago is
maturing on October 31, 20x2.

Analysis: A currently maturing obligation (i.e., due within 12 months after the reporting date) is
classified as current even if that obligation used to be noncurrent. Therefore, the loan is
presented as a current liability in Entity A's December 31, 20x1 statement of financial position.
On January 15, 20x2, Entity A enters into a refinancing agreement to extend the maturity date of
the loan to October 31, 20x7. Entity A's financial statements are authorized for issue on March
31,20x2.

Analysis: Continuing with the general rule, a currently maturing obligation is classified as
current even if a refinancing agreement, on a long-term basis, is completed after the reporting
period and before the financial statements are authorized for issue. Accordingly, the loan is
nevertheless presented as a current liability.

Under the original terms of the loan agreement, Entity A has the unilateral right to defer
(postpone) the payment of the loan up to a maximum period of 5 years from the original maturity
date. Entity A expects to exercise this right after the reporting date but before the financial
statements are authorized for issue.

Analysis: Entity A has the discretion (ie., unilateral right) to refinance the obligation on a
longterm basis under an existing loan facility (i.e., the unilateral right is included in the original
terms of the loan agreement). Accordingly, the loan is classified as noncurrent.

In this scenario, Entity A has an unconditional right to defer the settlement of the loan for
at least twelve months after the reporting period. Therefore, condition 'd' above for current
classification (i.e.,...does not have an unconditional right to defer settlement...') is inapplicable.

LIABILITIES PAYABLE ON DEMAND

Liabilities that are payable upon the demand of the lender are classified as current.

A long-term obligation may become payable on demand as a result of a breach of a loan

provision. Such an obligation is classified as current even if the lender agreed, after the
reporting period and before the authorization of the financial statements for issue, not to
demand payment. This is because the entity does not have an unconditional right to defer
settlement of the liability for at least twelve months after the reporting period.

However the liability is noncurrent if the lender provides the entity by the end of the
reporting period (e.g., on or before December 31) a grace period ending at least twelve
months after the reporting period, within which the entity can rectify the breach and during which
the lender cannot demand immediate repayment.

Illustration:

In 20x1, Entity A took a long-term loan from a bank. The loan agreement requires Entity A to
maintain a current ratio of 2:1. If the current ratio falls below 2:1, the loan becomes payable on
demand. On December 31, 20x1 (reporting date), Entity A's current ratio was 1.8:1, below the
agreed level. Entity A's financial statements were authorized for issue on March 31, 20x2.
Case 1:

On January 5, 20x2, the bank gives Entity A a chance to rectify the breach of loan agreement
within the next 12 months and promises not to demand immediate repayment within this period.

Analysis: The loan is classified as current liability because the grace period is received after
the reporting date.

Case 2:

On December 31, 20x1, the bank gives Entity A a chance to rectify the breach of loan
agreement within the next 12 months and promises not to demand immediate repayment within
this period.

Analysis: The loan is classified as noncurrent liability because the grace period is received by
the reporting date.

Illustration: Classified Statement of financial position

STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

Income and expenses for the period may be presented in either:

a. A single statement of profit or loss and other comprehensive income (statement of

comprehensive income); or

b. Two statements - (1) a statement of profit or loss (income statement) and (2) a
statement presenting comprehensive income.

These presentations have the following basic formats:

PAS 1 requires an entity to present information on the following: a.

Profit or loss;

b. Other comprehensive income; and x

Comprehensive income

Presenting a separate income statement is allowed as long as a separate statement

showing comprehensive income is also presented (i.e., "Two-statement presentation').
Presenting only an income statement is prohibited.

PROFIT OR LOSS

Profit or loss is income less expenses, excluding the components of other comprehensive
income. The excess of income over expenses is profit; while the deficiency is loss. This method
of computing for profit or loss is called the "transaction approach."
Income and expenses are usually recognized in profit or loss unless:

a. They are items of other comprehensive income; or

b. They are required by other PFRSS to be recognized outside of profit of loss.

The following are not included in determining the profit or loss for the period:
TRANSACTION ACCOUNTING
Correction of prior period error Direct adjustment to the beginning balance of retained
earnings. The adjustment is presented in the statement
of changes in equity.

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

Other comprehensive income Changes during the period are presented in the "other
comprehensive income" section of the statement of
comprehensive income. Cumulative balances are
presented in the equity section of the statement of
financial position.

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

The profit or loss section shows line items that present following amounts for the period:

a. revenue, presenting separately interest revenue;

b. finance costs;

c. gains and losses arising from the derecognition of financial assets measured at amortized
cost;

d. impairment losses and impairment gains on financial assets;

e. gains and losses on 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.

(PAS 1.82)

Additional line items shall be presented whenever relevant to the understanding of the
entity's financial performance. The nature and amount of material items of income or expense
shall be disclosed separately.
Circumstances that would give rise to the separate disclosure of items of income and
expense include:

a. write-downs of inventories to net realizable value or of property, plant and equipment to

recoverable amount, as well as reversals of such write-downs;

b. 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 1.98)

PAS 1 prohibits the presentation of extraordinary items in the statement of profit or loss
and other comprehensive income or in the notes.

PRESENTATION OF EXPENSES

Expenses may be presented using either of the following methods:

a. Nature of expense method - Under this method, expenses are aggregated according to
their nature (e.g., depreciation, purchases of materials, transport costs, employee benefits and
advertising costs) and are not reallocated according to their functions within the entity.

b. Function of expense method (Cost of sales method) - Under this method, an entity
classifies expenses according to their function (e.g., cost of sales, distribution costs,
administrative expenses, and other functional classifications). At a minimum, cost of sales shall
be presented separately from other expenses.

The nature of expense method is simpler to apply because it eliminates considerable

judgment needed in reallocating expenses according to their function. However, an entity shall
choose whichever method it deems will provide information that is reliable and more relevant,
taking into account historical and industry factors and the entity's nature.

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

expenses shall be provided, including depreciation and amortization expense and employee
benefits expense. This information is useful in predicting future cash flows.
OTHER COMPREHENSIVE INCOME (OCI)

Other comprehensive income "comprises items of income and expense (including

reclassification adjustments) that are not recognized in profit or loss as required or permitted by
other PFRSs." (PAS 1.7)

The components of other comprehensive income include the following:

a. Changes in revaluation surplus;

b. Remeasurements of the net defined benefit liability (asset);

c. Gains and losses on investments designated or measured at fair value through other
comprehensive income (FVOCI);

d. Gains and losses arising from translating the financial statements of a foreign operation;

e. Effective portion of gains and losses on hedging instruments in a cash flow hedge;

f. Changes in fair value of a financial liability designated at fair value through profit or loss
(FVPL) that are attributable to changes in credit risk;

g. Changes in the time value of option when the option's intrinsic value and time value are
separated and only the changes in the intrinsic value is designated as the hedging
instrument; and

h. Changes in the value of the forward elements of forward contracts when separating the
forward element and spot element of a forward contract and designating as the hedging
instrument only the changes in the spot element, and changes in the value of the foreign
currency basis spread of a financial instrument when excluding it from the designation of that
financial instrument as the hedging instrument. (PAS 1.7)

Amounts recognized in OCI are usually accumulated as separate components of equity.

For example, cumulative changes in revaluation surplus are accumulated in a "Revaluation
surplus” account, which is presented as a separate component of equity; cumulative gains and
losses from investments in FVOCI and from translation of foreign operation are also
accumulated in separate equity accounts.

RECLASSIFICATION ADJUSTMENTS

Items of OCI include reclassification adjustments.

➢ Reclassification adjustments "are amounts reclassified to profit or loss in the current

period that were recognized in other comprehensive income in the current or previous
periods." (PAS 1.7)

Reclassification adjustments arise, for example, on disposal of a foreign operation,

derecognition of debt instruments measured at FVOCI, or when a cash flow hedge becomes
ineffective or affects profit or loss.

On derecognition (or when the cash flow hedge becomes ineffective), the cumulative gains
and losses that were accumulated in equity on these items are reclassified from OCI to profit or
loss. The amount reclassified is called the reclassification adjustment.

A reclassification adjustment for a gain is a deduction in OCI and an addition to profit or

loss. This is to avoid double inclusion in total comprehensive income. On the other hand, a
reclassification adjustment for a loss is an addition to OCI and a deduction from profit or loss.

Reclassification adjustments do not arise on changes in revaluation surplus,

derecognition of equity instruments designated at FVOCI, and remeasurements of the net
defined benefit liability (asset).

On derecognition, the cumulative gains and losses that were accumulated in equity on these
items are transferred directly to retained earnings, rather than to profit or loss as a
reclassification adjustment.

PRESENTATION OF OCI

The other comprehensive income section shall group items of OCI into the following:

a. Those for which reclassification adjustment is allowed; and

b. Those for which reclassification adjustment is not allowed.

The entity's share in the OCI of an associate or joint venture accounted for under the
equity method shall also be presented separately and also grouped according to the
classifications above.
Types of Other Comprehensive Income Reclassification adjustment?
a. Changes in revaluation surplus No
b. Remeasurements of the net No
defined benefit liability (asset)
c. Fair value changes on FVOCI -
Equity instrument (election) No
- Debt instrument (mandatory) Yes
d. Translation differences on foreign
operations Yes
e. Effective portion of cash flow
hedges Yes

Items of OCI, including reclassification adjustments, may be presented at either net of

tax or gross of tax.

TOTAL COMPREHENSIVE INCOME

Total comprehensive income is "the change in equity during a period resulting from
transactions and other events, other than those changes resulting from transactions with owners
in their capacity as owners." (PAS 1.7)

Total comprehensive income is the sum of profit or loss and other comprehensive
income. It comprises all non-owner changes in equity. Presenting information on
comprehensive income, and not just profit or loss, helps users better assess the overall financial
performance of the entity,

ILLUSTRATION: STATEMENT OF COMPREHENSIVE INCOME

(Single-statement presentation/ Function of expense method)

STATEMENT OF CHANGES IN EQUITY

The statement of changes in equity shows the following information:

a. Effects of change in accounting policy (retrospective application) or correction of prior period

error (retrospective restatement);

b. Total comprehensive income for the period; and

c. For each component of equity, a reconciliation between the carrying amount at the beginning
and the end of the period, showing separately changes resulting from: i. profit or loss;

ii. other comprehensive income; and iii. transactions with owners, e.g.,

contributions by and distributions to owners.

Retrospective adjustments and retrospective restatements are presented in the
statement of changes in equity as adjustments to the opening balance of retained earnings
rather than as changes in equity during the period.

Components of equity include, for example, each class of contributed equity, the
accumulated balance of each class of other comprehensive income and retained earnings.
(PAS 1.108)

PAS 1 allows the disclosure of dividends, and the related amount per share, either in the
statement of changes in equity or in the notes.

Note:

“Non-owner “changes in equity are presented in the statement of comprehensive income

while "owner" changes (e.g., contributions by and distributions to owners) are presented in the
statement of changes in equity. This is to provide better information by aggregating items with
shared characteristics and separating items with different characteristics.

STATEMENT OF CASH FLOWS

PAS 1 refers the discussion and presentation of statement of cash flows to PAS 7 Statement of
Cash Flows.
NOTES

The notes provides information in addition to those presented in the other financial statements.
It is an integral part of a complete set of financial statements. All the other financial statements
are intended to be read in conjunction with the notes. Accordingly, information in the other
financial statements shall be cross referenced to the notes.

PAS 1 requires an entity to present the notes in a systematic manner. Notes are
normally structured as follows:

1. General information on the reporting entity.

This includes the domicile and legal form of the entity, its country of incorporation and
the address of its registered office (or principal place of business, if different from the registered
office) and a description of the nature of the entity's operations and its principal activities.

