Conceptual Framework Summary

PRELIM

Overview of Accounting

Accounting is “the process of identifying, measuring, and communicating economic information to permit informed judgments and
decisions by users of the information.” – (American Associations of Accountants)

Three important activities included in the definition of accounting

1. Identifying
2. Measuring
3. Communicating

IDENTIFYING

It is the process of analyzing events and transactions to determine whether or not they will be recognized.

Recognition refers to the process of including the effects of an accountable event in the statement of financial position or the statement of
comprehensive income through a journal entry.

 Only accountable events are recognized (journalized).

 Accountable events affects the asset, liabilities, equity, income or expenses of an entity. It is also known as economic activity,
which is the subject matter of accounting.
 Only activities are recognized in accounting. Sociological and psychological matters are not recognized. They are disclosed in
the notes through a memorandum entry if they have accounting relevance.

Types of events or transactions

1. External events – are events that involve an entity and another external party.

Types of external events

 Exchange (reciprocal transfer) – an event wherein there is a reciprocal giving and receiving of economic resources or discharging of
economic obligations between an entity and an external party.

Examples: sale, purchase, payment of liabilities, receipt of notes receivable in exchange for accounts receivable and the like.

 Non-reciprocal transfer – is a one way transaction in that the party giving something does not receive anything in return, while the party
receiving does not give anything in exchange.

Examples: donations, gifts or charitable contributions, payment of taxes, imposition of fine, theft, provision of capital by owners, and
distribution to owners.

 External event other than transfer – an event that involves changes in the economic resources or obligations of an entity caused by an
external party or external source but does not involve transfers of resources or obligations.

Examples: changes in fair values and price levels, obsolescence, technological changes, vandalism, and the like.

2. Internal events – are events that do not involve an external party.

Types of internal events

 Production – the process by which resources are transformed into finished goods. Examples: conversion of raw materials into finished
products, production of farm products, and the like.
 Casualty – an unanticipated loss from disasters or other similar events. Examples: loss from fire, flood, and other catastrophes.

MEASURING

It involves assigning numbers, normally in monetary terms, to the economic transactions and events.

Valuation by fact or opinion

The use of estimates is essential in providing relevant information. Thus, financial statements are said to be a mixture of fact and opinion.
 When measurement is affected by estimates, the items measured are said to be valued by opinion. Examples:

a. Estimates of uncollectible amounts of receivables.

b. Depreciation and amortization expenses, which are affected by estimates of useful life and residual value.
c. Estimated liabilities, such as provisions.
d. Retained earnings, which is affected by various estimates of income and expenses.

When measurement is unaffected by estimates, the items measured are said to be valued by fact. Examples:
a. Ordinary share capital valued at par value.
b. Land stated at acquisition cost.
c. Cash measured at face amount.

COMMUNICATING

Is the process of transforming economic data into useful accounting information, such as financial statements and other accounting reports, for
dissemination to users. It also involves interpreting the significance of the processed information.

The communication process of accounting involves three aspects.

1. Recording - refers to the process of systematically committing into writing the identified and measured accountable events in the journal
through journal entries.
2. Classifying – involves the grouping of similar and interrelated items into their respective classes through postings in the ledger.
3. Summarizing – putting together or expressing in condensed form the recorded and classified transactions and events. This includes the
preparation of financial statements and other accounting reports.

Interpreting the processed information involves the computation of financial statements ratios.

Basic purpose of accounting

Its purpose is to provide information that is useful in making economic decisions.

Various sources of information are used when making economic decisions and the financial statements are only one of the sources. Other
sources may include current events, industry publications, internet resources, professional advices, expert systems, etc.

Economic entities use accounting to record economic activities, process data and disseminate information intended to be useful in making
economic decisions. An economic entity may either be a:

a. Non-profit entity – one that carries out some socially desirable needs of the community or its members and whose activities are not directed
towards making profit; or
b. Business entity - one that operates primarily for profit.

Economic activities include:

1. Production – the process of converting economic resources into outputs of goods and services that are intended to have greater utility than
the required inputs.
2. Exchange – the process of trading resources or obligations for other resources or obligations.
3. Consumption – the process of using the final output of the production process.
4. Income distribution – the process of allocating rights to the use of output among individuals and groups in the society.
5. Savings – the process of setting aside rights to present consumption in exchange for rights to future consumption.
6. Investment – process of using current inputs to increase the stock of resources available for output as opposed to immediately consumable
output.

Types of information provided by accounting

1. Quantitative information – information expressed in numbers, quantities, or units.

2. Qualitative information – information expressed in words or descriptive form. It is found in the notes to financial statements as well as on
the face of the other financial statements.\
3. Financial information – information expressed in money. It is also quantitative information since monetary amounts are normally
expressed in numbers.
Types of accounting information classified as to users’ needs

1. General purpose accounting information – designed to meet the common needs of most statement users. This information is provided
under financial accounting.
2. Special purpose accounting information – designed to meet specific needs of particular statement users. This information is provided by
other types of accounting other than financial accounting.

Sources of information in financial statements

Information in the financial statements is not obtained exclusively from the entity’s accounting records. Some are obtained from external
sources.

Accounting as science and art

1. As a social science, accounting is the body of knowledge which has been systematically gathered, classified and organized.
2. As a practical art, accounting requires the use of creative skills and judgement.

Accounting as an information system

Accounting identifies and measures economic activities, processes information into financial reports, and communicates these reports to
decision makers.

Accounting as a language of business

Accounting is often referred to as a “language of business” because it is fundamental to the communication of financial information.

Creative and Critical thinking in accounting

The practice of accountancy requires the exercise of creative and critical thinking.

a. Creative thinking involves the use of imagination and insight to solve problems by finding new relationships (ideas) among items of
information. It is most important in identifying alternative solutions.
b. Critical thinking involves the logical analysis of issues, using inductive or deductive reasoning to test new relationships to determine their
effectiveness. It is most important in evaluating alternative solutions.

Accounting concepts

Accounting concepts are the principles upon which the process of accounting is based.

