PAS 1: Presentation of Financial Statements all amounts reported in the current period’s

financial statements, unless another PFRS requires

PAS 1 key points: otherwise.
--prescribes the basis for the presentation of --PAS 1 permits entities to provide comparative
general purpose financial statements, the information in addition to the minimum
guidelines for their structure, and the minimum requirement.
requirements for their content to ensure e.g., an entity may provide a third
comparability statement of comprehensive income. In this case,
COMPARABILITY: compare financial systems however, the entity need not to provide a third
in purpose of tracking progress statement for the other financial statements, but
--applies to the preparation and presentation and must to provide the related notes for that
preparation of general purpose financial additional statement of comprehensive income.
statements. The recognition, measurements and -- PAS 1 requires particular disclosures to be
disclosure for specific transactions and other presented either in the notes or on the face of the
events are set out in other PFRSs. other financial statements (e.g., footnote
--PAS 1 terminologies are suitable for profit disclosures). Other disclosures are addressed by
oriented entities. If non-profit organizations apply other PFRSs.
PAS 1, they may need to amend the line-item and --PAS 1 does not prescribe the order or format of
financial statement descriptions. presenting items in the statement of financial
--Reports that are presented outside of the position.
financial statements, such as financial reviews by --PAS 1 also permits mixed presentation, i.e,
management, environmental reports and value- presenting some assets and liabilities using a
added statements are outside the scope of PFRSs. current/non-current classification and others in
--PAS 1 requires an entity whose financial order of liquidity. This may be appropriate when
statements comply with PFRSs to make an explicit the entity has diverse operations. Whichever
and unreserved statement of such compliance in method is used, PAS 1 requires the disclosure of
the notes. However, an entity shall not make such items that are expected to recovered or settled (a)
statement unless it complies with ALL the PFRSs within 12 months and (b) beyond 12 months, after
requirements. reporting period.
--PAS 1 permits a departure from a PFRSs --PAS 1.68: The operating cycle of an entity is the
requirement if the relevant regulatory framework time between the acquisition of assets for
requires or allows such departure. (Law vs Standard processing and their realization in cash or cash
—Law prevails) equivalents. When the entity’s normal operating
Regulatory framework refers to the cycle is not clearly identifiable, it is assumed to be
accounting principles and other financial reporting 12 months.
requirements prescribed by a government --PAS 1 requires an entity to present information on
regulatory body. the following:
--Departure from a PFRSs requirement shall: a. Profit or loss
 Disclose the management’s conclusion as to b. Other comprehensive income
the fair presentation of the financial c. Comprehensive income
statements Presenting separate income statement is
 All other requirements of the PFRSs are allowed as long as a separate statement
complied with showing comprehensive income is also
 The title of the PFRSs from which the entity presented (i.e., “Two-statement presentation”)
has departed Presenting only an income statement is
 The financial effect of the departure prohibited.
--PAS 1 requires an entity to present comparative --PAS 1 prohibits the presentation of
information in respect of the preceding period for extraordinary items in the profit or loss and
other comprehensive income or in the notes.
5. Other disclosure required by PFRSs, such as:
a. Contingent liabilities and
--PAS 1.7: unrecognized contractual
 Other comprehensive income commitments
“comprises items of income and b. Non-financial disclosures, e.g., the
expense (including reclassification entity’s financial risk management
adjustments) that are not recognized in objectives and policies
profit or loss as required or permitted by c. Events after the reporting date, if
other PFRSs. material
 General purpose financial statements d. Changes in accounting policies and
(financial statements) are “those accounting estimates and correction
intended to meet the needs of users or prior period errors
who are not in a position to require an e. Related party disclosure
entity to prepare reports tailored to f. Judgments and estimations
their particular information needs” g. Capital management
 Reclassification adjustments “are h. Dividends declared after the
amounts reclassified to profit or loss in reporting period but before the
the current period that were recognized financial statements were
in other comprehensive income in the authorized for issue, and the related
current or previous periods. amount per share
 Total comprehensive income is: the i. The amount of any cumulative
change in equity during a period preference dividends not recognized
resulting from transactions and other 6. Other disclosures not required by PFRSs but
events, other than those changes the management deems relevant to the
resulting from transactions with owners understanding of the financial statements.
in their capacity as owners.