2. Statement of compliance with the PFRSS and Basis of preparation of financial statements.

3. Summary of significant accounting policies.

This includes narrative descriptions of the line items in the other financial statements,
their recognition criteria, measurement bases, derecognition, transitional provisions, and other
relevant information.

4. Disaggregation (breakdowns) of the line items in the other financial statements and other
supporting information.

5. Other disclosures required by PFRSs, such as (the list is not exhaustive):

a. Contingent liabilities and unrecognized contractual commitments.

b. Non-financial disclosures, e.g., the entity's financial risk management objectives and policies.
Events after the reporting date, if material.

d. Changes in accounting policies and accounting estimates and corrections of prior period
errors.

e. Related party disclosure.

f. Judgments and estimations. g. Capital management.

h. Dividends declared after the reporting period but before the financial statements were
authorized for issue, and the related amount per share.

i. The amount of any cumulative preference dividends not recognized.

6. Other disclosures not required by PFRSS but the management deems relevant to the
understanding of the financial statements.

Notes are prepared in a necessarily detailed manner. More often than not, they are
voluminous and occupy a bulk portion of the financial statements. For that reason (and to save
trees), only excerpts of notes to the financial statements are provided below, sufficient to give
you an idea on how the concepts discussed above are presented in the notes.
Illustration 1: General information, Basis of preparation and Statement of compliance

Entity A

Notes

December 31, 20x2

1. General information

Entity A (the 'Company') is a stock corporation incorporated and domiciled in the Philippines.
The Company is engaged in the manufacture and sale of security devices, fire prevention, and
other electronic equipment. The Company's registered office is located at 123 Kalsada St.,
Dalan City, Philippines.

The financial statements of the Company for the year ended December 31, 20x2 were
authorized for issue in accordance with a resolution of the board of directors on March 1, 20x3.

2.1 Basis of preparation

The financial statements have been prepared on a historical cost basis, except for inventories
which are measured at the lower of cost and net realizable value, investments in equity
securities which are measured at fair value with changes in fair values recognized in other
comprehensive income, and lands and buildings measured at revalued amounts. The
Company's financial statements are presented in Philippine peso (P), which is the Company's
functional currency.

2.2 Statement of compliance

The financial statements of the Company have been prepared in accordance with Philippine
Financial Reporting Standards (PFRSs). PFRSS are adopted by the Financial Reporting
Standards Council (FRSC) from the pronouncements issued by the International Accounting
Standards Board (IASB).

Illustration 2: Summary of significant accounting policies

2.3 Summary of significant accounting policies

(f) Inventories

Inventories are stated at the lower of cost and net realizable value. Cost comprises direct
materials, direct labor costs and factory overheads that have been incurred in bringing the
inventories to their present location and condition. Cost is calculated using the weighted
average method. Net realizable value represents the estimated selling price less all estimated
costs to complete and costs to sell.
Illustration 3: Significant judgments, estimates and assumptions

3. Significant accounting judgments, estimates and assumptions

The key assumptions concerning the future and other key sources of estimation uncertainty at
the reporting date, that have a significant risk of causing a material adjustment to the carrying
amounts of assets and liabilities within the next financial year are discussed below.

Revaluation of property, plant and equipment

The Company measures land and buildings at revalued amounts with changes in fair value
being recognized in other comprehensive income. The Company engaged independent
valuation specialists to determine fair value as at December 31, 20x1.

ILLUSTRATION 4: Supporting information for a line item in the statement of financial position.

Summary:

• The objective of PAS 1 is to prescribe the basis for 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 following: (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, and (6) additional statement of financial position when an entity makes a
retrospective application, retrospective restatement, or reclassifies items - with material
effect.
• The statement of financial position may be presented either showing
current/noncurrent 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), (c) unrealized gains and
losses on FVOCI investments, (d) translation gains and losses on foreign operation, and
(e) effective portion of 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 the financial statements, including the notes, is
prohibited.
• Expenses may be presented using either the Nature of expense or the Function of
expense method. Additional disclosure is required when the function of expense
method is used.
• Dividends are disclosed either in the statement of changes is equity or in the notes.
• Owner changes in equity are presented in the statement of changes in equity. Nonowner
changes in equity are presented in the statement of comprehensive income.
• The notes is an integral part of the financial statements. It presents (a) information
regarding the basis of preparation of financial statements, (b) information required by the
PERSS and (c) other information not required by PFRSS but is relevant to users of
financial statements.

PAS 2 INVENTORIES Introduction

PAS 2 prescribes the accounting treatment for inventories. PAS 2 recognizes that a primary
issue in the accounting for inventories is the determination of cost to be recognized as asset
and carried forward until it is expensed. Accordingly, PAS 2 provides guidance in the
determination of cost of inventories, including the use of cost formulas, and their subsequent
measurement and recognition as expense.

PAS 2 applies to all inventories except for the following:

➢ Assets accounted for under other standards

a. Financial instruments (PAS 32 and PFRS 9); and

b. Biological assets and agricultural produce at the point of harvest (PAS 41).

➢ Assets not measured under the lower of cost or net realizable value (NRV) under PAS 2

a. Inventories of producers of agricultural, forest, and mineral products measured at net

realizable value in accordance with well-established practices in those industries.

b. Inventories of commodity broker-traders measured at fair value less costs to sell.

INVENTORIES

Inventories are as assets:

a. Held for sale in the ordinary course of business (finished goods);

b. In the process of production for such sale (work in process); or

c. In the form of materials or supplies to be consumed in the production

process or in the rendering of services (raw materials and manufacturing supplies). (PAS
2.6) Examples of inventories:

a. Merchandise purchased by a trading entity and held for resale.

b. Land and other property held for sale in the ordinary course of business.

C. Finished goods, goods undergoing production, and raw materials and supplies awaiting use
in the production process by a manufacturing entity.

Ordinary course of business refers to the necessary, normal or usual business activities
of an entity.

MEASUREMENT

Inventories are measured at the lower of cost and net realizable value.
COST

The cost of inventories comprises the following:

a. Purchase cost - this includes the purchase price (net of trade discounts and other rebates),
import duties, non-refundable of non-recoverable purchase taxes, and transport, handling and
other costs directly attributable to the acquisition of the inventory.

b. Conversion costs - these refer to the costs necessary in converting raw materials into
finished goods. Conversion costs include the costs of direct labor and production overhead.

c. Other costs necessary in bringing the inventories to their present location and condition.

The following are excluded from the cost of inventories and are expensed in the period
in which they are incurred:

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

b. Storage costs, unless those costs are necessary in the production process before a further
production stage (e.g., the storage costs of partly finished goods may be capitalized as cost
of inventory, but the storage costs of completed goods are expensed);

c. Administrative overheads that do not contribute to bringing inventories to their present

location and condition; and

d. Selling costs. (PAS 2.16)

When a purchase transaction effectively contains a financing element, such as when

payment of the purchase price is deferred, the difference between the purchase price for normal
credit terms and the amount paid is recognized as interest expense over the period of the
financing.

ILLUSTRATION:
The advertisement costs are selling costs. These are expensed in the period in which
they are incurred.

COST FORMULAS

The cost formulas deal with the computation of cost of inventories that are charged as expense
when the related revenue is recognized (i.e., 'cost of sales' or 'cost of goods sold') as well as the
cost of unsold inventories at the end of the period that are recognized as asset (i.e., 'ending
inventory'). PAS 2 provides the following cost formulas:

1. Specific identification - this shall be used for inventories that are not ordinarily
interchangeable (i.e., those that are individually unique) and those that are segregated for
specific projects.
Under this formula, specific costs are attributed to identified items of inventory.
Accordingly, cost of sales represents the actual costs of the specific items sold while ending
inventory represents the actual costs of the specific items on hand.

For example, if an inventory with a serial number of "ABC-123" costing P10,948.67 is

sold, the amount charged to cost of sales is also P10,948.67. If that inventory remains unsold,
the amount included in ending inventory is also P10,948.67.

In this regard, records should be maintained that enables the entity to identify the cost
and movement of each specific inventory.

Specific identification, however, is not appropriate when inventories consist of large

number of items that are ordinarily interchangeable. In such cases, the entity shall choose
between formulas 2 and 3 below.

2. First-In, First-Out (FIFO) - Under this formula, it is assumed that inventories that were
purchased or produced first are sold first, and therefore unsold inventories at the end of the
period are those most recently purchased or produced.

Accordingly, cost of sales represents costs from earlier purchases while the cost of
ending inventory represents costs from the most recent purchases.

3. Weighted Average - Under this formula, cost of sales and ending inventory are
determined based on the weighted average cost of beginning inventory and all inventories
purchased or produced during the period. The average may be calculated on a periodic basis,
or as each additional purchase is made, depending upon the circumstances of the entity.

The cost formulas refer to "cost flow assumptions," meaning they pertain to the flow of
costs (i.e., from inventory to cost of sales) and not necessarily to the actual physical flow of
inventories. Thus, the FIFO or Weighted Average can be used regardless of which item of
inventory is physically sold first.

Same cost formula shall be used for all inventories with similar nature and use. Different
cost formulas may be used for inventories with different nature or use. However, a difference in
geographical location of inventories, by itself, is not sufficient to justify the use of different cost
formulas. (PAS 2.26)

PAS 2 does not permit the use of a last-in, first out (LIFO) cost formula.

Illustration:

Entity A, a trading entity, buys and sells Product A. Movements in the inventory of Product A
during the period are as follows:

Date Transaction Units Unit Cost Total Cost

Jan. 1 Beginning inventory 100 10 1,000
7 Purchase 300 12 3,600
12 Sale 320
21 Purchase 200 14 2,800
NET REALIZABLE VALUE (NRV)

Net realizable value is "the estimated selling price in the ordinary course of business less the
estimated costs of completion and the estimated costs necessary to make the sale." (PAS 2.6)

NRV is different from fair value. "Net realizable value refers to the net amount that an
entity expects to realize from the sale of inventory in the ordinary course of business. Fair value
reflects the price at which an orderly transaction to sell the same inventory in the principal (or
most advantageous) market for that inventory would take place between market participants at
the measurement date. The former is an entity-specific value; the latter is not. Net realizable
value for inventories may not equal fair value less costs to sell." (PAS 2.7)

Measuring inventories at the lower of cost and NRV is in line with the basic accounting
concept that an asset shall not be carried at an amount that exceeds its recoverable amount.

The cost of an inventory may exceed its recoverable amount if, for example, the
inventory is damaged, becomes obsolete, prices have declined, or the estimated costs to
complete or to sell the inventory have increased. In these circumstances, the cost of the
inventory is written-down to NRV. The amount of write-down is recognized as expense.

If the NRV subsequently increases, the previous write down is reversed. However, the
amount of reversal shall not exceed the original write-down. This is so that so that the new
carrying amount is the lower of the cost and the revised NRV.

Write-downs of inventories are usually carried out on an item by item basis, although in
some circumstances, it may be appropriate to group similar items. It is not appropriate to write
down inventories on the basis of their classification (e.g., finished goods or all inventories of an
operating segment).

Raw materials inventory is not written down below cost if the finished goods in which
they will be incorporated are expected to be sold at or above cost. If, however, this is not the
case, the raw materials are written down to their NRV. The best evidence of NRV for raw
materials is replacement cost.

Illustration 1:

Information on Entity A's inventories is as follows:

RECOGNITION AS AN EXPENSE

The carrying amount of an inventory that is sold is charged as expense (i.e., cost of sales) in the
period in which the related revenue is recognized. Likewise, the write-down of inventories to
NRV and all losses of inventories are recognized as expense in the period the write-down or
loss occurs.