Examples of accounting concepts:

 Double-entry system – each accountable event is recorded in two parts – debit and credit.
 Going concern assumption – the entity assumed to carry on its operation for an indefinite period of time.
 Separate entity – the entity is viewed separately from its owners.
 Stable monetary unit – accounting information should be stated in a common denominator. For example, amounts in foreign
currencies should be translated into pesos.
 Time period – the life of the entity is divided into series of reporting periods.
 Materiality concept – information is material if its omission or misstatement could influence economic decisions.
 Cost-benefit – the cost of processing and communicating information should not exceed the benefits to be derived from it.
 Accrual basis of accounting – the effects of transactions and other events are not recognized when they occur (and not as cash
is received or paid) and they are recorded in the accounting records and reported in the financial statements of the periods which
they relate.
 Historical cost concept – the value of an asset is determined on the basis of acquisition cost.
 Concept of Articulation – all of the components of a complete set of financial statements are interrelated.
 Full disclosure principle – this principle recognizes that the nature and amount of information included in the financial
statement reflect a series of judgmental trade-offs.
 Consistency concept – the financial statements are prepared on the basis of accounting principles that are applied consistently
from one period to the next.
 Matching – cost are recognized as expenses when the related revenue is recognized.
 Entity theory – the accounting objective is geared towards proper income determination. Proper matching of costs against
revenues is the ultimate end. This theory emphasizes the income statement and is exemplified by the equation “Assets =
Liabilities + Capital.”
 Proprietary theory – the accounting objective is geared towards the proper valuation of assets.
 Residual equity theory – this theory is applicable when there are two classes of shares issued.
  Fund theory – the accounting objective is neither proper income determination nor proper valuation of assets but the custody
and administration funds.
 Realization – the process of converting non-cash assets into cash or claims for cash.
 Prudence – is the use of caution when making estimates under conditions of uncertainty, such that assets or income are not
overstated and liabilities or expenses are not understated.

Expense recognition principles

 Matching concept – costs that are directly related to the earning of revenue are recognized as expenses in the same period the
related revenue is recognized.
 Systematic and rational allocation – costs that are not directly related to the earning of revenue are initially recognized as assets
and recognized as expenses over the periods their economic benefits are consumed, using some method of allocation.
 Immediate recognition – costs that do not meet the definition of an asset, or ceases to meet the definition of an asset, are
expensed immediately.

Common branches of accounting

1. Financial accounting – this focuses on general purpose of financial statements.

 General purpose financial statements are those statements that cater to the common needs of external users, primarily the
potential and existing investors, and lenders and other creditors.
 Financial accounting is governed by the PFRS.

Financial accounting vs. Financial reporting

Both financial accounting and financial reporting focus on general purpose financial statements, the latter endeavors to promote principles that are
also useful in “other financial reporting.”

Other financial reporting comprises information provided outside the financial statements that assists in the interpretation of a complete set of
financial statements or improve user’s ability to make efficient economic decisions.

Financial statements vs. Financial report

Financial statements are the structured representation of an entity’s financial position and results of its operations. They are the end product of the
accounting process.

Financial report includes the financial statements plus other information provided outside the financial statements that assists in the interpretation of
a complete set of financial statements or improves users’ ability to make efficient economic decisions.

Bookkeeping and Accounting

Bookkeeping refers to process of recording the accounts or transactions of an entity. Bookkeeping normally ends with the preparation of trial balance.
Unlike accounting, bookkeeping does not require the interpretation of significance of the processed information.

Accountancy

It refers to the profession or practice of accounting.

Four sectors in the practice of accountancy

R.A 9298 – Philippine Accountancy Act of 2004.

Practice of Public Accountancy – rendering of audit or accounting related services to more than one client on a fee basis.

Practice in Commerce and Industry – employment in the private sector in a position which involves decision making requiring professional
knowledge in the science of accounting and such position requires that the holder thereof must be a certified public accounting.

Practice in Education/Academe – employment in an educational institution which involves teaching in accounting, finance, business law, taxation,
and other technically related subjects.

Practice in the Government – appointment to a position in an accounting professional group in the government.
Conceptual Framework for Financial Reporting

Purpose of the Conceptual Framework

This prescribes the concepts for general purpose financial reporting. Its purpose is to:

a. Assist the IASB in developing standards that are based on consistent concepts.
b. Assists preparers in developing consistent accounting policies when no Standard applies to a particular transaction or when a Standard
allows a choice of accounting policy; and
c. Assists all parties in understanding and interpreting the Standards.

Status of the Conceptual Framework

The Conceptual Framework in not a Standard. If there is a conflict between a Standard and a Conceptual Framework, the requirement of the
Standard will prevail.

 Hierarchy of reporting standards

1. PFRS Accounting Standards
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 not consider the following:
a. Pronouncements issued by other standard-setting bodies
b. Other accounting literature and industry practices.

Scope of the Conceptual Framework

The CF is concerned with general purpose financial reporting and this involves general purpose financial statements. The CF provides the concepts
that underlie general purpose financial reporting with regard to the following:

1. The objective of financial reporting

2. Qualitative characteristics of useful financial information
3. Financial statements and the reporting entity
4. The elements of financial statements
5. Recognition and derecognition
6. Measurement
7. Presentation and disclosure
8. Concepts of capital and capital maintenance

The Objective of Financial Reporting

Is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making
decisions about providing sources to the entity

Primary Users

1. Existing and potential investors; and

2. Lenders and other creditors

These users cannot demand information directly from reporting entities and must rely on general purpose financial reports for much of their financial
information needs. Accordingly, they are the primary users to whom general purpose financial reports are directed to.

Information about use of the entity’s economic resources

Information on how efficiently and effectively the entity’s management has discharged its responsibilities to use the entity’s economic resources helps
users assess the entity’s managements stewardship.
Qualitative Characteristics

The qualitative characteristics of useful financial information identify the types of information that are likely to be most useful to the primary users in
making decisions using an entity’s financial report. This apply to information in the financial statements as well as to financial information provided
in other ways.

The Conceptual Framework classifies the qualitative characteristics into the following:

1. Fundamental qualitative characteristics – these are the characteristics that make information useful to users. They consist of the ff:
a. Relevance
b. Faithful representation
2. Enhancing qualitative characteristics – this enhance the usefulness of information. They consist of the ff:\
a. Comparability
b. Verifiability
c. Timeliness
d. Understandability

Financial statements and the Reporting entity

Objective and Scope of financial statements

The objective of general purpose financial statements is to provide financial information about the reporting entity’s assets, liabilities, entity, income,
and expenses that is useful in assessing:

a. The entity’s prospects for future net cash inflows; and

b. Management’s stewardship over economic resources.

That information is provided in the:

a. Statement of financial position

b. Statement of financial performance
c. Other statements and notes

Reporting period

Financial statements are prepared for a specified period of time and provide information in assets, liabilities, and equity that existed at the end of the
reporting period, or during the reporting period, and income and expenses for the reporting period.

Going concern assumption

Financial statements are normally prepared on the assumption that the reporting entity is a going concern. If this is not the case, the entity’s financial
statements are prepared on another basis.

The elements of financial statements

1. Assets
2. Liabilities
3. Equity
4. Income
5. Expenses

Recognition and Derecognition

Recognition is the process of including in the statement of financial position or the statements of financial performance an item that meets the
definition of one of the financial statement elements. This involves recording the item in words and in monetary amount and including that amount in
the totals of either of those elements.

