Accounting- a service activity - Classifying (posting to the ledger—a group of

- Its function is to provide quantitative information, accounts which are systematically categorized
primarily financial in nature, about economic into specific accounts) sorting or grouping of
entities, that is intended to be useful in making similar and interrelated economic transactions
economic decision into their respective classes
- Overall objective is to provide quantitative - Summarizing- preparation of financial
financial information about a business that is statements (statement of financial position,
useful to owners and creditors in making income statement, statement of comprehensive
economic decisions income, statement of changes in equity, and
- Its essence is decision usefulness statement of cash flows)
- art of recording, classifying and summarizing in a R.A. 10912 Continuing Professional Development (CPD)- the
significant manner and in terms of money, inculcation and acquisition of advanced knowledge, skill,
transactions and events which are in part at least proficiency and ethical and moral values after the initial
of a financial character and interpreting the registration of the CPA for assimilation into practice of
results thereof (Committee on Accounting lifelong learning; raises and enhances technical skill and
Terminology of the American Institute of Certified competence of CPA
Public Accountants) - CPD credit units- credit hours required for the
- Process of identifying, measuring and renewal of CPA license and accreditation of a CPA
communicating economic information to permit to practice accountancy profession every 3 years;
informed judgment and decision by users of the under the BOA resolution CPAs are required to
information (American Accounting Association in comply with 120 CPD credit units in compliance
its Statement of Basic Accounting Theory) period of 3 years (excess credit units are not taken
- Subject matter is only economic activities over the next 3 years unless it is a masteral or
(transactions) or the measurement of economic doctoral degree); a CPA is permanently exempted
resources and economic obligations only upon reaching the age of 65 years
Measuring– assigning of peso amounts to the accountable Financial accounting- primarily concerned with the
economic transactions and events recording of business transactions and the preparation of
Communicating- preparing and distributing accounting financial statements; it focuses on general purpose
reports to potential and existing users of accounting reports (financial statements) intended for external users
information (creditors and investors)
- Recording (journalizing) systematically Managerial accounting- accumulation and preparation of
maintaining a record of all economic transactions financial reports for internal users only; the area of
in their respective classes accounting that emphasizes developing accounting
information for use within the entity
• JUNE 1973
International accounting standards committee (IASC)- an independent private sector body, with the objective of
achieving uniformity in the accounting principles which are used by businesses and other organizations for financial
reporting around the world
Objectives;
1. To formulate and publish in the public interest accounting standards to be observed in the presentation of
financial statements and to promote their worldwide acceptance and observance
2. To work generally for the improvement and harmonization of regulations, accounting standards and procedures
relating to the presentation of financial statements
• NOVEMBER 18, 1981
The development of generally accepted accounting principles is formalized initially through the creation of
Accounting Standards Council (ASC)—organized by PICPA, adopted the Statements of Financial Accounting Standards
(SFAS) from the US previous accounting setting body, the Financial Accounting Standards Board (FASB)
- ASC comprises of 9 members with a chairman; 1 SEC, 1 BOA, 1 BSP, 1 FEP- financial executives of the Philippines,
represents the general public; body of users of financial information., 4 PICPA
• 1997
Started the process in which the Philippines moved from USA GAAP to International Financial Reporting Standards
(IFRS)
• 2001
The International Accounting Standards Committee (IASC) was replaced by the International Accounting Standards
Board (IASB) under the umbrella of the International Financial Reporting Standards Foundation
The IASB create and promulgate standards which are the International Financial Reporting Standards (IFRS)
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 IASB standard setting process;
1. Research
2. Discussion paper
3. Exposure draft
4. Accounting standard
• MAY 13, 2004
Philippine Accountancy Act of 2004 (R.A. 9298)
An at regulating the practice of Accountancy in the Philippines, repealing for the purpose presidential decree no. 692
(revised accountancy law) appropriating funds therefor and for other purposes
Board of Accountancy (BOA)- body authorized by law to promulgate rules and regulations affecting the practice of the
accountancy profession in the Ph; responsible for preparing and grading the Ph CPA examination which is offered
twice (May and October) a year
Certified public accountant, firms and partnerships of CPAs, including partners and staff members thereof are
required to register with BOA and PRC for the practice of public accountancy; PRC shall issue a certificate of
registration valid and renewable every 3 years
3 main areas of CPA profession
a. Public accounting
o Auditing- primary service offered by most public accountants; examination of financial statements
by independent CPA for the purpose of expressing an opinion as to the fairness with which the
financial statements are prepared
o Taxation- preparation of annual income tax returns and determination of tax consequences of
certain proposed business endeavors
o Management advisory services- services to clients on matters of accounting, finance, business
policies, organization procedures, product costs, distribution etc. it basically include: advice on
installation and modification of computer system or accounting system, quality control, budgeting,
forward planning and forecasting, design and modification of retirement plans, advice on mergers
and consolidations
b. Private accounting- assist management in planning and controlling the entity’s operations; maintaining the
records, producing the financial reports, preparing the budgets and controlling and allocating the resources
of an entity
c. Government accounting- encompasses the process of analyzing, classifying, summarizing, and
communicating all transactions involving the receipt and disposition of government funds and property and
interpreting the results thereof; its focus is the custody and administration of public funds
• JANUARY 2005
The full transition and effectiveness of the IFRS in the Philippines
Factors considered in deciding to move totally to international accounting standards;
a. Support of IAS by Ph organizations (SEC, BOA, and PICPA)
b. Increasing internalization of business which has heightened interest in a common language for financial
reporting
c. Improvement of IAS or removal of free choices in accounting treatments
d. Increasing recognition of IAS by the world bank, Asian development bank, and world trade organization
• 2006
Financial Reporting Standards Committee (FRSC)
- replaces the Accounting Standards Council (ASC)
- the accounting standard setting body created by the Professional Regulation Commission upon recommendation
of the Board of Accountancy to assist the BOA in carrying out its powers and functions provided under R.A. 9298
- comprises of 15 members with a chairman; 1 BOA, 1 SEC, 1 BSP, 1 BIR, 1 COA, 1 FINEX, 2 ACPAPP, 2 ACPACI, 2 ACPAE,
2 GACPA
• AUGUST 2006
Philippine Interpretations Committee (PIC) formed by the FRSC and replaced the Interpretations Committee (IC)
formed by the ASC last May 2000
- Its role is to prepare interpretations of PFRS for approval of the FRSC and to provide timely, authoritative guidance
on financial reporting issues not specifically addressed in current PFRS
- Its counterpart in UK is the International Financial Reporting Interpretations Committee (IFRIC) which also
replaced the Standing Interpretations Committee (SIC)
Accounting Standards- network of broad guidelines, rules and procedures that presents GAAP
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 - Its overall purpose is to identify the proper accounting practices for the preparation and presentation of financial
statements
- Creates a common understanding between preparers and users particularly on the measurement of assets and
liabilities—ensure comparability and uniformity of financial statements
Generally Accepted Accounting Principles (GAAP)
- accounting rules, procedures, and practices, and standards followed in the preparation and presentation of
financial statements—like laws that must be followed in financial reporting
- Developed the basis of experience, reason, custom, usage and practical necessity—a political process which
incorporates political actions of various interested user groups as well as professional judgement, logic and
research