"The amount of any reversal of any write-down of inventories, arising from an increase in
net realizable value, shall be recognized as a reduction in the amount of inventories recognized
as an expense in the period in which the reversal occurs." (PAS 234)
Inventories that are used in the construction of another asset is not expensed but rather
capitalized as cost of the constructed asset. For example, some inventories may be used in
constructing a building. The cost of those inventories is capitalized as cost of the building and
will be included in the depreciation of that building.

DISCLOSURES

a. Accounting policies adopted in measuring inventories, including the cost formula used;

b. Total carrying amount of inventories and the carrying amount in classifications appropriate to
the entity;

c. Carrying amount of inventories carried at fair value less costs to sell;

d. Amount of inventories recognized as an expense during the period;

e. Amount of any write-down of inventories recognized as an expense in the period;

f. Amount of any reversal of write-down that is recognized as a reduction in the amount of

inventories recognized as expense in the period;

g. Circumstances or events that led to the reversal of a write down of inventories; and

h. Carrying amount of inventories pledged as security for liabilities.

Summary:

• Inventories include goods that are held for sale in the ordinary course of business, in
the process of production for such sale, and in the form of materials and supplies to be
consumed in the production.
• Inventories are measured at the lower of cost and net realizable value (NRV).
• The cost of inventories comprises all costs of purchase, costs of conversion and
other costs incurred in bringing the inventories to their present location and condition.
• Trade discounts, rebates and other similar items are deducted in determining the costs
of purchase.
• The following are excluded from the cost of inventory: Abnormal costs, Storage
costs, unless necessary, Administrative costs, and Selling costs.
• The cost formulas permitted under PAS' 2 are (a) specific identification, (b) FIFO, and
(c) weighted average.
• Specific identification shall be used for inventories which are not ordinarily
interchangeable.

• Net realizable value is the estimated selling price in the ordinary course of business
less the estimated costs of completion and the estimated costs necessary to make the
sale.
• Inventories are usually written down to NRV on an item by item basis.
• Raw materials inventory is not written down below cost if the finished goods in which
they will be incorporated are expected to be sold at or above cost.
• Reversals of inventory write-downs shall not exceed the amount of the original
writedown.
PAS 7 STATEMENT OF CASH FLOWS Introduction

PAS 7 prescribes the requirements in the presentation of statement of cash flows.

The statement of cash flows provides information about the sources and utilization
(i.e., historical changes) cash and cash equivalents during the period.

Definition of terms

❖ Cash comprises cash on hand and cash in bank.

❖ Cash equivalents are "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." (PAS 7.6)

Only debt instruments acquired within 3 months or less before their maturity
date can qualify as cash equivalents.

Examples of cash equivalents:

a. 1-year treasury bill acquired 3 months before maturity date

b. 90-day money market instrument or commercial paper

c. 3-month time deposit

❖ Cash flows include inflows (sources) and outflows (uses) of cash and cash equivalents.

When used in conjunction with the rest of the financial statements, the statement of cash
flows helps users assess:

a. the ability of the entity to generate cash and cash equivalents,

b. the timing and certainty of the generation of cash flows, and

c. the needs of the entity to utilize those cash flows

The statement of cash flows may also provide information on the quality of earnings of
an entity. An entity may report profit under the accrual basis but suffers negative cash flows
from its operating activities. This may provide indicators of, among other things, difficulty in
collecting accounts receivable.

As the statement of cash flows can only be prepared on a cash basis, it enhances
intercomparability among different entities because it eliminates the effects of using different
accounting treatments for the same transactions and events.
Classification of cash flows

The statement of cash flows presents cash flows according to the following classifications:

1. Operating activities
2. Investing Activities
3. Financing Activities

OPERATING ACTIVITIES

"Cash flows from operating activities are primarily derived from the principal revenue-producing
activities of the entity." (PAS 7.14)

Operating activities usually include cash inflows and outflows on items of income and
expenses, or those that enter into the determination of profit or loss (i.e., included in the income
statement).

Examples of cash flows from operating activities:

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, and the
like, and payments or refunds of income taxes

d. cash receipts and payments from contracts held for dealing or trading purposes

Special items included in operating activities

➢ Cash flows from buying and selling held for trading securities (whether financial assets
or financial liabilities) are classified as operating activities. Held for trading securities
are similar to inventories in the sense that they are acquired specifically for resale.

➢ Some entities, in the ordinary course of their activities, routinely manufacture or acquire
items of property, plant and equipment to be held for rental to others and subsequently
transfer these assets to inventories when they cease to be rented and become held for
sale. For these entities, cash flows from the acquisition, rentals and subsequent sale of
such assets are considered operating activities. The proceeds from the sale of such
assets are recognized as revenue.

➢ Loan transactions of financial institutions (e.g., banks) are operating activities because
they relate to the main revenue producing activity of a financial institution.

INVESTING ACTIVITIES

Investing activities involve the acquisition and disposal of noncurrent assets and other
investments. Examples include:
a. cash receipts and cash payments in the acquisition and disposal of property, plant and
equipment, investment property, intangible assets and other noncurrent 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 (other than loans made by a financial institution)

FINANCING ACTIVITIES

Financing activities are those that affect the entity's equity capital and borrowing structure.

Examples include:

a. cash receipts from 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 short-
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. (PAS 7.17e)

Cash flows on trade payables, accrued expenses and other operating liabilities are
classified as operating activities and not financing activities. Only cash flows on non-operating
or non-trade liabilities are included as financing activities.

Remember the following:

1. Operating activities → affect profit or loss

2. Investing activities → affect non-current assets and other investments

3. Financing activities → affect borrowings and equity.

Cash flows excluded from the activities sections

➢ Cash flows on movements between "cash" and "cash equivalents" are not presented
separately because these are part of the entity's cash management rather than its
operating, investing and financing activities.

➢ Bank overdrafts that cannot be offset to cash are presented as financing activities.
Those that can be offset to cash (or are part of the entity's cash management) forms part
of the balance of cash and cash equivalents and therefore not presented separately in
the activities sections.

➢ Cash flows denominated in a foreign currency are translated using the spot exchange
rate at the date of the cash flow. Exchange differences are not cash flows. "However,
the effect of exchange rate changes on cash and cash equivalents held or due in a
foreign currency is reported in the statement of cash flows in order to reconcile cash
and cash equivalents at the beginning and the end of the period." (PAS 7.28) The
amount of reconciliation is reported separately from the operating, investing and
financing activities.

GENERAL CONCEPT IN THE PREPARATION OF STATEMENT OF CASH FLOWS

The statement of cash flows is prepared using cash basis. Under the cash basis of accounting,
income is recognized only when collected and expenses are recognized only when paid, rather
than when these items are earned, or incurred.

Accordingly, only transactions that affected cash and cash equivalents are reported
in the statement of cash flows. Non cash transactions are excluded and disclosed only.

When preparing statement of cash flows:

➢ Include only transactions that have affected cash and cash equivalents (e.g.,
purchase of assets by paying cash).
➢ Exclude transactions that have not affected cash and cash equivalents (e.g., purchase
of assets by issuing note payable or shares of stocks and conversion of debt to equity).

INTERESTS AND DIVIDENDS

Entities (except financial institutions) may classify cash flows on interests and dividends as
follows:

Option 1
➢ Interest income, Interest expense and dividend income are classified as operating
activities because they enter into the determination of profit or loss (i.e., income and
expenses).
➢ Dividend paid is classified financing activity because it is a transaction with tile owners
and alters the equity structure.

Option 2
➢ Interest income and dividend income are classified as investing activities because they
result from investments.
➢ Interest expense is classified as financing activity because it results from borrowing.
➢ Dividend paid is classified as operating activity in order to assist users in assessing the
entity's ability to pay dividends out of o operating cash flows.

Only interests and dividends received or paid in cash are included in the statement of cash
flows. For example, dividends declared in Year 1 but paid in Year 2 are excluded from the
statement of cash flows in Year 1 and reported only in Year 2.

Only option 1 is available to financial institutions.

When answering CPA board questions wherein the problem is silent, it is presumed that the
entity uses option 1.

PRESENTATION

Cash flows from operating activities may be presented using either.

a. Direct method - shows each major class of gross cash receipts and gross cash payments; or

b. Indirect method - profit or loss is adjusted for the effects of non-cash items and changes in
operating assets and liabilities.

PAS 7 does not require any particular method; both methods are acceptable. However,

PAS 7 encourages the direct method because it provides information that may be useful in
estimating future cash flows which is not available under the indirect method. In practice,
however, the indirect method is more commonly used because it is easier to apply.

Moreover, the choice between direct and indirect method of presentation is applicable
only for operating activities. For investing and financing activities, gross cash receipts and gross
cash payments for the related transactions are presented separately, unless they qualify for net
presentation.
CHANGES IN OWNERSHIP INTERESTS IN SUBSIDIARIES

Cash flows arising from acquisitions and disposals of subsidiaries or other business units
resulting to loss or obtaining of control are classified as investing activities. Those that do
not result to loss or obtaining of control are classified as financing activities.

DISCLOSURE

PAS 7 requires the following disclosures:

a. Components of cash and cash equivalents and a reconciliation of amounts in the

statement of cash flows with the equivalent items in the statement of financial position.

b. Significant cash and cash equivalents held by the entity that are not available for use by
the group, together with a management commentary.

Summary:

➢ The statement of cash flows shows the historical changes (i.e., sources and utilization)
in cash and cash equivalents during the period. It is an integral part of a complete set of
financial statements and is used in conjunction with the other financial statements in
assessing the ability of an entity to generate cash and cash equivalents, the timing and
certainty of their generation, and the needs of the entity to utilize those cash flows.
➢ Cash flows are classified into (a) operating activities, (b) investing activities, and (c)
financing activities.
➢ Operating activities include transactions that enter into the determination of profit or
loss, i.e., income and expenses.
➢ Investing activities include transactions that affect non-current assets and other
nonoperating assets.
➢ Financing activities include transactions that affect equity and non-operating liabilities.
➢ Only transactions that have affected cash and cash equivalents are included in the
statement of cash flows. Non-cash transactions are excluded and disclosed only.
➢ Entities other than financial institutions have options in presenting cash flows relating to
interests and dividends.
➢ Cash flows from operating activities may be reported using either (a) direct method or
(b) indirect method.

➢ The direct method shows each major class of gross cash receipts and gross cash
payments. Under the indirect method, profit or loss is adjusted for the effects of
noncash items and changes in operating assets and liabilities.
➢ Cash flows relating to investing and financing activities are presented separately at
gross amounts, unless they qualify for net presentation.

PAS 8 ACCOUNTING POLICIES, CHANGES IN ACCOUNTINGBESTIMATES AND ERRORS

Introduction

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. These are intended to enhance the
relevance, reliability and comparability of the entity's financial statements.

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)

When selecting and applying accounting policies, an entity shall refer to the hierarchy
guidance summarized

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

The foregoing means that, to account for a transaction, an entity refers to the PFRSs first
(which consist of the PFRSs, PASs and Interpretations); in the absence of a PFRS that
specifically deals with that transaction, management uses its judgment in developing and
applying an accounting policy that results in information that is relevant and reliable. In making
the judgment, management considers the applicability of the references listed above.

PFRSs are accompanied by guidance to assist entities in applying their requirements. A

guidance states whether it is an integral part of the PFRSS. A guidance that is an integral part of
the PFRSS is mandatory.

CHANGES IN ACCOUNTING POLICIES

PAS 8 requires the consistent selection and application of accounting policies.

PAS 8 permits a change in accounting policy only if the change:

a. is required by a PFRS; or

b. results in reliable and more relevant information

A change in accounting policy usually results from a change in measurement basis.