Recognition criteria

a. Meets the definition of the financial elements; and

b. Recognizing it would provide useful information

Relevance
The recognition of an item may not provide relevant information if, for example:

a. It is uncertain whether an asset or liability exists; or

b. An asset or liability exists, but the probability of an inflow or outflow of economic benefits is low.

Existence uncertainty & Low probability of inflows/outflows

Existence uncertainty or low probability of an inflow or outflow of economic benefits may result in, but does not automatically lead to, the non-
recognition of an asset or liability. Other factors should be considered.

Faithful representation

The recognition of an item is appropriate if it provides both relevant and faithfully represented information. The level of measurement uncertainty
and other factors affect an item’s faithful representation.

Measurement uncertainty

An asset or liability must be measured for it to be recognized. Often, measurement requires estimation and thus subject to measurement uncertainty.
The use of reasonable estimates is an essential part of financial reporting and does not necessarily undermine the usefulness of information. Even a
high level of measurement uncertainty does not necessarily preclude an estimate from providing useful information if the estimate is clearly and
accurately described and explained.

Derecognition

It is the opposite of recognition. It is the removal of a previously recognized asset or liability from the entity’s statement of financial position. It
occurs when the item no longer meet the definition of an asset or liability, such as when the entity loses control of all or part of the asset, or no longer
has a present obligation for all or part of the liability.

Unit of account

Is the right or group of rights, the obligation or the group of obligations, or the group of rights or obligations, to which recognition criteria and
measurement concepts are applied. It can be an account title, a group of similar assets, or a group of assets and liabilities.

If an entity transfers part of an asset or part of a liability, the unit of account may change at that time, so that the transferred component and the
retained component become separate units of account.

Transfers

Derecognition is not appropriate if the entity retains substantial control of a transferred asset. In such case, the entity continues to recognize the
transferred asset and recognize any proceeds received from the transfer as a liability. If there is only a partial transfer, the entity derecognizes only the
transferred component and continue to recognize the retained component.

Measurement

Recognition requires quantifying an item in monetary terms, thus necessitating the selection of an appropriate measurement basis.

The application of the qualitative characteristics, including the cost constraint, is likely to result in the selection of different measurement bases for
different assets, liabilities, income and expenses. Accordingly, the Standards prescribe specific measurement bases for different types of assets,
liabilities, income, and expenses.

Measurement bases

The Conceptual Framework describes the ff measurement bases:

1. Historical cost
2. Current value
a. Fair value
b. Value in use and fulfillment value
c. Current cost

Historical cost

The historical cost of an asset is the consideration paid to acquire the asset plus transaction costs.

The historical cost of a liability is the consideration received to incur the liability minus transaction costs.

Current value
Current value measures reflect changes in values at the measurement date. Unlike historical cost, current value is not derived from the price of the
transaction or other event that gave rise to the asset or liability.

Current value measurement bases include the ff:

a. Fair value
b. Value in use for assets and Fulfillment value for liabilities
c. Current cost

Fair value

It is the price that would be received to sell an asset, or paid to transfer liability, in an orderly transaction between market participants at the
measurement date.

Fair value reflects the perspective of market participants. Accordingly, it is not an entity-specific measurement.

Fair value can be measured directly by observing prices in an active market or indirectly using measurement techniques. Fair value is not adjusted for
transaction costs.

Value in use and fulfillment value

Value in use is the present value of the cash flows, or other economic benefits, that an entity expects to derive from the use of an asset and from its
ultimate disposal.

Fulfillment value is the present value of the cash, or other economic resources, than an entity expects to be obliged to transfer as it fulfils a liability.

Current cost

Current cost of an asset is the cost of an equivalent asset at the measurement date, comprising the consideration that would be paid at the
measurement date plus the transaction costs that would be incurred at that date.

Current cost of a liability is the consideration that would be received for an equivalent liability at the measurement date minus the transaction costs
that would be incurred at that date.

Current cost and historical cost are entry values, whereas fair value, value in use and fulfillment value are exit values. Unlike historical cost,
however, current cost reflects conditions at the measurement date.

In some cases, current cost can only be measured indirectly, for example, by adjusting the current price of a new asset to reflect the current age and
condition of the asset held by the entity.

Consideration when selecting a measurement basis

a. The nature of information provided by a particular measurement basis; and

b. The qualitative characteristics, the cost constraint, and other factors.

Factors specific to initial measurement

In transactions to market terms, an asset’s (liability’s) cost is normally similar to its fair value on initial recognition. Even so, it is still necessary to
describe the measurement basis used at initial recognition because this determines whether any income or expense arise on that date.

Moreover, the initial and subsequent measurement bases usually parallel each other.

More than one measurement basis

Sometimes, it may be necessary to use more than one measurement basis in order to provide useful information.

In most cases, the use of different measurement basis is applied in such a way that:

a. A single measurement basis is used in the statement of financial position and statement of financial performance; and
b. Additional information is disclosed in the noted for a different measurement basis.

In some cases, however, it may be appropriate to

a. Use a current value measurement basis for the asset or liability in the statement of financial position; and
b. A different measurement basis for the related income and expenses in the statement of profit or loss.

In such cases, the related total income or expense may need to be allocated to both profit or loss and other comprehensive income.

Measurement of equity
Total equity is not measured directly. It is simply equal to the difference between the carrying amounts of recognized assets and liabilities.

Financial statements are not designed to show an entity’s value. Thus, total equity cannot be expected to be equal to the entity’s market value nor the
amount that can be raised from either selling or liquidating the entity.

Although total equity is not measured directly, some of its components can be measured directly.

Cash flow based measurement techniques

A measure that cannot be observed directly needs to be estimated. One way to make the estimate is by using cash-flow-based techniques. Such
techniques are not measurement bases, but rather used in applying a measurement basis. Accordingly, when using such technique, it is necessary to
identify which measurement basis is used and the extent to which the technique reflects the factors applicable to that measurement basis.

Presentation and Disclosure

As communication tools

Information about assets, liabilities, equity, income and expenses is communicated through presentation and disclosure in the financial statements.

Effective communication makes information more useful. Effective communication requires:

a. Focusing on presentation and disclosure objectives and principles rather than on rules.
b. Classifying information by grouping similar items and separating dissimilar items.
c. Aggregating information in a manner that is not obscured either by excessive detail or by excessive summarization.

The cost constraint (cost-benefit principle) is a pervasive constraint – meaning it affects all aspects of financial reporting. Hence, it affects decisions
about presentation and disclosure.