--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.
--PAS 1 refers to the discussion and presentation of
statement of cashflows to PAS 7 Statement of Cash
Flows
--PAS 1 requires an entity to present the notes on a
systematic manner. Notes are normally structured
as follows:
1. General information on the reporting entity
2. Statement of compliance with the PFRSs
and Basis of preparation of financial
statements.
3. Summary of material accounting policy
information
4. Disaggregation (breakdowns) of the line
items in the other financial statements and
other supporting information.
---these information helps users assess the entity’s
PAS 1: Notes prospects for future met cash inflows.

--The objective of PAS 1 is to prescribe the basis for COMPLETE SET OF FINANCIAL STATEMENTS:
presentation of general purpose financial 1. Statement of financial position (or “balance
statements to ensure comparability. sheet”)
 Comparability requires consistency in the 2. Statement of profit or loss and other
adoption and of accounting policies in the comprehensive income (or “statement of
presentation of financial statements. comprehensive income”)
Types of Comparability: 3. Statement of changes in equity
1. Intra-comparability (horizontal or inter- 4. Statement of cash flows
period)- refers to the comparability of 5. Notes (or “notes to financial statements)
financial statements of the same entity but (5a) Comparative information
from one period to another. 6. Additional statement of financial position
2. Inter-comparability (dimensional)- refers to (required only when certain instances
the comparability of financial statements occur)
between different entities.
GENERAL FEATURES OF FINANCIAL
FINANCIAL STATEMENTS STATEMENTS
--are structured representation of an entity’s 1. Fair Presentation and Compliance with
financial position and results of its operations. (PAS PFRSs
1.9) --Fair presentation is faithfully
--are the end product of the financial reporting representing. (in accordance with the
process and the means by which the information definition and recognition criteria set out in
gathered and processed is periodically the Conceptual Framework).
communicated to users. --Fair presentation requires:
--General purpose financial statements cater to a. proper selection and application of
most of the common needs of a wide range of accounting policies
external users. b. proper presentation of information,
---are the subject matter of the Conceptual c. provision of additional disclosures
Framework and PFRSs. whenever relevant to the
PURPOSE OF FINANCIAL STATEMENTS: understanding of financial
Primary Objective: To provide information about statements.
the financial position, performance, and cash flows NOTE: Inappropriate accounting policies cannot be
of an entity that is useful to a wide range of users in rectified by mere disclosure.
making economic decisions.
Secondary Objective: To show results of 2. Going Concern
management’s stewardship over the entity’s --underlying assumption that the entity
resources. continues its operations in a foreseeable future.
Financial statements provide information about --if the entity has a history of profitable
an entity’s: operations and ready access to financial
a. Assets (economic resources) resources, management may conclude that the
b. Liabilities (economic obligations) entity is a going concern.
c. Equity --If there are material uncertainties on the
d. Income entity’s ability to continue, those uncertainties
e. Expenses shall be disclosed.
f. Contributions by, and distributions to, --if the entity is not a going concern, its financial
owners statements shall be prepared using another
g. Cash flows basis which shall be disclosed including the
basis used and the reason why the entity is not example, when an entity presents its 2022
a going concern. current year financial statements, the 2021
preceding year financial statements shall also
3. Accrual Basis of Accounting be presented as comparative information.
--All financial statements are prepared using --preceding financial statements are presented
accrual basis except for the statement of cash as comparative information to track progress.
flows which is prepared using cash basis.
ADDITIONAL STATEMENT OF FINANCIAL
4. Materiality and Aggregation POSITION instances are as follows:
--material class of similar items (line item) and a. The entity applies an accounting policy
dissimilar items are presented separately. retrospectively, makes a retrospective
--immaterial items are put together. restatement of items in its financial
statements, or reclassifies items in its
5. Offsetting financial statements
--the entity uses its economic resources to pay b. The instance in (a) has a material effect on
its obligations. the information in the statement of financial
--is permitted when it reflects the nature of the position at the beginning of the preceding
transaction. period.