Examples of changes in accounting policies:

a. Change from FIFO to the Weighted Average cost formula for inventories.

b. Change from the cost model to the fair value model of measuring investment property.

c. Change from the cost model to the revaluation model of measuring property, plant, and
equipment and intangible assets.

d. Change in business model for classifying financial assets.

e. Change in the method of recognizing revenue from long-term construction contracts.

f. Change to a new policy resulting from the requirement of a new PFRS.

8. Change in financial reporting framework, such as from PFRS for SMEs to full PFRSs.

The following are not changes in accounting policies:

a. the application of an accounting policy for transactions, other events or conditions that
differ in substance from those previously occurring

b. the application of a new accounting policy for transactions, other events or conditions
that did not occur previously or were immaterial (PAS 8.16)

ACCOUNTING FOR CHANGES IN ACCOUNTING POLICIES

Changes in accounting policies are accounted for using the following order of priority:

1. Transitional provision in a PFRS, if any.

2. Retrospective application, in the absence of a transitional provision.

3. Prospective application, if retrospective application is impracticable.

For example, if an entity changes an accounting policy, it shall refer first to any specific
transitional provision of the PFRS that specifically deals with that accounting policy. If there is
no transitional provision, the entity shall account for the change using retrospective application.
If, however, retrospective application is impracticable, the entity is allowed to account for the
change using prospective application.
RETROSPECTIVE APPLICATION

Retrospective application means adjusting the opening balance "of each affected component
of equity (e.g., retained earnings) for the earliest prior period presented and the other
comparative amounts disclosed for each prior period presented as if the new accounting policy
had always been applied." (PAS 8.22)

For example, if an entity changes its accounting policy from the Average to the FIFO
cost formula, all previous financial statements presented in comparative with the current-year
financial statements are restated to apply FIFO. It is as if FIFO had always been applied.

If retrospective application is impracticable for all periods presented, the entity shall
apply the new accounting policy as at the beginning of the earliest period for which retrospective
application is practicable, which may be the current period. If retrospective application is still
impracticable as at the beginning of the current period, the entity is allowed to apply the new
accounting policy prospectively from the earliest date practicable.

➢ Impracticable means it cannot be done after making every reasonable effort to do so.

A retrospective treatment is impracticable if the prior period effects cannot be determined

or if it requires significant estimates and assumptions to have been made when the prior period
financial statements were prepared and these are impossible to determine in the current period.

A voluntary change in accounting policy is accounted for by retrospective application. An

early application of a PFRS is not a voluntary change in accounting policy.

CHANGES IN ACCOUNTING ESTIMATES

Many items in the financial statements cannot be measured with precision but only through
estimation because of uncertainties inherent in business activities. The use of reasonable
estimates therefore is necessary in order to provide relevant information. Estimates are an
essential part of financial reporting and do not undermine the reliability of financial reports. For
example, the following necessarily requires estimation:

a. net realizable value of inventories;

b. depreciation;

c. bad debts;

d. fair value of financial assets or financial liabilities; and

e. provisions.

Estimates involve judgments based on latest available information or information.

Consequently, estimates need to be revised when there is a change in circumstances such that
new more experience is obtained.
A change in accounting estimate is "an adjustment of the carrying amount of an asset or
a liability, or the amount of the periodic consumption of an asset, that results from the
assessment of the present status of, and expected future benefits and obligations associated
with, assets and liabilities. Changes in accounting estimates result from new information or new
developments and, accordingly, are not corrections of errors." (PAS 8.5)
Change in accounting policy vs. Change in Accounting Estimate

Normally results from a change on Normally results from changes on how the
measurement basis (e.g., FIFO to Weighted expected inflows or outflows of economic
Average, Cost to Fair Value, etc.) benefits are realized from assets or
incurred on liabilities.

If a change is difficult to distinguish between these two, the change is treated as a change
in an accounting estimate.

Examples of changes in accounting estimates:

a. Change in depreciation method

b. Change in estimated useful life or residual value of a depreciable asset

c. Change in the required balance of allowance for uncollectible accounts or impairment losses

d. Change in estimated warranty obligations and other provisions

ACCOUNTING FOR CHANGES IN ACCOUNTING ESTIMATES

Changes in accounting estimates are accounted for by prospective application. Prospective

application means recognizing the effects of the change in profit or loss, either in:

a. the period of change; or

b. the period of change and future periods, if both are affected.

Under prospective application, the beginning balance of retained earnings and the
previous financial statements are not restated.

ERRORS

Errors include misapplication of accounting policies, mathematical mistakes, oversights or

misinterpretations of facts, and fraud.

"Financial statements do not comply with PFRSs if they contain either material errors or
immaterial errors made intentionally to achieve a particular presentation of an entity's
financial position, financial performance or cash flows." (PAS 8.41)

Material errors are those that cause the financial statements to be misstated.
Intentional errors are fraud. In the case of fraud, it does not matter whether the error is
material or immaterial. Fraudulent financial reporting does not comply with PFRSs.

Errors can be errors of commission errors of omission.

An error of commission is doing something wrong while an error of omission is not doing
something that should have been done.

The types of errors according to the period of occurrence are as follows:

a. Current period errors - are errors in the current period that were discovered either
during the current period or after the current period but before the financial statements were
authorized for issue. These are corrected simply by correcting entries.

b. 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 financial statements
were authorized for issue. These are corrected by retrospective restatement.

RETROSPECTIVE RESTATEMENT

Retrospective restatement means:

a. restating the comparative amounts for the prior period(s) presented in which the error
occurred; or

b. if the error occurred before the earliest prior period presented, restating the opening
balances of assets, liabilities and equity for the earliest prior period presented. (PAS 8.42)
Retrospective restatement Retrospective application
Correcting a prior period error as if the error Applying a new accounting policy as if the
had never occurred. policy had always been applied.

Just like retrospective application, retrospective restatement shall be made as far back
as practicable. If it is impracticable to determine the cumulative effect of a prior period error at
the beginning of the current period, the entity is allowed to correct the error prospectively from
the earliest date practicable.

Summary:

➢ The two types of accounting changes are (a) change in accounting policy and (b)
change in accounting estimate.
➢ Accounting policies are those adopted by an entity in preparing and presenting its
financial statements.
➢ PAS 8 requires the consistent selection and application of accounting policies. An
accounting policy shall be changed only when it (a) is required by a PFRS; or (b) results
in relevant and more reliable information.
➢ 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.
➢ A voluntary change in accounting policy is accounted for by retrospective application.
Early application of a PFRS is not a voluntary change in accounting policy.
PAS 10 Events after the Reporting Period
Introduction

PAS 10 prescribes the accounting for, and disclosures of, events after the reporting period,
including disclosures regarding the date when the financial statements were authorized for
issue.

EVENTS AFTER THE REPORTING PERIOD

Events after the reporting period are "those events, favorable and unfavorable, that occur
between the end of the reporting period and the date when the financial statements are
authorized for issue." (PAS 10.3)

For example, Entity A's reporting period ends on December 31, 20x1 and its financial
statements are authorized for issue on March 31, 20x2. Events after the reporting period are
those events that occur within January 1, 20x2 to March 31, 20x2.

➢ The 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

1. Adjusting events after the reporting period - are events that provide evidence of
conditions that existed at the end of the reporting period.

2. Non-adjusting events after the reporting period - are events that are indicative of
conditions that arose after the reporting period.

ADJUSTING EVENTS AFTER THE REPORTING PERIOD

Adjusting events, as the name suggests, require adjustments of amounts in the financial
statements. Examples of adjusting events:

a. 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.

b. The receipt of information after the reporting period indicating that an asset was impaired
at the end of reporting period. For example:

i. 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.

ii. The sale of inventories after the reporting period may give evidence to their net
realizable value at the end of reporting period.
c. The determination after the reporting period of the cost of asset purchased, or the
proceeds from asset sold, before the end of reporting period.

d. 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.

e. The discovery of fraud or errors that indicate that the financial statements are incorrect.
(PAS 10.9)

NON-ADJUSTING EVENTS AFTER THE REPORTING PERIOD

Non-adjusting events do not require adjustments of amounts in the financial statements.

However, they are disclosed if they are material. Examples of non-adjusting events:

a. Changes in fair values, foreign exchange rates, interest rates or market prices after
the reporting period.

b. Casualty losses (e.g., fire, storm, or earthquake) occurring after the reporting period
but before the financial statements were authorized for issue.

c. Litigation arising solely from events occurring after the reporting period.

d. Significant commitments or contingent liabilities entered after the reporting period,

e.g., significant guarantees.

e. Major ordinary share transactions and potential ordinary share transactions after the
reporting period.

f. Major business combination after the reporting period.

g. Announcing, or commencing the implementation of, a major restructuring after the

reporting period.

h. Announcing a plan to discontinue an operation after the reporting period.

i. Change in tax rate enacted after the reporting period.

j. Declaration of dividends after the reporting period

(PAS 10.22)

DIVIDENDS

Dividends declared after the reporting period are not recognized as liability at the end of
reporting period because no present obligation exists at the end of reporting period.

GOING CONCERN

PAS 10 prohibits the preparation of financial statements 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 but to do so.
PAS 24 RELATED PARTY DISCLOSURES

Introduction

PAS 24 prescribes the guidelines in identifying related party relationships, transactions,

outstanding balances commitments, and the necessary disclosures for these items. and

Related party relationships are a common feature of business. For example, the
companies operating under the trade names "Chowking," "Greenwich," "Red Ribbon," "Burger
King," and "Mang Inasal" are all subsidiaries of Jollibee Foods Corporation, the parent
company. All these companies are related parties. Collectively, they are referred to as the
'Jollibee Group.

Related party disclosures are necessary to indicate the possibility that an entity's
financial position and performance might have been affected by the existence of such
relationship. This is because related parties often enter into transactions that unrelated parties
would not. For example, a subsidiary might sell goods to its parent at preferential rates that are
unavailable to unrelated parties.

Sometimes the mere existence of a related party relationship is sufficient to affect an

entity's financial position and performance even in the absence of related party transactions. For
example, a parent might dictate a subsidiary's choice of supplier.

For these reasons, users of financial statements need information on related party
relationships, transactions, outstanding balances and commitments to help them better assess
the risks and opportunities surrounding entity.

RELATED PARTIES

Parties are related if one party has the ability to affect the financial and operating decisions of
the other party through control, significant influence or joint control.

Control, significant influence and joint control refer to the degree of one party's ability to
affect the relevant decisions of another. These are defined and discussed in the other sections
of this book.

Examples of related parties:

1. Parent and its subsidiary

2. Fellow subsidiaries with a common parent

3. Investor and its associate; and the associate's subsidiary

4. Venturer and the joint venture; and the joint venture's subsidiary

5. A joint venture and an associate of a common investor.

6. Key management personnel of the reporting entity or of the reporting entity's parent.

7. A person who has control, significant influence or joint control over the reporting entity.

8. Close family member of the person referred to in (6) and (7)

9. Post-employment benefit plan of the employees of either the reporting entity or an entity
related to the reporting entity

➢ Key management personnel - are "those persons having authority and responsibility
for planning, directing and controlling the activities of the entity, directly or indirectly,
including any director (whether executive or otherwise) of that entity." (PAS 24.9)

➢ Close family member is one who may be expected to influence, or be influenced by,
the person in his/her dealings with the reporting entity. It includes the person's spouse,
their children and their dependents.

The following are not related parties:

a. Two entities simply because they have one director or key management personnel in
common.

b. Two joint venturers simply because they are co-venturers in a joint venture.

c. Financers, trade unions, public utilities, and government agencies that do not control, jointly
control or significantly influence the reporting entity, simply by virtue of their normal dealings
with the entity, even though they may place some restrictions on the entity or participate it its
decision-makings.

d. A customer, supplier, or other business that the entity does significant transactions with,
simply because of economic dependence.

AN ENTITY AS A RELATED PARTY

An entity is related to a reporting entity if any of the following conditions applies (IAS 24.9). See
also a very useful diagram that follows.

