CHAPTER 1

CONCEPTUAL FRAMEWORK AND ACCOUNTING PROCESS

DEFINITION OF ACCOUNTING

Accounting Standards Council – set the accounting standards in the Philippines

Accounting is a service entity

Committee on Accounting Terminology –

Accounting is the art of recording, classifying, and summarizing

American Accounting Association

Accounting is the process of identifying, measuring, and communicating economic information.

MOST COMMON DEFINITION

Identifying

Note* NOT all business activities are accountable

Accountable – affect Asset, Liability, Equity

External and Internal Transaction

Measuring – assigning of peso amounts

Common financial denominators- same currency

Historical Cost – most common and original price

Current Cost – fair market value or today’s price

Communicating - transforming economic data into useful accounting information

Recording – journalizing

Classifying – posting to ledger

Summarizing – preparation of financial statement

Objective of Accounting – provide quantitative financial information to make economic decision

THE ACCOUNTANCY PROFESSION

RA NO. 9298 or PHILIPPINE ACCOUNTANCY ACT OF 2004 – regulate the practice of accountancy in PH

Board of Accountancy – authorize to regulate affecting accountancy profession in the PH

- grade the PH CPA examination

- May and October

3years experience in public accounting before becoming CPA

General Rule: The SEC of the Philippines prohibits corporations from directly practicing public
accountancy. However, it is ok if it’s a PARTNERSHIP

NOTE: the license MUST be renewable for every 3years

Licensed issued by: Professional Regulation Commission (PRC) in the State Government

PUBLIC ACCOUNTING

Auditing – most COMMON and primary service

Or External Auditing – “attest function of independent CPAs”

- to provide an independent and objective opinion on the reliability of information

Taxation – prepare annual income tax income and tax consequences

Management Advisory Services: both taxation and auditing

- consulting services to assist businesses in improving their performance and achieving their
strategic goals

Private Accounting – to assist management in planning and controlling in an entity

controller is the lead financial officer and highest accounting officer

Government Accounting – involving government funds

- focus the custody and admission of public funds

RA NO. 10912 or Continuing Professional Development (CPD)

- to continue the pursue of current knowledge of a certain professional

15 CPD credit units – renewal of CPA license

120 CPD credit units – accreditation of CPA to practice the accountancy profession

Exception: Age 65 for renewal not accreditation

NOTE* The work of an AUDITOR starts when the work of Accountant ends

Bookkeeping is the how of an accountant (recording phase)

Accountancy – profession

Accounting – fields in accountancy

Financial Accounting – financial statement and internal but more on external users

Management Accounting -financial reports and internal users

Generally Acceptance Accounting Principles (GAAP) – rules, procedures and practices

- law to be followed for financial reporting

- primary applying lies with Management

Accounting Standards – purpose is to identify proper accounting practices

Financial Reporting Standard Council (FRSC)– standard-setting body in the Philippines at the present
time. And constitute highest hierarchy of GAAP in the Philippines

Philippine Accounting Standards (PAS) - generally accepted accounting principles (GAAP) in PH

NOTE* PAS is not active

International Accounting Standards Committee (IASC)- private sector

- uniformity of accounting principle

Philippine Interpretation Committee (PIC) - to clarify the application of PAS but now is the PFRS

International Financial Reporting Interpretations Committee (IFRIC)- like PIC but global scale

HOWEVER, International Accounting Standards Board (IASB) replaced it

- standard-setting process

- characterized by a political process

- Neutrality
- due process system to express parties with their views and includes public hearing

International Financial Reporting Standards (IFRS)- deals more complexity than IAS but IAS adopted
from IFRS

USA Financial Accounting Standards Board (FASB)

NOTE* PH standards are based on American Accounting Standards

Philippine Financial Reporting Standards (PFRS) – replaced PAS

 IFRS
 PAS corresponds to IAS
 Interpretation in IFRIC develop by PIC

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CHAPTER 2
SCOPE OF REVISED CONCEPTUAL FRAMEWORK

Financial Reporting – communicating the set of financial statement and other financial information.

Internal Users- readily access to specific accounting information

- Management Accounting

 Active owners
 Managers

External Users- readily access to specific accounting information

- Financial Accounting (can be both)

 inactive owners- delegate stewardship and resources

 creditors and lenders- access the ability of company to pay loans
 suppliers- Cost of goods and services will be paid. Dependent on number of customers
 potential investors,
 taxing authorities,
  regulatory bodies,
 employees and employee unions- stability and profitability of the company; renumeration
(salary)
 financial analyst,
 Customers- long-term involvement (purchase)
 Government and their agencies – allocation of resources and regulate activities
 financial adviser and consultants,
 and the general public- give trends

Financial Statement- general-purpose reports

- Financial Accounting

Direct Users- direct interest

- protect their own interest

Tips to remember (with financial stake in the company)

 owners
 managers
 creditors
 suppliers
 customers
 employees
 taxing authorities

Indirect Users- provide advise or protect their own interest

 Regulatory agencies
 SEC – protect the interest of investors and the public
 Labor union – protect the interest of the employees
 Financial and legal consultants- provide advice and assistance to their clients

Monetary Unit- Unit of measurement

Quantitative information- measurable information

 Economic resources (asset)