Examples of offsetting: --if any of the instances aforementioned occur,
a. Presenting gains or losses from sales of the entity shall present three statements of
assets net of the related selling expenses. financial position as follows:
b. Presenting at net amount the unrealized Statement of Date
gains and losses arising from trading Financial Position
securities and from translation of foreign Current Year As at December 31,
currency denominated assets and liabilities, 20x2
except if they are immaterial. Preceding Year As at December 31,
c. Presenting a loss form a provision net of a (comparative 20x1
reimbursement from a third party. information)s
--measuring assets net of valuation allowances Additional As at January 1, 20x1
is not offsetting. For example, deducting --The opening (additional) statement of
allowance for doubtful accounts from accounts financial position is dated as at the beginning of
receivables or deducting accumulated the preceding period even if the entity presents
depreciation from a building account is not comparative information for earlier periods. No
offsetting. need to present the related notes to the
opening statement.
6. Frequency of reporting
--financial statements are prepared at least 8. Consistency of presentation
annually. --presentation and classification of items in the
--entity’s change in reporting period to a period financial statement is retained from one period to
longer than a year shall disclose: the next unless there is a change in presentation:
a. Period covered by the FS a. Is required by a PFRSs
b. Reason for using a longer or shorter b. Results in information that is reliable and
period more relevant.
c. Fact that amounts presented in the FSs --a change in presentation requires the
are not entirely comparable. reclassification of items in the comparative
information. If material, the entity shall provide
7. Comparative Information “additional statement of financial position”
--As a minimum, an entity presents two of each
of the statements and related notes. For
STRUCTURE AND CONTENT OF FINANCIAL --additional line items may be presented whenever
STATEMENTS relevant to the understanding of the entity’s
--Financial statements shall be presented with financial position.
equal prominence and shall be clearly identified
and distinguished from other information in the PRESENTATION OF STATEMENT OF FINANCIAL
same published document. POSITION
--The PFRSs only apply to the financial statements a. A classified presentation shows distinctions
and not necessarily to the other information. between current and noncurrent assets and
--The following shall be displayed prominently and liabilities
repeatedly whenever relevant to the understanding --shall be used except when an unclassified
of the information presented: presentation provides information that is reliable
a. Name of the reporting entity and more relevant. When that exception applies,
b. Whether the statements are for individual assets and liabilities are presented in order of
or group of entities liquidity.
c. The date of the end of the reporting period --highlights an entity’s working capital and
or the period covered by the FS facilitates the computation of liquidity and
d. Presentation currency solvency ratios
e. Level of rounding used (thousands, millions, b. An unclassified presentation also called as
etc.) “based on liquidity” shows no distinction between
--The statement of financial position is dated as at current and noncurrent assets and liabilities
the end of the reporting period while the other
financial statements are dated for the period that CURRENT ASSETS AND CURRENT LIABILITIES
they cover. --as long as it is within the operating cycle
A. Current Assets
MANAGEMENT’S RESPONSIBILITY OVER a. Expected to be realized, sold, or consumed in the
FINANCIAL STATEMENTS entity’s operating cycle
--Management is responsible for an entity’s b. Held primarily for trading
financial statements. The responsibility c. Expected to be realized within 12 months after
encompasses: reporting period
a. The preparation and fair presentation of d. Cash or cash equivalent, unless restricted from
financial statements in accordance with the being exchanged or used to settle a liability for at
PFRSs least 12 months after the reporting period
b. Internal control over financial reporting
c. Going concern assessment B. Current Liabilities
d. Oversight over the financial reporting a. Expected to be settled in the entity’s normal
process operating cycle
e. Review and approval of financial statements b. Held primarily for trading
--Responsibilities are expressly stated in the c. Due to be settled within 12 months after
“Statement of Management’s Responsibility for reporting period
Financial Statements” which is attached as cover d. The entity does not have the right at the end of
letter to the financial statements. the reporting period to defer settlement of the
liability for at least 12 months after reporting
STATEMENT OF FINANCIAL POSITION period
--shows the entity’s financial condition (i.e., assets, *ALL OTHER ASSETS AND LIABILITIES ARE
liabilities, and equity) as at a certain date. CLASSIFIED AS NONCURRENT
--entity may modify the descriptions used and
sequence of their presentation to suit the nature of
the entity and its transactions.