▪ The entity and the reporting entity are members of the same group. ▪ One entity is
an associate or joint venture of the other entity ▪ Both entities are joint ventures of the
same third party.
▪ One entity is a joint venture of a third entity and the other entity is an associate of the
third entity.
▪ The entity is a post-employment benefit plan for the benefit of employees of either the
reporting entity or an entity related to the reporting entity. If the reporting entity is itself
such a plan, the sponsoring employers are also related to the reporting entity.
▪ The entity is controlled or jointly controlled by a person identified as related party in
previous section.
▪ A person having control or joint control of the reporting entity (or his close family
member) has significant influence over the entity in question or is a member of the key
management personnel of this entity (or of a parent of this entity).
▪ The entity, or any member of a group of which it is a part, provides key management
personnel services to the reporting entity or to the parent of the reporting entity.

Illustration:

Mr. X is a director in A Co. and also in B Co.

Analysis: The related parties are A Co. and Mr. X and B Co. and Mr. X because Mr. X is a key
management personnel of these companies. A Co. and B Co. are not related parties simply
because they have an interlocking director.

DISCLOSURE

Relationships between parents and subsidiaries

A parent-subsidiary relationship is disclosed even if there have been no transactions between

them during the period.

A subsidiary discloses the name of its parent, and if different, the name of the ultimate
parent. If neither of these two prepares consolidated financial statements for public use, the
subsidiary discloses the name of the next most senior parent that does so.
KEY MANAGEMENT PERSONNEL COMPENSATION

An entity discloses the total key management personnel compensation broken down as follows:

a. short-term employee benefits;

b. post-employment benefits;

c. other long-term benefits;

d. termination benefits; and

e. share-based payment.

RELATED PARTY TRANSACTIONS

A related party transaction is "a transfer of resources, services or obligations between a

reporting entity and a related party, regardless of whether a price is charged." (PAS 24.9)

Examples of transactions that are disclosed if they are with a related party:

a. purchases or sales of goods, services or other assets

b. leases

c. transfers of research and development

d. transfers under license agreements e. loans and other financing arrangements, including
equity contributions

f. provision of guarantees or collateral

g. commitments

h. settlement of liabilities by or on behalf of either party

i. participation by a parent or subsidiary in a defined benefit plan wherein risks are shared

The following are disclosed when there are related party transactions during the periods
covered by the financial statements:

a. nature of the related party relationship

b. nature, terms and amount of the transaction balances and outstanding

c. doubtful debts recognized on the outstanding balances

Related party transactions and their outstanding balances are disclosed in an entity's
separate or individual financial statements. These, however, are eliminated in the group's
consolidated financial statements.
Disclosures that related party transactions were on arm's length basis are not made
unless this can be substantiated.

GOVERNMENT-RELATED ENTITIES

A government-related entity is "an entity that is controlled, jointly controlled or significantly

influenced by a government." (PAS 24.9)

A government-related entity discloses the following if there have been related party
transactions with the government:

a. name of the government and the nature of the relationship

b. nature and amount of each individually significant transaction

c. other transactions that are collectively significant but are individually insignificant

PAS 27 SEPARATE FINANCIAL STATEMENTS

Introduction

PAS 27 prescribes the accounting and disclosure requirements for investments in

subsidiaries, associates and joint ventures when an entity prepares separate financial
statements.

PAS 27 does not mandate which entities should produce separate financial statements.
PAS 27 is applied when an entity chooses, or is required by law, to present separate financial
statements that comply with PFRSs.

SEPARATE FINANCIAL STATEMENTS

Separate financial statements are those presented in addition to:

a. consolidated financial statements; or

b. the financial statements of an entity with an investment in associate or joint venture that is
accounted for using equity method in accordance with PAS 28 Investments in Associates
and Joint Ventures.

The financial statements of an entity that does not have an investment in subsidiary,
associate or joint venturer are not separate financial statements.

Entities exempted from preparing consolidated financial statements present separate

financial statements as their only financial statements.
➢ Consolidated financial statements are "the financial statements of a group in which
the assets, liabilities, equity, income, expenses and cash flows of the parent and its
subsidiaries are presented as those of a single economic entity." (PAS 27.4)

PREPARATION OF SEPARATE FINANCIAL STATEMENTS

Separate financial statements are prepared in accordance with all applicable PFRSs, except
that investments in subsidiaries, associates or joint ventures are accounted for either: a.
at cost,

b. in accordance with PFRS 9 Financial Instruments, or

c. using the equity method under PAS 28 Investments in Associates and Joint Ventures

The entity applies the same accounting for each investment category (i.e., subsidiaries,
associates, and joint ventures).

If the investments are measured at fair value through profit or loss in non-separate
financial statements, that same measurement is also used in the separate financial statements.

Investments classified for as held for sale are accounted for in accordance with PFRS 5
Non-current Assets Held for Sale and Discontinued Operations.

DIVIDENDS

Dividends from a subsidiary, associate or joint venture are recognized in profit or loss when
the entity's right to receive the dividends is established, except when the investment is
accounted for using the equity method, in which case the dividends are recognized as deduction
to the carrying amount of the investment.

PAS 29 FINANCIAL REPORTING ON HYPERINFLATORY ECONOMIES

INTRODUCTION

PAS 29 prescribes the restatement procedures for the financial statements of an entity whose
functional currency is the currency of a hyperinflationary economy.

Inflation is normally ignored in accounting due to the stable monetary unit assumption.
However, when inflation is very high (hyper), it can no longer be ignored. This is because
financial statements are stated in terms of money and when money loses its purchasing power
at a very high rate, the financial statements become misleading. The financial statements
therefore must be restated otherwise they are useless.
Inflation refers to a general increase in prices and decrease in the purchasing power of
money.

PAS 29 does not prescribe an absolute rate at which hyperinflation is deemed to arise.
This is a matter of judgment. Instead, PAS 29 provides the following indicators which an entity
considers when determining the existence of hyperinflation:

a. the general population prefers to keep its wealth in non monetary assets or in a relatively
stable foreign currency. Amounts of local currency held are immediately invested to maintain
purchasing power;

b. the general population regards monetary amounts not in terms of the local currency but in
terms of a relatively stable foreign currency. Prices may be quoted in that currency:

c. sales and purchases on credit take place at prices that compensate for the expected loss of
purchasing power during the credit period, even if the period is short;

d. interest rates, wages and prices are linked to a price index; and

e. the cumulative inflation rate over three years is approaching, or exceeds, 100%. (PAS 29.3)

CORE PRINCIPLE

The financial statements of an entity that reports in the currency of a hyperinflationary economy,
whether they are based on historical cost or current cost, shall be stated in terms of the
measuring unit current at the end of the reporting period. Comparative figures for prior
period(s) shall also be restated into the same current measuring unit.

PAS 29 prohibits the presentation of the required information as supplement to

unrestated financial statements. PAS 29 discourages the separate presentation of the financial
statements before restatement.

RESTATEMENT OF FINANCIAL STATEMENTS

Financial statements are restated by applying a general price index as follows:

Statement of Financial Position
a. Monetary items - Not restated
b. Non-monetary items Measured at - restated
cost
c. Non-monetary items measured at - Not restated. However, if the
fair value or NRV at the end of fair value or NRV was
the reporting period determined at a date other than
the end of the reporting period,
that fair value or NRV is
nonetheless restated, from the
date it was determined.
Statement of comprehensive income & Statement of cash flows
d. All items are restated.

The corresponding figures for prior period(s), whether monetary or nonmonetary, are all
restated.

The gain or loss on the net monetary position resulting from the restatements is
recognized in profit or loss.

Formula for restatement:

Historical cost × Current price index (index as of end of reporting period) ÷ Historical price
index* (index as of acquisition date)

"When it is impracticable to determine the historical price indices, such as for transactions
recurring very frequently, an entity may use the average price index for the period.

Illustration:

Entity A operates in a hyperinflationary economy. Entity A's building has a carrying amount of
P1M on December 31, 20x2. The building was acquired on June 21, 20x0. The general price
indices are as follows:

June 21, 20x0 100

December 31, 20x1 150

Average-20x2 180

December 31, 20x2 200

➢ The building's carrying amount is restated as follows:

1M x 200 Current price index, Dec. 31, 20x2 ÷ 100 Historical price index, June 21, 20x0 =

2M restated amount to current measuring unit as of Dec. 31, 20x2

Assume that the 20x2 depreciation expense on the building is $200,000. The
depreciation is restated in the same manner as follows: (200K x 200/100) = 400K.

Assume further that the carrying amount of the building is 1.2M on December 31, 20x1.
This corresponding figure is restated also in the same manner as follows: (1.2M x 200/100) =
2.4M.
CONSOLIDATED FINANCIAL STATEMENTS

If any of the entities belonging to a group entity reports in a hyperinflationary economy, the
financial statements of that entity needs to be restated first before they are consolidated in the
group's financial statements.

If a foreign operation reports in a hyperinflationary economy, its financial statements are

also restated first under PAS 29 before they are translated in accordance with PAS 21.

DISCLOSURES

a. the fact that the financial statements, including corresponding figures, have been restated for
changes in the general purchasing power of the reporting currency.

b. whether the financial statements are based on historical cost or current cost.

c. the identity and level of the price index at the end of the reporting period and the movements
during the current and previous reporting period.

PAS 34 INTERIM FINANCIAL REPORTING

INTRODUCTION

PAS 34 prescribes the minimum content of an interim financial report and the recognition and
measurement principles in complete or condensed financial statements for an interim period.

PAS 34 does not mandate which entities should produce interim financial reports. PAS
34 is applied when an entity chooses, or is required by the government or other institution, to
publish interim financial report that complies with PFRSs.

PAS 34, however, encourages publicly listed entities to provide at least a semi-annual
financial report for the first half of the year to be issued not later than 60 days after the end of
the interim period.

❖ Under the reportorial requirements of the Revised Securities Act in the Philippines, the
Securities and Exchange Commission (SEC) and the Philippine Stock Exchange (PSE)
require certain entities to provide quarterly financial reports within 45 days after the end
of each of the first three quarters. Similarly, the SEC requires entities covered under the
Rules of Commercial Papers and Financing Act to file quarterly financial reports within
45 days after each quarter-end.
Financial reports, whether annual or interim, are evaluated for conformity to the PFRSS
on their own. Non preparation of interim reports or non-compliance with PAS 34 does not
necessarily prevent the entity's annual financial statements from conforming to the PFRS.

INTERIM FINANCIAL REPORT

An interim financial report is a financial report prepared for an interim period and contains
either:

a. A complete set of financial statements as described in PAS 1; or

b. A set of condensed financial statements as described in PAS 34.

➢ Interim period is "a financial reporting period shorter than a full financial year." (PAS 34.4)

An entity presenting an interim financial report has the option of applying either PAS 1 or
PAS 34.

▪ The entity applies PAS 1 if it opts to provide a complete set of financial

statements in its interim financial report.
▪ The entity applies PAS 34 if it opts to provide a condensed set of financial
statements in its interim financial report.
PAS 1 Complete set of FS PAS 34 Condensed set of FS

1. Statement of financial position 1. Condensed statement of financial

2. Statement of profit or loss and other position
comprehensive income 2. Condensed statement of profit or loss
3. Statement of changes in equity and other comprehensive income 3.
4. Statement of cash flows Condensed statement of changes in
5. Notes equity
(5.a) Comparative information 4. Condensed statement of cash flows
6. Additional statement of financial position 5. Selected explanatory notes
(required only when certain instances occur)

An entity is not prohibited or discouraged from preparing a complete set of financial

statements (in accordance with PAS 1) for its interim financial reporting.