Presentation and disclosure objectives and principles

Those requirements strive for a a balance between:

a. Giving entities the flexibility to provide relevant and faithfully represented information; and
b. Requiring information that has both intra-comparability and inter-comparability.

Effective communication also requires the consideration of the following principles:

a. Entity-specific information is more useful than standardized descriptions, also known as ‘boilerplate’; and
b. Duplication of information is usually unnecessary as it can make financial statements less understandable.

Classification

It refers to the sorting of assets, liabilities, equity, income or expenses with similar nature, function, and measurement basis for presentation and
disclosure purposes.

Combining dissimilar items can reduce the usefulness of information.

Classification of assets and liabilities

Classification is applied to an asset’s or liability’s selected unit of account. However, it is sometimes necessary to apply classification to a higher
level of aggregation and the sub-classify the components separately.

Offsetting

This occurs when an asset and a liability with a separate units of account are combined and only the net amount is presented in the statement of
financial position. Offsetting is generally not appropriate because it combines dissimilar items. Treating a set of rights and obligations as a single unit
of account is not offsetting.

Classification of equity

Equity claims with different characteristics may be classified separately. Similarly, equity components that are subject to legal or similar requirements
may be classified into share capital, retained earnings, and other components.

Classification of income and expenses

a. Profit or loss; or
b. Other comprehensive income.
Aggregation

It is the adding together of assets, liabilities, equity, income, or expenses that have shared characteristics and are included in the same classification.

Aggregation summarizes a large volume of detail, thus making information more useful. However, balance should be strived for because excessive
aggregation can conceal important detail.

Typically, summarized information is presented in the statement of financial position and the statements of financial performance, while detailed
information is provided in the notes.

Concepts of capital and capital maintenance

The CF mentions 2 concept of capital namely:

a. Financial concept of capital – capital is regarded as the invested money or invested purchasing power. Capital is synonymous with equity,
net assets, or net worth.
b. Physical concept of capital – capital is regarded as the entity’s productive capacity.

The concept chosen affects the determination of profit. In this regard, the concepts of capital gives rise to the following concepts of capital
maintenance.

a. Financial capital maintenance – profit is earned if the net assets at the end of the period exceeds the net assets at the beginning of the
period, after excluding any distributions to, and contributions from, owners during the period. Financial capital maintenance can be
measured in either nominal monetary units or units of constant purchasing power.
b. Physical capital maintenance – profit is earned only if the entity’s productive capacity at the end of the period exceeds the productive
capacity at the beginning of the period, after excluding any distributions to, and any contributions from, owners during the period.

The concept of capital maintenance is essential in distinguishing between a return on capital or return of capital.

Capital maintenance adjustments

The revaluation of assets and liabilities results in increases or decreases in equity. Although theses increases or decreases meet the definition of
income or expenses, they are not recognized in profit or loss under certain concepts of capital maintenance. Accordingly, these items are included in
equity as capital maintenance adjustments or revaluation reserves.

PAS 1 Presentation of Financial Statements

This 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 – refers to the comparability of financial statements of the same entity but from one period to another.
b. Inter-comparability – 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, account
titles, either within a single entity from one period to another or across different entities.

PAS 1 applies to the presentation and preparation of general-purpose financial statements. The recognition, measurement and disclosure requirements
for specific transactions and other events are set out in the PFRSs/

Financial statements

Are the structured representation of an entity’s financial position and results of its operations.

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.

Purpose of financial statements

1. Primary objective: 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: show the results of managements’ stewardship over the entity’s resources.
To meet the objective, financial statements provide information about an entity’s:

a. Assets
b. Liabilities
c. Equity
d. Income
e. Expenses
f. Contributions by, and distributions to, owners; and
g. Cash flows/

Complete set of financial statements

1. Statement of financial position

2. Statement of profit or loss and other comprehensive income
3. Statement of changes in equity
4. Statement of cash flows
5. Notes
6. Additional statement of financial position

General features of financial statements

1. Fair Presentation and Compliance with PFRSs

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 requirement of PFRSs.

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.

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. 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. Measuring assets net of valuation allowances is not offsetting.

6. Frequency of reporting

Financial statements are prepared at least annually. If an entity changes its reporting period to a period longer or shorter than one year, it
shall disclose the following:

a. The period covered by the financial statements:

b. The reason for using a longer or shorter period, and
c. The fact that amounts presented in the financial statements are not entirely comparable.
7. Comparative information
PAS 1 requires an entity to present comparative information in respect of the preceding period for all amounts reported in the current
period’s financial statements, unless another PFRS requires otherwise.
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.
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.

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

Presentation of statement of financial position

A SFP 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 shows no distinction between current and noncurrent items.

Refinancing agreement

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

However, the obligation is classified as noncurrent, if the entity has the right, at the end of the reporting period, to roll over the obligation for at
least 12 months after the reporting period under an existing loan facility. Without such right, the entity does not consider the potential to refinance
the obligation and classifies the obligation as current.

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 loan covenant. 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.

However, the liability is noncurrent if the lender provides the entity by the end of the reporting period 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.

Statement or 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; or

b. Two statements a statements of profit or loss and a statement presenting comprehensive income.

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

a. Profit or loss
b. Other comprehensive income; and
c. Comprehensive income

Presenting a separate income statement is allowed as long as a separate statement showing comprehensive income is also presented. 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 bu other PFRSs to be recognized outside of profit or loss.
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

b. Function of expense method

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 be provided, including depreciation and amortization expense and employee benefits expense. This information is
useful in predicting future cash flows.

Other comprehensive income

It comprises items of income and expense that are not recognized in profit or loss as required or permitted by other PFRSs.

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;
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 FVPL that are attributable to changes in credit risks;

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

Reclassification Adjustment

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

On derecognition, 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.

Presentation of OCI

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

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. Items of OCI, including reclassification adjustments, may be presented at either net of tax or gross of
tax.

Total Comprehensive Income

It 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.

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.

Statement of Changes in Equity

It shows the following information:

a. Effects of change in accounting policy or correction of prior period error.

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:
 Profit or loss;
 Other comprehensive income; and
 Transactions with owners.

Statements 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 provide information in addition to those presented in the other 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 prepared in a necessarily detailed manner. More often than not, they are voluminous and occupy a bulk portion of the financial statements.

PAS 7 Statements of Cash Flows

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 of cash and cash equivalents during the period.

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
receivables.

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 flow from operating activities are primarily derived from the principal revenue-producing activities of the entity.”

Operating activities usually include cash flows inflows and outflows on items of income and expenses or those that enter into the determination of
profit or loss.

Special items included in operating activities

 Cash flows from buying and selling held for trading securities are classified as operating activities.
 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.
 Loan transactions of financial institutions are operating activities because they relate to the main revenue-producing activities of a
financial activities.