 Economic obligation (obligation)
 Changes in economic resource
 Economic Obligation of Income and Expense
Reporting Entity- Accounting Entity

- separate the entity to its owner

- capable of control

BRANCHES OF ACCOUNTING

Financial Accounting- broadest branch

- profitability

- liquidity

- stability

Accounting Standards- standard-setting

Purpose:

 Relevance
 Reliability

Management Accounting- short-term and long-term plans for the enterprise

- NOT STRUCTURED AND NOT NECCESARY TO FOLLOW ACCOUNTING STANDARDS

Cost Accounting- specialized on expenses

- measurement and recognition of cost

- manufacturing companies

Tax Accounting- computation of taxes and tax returns

Government Accounting – receipts and disposition of government funds (selling of asset)

Bookkeeping- Recording phase

Auditing- independent examination of FS for rendering opinion in purpose of fairness

- Attest Function - conducting an examination of an entity’s financial statements by a third party

International Accounting Standards Committee (IASC)- private sector

- uniformity of accounting principle

- IAS

International Accounting Standards Board (IASB) replaced it in 2001

- International Financial Reporting Standards (IFRS)- not for profit

IFRS- principle-based rather than procedure-based

1. Specific IFRS
2. Interpretation in IFRIC
3. IAS
4. Interpretation by Standing Interpretations Committee (SIC) (interpret the works of IAS)
(14 voting members and 1 chairman that are not represent any organization)

Purpose: Communicate Financial Information that achieves

 Transparency- enhance international comparability and quality

 Accountability- reduce information gap
 Efficiency – improve capital allocation

Financial Reporting- practice are dynamic

Due Process System

1. Setting the agenda

2. Planning the project
3. Developing and Publishing the discussion paper
4. Developing and Publishing the exposure draft (preliminary document proposed changes to
accounting standards; vote)
- main vehicle to consult the public interest
- Comment Period (120 days)
- IFRIC interpretation (60 days)
- make revision
 - second exposure draft is developed and published
- Balloting- (must be majority of votes)
- final review and approval
- posted in IASB website for 10 days
5. Developing and Publishing the standard
6. Standard is issued

- IASB holds regular meeting to answer inquiries

- study it more

Conceptual Framework – terms and concept for presentation of FS for external users

- theoretical foundation of accounting

Contribute to transparency, strengthen accountability, and economic efficiency

Purpose

 Assist IASB to develop IFRS

 Assist to develop new accounting policy to the events not yet addressed
 Assist if the company has accounting policy choices
 Assist to understand and interpret the IFRS Standards

NOTE* if there is IFRS then it must be followed than Conceptual Framework

NOTE* Conceptual Framework Cannot overwrite IFRS but IASB can use it to rewrite the IFRS

Financial Reporting – communicating the set of financial statement and other financial information

PRIMARY USERS – Financial information is directly

 Existing and potential investors – risk and return

 Lenders and other creditors

OTHER USERS - Financial information is not directly

 Employees – stability and profitability of the company; renumeration (salary)

 Government and their agencies – allocation of resources and regulate activities
 Public – give trends

SCOPE OF REVISED CONCEPTUAL FRAMEWORK

1. OBJECTIVE OF FINANCIAL REPORTING- foundation

- provide financial information to users

- why of accounting

- financial information through annual financial statement

- financial reporting not only encompasses financial statement but also

 Financial highlights – standard format (table); overview of financial statements

 Summary of Important Financial Figures – more flexible; overview of financial statements
 Analysis of financial statements and significant ratio - examining and interpreting a company's
financial statements
 Other nonfinancial information

Specific objective of financial reporting

- To provide information

1. useful in decision making

2. to assess the cash flow

3. entity resources (asset) and claims (liability and equity) and changes on it

- financial position - income and comprehensive income

Liquidity – meet its short-term obligations

Solvency - meet its long-term obligations

Useful of Financial Performance

- information about return

- past financial performance predicts future returns

- generate future cash inflows from operations

Accrual Basis of Accounting

“accrual accounting means that income is recognized when earned regardless of when received and
expenses is recognized when incurred regardless of when its paid”

- basis for past and future performance

- most common
Limitations

 Cannot provide all information; primary users is need to consider pertinent (relevant)
information
 Not the value of an entity but estimate the value of the entity
 Cannot accommodate for every request for information so, they provide common info
 Doesn’t have exact depiction and only based on estimate and judgement

NOTE* Management Stewardship – how management manage their company

- Predicting how management use resources for future net cash flow

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CHAPTER 3
QUALITATIVE CHARCTERISTICS

2. QUALITATIVE CHARCTERISTICS

- qualities what makes financial information useful

A. Fundamental Qualitative Characteristics

- content of financial information

1. Relevance
2. Faithful Representation

Relevance and Faithful Representation

Application

1. identify economic phenomenon that is potential usefulness

2. identify information that is most relevant and can be faithfully represented

3. if the information is available

Relevance – influence a decision

- related

Statement of Financial Position - Financial Position

Income Statement – relevant of determining performance

NOTE* Earning per share is better then Book value per share in attractiveness of an investment

Ingredients of Relevance

 Predictive Value – current financial information can determine future outcome of events

NOTE* Financial Position predicts dividends and wage payments and maturing commitment

NOTE* NET CASH

 Confirmatory Value – feedback about previous evaluations

- confirm or correct expectations

Materiality – mistake that affects economic decision

a.k.a doctorine of convinence - professional judgment in applying accounting standards