Philippine Institute of
Certified Public
Accountants

Association of Association of Association of Government

certified public certified public
accountants in accountants in
public practice education
Conceptual framework
- Complete, comprehensive, and single
document promulgated by the IASB
- Summary of the terms and concepts that
underlie the preparation and presentation of
financial statements for external users; it
describes the concepts for general purpose
financial reporting; an attempt to provide an
overall theoretical foundation for accounting
- Intended to guide standard setters, preparers
and users of financial information in the
preparation and presentation of financial
statements
- Underlying theory for the development of
accounting standards and revisions of
previously issued standards
Conceptual framework provides the foundation for
standards that:
a. Contribute to transparency by enhancing
international capability and quality of financial
information
b. Strengthen accountability by reducing
information gap
c. Contribute to economic efficiency by helping
investors identify opportunities and risks across
the world
Purposes of revised conceptual framework
a. Assist the IASB to develop IFRS based on
consistent concepts
b. Assist preparers of financial statements to
develop consistent accounting policy when no
standard applies to a particular transaction or
other event or where an issue is not yet addressed
by an IFRS
certified public association of
accountants in certified public
commerce and accountants
industry
c. Assist preparers of financial statements to
develop accounting policy when a standard
allows a choice of an accounting policy
d. Assist all parties to understand and interpret the
IFRS
Authoritative status- standard overrides the conceptual
framework. In the absence of a standard that specifically
applies to a transaction, management shall consider the
applicability of the conceptual framework in developing
and applying an accounting policy that results in a relevant
and reliable information; the conceptual framework is not
an international financial reporting standard, nothing in
the conceptual framework overrides any specific IFRS; in
case of conflict, the requirements of the IFRS shall prevail
Users of financial information
a. Primary users- parties to whom general purpose
financial reports are primarily directed; such
users cannot require reporting entities to provide
information directly to them, therefore must rely
om general purpose financial reports
- Existing and potential investors- concerned
with the risk inherent in and return provided
by their investments; to determine whether
they should buy, hold, or sell; enables them to
assess the ability of the entity to pay
dividends
- Existing and potential lenders and other
creditors- enables them to determine
whether their loans, interest thereon and
other amounts owing to them will be paid
when due
b. Other users- parties that may find the general-
purpose financial reports useful, but the reports
are not directed to them