Investing activities

Investing activities involve the acquisition and disposal of noncurrent assets and other investments.

Financing activities

These are those that affect the entity’s borrowings and contributed equity.

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 activities or non-trade liabilities are included as financing activities.

Cash flows excluded from the activity’s sections

 Cash flows on movements between “cash” and “cash equivalent” 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 forms part of the
balance of cash and cash equivalents and therefore not presented separately in the activities sections.
 Cas 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.

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.

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, indirect method
is more commonly used because it is easier to apply.

Moreover, the choice between the two is applicable only in operating activities. For financing and investing activities, gross cash receipts and
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.

Disclosures

 Changes in liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes.
 Supplier finance arrangements
 Components of cash ad cash equivalents and a reconciliation of amounts in the statement of cash flows with the equivalent items in the
statement of financial position.
 Significant cash and cash equivalents held by the entity that are not available for use by the group, together with a management
commentary.

PAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

Objective and Scope

PAS 8 prescribes the criteria for selecting, applying, and changing accounting policies and the accounting and disclosure of changes in accounting
policies, changes in accounting estimates and correction of prior period errors.

Accounting policies

Accounting policies are “the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial
statements.” (PAS 8.5)

Accounting policies are the relevant PFRSs adopted by an entity in preparing and presenting its financial statements.

PFRSs

Philippine Financial Reporting Standards (PFRSs) are Standards and Interpretations adopted by the Financial Reporting Standards Council
(FRSC).

They comprise the following:

1. Philippine Financial Reporting Standards (PFRSs);

2. Philippine Accounting Standards (PASs); and

3. Interpretations

Categories of Accounting Changes

• Change in Accounting Estimate

• Change in Accounting Policy

Change in Accounting Estimate

PAS 8, paragraph 5, defines a change in accounting estimate as 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 and expected future benefit and obligation associated with the
asset and liability.

Simply stated, a change in accounting estimate is a normal recurring correction or adjustment of an asset or liability which is the natural result of
the use of an estimate.

Examples of changes in accounting estimate

1. Change in depreciation or amortization methods

2. Change in estimated useful lives of depreciable assets

3. Change in estimated residual values of depreciable assets

4. Change in required allowances for impairment losses and uncollectible accounts

5. Changes in fair values less cost to sell of non-current assets held for sale and biological assets

How to report change in Accounting Estimate?

The effect of a change in accounting estimate shall be recognized CURRENTLY AND PROSPECTIVELY by including it in income or loss of:

a) The period of change if the change affects that period only.

b) The period of change and future periods if the change affects both.

Change in Accounting Policy

Once selected, accounting policies must be applied consistently for similar transactions and events. A change in accounting policy shall be made only
when:

a) Required by an accounting standard or an interpretation of the standard.

b) The change will result in more relevant and faithfully represented information about the financial position. Financial performance and cash flows
of the entity.

Examples of changes in accounting policy

1. Change from FIFO cost formula for inventories to the Average cost formula.

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

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

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

5. Initial adoption of the revaluation model for property, plant, and

6. equipment and intangible assets.

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

8. Change in business model for classifying financial assets resulting to reclassification between financial asset categories.

How to report a change in accounting policy?

A change in accounting policy required by a standard or an interpretation shall be applied in accordance with the transitional provisions. If the
standard or interpretations contains no transitional provisions or if an accounting policy is changed voluntarily, the change shall be applied
retrospectively or retroactively.

Retrospective Application

Retrospective application is applying a new accounting policy to transactions, other events and conditions as if that policy had always been applied.

Simply stated, retrospective application means that any resulting adjustment from the change in accounting policy shall be reported as an
adjustment to the opening balance of retained earnings.

The impact of the new policy on the retained earning prior to the earliest period presented shall be adjusted against the opening balance of retained
earnings.
NOTE:

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.

If it is impracticable to apply it retrospectively = Prospective application

Errors

Errors include the effects of:

1. Mathematical mistakes

2. Mistakes in applying accounting policies

3. Oversights or misinterpretations of facts; and

4. Fraud

Types of Errors

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.

Prior Period Errors – are errors in one or more periods that were only discovered either during the current period or after the current period but
before the financial statements were authorized for issue.

Retrospective Restatement

Restating the comparative amounts for the prior period(s) presented in which the error occurred. 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.

NOTE: If it is impracticable to apply it retrospectively = Prospective application.

PAS 10 Events after the Reporting period

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. 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, require adjustments of amounts in the financial statements. Examples of adjusting event:

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.

had a present legal or constructive obligation at the end of reporting period to make such payments.

b. The discovery of fraud or errors that indicate that the financial statements are incorrect.

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.

d. For example:
e. i. The
bankruptcy of
a customer
that occurs
after the
f. reporting
period may
 indicate that the
carrying amount
g. of a trade
receivable at
the end of
reporting period
is
h. impaired.
i. ii. The sale of
inventories after
 the reporting
period may
j. give evidence
to their net
realizable value
at the end of
k.reporting
period
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., 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., 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.

PAS 24 Related Party Disclosures

It prescribes the guidelines in identifying the related party relationships, transactions, outstanding balances and commitments, and
the necessary disclosure for these items.

The financial position and profit or loss of an entity may be affected by a related party relationship even if related party transactions do not
occur. The mere existence of the relationship may be sufficient to affect the transactions of the entity with other parties.

Necessary disclosures, therefore, should be provided to draw users’ attention to the possible effects of such relationships and transactions
on the financial statements presented.

Related Party

Parties are related if one party has the ability to affect the financial and operating decisions of the other party through;

a. Control

b . It is an investor
controls an investee when
the investor is exposed,
c. or has rights, to variable
returns from its
involvement with the
d. investee and has the
ability to affect those
returns through its
e. power over the investee
f . It is an investor
controls an investee when
the investor is exposed,
g. or has rights, to variable
returns from its
involvement with the
h. investee and has the
ability to affect those
returns through its
i. power over the investee
j . It is an investor
controls an investee when
the investor is exposed,
k. or has rights, to variable
returns from its
involvement with the
l. investee and has the
ability to affect those
returns through its
m. power over the investee
n . It is an investor
controls an investee when
the investor is exposed,
o. or has rights, to variable
returns from its
involvement with the
p. investee and has the
ability to affect those
returns through its
q. power over the investee
r . It is an investor
controls an investee when
the investor is exposed,
s. or has rights, to variable
returns from its
involvement with the
t. investee and has the
ability to affect those
returns through its
u. power over the investee
v . It is an investor
controls an investee when
the investor is exposed,
w. or has rights, to variable
returns from its
involvement with the
x. investee and has the
ability to affect those
returns through its
y. power over the investee
It is an investor controls an investee when the investor is exposed, or has rights, to variable returns from its involvement with the investee and has

the ability to affect those returns through its power over the investee.