NOTE* if the mistake is small, it’s irrelevant

- quantitative threshold

- relative size than absolute size

AISB definition

Could reasonable be expected to influence

- limited to the economic decision of primary users

- include in financial statements

Obscuring information

- not understand or not clearly expressed

a) Languagex
b) Info is scatter
 c) Dissimilar items are combined
d) Similar items are not combined

Primary Users

Factors

Magnitude (relative size) and nature

Size of the item – total of the group to which item is belong (e.g. Cash in Current Asset)

Nature of the item – transaction is material (e.g. X company loans Y in unusual term)

Faithful Representation

- kind of transaction match the quantitative informative

Ingredients of Faithful Representation

 Completeness

- All information must be understand and avoids erroneous implication

Notes to Financial Statements

- necessary disclosure required by PFRS

Standard of adequate disclosure

- results in completeness

-all significant and relevant information shall be reported

- disclosure of financial facts significant enough to influence judgements of users

 Neutrality

- no bias

- free from bias

- to be neutral is to be fair

- Objectivity

- common needs of users

Prudence

- exercise of care and caution in dealing uncertainties

- Neutrality supports exercise of prudence

Conservatism

- synonymous with prudence

- least effect on equity

- “in case of doubt, record any loss and do no record any gain”

- e.g. Inventory cost is either 10,000 or 20,000. Then record the least cost

- not always required since it may cause fraud

Contingent loss- prepared in advance (provision)

Contingent gain – not recognized but disclose only (the expected gains is not added in the amount but
noted or disclose)

 Free from error

- no errors or omission in description of transactions

- estimate is faithful if the amount is clearly and accurate and explain

- if there is an error, this does not always result in material

Measurement Uncertainty

- cannot be observed and must be estimated

- affect faithful representation if there is high estimate

- estimate is faithful if the amount is clearly and accurate and explain even high level of measurement
uncertainly

Substance over Form

- Transaction must record in substance (economic substance) not in legal form

E.g. Y company purchase a truck worth 12,000 with monthly installments.

Analysis:
Substance: on the first transaction he become an owner

Legal form: the day the 12 monthly installment is finished, Y company become an owner

B. Enhancing qualitative characteristic

- increase the usefulness

1. Comparability
2. Understandability
3. Verifiability
4. Timeliness

Comparability

- likeness (similarities) and differences

Comparability within an entity – comparison of one accounting period vs another period

- a.k.a. horizontal comparability or intracomparability

Comparability between and across entity – comparison between entities in the same industry

- a.k.a. intercomparability or dimensional comparability

Consistency

- use of same accounting method from period to period

NOTE* Comparability is a goal and Consistency helps to achieve that goal

NOTE* Changing an accounting standard to better alternative must be made and must be full disclosure

NOTE* Not changing accounting policies is inappropriate

Understandability

- comprehensible (language) and intelligible (meaning of information)

- easily understand by the user

NOTE* realistically not everyone can understand the financial statements

Verifiability

- consensus (agreement of a group)

- supported by evidence

- duplicated by measurers (accounting department or teams like internal audit is need for verifiability)

- arm’s length transaction

- Principle of Objectivity

Direct Verification – direct observation (e.g. counting cash)

Indirect Verification - Evaluating information through secondary evidence (e.g. review documentation)

Timeliness

- Financial Information must be communicated early enough when decision is to be made

- Most important attribute in interim financial information

NOTE* the older the info, the less useful

- Past can be used in future

C. Cost constraint on useful information

- pervasive constraint- gathering information comes at cost

E.g. X company decide to issue annual financial statement and not quarterly to reduce cost

NOTE* benefit should exceed cost

- Judgmental process- decision is based on professional judgement

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CHAPTER 4
GENERAL OBJECTIVE OF FINANCIAL STATEMENT

3. GENERAL OBJECTIVE OF FINANCIAL STATEMENT

a. assessing future cash flow

b. assessing management stewardship

1. Statement of Financial Position

2. Income Statement
3. Statement of Cash Flow
4. Statement of Changes in equity
5. Notes to financial statements

Types of Financial Statements

1. Consolidated financial statements – parents and subsidiary

2. Unconsolidated financial statements – only parent

3. Combined Financial Statements – 2 or more entities not linked by parents and subsidiary relationship

Consolidated Financial Statements

Parent – has control over other company or subsidiary company

Primary users

- subsidiary creates own FS then combine it to parent company

Unconsolidated financial statements

- primary users

- not sufficient to meet the needs of the primary users

- cannot be a substitute if consolidated FS is required

NOTE* Claim to parent does not give claim to subsidiary

Combined Financial Statements

- Combining 2 separate entities own by one person or company

Reporting Entities
- prepares financial statements

- Not a legal entity

Whom to prepares?