However, in view of timeliness and cost considerations and to avoid repetition of

information previously reported, an entity may be required or elect to provide less information
at interim dates as compared with its annual financial statements. In such case, the entity
applies PAS 34 to provide a set of condensed financial statements. "Condensed" means the
entity need only provide the minimum information required under PAS 34.

At a minimum, condensed interim financial include each of the headings and subtotals
that were included in the entity's most recent annual financial statements and the selected
explanatory notes required by PAS 34. Additional line items or notes are provided if their
omission makes the condensed financial statements misleading.
SIGNIFICANT EVENTS AND TRANSACTIONS

Interim reports are intended to provide an update on the latest complete set of annual financial
statements. Hence, they focus on providing information on significant events and
transactions that have occurred since the latest annual period, rather than duplicating
previously reported information providing relatively or insignificant updates on them.

Consequently, users of interim financial report are assumed to also have access to the
entity's latest annual financial report.

Examples of events and transactions for which disclosures would be required if they are
significant:

a. write-down of inventories and reversal thereof

b. impairment losses and reversal thereof
c. reversal of provision for restructuring costs
d. acquisitions and disposals of PPE, including purchase commitments
e. litigation settlements
f. corrections of prior period errors
g. business or economic circumstances affecting the fair value of financial assets and
financial liabilities
h. unremedied loan default or breach of loan agreement

i. related party transactions

j. transfers between levels of the fair value hierarchy used in measuring the fair value of
financial instruments
k. changes in the classification of financial assets
l. changes in contingent liabilities or contingent assets (PAS 34.158)

OTHER DISCLOSURES

In addition to significant events and transactions, the following are also disclosed in the interim
financial report:

a. a statement that the same accounting policies were used in the interim financial statements
as those used in the latest annual financial statements. If there have been changes, those
changes are disclosed.

b. explanation of seasonality or cyclicality of interim operations

c. unusual items affecting the financial statement elements

d. changes in accounting estimates

e. issuances and settlements of debt and equity securities

f. dividends paid

g. segment information (if the entity is covered by PFRS 8)

h. events after the reporting period

i. changes in the composition of the entity, e.g., business combinations, obtaining or losing
control subsidiaries, restructurings, and discontinued operations

j. disclosures on the fair value of financial instruments

k. disclosures required by PFRS 12 when the entity becomes or ceases to be an investment

entity

l. Disaggregation of revenue from contracts with customers as required by PFRS 15

• The entity presents basic and diluted earnings per share if the entity is within the
scope of PAS 33.
• The entity discloses its compliance with PFRSs if it has complied with PAS 34 and
all the requirements of other PFRSs.

Periods for which interim financial statements are presented

The following illustrates the periods covered by interim financial statements, including
comparative information:

❖ Semi-annual interim financial reporting

For an entity that uses the calendar year as its accounting period, the following interim
financial statements will appear in its semi-annual interim financial report on June 30,
20x1:

❖ Quarterly interim financial reporting

For an entity that uses the calendar year, the following statements will appear in its third
quarter interim financial report on September 30, 20x1.
Notes:

• The comparative statement of financial position is the most recent annual financial
statement.
• For the other financial statements, the comparatives are presented on a comparable
year-to-date period.

• The interim financial statements are presented on a cumulative basis (year-to-date).

However, an additional statement of profit or loss and other comprehensive income is
presented that covers the current quarter only.

If an entity's business is highly seasonal, PAS 34 encourages disclosure of financial

information for the latest 12 months and comparative information for the prior 12-month period in
addition to the interim period financial statements above.

If an entity changes an accounting estimate in the final I interim period (e.g., 4th quarter)
but interim financial statements are not prepared for that period, the change in accounting
estimate is disclosed in the annual financial statements.

MATERIALITY

Materiality judgments on recognition, classification and disclosure of items in the interim

financial report are assessed in relation to the interim period financial data, and not forecasted
annual data. PAS 34 recognizes that interim measurements may rely on estimates to a greater
extent than measurements of annual financial data.
RECOGNITION AND MEASUREMENT Same accounting policies as annual

The same accounting policies are used in interim reports as those used in annual reports,
except for accounting policy changes made after the date of the most recent annual financial
statements that are to be reflected in the next annual financial statements.

TWO VIEWS ON INTERIM REPORTING

1. Integral view - the interim period is considered as an integral part of the annual
accounting period. Thus, annual operating expenses are estimated and then allocated to the
benefitted interim periods based on forecasted annual activity levels. Subsequent interim period
financial statements are adjusted to reflect the effect of changes in estimates in earlier interim
periods of the same financial year.

2. Discrete view - the interim period is considered as a discrete ('stand-alone') accounting

period. The same expense recognition principles applied in annual reporting are used in the
interim period. No special interim accruals or deferrals are made. Annual operating expenses
are recognized in the interim period in which they are incurred regardless of whether
subsequent interim periods are benefitted.

Proponents of the integral view argue that the estimation and allocation procedures
for interim expenses are necessary to avoid fluctuations in period-to-period results that might be
misleading to financial statement users. The use of integral view arguably increases the
predictive value of interim reports by showing interim performance that is indicative of what the
annual performance would be.

Proponents of the discrete view argue that smoothing interim results for purposes of
forecasting annual performance may have undesirable effects. A significant change in
performance trend could be obscured if smoothing techniques implied by the integral view
approach were to be employed.

PAS 34 adopts a combination of the two views. PAS 34.29 recognizes that while the
requirement that same accounting policies shall be used in the interim period as those used in
the annual period suggests that the interim period is a stand-alone period (discrete view), PAS
34.28 states that the frequency of the reporting (annual, half-yearly, or quarterly) shall not affect
the measurement of the annual results, which is on a year-to-date basis; and therefore, the
interim period is part of a larger financial year (integral view).

PAS 34 provides the following accounting principles:

a. Losses from inventory write-downs, restructurings, or impairments in an interim period

are accounted for in the same way as in annual financial statements (i.e., losses are recognized
immediately in the interim period in which they arise).

If there are subsequent changes in estimates, the original estimate is adjusted by accruing an
additional loss or by reversing a previously recognized loss. Financial statements in previous
interim periods are not restated.
b. A cost that does not qualify as an asset in an interim period is not deferred either to wait
if it qualifies in the next period or to smooth earnings over the interim periods within a financial
year.

Likewise, a liability at the end of an interim period I must meet all the recognition criteria at that
date, just as it must at the end of an annual reporting period.

c.Income tax expenses in interim periods are based on the best estimate of the weighted
average annual income tax rate expected for the full financial year.

Items (a) and (b) above favor the discrete view while item (c) favors the integral view.

The recognition principles of assets, liabilities, income and expenses under the Conceptual
Framework are interim period in the same way as in the annual period. Thus, items that do not
qualify as assets, liabilities, income or expenses applied in the in the annual period do not also
qualify as such in the interim period.

MEASUREMENT

Measurements in the interim period are made on a year-to-date basis, so that the frequency of
reporting (annual, semi-annual, or quarterly) does not affect the measurement of annual results.

Revenues received seasonally, cyclically, or occasionally

Revenues that are received seasonally, cyclically, or occasionally are not anticipated or deferred
in the interim period if anticipation or deferral is also not appropriate at the end of the annual
period.

Examples include: dividend revenue, royalties, and government grants. Such revenues are
recognized when they occur.

Costs incurred unevenly during the financial year

Costs that are incurred unevenly during a financial year are anticipated or deferred in the interim
period only if it is also appropriate to anticipate or defer them at the end of the financial year.

PAS 37 PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS

Introduction

PAS 37 prescribes the accounting and disclosure requirements for provisions, contingent
liabilities and contingent assets to help users understand their nature, timing and amount.

PAS 37 applies to the accounting for provisions, contingent liabilities and contingent
assets, except those arising from executory contracts, unless they are onerous, and those that
are covered by other PFRSs.

➢ Executory contracts are contracts that are not yet fully executed, meaning, the parties
thereto still have obligations to perform.
➢ Onerous means burdensome. A contract becomes when the cost of fulfilling it exceeds
the economic benefits expected to be derived from it.

For example, Entity A commits to purchase 1,000 units of inventory for $100 per unit under a
non-cancellable purchase commitment for future delivery. Generally, no liability is recognized on
the contract until the inventories are delivered. However, if the inventories become obsolete
before the delivery, such that the price declines to $20 per unit, Entity A recognizes a loss of
$80 per unit (100 committed price - P20 actual price). In this case, PAS 37 applies because the
contract became onerous.

PROVISIONS

A provision is "a liability of uncertain timing or amount." (PAS 37.10)

Provisions differ from other liabilities because of the uncertainty in the timing of their
settlement or the amount needed to settle them. Unlike other liabilities, provisions must
necessarily be estimated. Although some other liabilities are also estimated, their uncertainty is
generally much less compared to provisions.

Examples of provisions:

a. Warranty obligations

b. Estimated liabilities on pending lawsuits

c. Provisions for environmental damages

d. Provisions of decommissioning costs of an item of PPE

e. Obligations caused by an entity's policy to make refunds to customers

f. Obligations arising from guarantees

g. Provisions on onerous contracts (e.g., purchase commitment)

h. Provisions for restructuring costs

Provisions are presented in the statement of financial position separately from other
types of liabilities.
RECOGNITION

A provision is recognized when all of the following conditions are met:

a. The entity has a present obligation (legal or constructive) resulting from a past event;

b. It is probable that an outflow of resources embodying economic benefits will be required to

settle the obligation; and

c. The amount of the obligation can be reliably estimated.

If any of the conditions is not met, no provision is recognized. (PAS 37.14)

PRESENT OBLIGATION

In rare cases where it is not clear whether there is a present obligation, an entity deems a past
event to give rise to a present obligation if available evidence shows that it is more likely than
not that a present obligation exists at the end of the reporting period.

PAST EVENT

A past event that creates a present obligation is called an obligating event. An obligating event
is one whereby the entity does not have any other recourse but to settle an obligation. This is
the case where:

a. the obligation is legally enforceable (legal obligation); or

b. the entity's actions (e.g., past practice or published policies) have created valid
expectations on others that the entity will discharge the obligation (constructive
obligation).

Financial statements deal with past or historical information. Therefore, no provision is

recognized for future operating costs. "The only liabilities recognized in an entity's statement of
financial position are those that exist at the end of the reporting period." (PAS 37.18)

Only those obligations arising from past events existing independently of an entity's
future actions are recognized as provisions. Thus, possible outflows of resources embodying
economic benefits that the entity can avoid by changing its future actions are not recognized as
provision.

Although an obligation always involve another party to whom the obligation is owed (i.e.,
obligee), it is not necessary that the identity of the obligee is known - indeed the obligee may be
the public at large.

For a constructive obligation to create a valid expectation on others, it is necessary that

the commitment must have been communicated to the parties concerned before the end of the
reporting period.
PROBABLE OUTFLOW OF RESOURCES EMBODYING ECONOMIC BENEFITS

Probable means "more likely than not." Meaning, there is a greater chance that the present
obligation will cause settlement than not.

RELIABLE ESTIMATE OF THE OBLIGATION

Provisions necessarily need to be estimated. If a reliable estimate cannot be made, no provision

is recognized.

CONTINGENT LIABILITIES

In a general sense, all provisions are contingent because they are of uncertain timing or
amount. However, PAS 37 uses the term "contingent" to refer to those liabilities and assets that
are not recognized because they do not meet all of the recognition criteria.

A provision and a contingent liability are differentiated below:

Provision Contingent liability

➢ A liability of an uncertain timing or ➢ A possible obligation whose existence
amount that meets all of the following will be confirmed only by the occurrence or
conditions: non-occurrence of one or more uncertain
a. present obligation; future events not wholly within the control
b. probable outflow; and of the entity; or ➢ A present obligation but:
c. reliably estimated i. it is not probable that it will cause
an outflow in its settlement; or ii. its
amount cannot be reliably estimated.