c. Significant influence

d . It is the power to
participate in the financial
and operating policy
e. decisions of an entity,
but is not control over
those policies.
f. Significant influence may
be gained by share
ownership, statute or
g. agreement.
h . It is the power to
participate in the financial
and operating policy
i. decisions of an entity,
but is not control over
those policies.
j. Significant influence may
be gained by share
ownership, statute or
k. agreement.
l . It is the power to
participate in the financial
and operating policy
m. decisions of an entity,
but is not control over
those policies.
n. Significant influence may
be gained by share
ownership, statute or
o. agreement.
p . It is the power to
participate in the financial
and operating policy
q. decisions of an entity,
but is not control over
those policies.
r. Significant influence may
be gained by share
ownership, statute or
s. agreement.
t . It is the power to
participate in the financial
and operating policy
u. decisions of an entity,
but is not control over
those policies.
v. Significant influence may
be gained by share
ownership, statute or
w. agreement.
x . It is the power to
participate in the financial
and operating policy
y. decisions of an entity,
but is not control over
those policies.
z. Significant influence may
be gained by share
ownership, statute or
aa. agreement.
b b . It is the power to
participate in the financial
and operating policy
cc.decisions of an entity,
but is not control over
those policies.
dd. Significant influence
may be gained by share
ownership, statute or
ee. agreement.
f f . It is the power to
participate in the financial
and operating policy
gg. decisions of an
entity, but is not
control over those
policies.
hh. Significant influence
may be gained by share
ownership, statute or
ii. agreement.
j j . It is the power to
participate in the financial
and operating policy
kk.decisions of an entity,
but is not control over
those policies.
ll. Significant influence may
be gained by share
ownership, statute or
mm. agreement.
n n . It is the power to
participate in the financial
and operating policy
oo. decisions of an
entity, but is not
 control over those
policies.
pp. Significant influence
may be gained by share
ownership, statute or
qq. agreement.
It is the power to participate in the financial and operating policy decisions of an entity, but is not control over those policies. Significant
influence may be gained by share ownership, statute or agreement.

c. Joint control

d . It is the contractually
agreed sharing of control
over an economic
e. activity.
It is the contractually agreed sharing of control over an economic activity.

 Control, significant influence and joint control refer to the degree of one’s party ability to affect the relevant decisions of another.

Examples of related Parties:

1. Parent and its subsidiary

2. Fellow subsidiaries with a common parent

3. Investor and investee relationship where control, joint control or significant influence exists.

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

5. Key management personnel.

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

7. Close family member

8. Post-employment benefit plan

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.

Close members of the family of an individual

a. the individual’s domestic partner and children;

b. children of the individual’s domestic partner; and

c. dependents of the individual or the individual’s domestic partner.

The following are not related parties:

a. Two entities simply because they have a director in common.

b. Two venturers simply because they share joint control over a joint venture.
c. Providers of finance, trade unions, public utilities, and departments an agencies of a government that does not control, jointly
control or significantly influence the reporting entity, simply by virtue of their normal dealings with an entity.
d. d. A customer, supplier, franchisor, distributor or general agent with whom an entity transacts a significant volume of business, simply by
virtue of the resulting economic dependence.

Related Party Transactions

It is a transfer of resources, services or obligations between a reporting entity and a related party, regardless of whether a price is charged.

If there have been transactions between related parties, disclose the nature of the related party relationship as well as information about the
transactions and outstanding balances necessary for an understanding of the potential effect of the relationship on the financial statements.

These disclosures would be made separately for each category of related parties and would include:

a. The amount of the transactions.

b. The amount of outstanding balances, including terms and conditions and guarantees.

c. Provisions for doubtful debts related to the amount of outstanding balances.

d. Expense recognized during the period in respect of bad or doubtful debts due from related parties.

Examples of the kinds 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. Transfers under finance arrangements (including loans and equity contributions in cash or in kind).

f. Provision of guarantees or collateral.

g. Settlement of liabilities on behalf of the entity or by the entity on behalf of another party.

Disclosures

Relationships between parents and subsidiaries

Regardless of whether there have been transactions between a parent and a subsidiary, an entity must disclose the name of its parent and, if different,
the ultimate controlling party.

If neither the entity's parent nor the ultimate controlling party produces financial statements available for public use, the name of the next most senior
parent that does so must also be disclosed.

Management Compensation

Disclose key management personnel compensation in total and for each of the following categories:

a. Short-term employee benefits

b. Post-employment benefits

c. Other long-term benefits

d. Termination benefits

e. Share-based payments

Government Related entities

It is an entity that is controlled, jointly controlled or significantly influenced by a government.

Government related entities; transaction shall disclose the following:

a. Name of the government and the nature of relationship

b. Nature and amount of each individually significant transactions

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

PAS 32 Financial Instruments: Presentation

PAS 32 prescribes the principles for presenting financial instruments as liabilities or equity and for offsetting financial assets and financial liabilities.

PAS 32 complements PFRS 9 Financial Instruments, which prescribes the recognition and measurement of financial assets and financial liabilities,
and PFRS 7 Financial Instruments:

Disclosures, which prescribes the disclosures for financial instruments.

PAS 32 applies to all types of financial instruments except the following for which other standards apply:

a. Investments in subsidiaries, associates and joint ventures;

b. Employer’s rights and obligations under employee benefit plans and share-based payments; and

c. Insurance contracts

PAS 32 applies to instruments designated to be measured at fair value through profit or loss and contracts for the future purchase or delivery of a
commodity or other nonfinancial items that can be settled net.

PRESENTATION

The issuer classifies a financial instrument, or its component parts, as a financial asset, a financial liability or an equity instrument in accordance with
the substance of the contract (rather than its legal form) and the definitions of a financial asset, a financial liability and an equity instrument. When
determining whether a financial instrument is a financial liability or an equity instrument, the overriding consideration is whether the instrument
meets the definition of a financial liability.

FINANCIAL LIABILITY

The entity has a contractual obligation to pay cash or another financial asset or to exchange financial instruments under potentially unfavorable
condition.

EQUITY INSTRUMENT

The entity has no obligation to pay cash or another financial asset or to exchange financial instruments under potentially unfavorable condition.