1. Corpo, partnership, and sole proprietorship

2. parent only

3. parents and subsidiary as one entity

4. 2 or more entity as one entity (combined financial statement)

5. reportable business segments of an entity ( more than 10% of total asset, revenue, and expenses )

Reporting Period

Interim Financial Statement- optional and not required

Annual Financial Statement – required

NOTE* Required Comparative Information at least from preceding period

NOTE* Transaction after end of reporting period may reported if necessary (e.g. sale of asset)

Any subsequent event happen before official issuance date must be record & disclose ( 75-120 day
range after year-end )

Underlying Assumptions

Accounting Assumptions – foundation of accounting

- enhance understanding and usefulness of FS

NOTE* Only one Assumption is Going Concern

Basic Accounting Assumption

1. Accounting Entity

2. Time Period

3. Monetary Value
Going Concern or Continuity Assumption

- Continuing in operation indefinitely

- Foundation of Cost Principle or historical cost principle

- asset is recorded at cost and liabilities recorded at amount expected to pay

- if the business will be terminated, the assumption is abandoned

Accounting Entity – type of business organization (sole, proprietorship, partnership, and corporation )

-Business is separate from owner

- fair presentation of financial statements

- different business is independent accounting entity

-consolidated FS is treated as single economic entity

Time Period

- indefinite life of an entity is subdivided into accounting periods

Calendar year and Natural Business Year

Monetary Unit

1. Quantifiability

2. Stability of Peso

Quantifiability – unit of measure is “peso” in the Philippines

Stability of the Peso- value of peso does not change

- revaluation model – to adjust in case of inflation

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CHAPTER 5
ELEMENTS OF FINANCIAL STATEMENTS
CHAPTER 5

ELEMENTS OF FINANCIAL STATEMENTS

- broad classes

- quantitative information

- building blocks to financial statement

- financial position and income statement

- process of classification and subclassification

NOTE* no elements in statement of changes in equity

Essential Characteristic of Asset

1. present economic resources

2. Economic resources is a right to produce economic benefit

3. Controlled by entity as a result of past events

Right

1. Rights to an obligation of another entity. Right to receive

a) Cash
b) Goods or Service
c) Exchange economic resources with other party on favorable term (e.g. buying in bundle to
reduce cost
d) Benefit from an obligation of another party if a specified uncertain future event occurs (e.g.
insurance, repairs to new equipment)

2. Rights that are not obligation of another entity. Right to

a) Physical Object
b) Intellectual Property

3. Rights establish by contract

Potential to Produce economic Benefit

NOTE* For the Potential to exist, the right must already exist

- even if the economic benefit is low, it can be right

- present right and future benefits of right is uncertain

a) Receive Contractual Cash Flow

b) Exchange economic resources with other party on favorable term (e.g. buying in bundle to
reduce cost
c) Produce Cash Inflow and Not Cash Outflows
d) Receive Cash by Selling Economic Resources
e) Reduce Liability

Control of an economic resource

- control assets if it has present ability to obtain economic benefit

- arise when entity enforce legal right

- prevent others from using your asset

NOTE* Control can still exist without legal right as long as entity has a way of ensuring it (e.g.
Knowledge)

LIABILITY

a) Has an Obligation
b) obligation to transfer economic resource
c) present obligation that exist as a result of past event

NOTE* recognized until it is incurred

NOTE* NOT the ultimate outflow

Obligation

- responsibility that the entity cant avoid

Obligation is legal- contract or statutory requirement (obligation in government e.g. taxes)

Constructive Obligation – normal business practice (not written)

Transfer Economic Resource

a) pay cash
 b) deliver goods or noncash resources
c) providing service in future (Accrued Revenue)
d) exchange of economic resources with other party on unfavorable terms (accidents) (current)
e) transfer of economic resources if uncertain in future

Past event

a) already obtained economic benefits

b) transfer of an economic resources

INCOME

- both revenue and gains

Revenue- ordinary regular activity

- essence is regularity

Gains – do not arise from ordinary regular activity

Statement of Financial Performance

- income and comprehensive income

NOTE* The report may be recycle for another reporting period as long it results to relevant and faithful
represented

EXPENSE

- loss and ordinary regular activities

Loss – do not arise from ordinary regular activity

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CHAPTER 6
RECOGNITION AND MEASUREMENT
CHAPTER 6

RECOGNITION AND MEASUREMENT

Recognition – process of capturing for inclusion in the financial statement (elements)

NOTE* Asset, liability, equity recorded as carrying amount

- linked (recognized in one statement require recognition in another) one element affects another

- Recognized only if it is relevant and faithfully represented

- do not focus on how probable economic benefits will flow

- an element can exist even the benefits is low

Recognition Links – for every transaction there is an opposite effect

Income Recognition

- recognized when earned

- legal title pass to buyer at point of sale

Production Method – recognizing income at the point of or during production (overstated income and
not commonly use)

During Production- while happening the income is recognized

Point of Production – when production is done, the income is recognized

Cash basis of accounting- income is recognized when cash is received

NOTE* Accrual basis of accounting is commonly used

NOTE* According to IFRS, cash basis is prohibiting to used in most of the business

Expense Recognition

Matching Principle - expenses should be matched to the revenue they helped generate, regardless of
when the cash is actually paid or received. It is a concept that guides Accrual Basis of Accounting

- No pain, no gain (no expense, no revenue)

 a) Cause and Effect Association
b) Systematic and rational allocation
c) Immediate Recognition

NOTE* both expense and income is reported in the same period

Cause and Effect Association

- expense is recognized when revenue is already recognized

- actual strict matching concept

- matching process – matching of cost(expense) with revenue

- best example is cost of merchandise inventory

Systematic and rational allocation

- cost are expensed by allocating them in different accounting period when economic benefit arises from
different time period