--Operating cycle of an entity is the time between
the acquisition of assets for processing and their LIABILITIES PAYABLE ON DEMAND
realization in cash or cash equivalents. When the --Liabilities that are payable upon the demand of
entity’s operating cycle is not clearly identifiable, it the lender is classified as current
is assumed to be 12 months. --a long term obligation may become on demands
as a result of breach of a loan covenant:
--Assets and Liabilities that are realized or settled
as a part of the entity’s normal operating cycle are a. Current Liability
presented as current even if they are expected to --No grace period was agreed upon
be realized or settled beyond 12 months after the --is demandable immediately
reporting period. --Grace period was agreed upon AFTER BALANCE
e.g., trade receivables, inventory, trade SHEET DATE
payables, and some accruals for employee --Grace period is received after the reporting date
and other operating costs --Grace period was given on or before balance
sheet date which was less than 12 months
--Assets and Liabilities that do not form part of the
entity’s normal operating cycle are presented as b. Noncurrent Liability
current only when they are expected to be --Grace period was agreed upon
realized or settled within 12 months after --Grace period is received by the reporting period
reporting period. --Grace period was given on or before balance
e.g., non-operating assets and liabilities sheet date which was equal or more than 12
-- Deferred taxes and liabilities are always months
presented as noncurrent in a classified statement
of financial position regardless of their expected STATEMENT OF PROFIT OR LOSS AND OTHER
dates of reversal COMPREHENSIVE INCOME
--Income and expenses for the period may be
REFINANCING AGREEMENT presented in either:
--Refinancing: refers to the replacement of an a. single statement profit or loss and other
existing debt with a new one but with different comprehensive income (statement of
terms comprehensive income)
--debtor is under a financial distress called
“troubled debt restructuring” b. Two Statements:
a. Noncurrent Liability: 1. a statement of profit or loss (income statement)
--with unconditional right to refinance the liability 2. a statement presenting comprehensive income
--without unconditional right to refinance the
liability but refinancing was made ON or BEFORE BASIC FORMULAS
year-end A. SINGLE STATEMENT PRESENTATION:
Revenue-Expense=Profit or Loss+ Other
b. Current Liability: Comprehensive Income= Comprehensive Income
--Without unconditional right to refinance the
liability B. TWO STATEMENT
--Without unconditional right to refinance the 1. Revenue-Expenses=Profit or Loss
liability but refinancing was made AFTER year end 2. Profit or Loss+ Other Comprehensive Income=
*DATE OF ISSUANCE DOESN’T MATTER Comprehensive Income

PROFIT OR LOSS
--is income less expenses, excluding the
components of other comprehensive income
--Profit: excess of income over expenses c. gains and losses arising from the derecognition of
--Loss: deficiency financial assets measured at amortized cost;
--Transaction Approach: method of computing for d. impairment losses and impairment gains on
profit or loss financial
Income and expenses are usually recognized in e. gains and losses on reclassifications of financial
profit or loss unless: assets from amortized cost or fair value through
a. they are items of other comprehensive income other comprehensive income to fair value through
b. they are required by other PFRSs to be profit or loss;
recognized outside Profit or Loss f. share in the profit or loss of associates and joint
Transaction Accounting ventures;
Correction of Prior Direct adjustment to g. tax expense; and
period error the beginning balance h. result of discontinued operations.
of retained earnings.
The adjustment is Additional line items shall be presented whenever
presented in the relevant to the understanding of the entity’s
statement of changes financial performance. The nature and amount of
in equity. material items of income or expense shall be
disclosed separately.
Change in accounting Similar treatment to
policy correction of prior Circumstances that would give rise to the separate
period error. disclosure of items of income and expense include:
Other comprehensive Changes during the a. write-downs of inventories to net realizable value
income period or of property, plant and equipment to recoverable
are presented in the amount, as well as reversals of such write-downs;
"other b. restructurings of the activities of an entity and
comprehensive reversals of any provisions for restructuring costs;
income" section of the c. disposals of items of property, plant and
statement of equipment;
comprehensive d. disposals of investments;
income. e. discontinued operations;
Cumulative balances f. litigation settlements; and
are presented in the g. other reversals of provisions.