Financial asset

a. Cash

b. An equity instrument of another entity

c. A contractual right to receive cash or other financial asset from another entity

d. A contractual right to exchange financial instruments with another entity under conditions that are potentially favorable

e. A contract that will or may be settled with the entity’s equity instruments and is NOT classified as the entity’s equity
Financial Liability

a. A contractual obligation to deliver cash or other financial asset to another entity

b. A contractual right to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavorable to the
entity

c. A contract that will or may be settled in the entity’s own equity instruments and is NOT classified as the entity’s own equity instrument

Equity Instrument

Is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities.

CASH is the most basic financial instrument because it is the medium of exchange and the basis of measurement of all financial statement elements

FINANCIAL INSTRUMENT encompasses both financial asset and financial liability but NOT the entity’s own equity instrument

Examples: ordinary shares, non-redeemable preference shares, stock options and warrants

Compound Financial Instruments

Is a financial instrument that, from the issuers perspective contains both a liability and an equity component.

These components are classified and accounted for separately

An example of a compound instrument is convertible bonds are bonds that can be converted into shares of stocks of the issuer when an entity issues
convertible bonds, in effect, it is issuing two instruments

(1) a debt instrument for the bonds payable

(2) an equity instrument for the equity conversion feature

These two components are presented separately in the statement of financial position

Treasury Shares

Are an entity's own shares that were previously issued but were subsequently reacquired but not retired

Are presented separately either in the statement of financial position or in the notes as deduction from equity

No gain or loss arises from the purchase, cell, issue or cancellation of the entity’s own equity instruments. The consideration paid or received from
such transaction is recognized directly in equity.

If there are gains or losses on the purchase or issue one says of the treasury shares, they will not be recorded as gains or losses but instead they will be
recorded in the equity section.

PFRS 9 Financial Instruments

PFRS 9 establishes the financial reporting principles for financial assets and liabilities, particularly their classification and measurement.

Initial Recognition

Financial asset and liabilities are recognized only when the entity becomes a party to the contractual provisions of the instrument.

Classification of Financial Asset

1. Amortized cost

2. Fair Value through other comprehensive income (FVOCI)

3. Fair Value through profit or loss (FVPL)

Basis of Classification (Financial Asset)

1. Business model

2. Contractual cash flow characteristics

Classification at Amortized Cost

1. Hold to collect business model

2. Solely payments of principal and interest on the principal amount outstanding (SPPI)

Classification at Fair Value through Other Comprehensive Income

1. Hold to collect and sell business model

2. Solely payments of principal and interest on the principal amount outstanding (SPPI)

Classification at Fair Value through Profit or Loss

1. Financial asset that does not meet the conditions for measurement at amortized cost or FVOCI is measured at FVPL. This is normally the case for
"held for trading" securities.

Exceptions.

1. Investment in equity instruments at FVOCI

- an entity may make an irrevocable election at initial recognition to classify an investment in equity instruments.

2. Option to Designate a financial asset at FVFVP

-an entity may irrevocably designate a financial asset, at initial recognition as measured at FVPL

BUSINESS MODEL

how an entity manages its financial assets in order to generate cash flows.

- not a financial instrument.

1. Hold to collect

2. Hold to collect and sell

HOLD TO COLLECT BUSINESS MODEL

financial assets are managed to realize cash flows by collecting payments over the life of the instrument. Cash flows will be generated through
collections.

1. Frequency, value, and timing of sales in prior periods

2. Reason for those sales

3. Expectations about future sales activity

A "hold to collect" business model is appropriate even when some sales occur or are expected to occur in the future.

For example, the business model remains appropriate under the following circumstances:

1. Sales of financial assets because of an increase in credit risk.

2. Sales of financial assets with insignificant value, even when such sales are frequent

3. Sales of financial assets that are infrequent, even when the sales have significant value.

4. Sales made close to the maturity.

'Hold to collect and sell' business model

This model is applicable when both collecting contractual cash flows and selling financial assets are integral to achieving the entity's objective of
holding financial assets. Compared to the 'hold to collect' business model, this business model will typically involve greater frequency and value of
sales.

This is because selling financial assets is integral to achieving the business model's objective rather than only incidental to it. There is no threshold.

This model may be appropriate when the entity's objectives are:

1. manage everyday liquidity needs

2. maintain a particular interest yield profile

3. match the duration of the financial assets

Other Business Models

Not held under a "hold to collect" or a "hold to collect and sell" business model is measured at fair value through profit or loss (FVPL). This is the
case for the following:

1. a debt instrument that is neither held under a "hold to collect" nor a "hold to collect and sell" business model

2. an equity instrument that the entity does not elect to classify as FVOCI

3. an equity or debt instrument that meets the definition of a held for trading security.

A held for trading security is a financial asset that is:

1. acquired principally for the purpose of selling it in the near term

2. part of a portfolio of financial instruments that are managed together and for which there is evidence of a recent actual pattern of a short-term
profit-taking

3. a derivative

Contractual Cash Flow Characteristic

Financial assets are classified as either amortized cost of FVOCI if their contractual terms give rise on specified dates to cash flows that are SPPI on
the principal amount standing. If not qualify under this, it is classified as FVPL.

Principal- the fair value of the financial asset at initial recognition.

Interest- consideration for the time value of money

Measurement of Financial Assets

Initial Measurement

- Financial assets are initially measured at fair value plus transaction costs, except FVPL.

- Financial assets classified as FVPL are initially measured at fair value; transaction is expensed immediately.

Fair value of a financial asset on initial recognition is normally the transaction price.

Transaction Cost

incremental cost that are directly attributable to the acquisition, issue or disposal of a financial asset or liability.

Subsequent Measurement

1. amortized cost

2. FVOCI

3. FVPL

Gains and Losses

FVPL Gains and losses on financial assets measured at FVPL are recognized in profit or loss.

FVOCI- MANDATORY

- recognized in other comprehensive income.

FVOCI- ELECTION

- recognized in other comprehensive income.

AMORTIZED COST

- gains or losses on financial assets measured at amortized cost.

- amount at which the financial asset or liability is measured at initial recognition minus principal repayments, plus or minus the cumulative
amortization.
- Reclassification
- -After initial recognition,
financial assets are
reclassified
- only when the entity changes
its business model for
- managing financial assets.
- -Applied prospectively from
the reclassification date.
- -Reclassification date is the
first day of the first reporting
- period following the change in
business model that
- results in an entity
reclassifying financial assets.
- - Only debt instruments can
be reclassified. Equity
- instruments (e.g.,
investments in shares of
stocks) cannot
- be reclassified.
- - Financial assets cannot be
reclassified into or out of the
- “designated at FVPL” and
“FVOCI - election”
- classifications.
- - The initial measurement is
fair value at reclassification
- date, except for a
reclassification from FVOCI to
- Amortized cost where the fair
value on reclassification
- date is adjusted for the
cumulative balance of gains
and
 - losses previously recognized
in OCI
Reclassification

After initial recognition, financial assets are reclassified only when the entity changes its business model for managing financial assets.