- example is depreciation

Immediate Recognition

a) Expenditure produces no future benefit (loss in fire, etc.)

b) Cost incurred does not qualify for an asset (supplies expense)

Derecognition

- removal of an asset or liability in the SFP

Measurement

- quantifying in monetary terms

a) Historical Cost
b) Current Value

Historical Cost

Initially – Historical Cost which is current value ; Subsequently – Amortized Cost

- readily verifiable
- most commonly use

- cost upon acquiring an asset

- cost of liability before interests

- entry price or entry value

Amortized Cost- intangible asset with lifespan

- Estimate of future cash flows (how much you will benefit from useful life)

- Discounted at a rate (todays money is worth more than futures money)

- same formula as depreciation

Historical Cost Updated

In terms of asset

a) Depreciation and amortization

b) Payment received in exchange of asset
c) Impairment
- loss due to fire and etc.
- Carrying Value – Fair Market Value = impairment loss (expense)

d) accrual interest revenue

e) Amortization cost measurement in financial asset like bonds

In terms of liability

a) Payment made
b) Increase in value of liability that it becomes onerous
c) Accrual Interest expense
d) Amortization cost measurement in financial liability like bonds

Current Value

a) Value in use for asset

b) Fair Value
c) Fulfillment value for liability
d) Current Cost
Fair Value

- Price of an asset in the market

- value of liability upon payment due to changes like interest

- exit price or exit value

NOTE* if FMV cannot be determined then present value of cash flow is used

NOTE* FV is not adjusted for transaction cost (freight in in expense and not asset and liability)

Value in use

- present value of cash flow

- how much is the usefulness of an asset

- does not record transaction cost in acquiring

- record the transaction cost on the disposal of the asset

PV= CE / (1+r) ^ n

FV=PV × (1+r) ^ n

 PV = Present value of the cash flow

 CF = Cash flow amount

 r = Discount rate (interest rate)

 n = Number of periods (time)

- exit price or exit value

Fulfillment Value

- present value of the cash flows that an entity expects to incur as it fulfils a liability

- Settlement value is used acc. To IFRS than to Fulfillment Value

- exit price or exit value

Current Cost – have transaction cost

Of an Asset- cost of an asset at measurement date including transportation cost (replacement cost)

Of a Liability

- not applicable in depreciation

- entry price or entry value

Selecting a measurement basis

- nature of information

- no single factor to determine which one to use (IASB)

- historical cost

- simple and cheaper than to measure current value

- well understood and verifiable

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CHAPTER 7
PRESENTATION AND DSICLOSURE AND CONCEPT OF CAPITAL

PRESENTATION AND DSICLOSURE AND CONCEPT OF CAPITAL

Presentation and disclosure

- effective communication tool

- More relevant and faithful representation

- enhance comparability and understandability

NOTE* Duplication is unnecessary and result in less understandable

Classifying

- sort the elements of FS based on similarities

- Current and Non-Current

NOTE* dissimilar items result in less relevant, comparability, understandability and no faithful rep

- components of equity is disclose separately

Classification of income and expense

Other comprehensive income- income and expense items that are not included in the main profit and
loss (P&L) statement.

Foreign currency translation adjustments

Revaluation gains/losses

original cost - fair market value of an asset

Aggregation- (summarize)

- adding together the ALORE in the same classification

- useful by summarizing a large volume of details

- conceal some details

Traditional Approach- traditional preparation of income statement

Capital Maintenance Approach- net income can only occur if the beginning capital is meet

-a.k.a. net worth method of measuring profit

Formula for inflation

Capital Investment + inflation percentage = inflation-adjusted cost of capital

Net income > Inflation-adjusted cost of capital MEANS maintains capital

Net income - Inflation-adjusted cost of capital= true increase in purchasing power

Return on Capital – percentage of profit or income generated from invested capital

= Net income / Invested Capital * 100

Return of Capital – return or erosion of your original investment.

Financial Concept- nominal monetary unit

- does not required measurement basis

Physical Concept- operating capability

- there is profit if physical productive capacity end > beg

Price changes treat as capital maintenance adjustment

Physical Capital Maintenance Approach – correct cost

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CHAPTER 8
FINANCIAL STATEMENTS

Financial Statements – economic activities and its result.

- internally for economic decisions

- representation of the company’s management

- fairly presented and comparable to other enterprise

Notes* affected by accounting Policies

Accounting Policies – specific principles applied in preparing FS

Note* Must comply to financial reporting framework

Note: All components of FS except Cash flow is prepared with accrual basis

Components of Financial Statement

1. Statement of Financial Position

2. Statement of Comprehensive Income
3. Statement of Cash Flow
4. Statement of Changes in Equity
5. Notes in Financial Statement
1. Statement of Financial Position

- balance sheet

- Basic Accounting Equation Assets = Liabilities + Owner’s Equity

PAS 1 – Presentation of Financial Statements

a. Presentation of Assets and Liabilities using Current and Non-Current

Note* Unless presentation based on liquidity

- Most liquid to less liquid assets

- most urgent to least urgent liabilities

- aids the ability to meet its current obligations

Current Assets (par. 66 IAS 1)

a. Consumption in normal operating cycle (inventories, prepaid expenses)

b. For trading purposes (financial assets (profit or loss, e.g. investment in debt or equity)
c. Realized in 12 months after reporting period (trade receivable)
d. Cash or cash equivalents , or settle transaction at least 12 months (non-trade receivable, e.g.
interest receivable)