equity section of the
statement of financial PAS 1 prohibits the presentation of extraordinary
position. items in the statement of profit or loss and other
comprehensive income or in the notes
Transactions with Recognized directly in
owners (e.g., issuance equity. Transactions PRESENTATION OF EXPENSES
of share capital, during the period are Expenses may be presented using either of the
declaration of presented in the following methods:
dividends, and the like) statement of changes a. Nature of expense method
in equity. --Under this method, expenses are aggregated
according to their nature (e.g., depreciation,
The profit or loss section shows line items that purchases of materials, transport costs, employee
present the benefits and advertising costs) and are not,
following amounts for the period: reallocated according to their functions within the
a. revenue, presenting separately interest revenue; entity.
b. finance costs; b. Function of expense method
--Cost of sales method - Under this method, an h. Changes in the value of the forward elements of
entity classifies expenses according to their forward contracts when separating the forward
function (e.g., cost of sales, distribution costs, element and spot element of a forward contract
administrative expenses, and other functional and designating as the hedging instrument only the
classifications). At a minimum, cost of sales shall be changes in the spot element, and changes in the
presented separately from other expenses. value of the foreign currency basis spread of a
financial instrument when excluding it from the
The nature of expense method is simpler to apply designation of that financial instrument as the
because it eliminates considerable judgment hedging instrument.
needed in reallocating expenses according to their
function. However, an entity shall choose Amounts recognized in OCI are usually accumulated
whichever method it deems will provide as separate components of equity. For example,
information that is reliable and more relevant, cumulative changes in revaluation surplus are
taking into account historical and industry factors accumulated in a "Revaluation surplus" account,
and the entity's nature. which is presented as a separate component of
equity; cumulative gains and losses from
If the function of expense method is used, investments in FVOCI and from translation of
additional disclosures on the nature of expenses foreign operation are also accumulated in
shall be provided, including depreciation and separate equity accounts.
amortization expense and employee benefits
expense. This information is useful in predicting RECLASSIFICATION ADJUSTMENTS
future cash Items of OCI include reclassification adjustments.
flows. Reclassification adjustments "are amounts
OTHER COMPREHENSIVE INCOME (OCI) reclassified to profit or loss in the current period
Other comprehensive income "comprises items of that were recognized in other comprehensive
income and expense including reclassification income in the current or previous periods."
adjustments) that are not recognized in profit or --amounts reclassified from OCI to profit or loss
loss as required or permitted by other
PFRSs." (PAS 1.7) Reclassification adjustments arise, for example, on
The components of other comprehensive income a foreign operation, derecognition of debt
include the following: instruments measured at FVOCI, or when a cash
a. Changes in revaluation surplus; flow hedge becomes ineffective or affects profit or
b. Remeasurements of the net defined benefit loss.
liability (asset);
c. Gains and losses on investments designated or On derecognition (or when the cash flow hedge
measured at fair value through other becomes ineffective), the cumulative gains and
comprehensive income (FVOCI); losses that were accumulated in equity on these
d. Gains and losses arising from translating the items are reclassified from OCI to profit or loss.
financial statements of a foreign operation; The amount reclassified is called the
e. Effective portion of gains and losses on hedging reclassification adjustment.
instruments in a cash flow hedge;
f. Changes in fair value of a financial liability A reclassification adjustment for a gain is a
designated at fair value through profit or loss deduction in OCI and an addition to profit or loss.
(FVPL) that are attributable to changes in credit This is to avoid double inclusion in total
risk; comprehensive income. On the other hand, a
g. Changes in the time value of option when the reclassification adjustment for a loss is an addition
option's intrinsic value and time value are to OCI and a deduction from profit or loss.
separated and only the changes in the intrinsic
value is designated as the hedging instrument; and
Reclassification adjustments do not arise on and other events, other than those changes
changes in revaluation surplus, derecognition of resulting from transactions with owners in their as
equity instruments designated at FVOCI, and owners”
remeasurements of the net defined benefit
liability (asset). Total comprehensive income is the sum of profit or
loss and other comprehensive income. It comprises
On derecognition, the cumulative gains and losses all 'non-owner' changes in equity. Presenting
that were accumulated in equity on these items are information on comprehensive income, and not
transferred directly to retained earnings, rather just profit or loss, helps users better assess the
than to profit or loss as reclassification adjustment. overall financial performance of the entity.