Contingent liabilities are disclosed only, except when the possibility of an outflow of
resources embodying economic benefits is remote.

CONTINGENT ASSETS

Contingent assets are those that are not recognized because they do not meet all of the
asset recognition criteria (i.e., 'resource controlled arising from past events', 'probable inflow',
and reliable estimation').

Contingent assets include possible inflows of economic benefits from unplanned or

unexpected events, such as claims that an entity is seeking through legal processes where the
outcome is uncertain (e.g., claims under tax disputes and disputed insurance claims).

Contingent assets are disclosed only, if the inflow of economic benefits is probable.
They are not recognized because recognizing them may result to the recognition of income that
may never be realized.
However, when the realization of income is virtually certain (100% chance of
occurrence), the asset is not a contingent asset and therefore it is appropriate to recognize it.

MEASUREMENT

Provisions are measured at the best estimate of the amount needed to settle them at the end
of the reporting period.

Making the estimate requires management's judgment, supplemented by experience

from similar transactions, and in some cases, reports from independent experts. The estimate
also considers events after the reporting period.

If the provision being measured involves a large population items, the obligation is
measured at its "expected value."

Expected value is computed by weighting all possible outcomes by their associated

probabilities.

If there is a continuous range of possible outcomes, and each point in that range is
as likely as any other, the mid-point of the range is used.

Estimates take into account risks and uncertainties. Thus, estimates may be increased
by a risk adjustment factor to provide an allowance for imprecision inherent in estimates. This,
however, does not mean that the entity can make excessive provisions or can deliberately
overstate liabilities.

If the effect of time value of money is material, the estimate of a provision is

discounted to its present value using a pre-tax discount rate. This is usually the case for
provisions for restoration and decommissioning costs where cash outflows occur only after a
relatively long period of time from the date of initial recognition.

Future events may affect the amount needed to settle an obligation. However, future
events are considered in estimating a provision only if there is objective evidence that supports
their anticipation. For example, the penalty for an environmental damage may be affected by
legislation. If a new law that will increase the amount of penalty is expected to be enacted, that
new law is anticipated only when it is virtually certain that it will be enacted. Otherwise, it would
not be appropriate to anticipate it.

Gains from the expected disposal of assets are not taken into account when measuring
a provision. Gains are recognized separately when the disposals occur.

If another party is expected to reimburse the settlement amount of a provision, a

reimbursement asset is recognized if it is virtually certain that the reimbursement will be
received. The reimbursement asset is presented in the statement of financial position separately
from the provision. However, in the statement of comprehensive income, the expense related to
the provision may be presented net of the reimbursement. The amount recognized for the
reimbursement should not exceed the amount of the provision.

An example of an instance where a reimbursement asset may be recognized is when the

obligating event that caused the recognition of a provision is insured. The reimbursement asset
would be the amount that the entity can claim from the insurance company.

RECORDING THE PROVISION

Provisions are normally recognized as a debit to expense (or loss) and a credit to an estimated
liability account. However, sometimes a provision forms part of the cost of an asset. For
example, provisions for restoration and decommissioning costs are capitalized as part of the
cost of a PPE.

CHANGES IN PROVISIONS

Provisions are reviewed at the end of each reporting period and adjusted to reflect the current
best estimate. Changes in provisions are accounted for prospectively by accruing an additional
amount or by reversing a previously recognized amount.

When the provision is discounted, the unwinding (amortization) of the related discount
which increases the carrying amount of the provision is recognized as interest expense.

USE OF PROVISIONS

A provision is used only for the expenditure it was originally intended for. Charging expenditure
against a provision that is intended for another purpose is inappropriate as it would conceal the
impact of two different events.

APPLICATION OF THE RECOGNITION AND MEASUREMENT RULES

FUTURE OPERATING LOSSES

No provision is recognized for future operating losses because they do not meet the definition of
a liability (i.e., 'arising from past events'). The expectation of future operating losses may
indicate that certain assets may be impaired. Those assets are tested for impairment under PAS
36.

ONEROUS CONTRACTS

The provision recognized from an onerous contract reflects the least net cost of exiting from the
contract, which is the lower of the cost of fulfilling it and any compensation or penalties arising
from failure to fulfill it.

RESTRUCTURING

Restructuring is "a program that is planned and controlled by management, and materially
changes either:

a. The scope of a business undertaken by an entity; or

b. The manner in which that business is conducted." (PAS 37.10)

Examples:

a. Sale or termination of a line of business;

b. Closure of business locations in a country or region or the relocation of business activities

from one country or region to another;

c. Changes in management structure, for example, eliminating a layer of management; and

d. Fundamental reorganizations that have a material effect on the nature and focus of the
entity's operations. (PAS 37.70)

An entity applies the general recognition criteria provided earlier when recognizing
provisions for restructuring costs. In addition, the entity considers the following:

Sale of operation

A legal obligation exists (and therefore a provision is recognized) only if, at the end of reporting
period, a binding sale agreement is obtained. This is because, until a binding sale agreement is
obtained, the entity can still change its mind and may withdraw its plan to sell if it cannot find a
purchaser under acceptable terms.
If the binding sale agreement is obtained only after the end of the reporting period, no
provision is recognized because no present obligation exists at the end of the reporting period.
This, however, may be disclosed as a non-adjusting event after the reporting period.

Closure or Reorganization

A constructive obligation exists (and therefore a provision is recognized) only if at the reporting
date, the entity has created valid expectations from others that it will discharge certain
responsibilities. This would be the case if, at the end of the reporting period, both the following
conditions are met:

a. Detailed formal plan for the restructuring is adopted; and

b. The plan is announced to those affected by it.

A mere board decision to restructure is not enough. No provision is recognized if the

detailed plan is adopted or announced after the end of the reporting period. This may also be
disclosed as a non-adjusting event after reporting period.

Measurement of restructuring provision

A restructuring provision includes only the direct costs that are necessarily entailed with the
restructuring. It does not include costs that relate to the ongoing activities of the entity or the
future conduct of its business. A restructuring provision excludes the following costs:

a. retraining or relocating continuing staff

b. marketing

c. investment in new systems and distribution networks (PAS 37.81)

DISCLOSURE

a. Reconciliation for each class of provision showing:

i. Beginning balance

ii.Additions (additional provisions recognized, unwinding of the discount, and effect of a

change in the discount rate)

iii. Deductions (amounts charged against the provision or reversed) iv. Ending

balance

b. Comparative information is not required.

C. For each class of provision, a brief description of the:

i. Nature ii.

Timing iii.

Uncertainties

iv. Assumptions

v. Reimbursement

ANSWERS:
FALSE 1. Cash flows are presented in the statement of cash flows into four activities.

TRUE 2. Non-financial institutions have the option of classifying interest income received as
either investing activities or operating activities.
FALSE 3.Cash flows relating to income and expenses are normally classified as investing
activities in the statement of cash flows.
TRUE 4. Only transactions that have affected cash and cash equivalents are included in the
statement of cash flows. Non-cash transactions are excluded and disclosed only.

FALSE 5. According to PAS 7, the indirect method of presenting cash flows relating to operating
activities shows each major class of gross cash receipts and gross cash payments.

6. 460,000
7. Which of the following cash flows is presented in the operating activities section of a
statement of cash flows?

= Cash receipts from the sale of goods, rendering of services, or other forms of income
8. In the statement of cash flows of a non-financial institution, interest expense paid is
presented under operating or financing activities.

9. Which of the following is presented in the activities section of the statement of cash flows? =
Acquisition of equipment through issuance of note payable
10. Entity A acquires equipment by paying a 10% down payment and issuing a note payable for
the balance. How should Entity A report the transaction in the statement of cash flows?
= Down payment-investing activities; Note payable-None
11. A change in measurement basis is most likely a change in accounting policy.

12. A correction of prior period error is accounted for by retrospective restatement.

13. Which of the following is a change in accounting estimate?
= change in the depreciation method, useful life or residual value of an item of property, plant
and equipment.
14. These result from new information or new developments.

= change in accounting estimates

15. The effect of which of the following is presented in profit or loss in the current period (or
current and future periods, if both are affected) rather than as an adjustment to the opening
balance of retained earnings. = Change in accounting estimate

16. Which of the following best indicates that two parties are related for purposes of PAS 24?
= one party has the liability to affect the financial and operating decisions of the other party
through control, significant influence or joint control.
17. Which of the following are not related parties?
= two co-ventures of a common joint venture business
18. Which of the following is not a required disclosure under PAS 24?

= Related party transactions (in the consolidated financial statements)

19. According to PAS10, these are events that provide evidence of conditions that existed at the
end of the reporting period. = Adjusting events
20. Which of the following events after the reporting period are treated as adjusting events?

= Discovery of prior period fraud or errors

21. It is an entity that is controlled, jointly controlled or significantly influenced by a government?
= Government-related entity

22. It refers to a transfer of resources, services or obligations between a reporting entity and a
related party, regardless of whether a price is charged. = Related party transactions

23. All of the following are examples of related parties except.

= two entities simply because they have one director or key management personnel in common
24. These include transactions that affect equity and non-operating activities. PAS 7

= Financing activities
25. These include transactions that affect non-current assets and other non-operating assets.
PAS7 = Investing activities

26. Liabilities arise from either legal or constructive obligation. Which of the following is a source
of constructive obligation? = an established pattern of past practice

27. According to PAS 37, provision are measured at any of these, whichever is most
appropriate.
28. According to PAS 27, a provision does not arise from future operating losses.

29. According to PAS 37, a provision is a liability of uncertain timing or amount.

30. According to PAS 37, contingent liabilities are always disclosed.

PAS 2 INVENTORIES
PROBLEMS
TRUE OR FALSE
FALSE 1. According to PAS 2, inventories are measured at net realizable value.

FALSE 2. According to PAS 2, net realizable value and fair value less costs to sell are the
same.
FALSE 3. Storage costs of part-finished goods may be included in the cost of inventory but not
storage costs of finished goods.
TRUE 4. Trade discounts are added to the cost of inventories.

TRUE 5. Import duties, freight-in and non-refundable purchase taxes form part of the cost of
inventories.
TRUE 6. Raw materials inventory is not written down below cost if the finished goods to which
they will be incorporated are expected to be sold at or above cost.
FALSE 7. Reversals of inventory write-downs may exceed the amount of the original write-down
previously recognized.

TRUE 8. The cost of factory management is included in the cost of inventory.

FALSE 9. The maintenance costs of a machine used in the manufacturing process are not
included in the cost of inventories.
TRUE 10. If the cost of an inventory is P8 while its net realizable value is P6, the amount of
write down is 2.

PROBLEM 2: MULTIPLE CHOICE

1. Which of the following is not included as part of the cost of an inventory?

Purchase cost, net of trade discount

Direct labor cost

Freight in

Selling cost
2. Conversion costs do not include which of the following costs?

Direct materials c. Production

Direct labor d. All of these are included

3. These deal with the computation of cost of sales and cost of ending inventory.

net realizable value c. cost formulas

perpetual inventory system d.. costing

4. Entity A’s inventories consist of items that are ordinarily interchangeable. According to PAS 2,
which of the following cost formulas shall Entity A use?
Specific identification c. Weighted Average

FIFO d. b or c
5. Which of the following statements is incorrect regarding the use of cost formulas?
PAS 2 requires the use of specific identification of costs for inventories that are not ordinarily
interchangeable.
Entities may choose between FIFO and Weighted Average cost formulas for inventories that are
ordinarily interchangeable.
Different cost formulas may be used for each class of inventory with dissimilar nature and use.