If the criteria is not meet then it is a NON-CURRENT ASSETS

Non-Current Assets

a. PPE
b. Intangible Assets
c. Investment Property / restricted
d. Financial assets not expected to realized (comprehensive income)

Operating Cycle- from acquisition of asset to the conversion on cash or cash equivalents

NOTE* if not stated, it is assumed to be 12 months

Current Liabilities

a. Settled in normal operating cycle

b. For trading Purposes
 c. Settled in 12 months after the reporting period
d. Does not have unconditional right to defer/ delay settlement of the liability for at least 12
months after the reporting period

1. Trade Payables
2. Accrued Expense
3. Dividends Payable
4. Unearned Revenues
5. Long terms of Notes payable due every 12 months

Non-Current Liabilities

a. Long term notes due more than 12 months

b. Bonds Payable due beyond 12 months
c. Long term Notes due within 12 months but extended on long term after negotiation \
d. Share Dividend Payable

Equity

- depends on the form of business organization

b. Sole proprietorship

- Only Capital Account of proprietor

c. Partnership

- Equity balance with the sum of capital and drawing accounts of the partner, each
partners’ equity is presented separately

d. Corporation

- Presented According to source

- contributed capital

- retained earnings

- cumulative other comprehensive income

Contributed Capital

- Share Capital (preference or/and ordinary share)

Share Premium or Additional CC

 - excess in CC

Cumulative Other Comprehensive Income (OCI)

- equity arise from non-owner trasaction

1. revaluation surplus

e.g. Land is purchase on Jan 1 2020 for 100,000. On Jan 1 2025, revaluation of land and
now is worth 500,000 so there is 400,000 revaluation surplus

2. Unrealized gains or losses

e.g. increase of market value of share ( from P40 per share to P80 per share). There is
P20 per share x shares is unrealized gain or loss

3. Foreign currency translation adjustments

Exchange rate like from parent company to subsidiary company

4. Actuarial gains or losses on defined benefit pension plans

STATEMENT OF FINANCIAL STATEMENT

Forms:

a. Account Form- T account (asset is on left and liability and equity on right)
b. Report Form- Continuous format
c. Financial Position form- working capital

- Working Capital = Current Asset – Current Liability

NOTE* SMEs do not report OCI

Statement of Comprehensive Income

- performance of the entity

Two Sections

a. Profit and loss section (income statement)

- interest expense or finance cost is required
- income tax is presented separately
b. OCI
Forms:

1. One statement form

Combined two sections
2. Two-statement form
Separate sections

Two Methods in Presentation

1. Function Method
- merchandising or manufacturing
- expenses is COGS, Selling expense, and general and administrative expense

a. Distribution Cost or Selling Expense

 Sales Salaries,
 Sales Commissions,
 Advertising Expense,
 Store Supplies,
 Delivery Expense,
 Depreciation of Store Equipment
b. Administrative Expense
 Office Salaries
 Office Supplies
 Taxes and Licenses
 Bad Debt
 Depreciation of Office Equipment

c. Other Expenses and Loses

 Loss on Sale of Investment or Property or Casualty Losses

d. Finance Cost
 Interest
 Finance Charge

a) Other Income
 Gain on FVPL
 Gain on sale
 Dividend Income

2. Nature Method
 -any type of business

- expenses is presented based on ledger

NOTE* Gain on FVOCI need income tax = Gain on FVOCI x (100% - income tax percentage)

NOTE* Large or/and public publicly accountable entities are required earning per share

Earning per Share

- Profit / weighted average outstanding shares

STATEMENT OF CASH FLOWS

- inflows and outflows of operating, investing and financing

Operating Activities

 Income Statement
 Current Asset
 Current Liability

Investing Activities – Cash Transactions affects asset not in Normal Operating Cycle

 Non-current Assets

Financing Activities

 Non-current Liability
 Shareholder’s Equity

Not Included but Shall disclose

a. Acquisition of assets either by assuming directly related liabilities pr by means of a finance lease
- like renting but have option to buy on the end of term

b. Acquisition of an entity by means of an equity issue

- ABC company bought XYZ company using ABC company's shares

c. Conversion pf debt to equity

 - e.g. ABC company has debt to X, instead of paying ABC offers shares and X accept it

d. Declaration and issuance of bonus issue (stock dividends)

Methods of Presenting Cash Flow from Operating Activities

Direct Method

- Gross Cash Receipts and Gross Cash Payments

Indirect Method

- Starts with Profit before Taxation and adjust it

a) Working Capital
 Inventories
 Operating Receivables
 Payables
b) Non-cash Items
 Depreciation
 Unrealized foreign exchange gain or losses etc.
c) Items associated with investing or financing activities

Inflows

 Depreciation and Amortization

 Losses
 Increase in A/R
 Increase in Accounts Payable

Outflows

 Gains
 Increase in Inventories
 Increase in Prepaid expense

Statement of Changes in Equity

Notes to the Financial Statements

 a) Basis for presentation of FS
 Company Information
 Summary of Significant Accounting Policies
o Criteria determining which investments are treated as cash equivalents
 Financial Framework
 Measurement of Classes
 Useful lives
 Accounting Methods

b) Supporting Schedule
 Balance of Inventories
 PPE
 Intangible Assets
 List of items

c) Other disclosure
 Contingent Liability – legal claims
 Contractual Commitments
 Events after reporting period that may be relevant
 Leasing Agreement