PRESENTATION OF OCI
The other comprehensive income section shall STATEMENT OF CHANGES IN EQUITY
group items of OC into the following: a. The statement of changes in equity shows the
a. Those for which reclassification adjustment is following information:
allowed; and b. a. Effects of change in accounting policy
b. Those for which reclassification adjustment is (retrospective application) or correction of prior
not allowed. period error (retrospective restatement);
b. Total comprehensive income for the period; and
The entity's share in the OCI of an associate or join c. For each component of equity, a reconciliation
venture accounted for under the equity method between the carrying amount at the beginning
shall also be presented separately and also grouped and the end of the period showing separately
according to the classification above changes resulting from:
a. profit or loss;
Type of OCI Reclassification b. other comprehensive income; and
Adjustment? c. transactions with owners, e.g., contributions by
Changes in revaluation NO and distributions to owners.
surplus
Remeasurements of NO Retrospective adjustments and retrospective
the net defined benefit restatements are presented in the statement of
liability (asset) changes in equity as adjustments to the opening
Fair value changes in balance of retained earnings rather than as
FVOCI changes in equity during the period.
- equity instrument NO
(election) Components of equity include, for example, each
- debt instrument YES class of contributed equity, the accumulated
(mandatory) balance of each class of other comprehensive
Translation differences YES income and retained earnings. (PAS 1.108)
on foreign operations --PAS 1 allows the disclosure of dividends, and the
Effective portion of YES related amount per share, either in the statement
cash flow hedges of changes in equity or
--------------------------------------------------------------------
Items of OCI, including reclassification adjustments, Note:
may be presented at either net of tax or gross of "Non-owner" changes in equity are presented in
tax. the statement of comprehensive income while
"owner" changes (e.g., contributions by and
TOTAL COMPREHENSIVE INCOME distributions to owners) are presented in the
Total comprehensive income is "the change in statement of changes in equity. This is to provide
equity during a period resulting from transactions better information by aggregating items with
shared characteristics and separating items with f. Judgments and estimations.
different characteristics. g. Capital management
-------------------------------------------------------------------- h. Dividends declared after the reporting period but
before the financial statements were authorized for
STATEMENT OF CASH FLOWS issue, and the related amount per share.
PAS 1 refers the discussion and presentation of i. The amount of any cumulative preference
statement of cash flows to PAS 7 Statement of dividends not recognized.
Cash Flows.
NOTES 6. Other disclosures not required by PFRSs but the
--The notes provide information in addition to management deems relevant to the
those presented in the other financial statements understanding of the financial statements.
--It is an integral part of a complete set of financial
statements. All the other financial statements are Notes are prepared in a necessarily detailed
intended to be read in conjunction with the notes. manner. More often than not, they are voluminous
Accordingly, information in the other financial and occupy a bulk portion of the financial
statements shall be cross-referenced to the notes. statements. For that reason only excerpts of notes
--PAS 1 requires an entity to present the notes in a to the financial statements are provided below,
systematic manner. Notes are normally structured sufficient to give you an idea on how the concepts
as follows: discussed above are presented in the notes
1. General information on the reporting entity.
This includes the domicile and legal form of --It presents:
the entity, its country of incorporation and a. information regarding the basis of preparation
the address of its registered office (or of financial statements
principal place of business, if different from b. information required by the PFRSs
the registered office) and a description of c. other information not required by PFRSs but is
the nature of the entity's operations and its relevant to users of financial statements
principal activities.
2. Statement of compliance with the PFRSs and
Basis of preparation of financial statements.
3. Summary of material accounting policy
information.
This includes narrative descriptions of the
line items in the other financial statements,
their recognition criteria, measurement
bases, derecognition, transitional
provisions, and other relevant information.
4. Disaggregation (breakdowns) of the line items
in the other financial statements and other
supporting information.
5. Other disclosures required by PFRSs, such as
(the list is not exhaustive):
a. Contingent liabilities and unrecognized
contractual commitments.
b. Non-financial disclosures, e.g., the entity's
financial risk management objectives and policies.
c. Events after the reporting date, if material.
d. Changes in accounting policies and accounting
estimates and corrections of prior period errors.
e. Related party disclosure.
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
PAS 2: INVENTORIES necessary, normal or usual business activities of
--PAS 2 prescribes the accounting treatment for an entity.
inventories.