Only one formula shall be used for all inventories regardless of differences in their nature and
use.
6. Entity A’s buys and sells two types of products – Product A and Product B. Items of Product A
are not ordinarily interchangeable while items of Product B are ordinarily interchangeable.
According to PAS 2, what cost formula shall Entity A use? (specific identification ‘SI’, first-in,
first-out ‘FIFO’, weighted average ‘WA’)
Product A – SI; Product B- FIFO or WA
Product B

SI FIFO or WA
SI, FIFO, or WA SI, FIFO, or WA

FIFO WA

SI SI

7. Entity A is a distributor of oil. Entity A’s inventories are ordinarily interchangeable. Entity A
maintains a specific level of inventory such that the latest purchases are the ones dispatched
first to the sales outlets. Consequently, the latest purchases are sold first. Which of the
following cost formulas shall be used by Entity A?
Last-in. first-out (LIFO) c. Weighted Average
FIFO d. b or c

8. In which of the following instances is a write-down of inventories to net realizable value may
not be required?

the inventories are damaged

the inventories have become wholly or partially obsolete the
estimated costs to complete or costs to sell have increased
selling prices are rising because demand has increased
9. Write-downs of inventories to their net realizable value are recognized

in profit or loss c. directly in equity

in other comprehensive income d. any of these

PROBLEM 1: TRUE OR FALSE

FALSE 1. Cash flows are presented in the statement of cash flows into four activities.
TRUE 2. Non-financial institutions have the option of classifying interest income received as
either investing activities or operating activities.

FALSE 3. Cash flows relating to income and expenses are normally classified as investing
activities in the statement of cash flows.

TRUE 4. Only transactions that have affected cash and cash equivalents are included in the
statement of cash flows. Non-cash transactions are excluded and disclosed only.

FALSE 5. According to PAS 7, the indirect method of presenting cash flows relating to operating
activities shows each major class of gross cash receipts and gross cash payments.
PROBLEM 2: MULTIPLE CHOICE
1. Entity A had the following balances at December 31, 20x1:
Cash in bank P 35,000

Cash in 90-day money market account 75,000

Treasury bill, purchased 11/1/xl, maturing 1/31/x2 350,000

Treasury bill, purchased 12/1/xl, maturing 3/31/x2 400,000

How much is the cash and cash equivalents to be reported in Entity A's December 31, 20x1
statement of financial position? a. 110,000 c. 460,000
b. 385,000 d. 860,000

2. Which of the following cash flows is presented in the operating activities section of a
statement of cash flows?
a. cash receipts from 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 short-term or
long-term borrowings, and their repayments

c. cash receipts from the sale of goods, rendering of services, or other forms of income
d. cash payments by a lessee for the reduction of the outstanding liability relating to a lease

3. In the statement of cash flows of a non-financial institution, interest expense paid is presented
under

a. operating activities.
b. investing activities.

c. financing activities
d. a or c

4. Which of the following is presented in the activities section of the statement of cash flows?
a. Purchase of a treasury bill three months before its maturity date.

b. Exchange differences from translating foreign currency denominated cash flows.

c. Acquisition of equipment through issuance of note payable.

d. Bank overdrafts that can be offset.

5. Entity A acquires equipment by paying a 10% down payment and issuing a note payable for
the balance. How should Entity A report the transaction in the statement of cash flows?
Down payment Note payable

a. Investing Activities None

b. Investing Activities Financing Activities

c. Financing Activities None

d. None None

PROBLEM 3: FOR CLASSROOM DISCUSSION

Cash and cash equivalents
1. Entity A had the following balances at December 31, 20x2;

Cash on hand P300,000

Cash in bank 700,000

Cash in 90-day money-market account 500,000

Treasury bill, purchased 12/1/x2, maturing 2/28/x3 1,600,000

Treasury bond, purchased 3/1/x2, maturing 2/28/x3 1,000,000

How much cash and cash equivalents is reported in Entity A's December 31, 20x2 statement of
financial position?

a. 3,800,000 c. 2,800,000
b. 1,100,000 d. 1,500,000
Presentation
2. Which of the following is included in the investing activities section of the statement of cash
flows?

a. Acquisition and sale of investments in held for trading securities.

b. Acquisition and sale of items of property, plant and equipment that are routinely
manufactured in the entity's ordinary course of business and are to be held for rentals
and reclassified to inventories when the assets cease to be rented and become held
for sale.

c. Acquisition and sale of short-term investments in cash equivalents.

d. Cash inflow from repayment of loan.

3. Which of the following is included in the financing activities section of the statement of cash
flows?

a. cash payments for purchases of goods and services

b. cash receipts and cash payments in the acquisition and disposal of property, plant and
equipment, investment property, intangible assets and other noncurrent assets

c. loans to other parties and collections thereof (other than loans made by a financial institution)

d. cash receipts from issuing shares or. other equity instruments and cash payments to
redeem them
4. This method of presenting cash flows from (used in) operating activities involves adjusting
accrual basis profit or loss for the effects of changes in operating assets and liabilities and
effects of non-cash items. a. Direct method
c. Inverse method
b. Indirect method
d. Reverse method
5. Entity A declares cash dividends in 20x1 and pays the dividends in 20x2. How should Entity
A report the dividends paid in the statement of cash flows for 20x1 20x2 a. Operating activities
None
b. Financing activities None

c. None Financing Activities

d. None Operating or Financing

10. Inventories are usually written-down to net realizable value

a. on an item by item basis.
b. on the basis of their classification, for example, as all finished goods, all work
in process and all raw materials and supplies. c. every year.
d. on the basis of their relative stand-alone selling prices.
PROBLEM 3: FOR CLASSROOM DISCUSSION
Cost of inventories
1. Which of the following is correct regarding the determination of the cost of an
inventory?

2. How much are the ending inventory and cost of sales under the FIFO cost
formula?
3. How much are the ending inventory and cost of sales under the Weighted
Average cost formula? (The average calculated on a periodic basis.)

4. How much are the ending inventory and cost of sales under the Weighted
Average cost formula? (The average is calculated as each additional purchase is
made, i.e., 'moving average'.)
Lower of Cost and NRV
5. Information on ABC Co.'s December 31, 20x1 inventory is shown below: How
much is the valuation of ABC's total inventory on December 31, 20x1?

PAS 8 PROBLEMS
PROBLEM 1: MULTIPLE CHOICE
1. A change in measurement basis is most likely a change in accounting policy 2.

A correction of prior period error is accounted for by retrospective restatement

3. Which of the following is a change in accounting estimate?

4. These result from new information or new developments. Change in accounting

estimates

5. The effect of which of the following is presented in profit or loss in the current
period (or current and future periods, if both are affected) rather than as an
adjustment to the opening balance of retained earnings. Change in accounting
estimates

PROBLEM 2:
1. According to PAS 8, in the absence of a PFRS that specifically deals with a
transaction, management shall its judgement

2. According to PAS 8, a change in accounting policy is accounted for a,b,c

3. This refers to applying a new accounting policy to transactions, other events and
conditions as if that policy had always been applied.

4. According to PAS 8, a change in accounting estimate is accounted for

prospective application.

5. Entity A changes its inventory cost formula from FIFO to weighted average. How
should Entity A account for this change?
PAS 10 PROBLEM 1
1. ABC Co. completes the draft of its December 31, 20x1 year-end financial
statements on January 31, 20x2. On March 1, 20x2, the management of ABC
Co. authorizes the financial statements for issue to its supervisory board. The
supervisory board is made up solely of non-executives and includes
representatives of employees and other outside interests. The supervisory board
approves the financial statements on March 10, 20x2. The financial statements
are made available to shareholders and others on March 14, 20x2. The
shareholders approve the financial statements at their annual meeting on March
23, 20x2 and the financial statements are then filed with a regulatory body on
April 1, 20x2. For purposes of PAS 10, what is the date of authorization of the
financial statements?

2. According to PAS 10, these are events that provide evidence of conditions that
existed at the end of the reporting period. ADJUSTING

3. Which of the following events after the reporting period are treated as adjusting
events? Discovery of prior period fraud or errors

4. Entity A's inventories on December 31, 20x1 have a cost of $100,000 and a net
realizable value of $80,000. Shortly after December 31, 20x1, but before the
financial statements were authorized for issue, the inventories were sold for a net
sale proceeds of P70,000. The correct valuation of Entity A's inventories in the
December 31, 20x1 financial statements is

5. According to PAS 10, non-adjusting events after the reporting period disclosed if
material

PROBLEM 2
1. ABC Co. completes the draft of its December 31, 20x1 year-end financial
statements on January 31, 20x2. On February 5, 20x2, the board of directors
reviews the financial statements and authorizes them for issue. The entity
announces its profit and selected other financial information on February 23,
20x2. The financial statements are made available to shareholders and others on
March 1, 20x2. The shareholders approve the financial statements at their annual
meeting on March 18, 20x2 and the approved financial statements are then filed
with a regulatory body on April 1, 20x2. Events after the reporting period are
those occurring

2. These are events that are indicative of conditions that arose after the reporting
period. NON ADJUSTING

3. Entity A recognized a provision for a pending litigation amounting to $50,000 on

December 31, 20x1 (end of current reporting period). This amount is reflected in
Entity A's reported profit of $600,000 for the year 20x1. Shortly after December
20x1, but before the financial statements were authorized for issue, the litigation
is settled for 40,000. The correct profit in 20x1 is

4. Which of the following is an example of an adjusting event? Sale of inventories

5. Which of the following is an example of a non-adjusting event? Significant

decline of foreign

PAS 24 PROBLEM 1
1. Which of the following best indicates related for purposes of PAS 24?

2. Which of the following are not related parties?

3. Which of the following is not a required disclosure under PAS 24? D

PROBLEM 2
1. According to PAS 24, related party disclosures are necessary to indicate the
possibility

2. What is overriding consideration when determining the existence of a related

party relationship?

3. Mr. Y and Ms. Z share joint control over Ventures, Inc. Which of the following are
related parties? B

4. Entity A is the parent company of Entity B. Which of the following is required to

be disclosed in the group's (Entity A and B's) consolidated financial statements?

PAS 27 PROBLEM 1
1. According to PAS 27, investments in subsidiaries, associates or joint ventures
are accounted for in the separate financial statements d any

2. According to PAS 27, which of the following is required to present separate

financial statements?

PAS 29 PROBLEM 1
1. PAS 29 applies only in case of

2. According to PAS 29, which of the following are restated in case an entity's
functional currency is that of a hyperinflationary economy?

3. What is the restated amount of the land on December 31, 20x2?

PROBLEM 2
1. What are the restated amounts of the assets?

2. What is the restated amount of the sales?

PAS 34 PROBLEM1
1. Entity A wants to publish quarterly interim financial reports. Which of the following
standards may Entity A apply in preparing and presenting its interim financial
reports?

2. If an entity does not prepare interim financial reports,

PROBLEM 2
1. Which of the following is correct regarding the provisions of PAS 34?

2. Interim financial reports prepared in accordance with PAS 34 shall, at a

minimum, include

3. Entity A publishes quarterly interim financial reports. Entity A's annual

depreciation for items of PPE is 120,000. At the end of the first quarter, Entity A's
inventories have a cost of P600,000 and a net realizable value of P510,000.
Entity A expects that the total employee bonuses (13th month pay) that will be
paid at year-end will amount to P60,000. How much is the total amount of
expense to be recognized from the items described above in Entity A's first
quarter statement of profit or loss?

PAS 37 PROBLEM 1
1. Liabilities arise from either legal or constructive obligation. Which of the following
is a source of constructive obligation?

2. According to PAS 37, provisions are measured at

3. According to PAS 37, a provision does not arise from

PROBLEM 2
1. According to PAS 37, a provision is

2. According to PAS 37, contingent liabilities are

3. Which of the following statements is correct?