Effects of Events After the Reporting Period

- requires assessment from the management

- favorable and unfavorable events

- from end of reporting period until issuance of FS

Date of Issuance = Date of approval and authorized by managements

Two Types of Events

a) Adjusting Period – events at the end of reporting period

1) Settlement of court case (Liability)
2) Receipt of information of asset impaired
- e.g. bankruptcy (impairment loss and derecognition of receivables)
3) Gains or loss on sale
4) Profit-sharing or bonus payments
5) Fraud or error (correction)
b) Non-adjusting Events – events after the end of reporting period that does not need adjustment
 - can be ignored

- be disclosed if material (nature of an event and estimate of financial effect)

1) Major Business Combination or disposal of a major subsidiary

2) Discontinue business
3) Major purchase and disposal of assets
4) Destruction of major plant
5) Major reconstruction
6) Major ordinary share transaction
7) Abnormally Large Changes (Inflation)
8) Change of tax rate
9) Contingent liabilities
10) Major litigation

- fixing court disputes

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PAS 34
Interim Reporting

Interim Reporting

- presentation of Financial Statement less than one year

- Monthly, Quarterly, Semi-annually

NOTE* Public Traded Entities need to provide reports at least semi-annually

- Controlled by Government

- fund by tax payers’ money

Improve Timeliness, Decision-Making, & Transparency

Frequency of Reporting
 - PAS 34 does not required which entities, how frequently, and how soon

SEC & PSE encourage entities to file interim reporting

We make additional line or disclosure for better understanding for those line items we remove in
financial statement

Main purpose is to make update

Rely on estimates

General Rule: Under AIS8 any change in accounting policy is report respectively

Condensed Financial Statement

- need to report most recent annual financial statement.

Selected Explanatory Notes

- explanation on significant events and transactions from last annual financial statement

Since users can see the latest annual financial statements, repeating the same notes in the interim
reports is unnecessary and would just add extra, redundant information.

1. Statement of Financial Position

- end of current interim period
- comparative SFP at the end of preceding period
- June 30, 2023 – December 31, 2022 (half-yearly) & (quarterly)
2. Income Statement
- current interim period
- cumulatively for the current financial year to end
- comparative for the comparable interim period in the preceding year (2025 & 2024)
- comparative cumulatively for the comparable financial year to date of preceding year
(January 1, 2024, to June 30, 2024 and January 1, 2023, to June 30, 2023)
 - June 30, 2023 – June 30, 2022 (half-yearly) & (quarterly)
3. Statement of Comprehensive Income
- same presentation of Income Statement
- June 30, 2023 – June 30, 2022 (half-yearly) & (quarterly)
4. Statement of changes in equity
- cumulatively for the current financial year to end
- comparable financial year to date of preceding year
- June 30, 2023 – June 30, 2022 (half-yearly) & (quarterly)
5. Statement of cash flows
- cumulatively for the current financial year to end
- comparable financial year to date of preceding year
- June 30, 2023 – June 30, 2022 (half-yearly) & (quarterly)

Cumulatively - If a company is reporting its interim results for the third quarter (ending September 30),
the cumulative income statement would include all revenues and expenses from January 1 (the start of
the financial year) to September 30.

 For Q1 (First Quarter): The income statement will show the financial results from January 1 to
March 31.
 For Q2 (Second Quarter): The income statement will show the financial results from January 1 to
June 30.
 For Q3 (Third Quarter): The income statement will show the financial results from January 1 to
September 30.
 For Q4 (Full Year): The income statement will show the financial results from January 1 to
December 31.

if the first quarter shows a total expense of 10,000 and on the second quarter accumulate another total
expense of 10,000, thus the reported expenses in second quarter is 20,000.

NOTE* How we present on IAS 1, is the same on interim reporting

NOTE* Revenues are recognized the same basis in Annual reporting

Cost and Expenses – same basis in annual reporting

Expenses not associated directly with revenue are recognized in interim reporting as incurred over the
interim periods benefited (General administrative expenses, rent, utility costs, salaries of
administrative staff, etc.)

EXAMPLE: A company pays P12,000 for annual office rent. In interim reporting, P3,000 would be
recognized each quarter to reflect the benefit received during each period.

Expenses associated directly with revenue are match against revenue in those interim period (Cost of
goods sold, sales commissions, direct labor costs, shipping costs related to sales, etc.)
EXAMPLE: If a company sells goods worth P100,000 in a quarter, and the cost to produce those goods is
P60,000, the P60,000 will be recognized as COGS in that quarter, matching it with the revenue from the
sales.