--PAS 2 recognized that a primary issue in the MEASUREMENT
accounting for inventories is the determination of Inventories are measured at the lower of cost and
cost to be recognized as asset and carried forward net realizable value
until it is expensed
--PAS 2 provides guidance in the determination of COST
cost inventories, including the use of cost 1. Purchase Cost
formulas, and their subsequent measurement and  Purchase Price net of trade discounts and
recognition as expense other rebates
 Import duties
--PAS 2 applies to all inventories except for the  Non-refundable or non-recoverable
following: purchase taxes
1. Assets accounted for under other standards:  Transport
a. Financial Instruments (PAS 32 and PFRS 9)  Handling and other costs directly
b. Biological assets and agricultural produced at the attributable to the acquisition of the
point of harvest (PAS 41) inventory
2. Assets not measured under the lower of cost or 2. Conversion Costs
net realizable value (NRV) under PAS 2: --Necessary in converting Raw Materials into
a. Inventories of producers of agricultural, forest, Finished Goods
and mineral products measured at net realizable  Costs of direct labor
value in accordance with well-established practices  Production Overhead
in those industries. 3. Other Costs necessary in bringing the
b. Inventories of commodity broker-traders inventories to their present location and
measured at fair value less cost to sell. condition.

INVENTORIES The following are excluded from the cost of

Assets: inventories and are expensed in the period in which
1. Held for Sale in the ordinary course of business they are incurred:
(FINISHED GOODS) a. Abnormal amounts of wasted materials, labor or
Ordinary Course- necessary, normal or usual other production costs;
business activities of an entity. b. Storage costs, unless those costs are necessary
2. In the process of production for such sale in the production process before a further
(WORK IN PROCESS) production stage (e.g., the storage costs of partly
3. In the form of materials or supplies to be finished goods may be capitalized as cost of
consumed in the production process or in the inventory, (work in progress and raw materials)
rendering of services (RAW MATERIALS AND but the storage costs of completed goods are
MANUFACTURING SUPPLIES) expensed);

Examples of inventories:
c. Administrative overheads that do not contribute --Refers to the net amount that an entity expects to
to bringing inventories to their present location and realize from the sale of inventory in the ordinary
condition; and course of business.
d. Selling costs (e.g., freight out and advertisement - This is entity-specific value. It may not equal to
costs). fair value less costs to sell.
When a purchase transaction effectively contains a --The use of lower of cost and NRV in measuring
financing element, such as when payment of the inventories is in line with the basic accounting
purchase price is deferred, the difference between concept that an asset shall not be carried at an
the purchase price for normal credit terms and the amount that exceeds its recoverable amount.
amount paid is recognized as interest expense over --If the cost of an inventory is written down to NRV
the period of the financing. due to damage, obsolescence, declined prices or
COST FORMULA estimated costs to complete or sell have increases,
1. SPECIFIC INDENTIFICATION the write down is recognized as an expense.
Shall be used for inventories that are not ordinarily - If the NRV subsequently increases, the previous
interchangeable and those segregated write down is reversed, and said reversal shall not
for specific projects exceed its original write down so that the new
- Specific costs are attributed to identified items of carrying amount is lower of the cost and revised
inventory NRV.
- Cost of Sales- represents actual costs of the ----The cost of inventory may exceed its
specific items sold recoverable amount, if for example, the inventory
- Ending Inventory- represents actual costs of the is damaged, becomes obsolete, prices have
specific items on hand declined, or estimated costs to complete or to sell
- Not appropriate when inventories consist of large the inventory have decreased. In these
number of items that are ordinarily circumstances, the cost of inventory is written
interchangeable down to NRV. Write-down is recognized as
- Simply multiply UNITS on HAND by ACTUAL UNIT expense.
COST --Write down of inventories are usually carried out
on an item-by-item basis.
2. FIRST-IN, FIRST-OUT (FIFO)
-Inventories purchased or produced first are sold EXPENSE RECOGNITION OF INVENTORIES
first, the unsold inventories at the end of the period (Recognition as an expense)
are those most recently purchased or produced --The carrying amount of an inventory that is sold
- Cost of Sales - represents actual costs from is charged as expense in the period in which the
earlier purchases related revenue is recognized.
- Ending Inventory- represents actual costs from --The write-down of inventories to NRV and all
the most recent purchases losses of inventories are recognized as expense in
the period the write-down or loss occurs.