Applied prospectively from the reclassification date.

Reclassification date is the first day of the first reporting period following the change in business model that results in an entity reclassifying financial
assets.

Only debt instruments can be reclassified. Equity instruments (e.g., investments in shares of stocks) cannot be reclassified.

Financial assets cannot be reclassified into or out of the “designated at FVPL” and “FVOCI - election” classifications.

The initial measurement is fair value at reclassification date, except for a reclassification from FVOCI to Amortized cost where the fair value on
reclassification date is adjusted for the cumulative balance of gains and losses previously recognized in OCI.

IMPAIRMENT

The impairment requirements of PFRS 9 apply equally to debt-type financial assets that are measured either at amortized cost or at FVOCI.

Impairment gains or losses on debt instruments measured at FVOCI are recognized in profit or loss. However, the loss allowance shall be recognized
in other comprehensive income and shall not reduce the carrying amount of the financial asset in the statement of financial position

An entity recognizes a loss allowance for expected credit losses.

Loss Allowance - allowance for expected credit losses.

Expected Credit Losses- weighted average of credit losses.

Credit loss - difference between all contractual cash flows.

The amount of loss allowance shall reflect the credit quality of the instruments.

1. The entity shall recognize a loss allowance equal to 12-month expected credit losses.

a. 12-month expected credit losses- possible within the 12 months after the reporting date.

b. credit risk- risk that will cause a financial loss.

2. The entity shall recognize a loss allowance equal to lifetime expected credit losses (no objective evidence of impairment) lifetime expected credit
losses- the expected credit losses that result from all possible default events over the expected life of a financial instruments.

3. The entity shall recognize a loss allowance equal to lifetime expected credit losses (has objective evidence of impairment)

Derecognition

1. the contractual rights to the cash flows from the financial asset expire

2. financial assets are transferred and the transfer qualifies for derecognition
MIDTERM

PAS 2 INVENTORIES

The objective of PAS 2 is to prescribe the accounting treatment for inventories. It provides guidance for determining the cost of inventories and for
subsequently recognizing an expense, including any write-down to net realizable value. It also provides guidance on the cost formulas that
are used to assign costs to inventories.

Inventories include assets held for sale in the ordinary course of business (finished goods), assets in the production process for sale in
the ordinary course of business (work in process), and materials and supplies that are consumed in production (raw materials). [PAS 2.6]

However, PAS 2 excludes certain inventories from its scope: [PAS 2.2] I. work in process arising under construction contracts (see PAS 11) II.
financial instruments (see PAS 39) III. biological assets related to agricultural activity and agricultural produce at the point of harvest (see PAS 41).

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)

c. Form of materials or supplies to be consumed in the production process (raw materials and manufacturing supplies)

Examples:

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

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

c. FG, WIP, and raw materials by a manufacturing entity

MEASUREMENT

- Lower of cost and net realizable value

COST

a. Purchase cost

- Purchase price (net of trade discounts and rebates)

- Import duties

- Non-refundable purchase taxes

- Transport and handling costs

b. Conversion costs

- Cost necessary in converting raw materials into finished goods

- Direct labor and production overhead

c. Other costs

- Necessary in bringing the inventories to their present location and condition

Excluded from the cost:

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

b. Storage costs, unless those costs are necessary in the production process
c. Administrative overheads that do not contribute to bringing inventories to their present location

d. Selling costs

Cost Formulas

A. Specific identification

- Used for inventory that are not ordinarily interchangeable

- Segregated for specific projects

- Cost of sales represents actual costs of items sold

- Ending inventory represents actual costs of items on hand

- Not appropriate when inventories consist of large number of items that are ordinary interchangeable

B. FIFO

- Assumed that inventories that were purchased or produced first are sold first

- Unsold inventories are those most recently purchased or produced

- Cost of sales represents cost from earlier purchases

- Ending inventory represents costs from the most recent purchases

C. Weighted Average

- Cost of sales and ending inventory are determined based on the weighted average cost of beginning and all inventories purchased during the periods

NET REALIZABLE VALUE

- Estimated s.p in the ordinary business course less the estimated costs of completion and estimated costs to make the sale

- Different from FV

- Net amount that an entity expects to realize from the sale of inventory in the ordinary course of business while Fv reflects the price which an orderly
transaction to sell the same inventory in the principal market

- An asset shall not be carried at an amount that exceeds its recoverable amount

Cost of an inventory may exceed its recoverable amount then it is written down to NRV

- The amount of written down is recognized as expense

- If NRV increases, the previously written down is reversed, but it shall not exceed the original write-down

- Raw materials inventory is not written down if the finished good in which they will be incorporated are expected to be sold at or above cost. If not,
it is written down to their NRV

- Best evidence is replacement cost

RECOGNITION

- Recognized when they meet the definition of inventory

- Qualify for recognition as assets, such as when the entity obtains control over them

Ownership is not always necessary for control to exist because control can arise from other rights. Entity considers all relevant facts and
circumstances including the following:

A. GOODS IN TRANSIT

- Goods that the seller has already shipped but the buyer has not yet received

- Lack of physical possession may pose a question on which party includes the goods in transit

a. FOB shipping point

- Ownership is transferred to the buyer upon shipment

- Less to the seller’s inventory, add to the buyer’s inventory

b. FOB destination

- Ownership is transferred only when the buyer receives

- Goods is still in the seller’s inventory

B. CONSIGNED GOODS

- An entity (consignor) delivers goods to another party (consignee) who undertakes to sell the goods to end customers on behalf ofthe consignor

- Consignor retains control until they are sold to end customers

- Before sale, the goods is part on the consignor’s inventory

- Recorded through memo entries

Freight and other incidental costs of transferring form part of the cost of the consigned goods.

Repair costs for damages during shipment and storage are charged as an expense.

Commissions

- Consignee is entitled to commission on the sales he makes.

- accounted for as expense by the consignor and as income by the consignee.

- Do not affect the cost of consigned goods

- Commission is paid in advance, consignor records the advanced commission as receivable and not as cost of inventory

C. INVENTORY FINANCING AGREEMENTS

a. Product financing agreement

- Seller sells inventory but assumes an obligation to repurchase it

- Does not result to transfer of control over the asset

- Seller retains ownership over the inventory

b. Pledge of inventor

- Borrower uses its inventory as collateral

- Does not result to transfer of control

- Borrower retains ownership

c. Loan of inventory

- Entity borrows inventory from another to be replaced with the same kind of inventory

- Results to transfer of control over the asset

- Borrow includes the loaned goods in its inventory