INVENTORIES

- same reporting as financial reporting

- measured at lower cost or net realizable value

- cost of inventory can be estimate using gross profit method or retail inventory method

Cost of Inventory - Gross Profit Method or Net realizable Value

- like normal computation of COGS

Full inventory valuation is not required

- hard to count inventory in interim periods and costly too

Then you may compute it using historical gross profit margin

Gross Profit = Sales Revenue × Gross Profit Margin

Gross Profit = P300,000 × 40% = P120,000

Cost of Inventories = Sales Revenue - Gross Profit

Cost of Inventories = P300,000 - P120,000 = P180,000

net realizable value is < cost, shall recognized loss Loss on Inventory Write-down

- need disclosure

Dividend revenue and other related income shall be only recognized when realized / declared

UNEVEN COST

Cost that are incurred unevenly during an entity's financial year shall be accrued or deferred for interim
purposes only if it is also appropriate or defer that type of cost at the end of the financial year.

- like adjusting entries e.g. prepaid expenses for 12,000 thus 1,000 per month

e.g. depreciation and amortized cost; paid vacation and holiday leave

- must create legal obligation for that period (may estimate)

e.g. advertisement will not be recognized as an asset but as expense

Recognition of Bonus

 Legal obligation
 Reliable estimate
- year end bonus shall be allocated over the year

e.g. December 31, 2023 the XYZ estimated bonus for the year 2024 will be 400,000 thus the
bonus on first quarter is 100,000

given: 1 st Q the cost of inventory is 560,000 and NRV is 510,000. If COST> NRV record the difference in
P/L

Gain is recognized when realized and not spread out in interim periods

- Gain on Sale

Loss is recognized when incurred

- repair cost when the PPE is damage, record immediately

Income Tax

- same treatment as annual reporting

- accrued

Recent Quarter Income Tax = (Total Sales for cumulative quarters x recent tax rate ) - (Income tax for Q1
+ Income Tax for Q2 )

Other Formulas

Change of percentage Total Sales x expected warranty claim for the year xxx

Initial provision = sales, Q1 x percentage of Q1 warrant (xxx)

Reported in the Q2 xxx

 ----- ----- ----- ----- ----- ----- ----- -----
IFRS 8
Reporting by Operating Segments

- shorter interim periods

Purpose: Inform users about different products and services and geographic areas to assess entity’s 1 1
1. Past performance

2. Risk and Return

3. More informed Judgment

Required for entities with debt and equity investment that are publicly traded

Operating Entity’s Component

1. Earn revenues and incur expenses

2. Reviewed by CODM (Chief Operating Decision Maker) for assessing performance and allocating
resources
3. Discrete Financial Information (e.g. Information only for Revenue, only for expense)

NOT EXCLUDED: Component that sole purpose is to sell product internally

Identifying Operating Segments

- Significant for reporting purpose

Management Approach – looking at

 Organizational Structure (Hierarchy)

 Management Structure (leadership style and roles and responsibility)
For external reporting

NOTE* do not need separate management for different segment

CODM may be

1. Chief Executive Officer

2. Chief Operating Officer
3. Group of Executive directors or officers

Components can be group together to be one operating segment, if they have similar characteristics

1. Nature of products or service

2. Nature of the production processes
3. Type or class of customers
4. Method to use distribute
5. If applicable, nature of the regulatory environment

NOTE* Segment 1 and 2 are group together. And segment 3 and 4 are group together. Which one have
the more similar characteristic is the one use to added if 75% is not meet

Identifying Reporting Segments

Reportable segment – required to be disclosed

Quantitative threshold

Segment is reportable if met the 10% threshold

1. Revenue is 10% more of total revenue of all segments

2. Whether profit or loss, is 10% more of all segments combined
3. Asset is 10% more of all asset in the segment

Kahit ma meet lng isa goods na

EXCEPTIONS
 1. May combine segments that does not meet the 10%, if same characteristics, then become
reporting segments
2. Based on Management Judgement, if the preceding period have continuing significance
3. If the reportable segment is less than 75% of consolidated external revenue, ∑all reportable
segment, external revenue / total external revenue

∑ identifiable asset x 10%

∑external revenue + ∑ internal revenue x 10%

∑ all profit x 10%

Reconcile total asset of reportable segment to total asset of assets. Same with liabilities

Segment’s Financial Information

Purpose: additional information about nature and financial effects

Identified Reportable Operating Segments, shall report

1. General information
a. Factors to identify reportable segments
b. Product and services of reportable segments (Revenues
2. Basis of aggregation of segments (Criteria) segments aggregated on the basis (segments that
are combined)
3. Info about P/L and total Assets
4. Info on Liabilities, if provided to CODM

Measuring and Reporting segment profit or loss

Segment Revenue (may be both external and internal revenue) xxx

Directly Attributable cost and expenses (xxx)

Common cost that are charge to segment on some rational basis (xxx)

Segment Profit (Loss) xxx

Common cost that are charge to segment on some rational basis = (Revenue for segment 1– Traceable
Cost for segment 1) / (Whole entity Revenue – whole entity Traceable cost) x Common Cost
Or

Common Cost = (Indirect Operating Expenses + Interest Expense) x (segment 1 sales / total sales)

NOTE* general corporate expenses is not allocated to operating segments

Separate line: Interest Expense and Interest Revenue

Measuring and Reporting segment assets and liabilities

Disclosed but not included in segment asset with reasonable basis

 Amount of investment in Associate and joint ventures (equity method)

 Amounts additional to non-current assets other than financial instrument
o Deferred Tax Assets
o Post-Employment Benefit Assets
o Rights arising under insurance contracts

iN what way or how the compny comply or not in stanards (related party disclosure)