3. WEIGHTED AVERAGE --The amount of any reversal of any write-down of
-Cost of Sales and Ending Inventory are determined inventories, arising from an increase in net
based on the weighted average cost of beginning realizable value shall be recognized as a reduction
inventory and all inventories purchased or in the amount of inventories recognized as an
produced during the period. expense in the period in which the reversal occurs.

NET REALIZABLE VALUE (NRV) CAPITALIZED AS COST OF CONSTRUCTED ASSET

- Per PAS 2.6, this is the estimated selling price in --Inventories that are used in the construction of
the ordinary course of business less the estimated another asset is not expensed but rather
costs of completion and the estimated costs capitalized as cost of the constructed asset.
necessary to make the sale.
--Example: Inventories used in constructing a --Whoever owns the goods during its shipment
building. The cost will form part of the building cost should also PAY for the Freight Charges.
and will be included in the depreciation. FOB SHIPPING POINT-------------FREIGHT COLLECT -
buyer made the actual payment for the freight
FOR DISCLOSURES: • TITLE is transferred to the BUYER UPON
1. Accounting policies adopted in measuring SHIPMENT OF GOODS
inventories, including the cost formula used; • The BUYER is responsible for the delivery
2. Total carrying amount of inventories and the charges
carrying amount in classifications appropriate to • Such COST will be considered as FREIGHT IN and
the entity; will become part of the initial cost of the inventory
3. Carrying amount of inventories carried at fair
value less costs to sell; • TITLE is transferred to the BUYER ONLY UPON
4. Amount of inventories recognized as an expense RECEIPT OF THE GOODS AT THE POINT OF
during the period; DESTINATION
5. Amount of any write-down of inventories • The SELLER is responsible for the delivery
recognized as an expense in the period; charges
6. Amount of any reversal of write-down that is • Such COST will be considered as FREIGHT OUT
recognized as a reduction in the amount of and will become part of OPERATING EXPENSES
inventories recognized as expense in the period; INVENTORIES UNDER CONSIGNMENT:
7. Circumstances or events that led to the reversal --Consignment- an agreement between two
of a write-down of inventories; and parties wherein the consignor is contracting
8. Carrying amount of inventories pledged as consignee to sell the goods on its behalf.
security for liabilities. --OWNERSHIP of GOODS remains with
CONSIGNOR.
INVENTORIES:  Goods held on consignment - ordinarily
1. Land or any other assets can be classified as part associated with CONSIGNEE thus, inventory
of inventories if the entity is engaged in buying and account will NOT FORM PART of ITS
selling of this kind of property such as real estate Inventories
business.  Goods out on consignment - ordinarily
2. Work-in-Process refers to the products that are associated with CONSIGNOR thus,
yet to be completed and transferred to the entity's inventory account will FORM PART of ITS
warehouse. Although not yet finished, they will Inventories
already be part of the entity's inventory items.
3. All finished goods that are already available for INCLUDED IN THE INVENTORY:
sale will form part of inventories. 1. Goods in transit and sold FOB Destination
4. For trading businesses, inventory items will only 2. Goods in transit and purchased FOB Shipping
comprise of the goods purchased or known as point
merchandise inventories. 3. Goods out on consignment
5. For manufacturing businesses, 3 types of items 4. Goods purchased under bill and hold
included in the inventory account: arrangement
a. Raw Materials 5. Segregated normal order goods
b. Work-In-Process 6. Goods purchased under installment basis
c. Finished Goods 7. Goods sold with buyback arrangements
6. Ownership of Goods: 8. Goods purchased with refund offers
*When the company has the title to the goods, 9. Goods owned and on hand (exclude goods held
regardless of their location on consignment)
*If goods are still in TRANSIT, the freight terms is 10. Goods in the hands of salesmen or agents
considered in determining the ownership of 11. Goods held by customers on approval or trial
Inventories
INVENTORY SYSTEMS:
1. Periodic Inventory Systems
--does not maintain records of inventories during
the year and relies on physical count at the end of
the accounting period
--used for low prices but maintained in large
quantities such as groceries, hardware

2. Perpetual Inventory Systems

-maintains a detailed record of inventories
-applicable to high value inventories such as cars,
jewelry
-facilitates purchasing and production planning
-ensures adequate on-hand inventories