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 - Employees- interested about the stability and
profitability of the entity; assess the ability of
the entity to provide remuneration,
retirement benefits and employment
opportunities
- Customers- interested about the continuance
of an entity especially when they have a long-
term involvement with or are dependent on
the entity
- Government and their agencies- interested in
the allocation of resources and therefore the
activities of the entity; requires information to
regulate the activities of the entity, determine
taxation policies and basis for national
income and similar statistics
- Public- provides information about the trend
and the range of its activities
Scope of revised conceptual framework
1. Objective of financial reporting- provide financial
information about the reporting entity that is
useful to existing and potential investors, lenders
and other creditors in making decisions about
providing resources to the entity; The principal
way of providing financial information to external
users is through annual financial statements;
financial reporting encompasses not only
financial statements but also financial highlights,
summary of important financial figures, analysis
of financial statements and significant ratios;
financial reports also include nonfinancial
information such as the description of major
products and listing of corporate officers and
directors
The conceptual framework places more emphasis on the
importance of providing information needed to assess the
management stewardship of the entity’s economic
resource. Specific objectives of financial reporting:
a. Provide information useful in making
decisions about providing resources to the
entity
b. Information useful in assessing the cash flow
prospects of the entity
c. Information about the entity resources,
claims and changes in resources and claims
Financial position- information about the entity’s economic
resources (assets) and the claims (liabilities) against the
reporting entity; help users identify the entity’s financial
strength and weakness; assess the entity’s liquidity,
solvency and the need for additional financing
Liquidity- availability of cash in the ear future to cover
currently maturing obligations
Solvency- availability of cash over a long term to meet
financial commitments when they fall due
Financial performance (results of operations)-
information about the effects of transactions and other
events that change the economic resources and claims;
level of the income earned through the efficient and
effective use of its resources; helps users understand the
return that the entity has produces on the economic
resources; useful in assessing the entity’s ability to
generate future cash inflows from operations
Accrual accounting- depicts the effects of transactions on
an entity’s economic resources and claims in the periods in
which those effects occur even if the resulting cash
receipts and payments occur in a different period; income
is recognized when earned, expense is recognized when
incurred; this provides better basis for assessing past and
future performance
Limitations of financial reporting:
a. It does not and cannot provide all information that
primary users need
b. Not designed to show the value of an entity but the
reports provide information to help the primary
users estimate the value of the entity
c. Provide common information
d. Based on estimate and judgement rather than
exact depiction
Management stewardship- information about how
efficiently and effectively management has discharged its
responsibilities to use the entity’s economic resources;
predicting how management will use the entity’s economic
resource in future periods
2. Qualitative characteristics of useful financial
information- qualities or attributes that make
financial accounting information useful
Application of qualitative characteristics:
1. Identify the economic phenomenon that has the
potential to be useful
2. Identify the type of information about the
phenomenon that would be most relevant and can
be faithfully represented
3. Determine whether the information is available
- Fundamental qualitative characteristics-
should be both present; related to the
substance or content
o Relevance- capacity of the
information to influence a decision;
information must be capable of
making a difference in the decisions
made by users
➢ Predictive value- used as an
input to processes
employed by users to
predict future outcome;
increase the likelihood of
correctly/ accurately
predicting or forecasting
outcome of events
➢ Confirmatory value-
provides feedback about
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 previous evaluations;
enables users confirm
earlier expectations
Materiality (doctrine of convenience)- strict adherence to
GAAP is not required when the items are not significant
enough to affect the evaluation, decision and fairness of
the financial statements; sub quality of relevance based on
the nature or magnitude or both items to which the
information relates
o Faithful representation- financial
reports represent economic
phenomena or transactions in words
and numbers; descriptions and
figures must match what really
existed or happened; actual effects
of the transactions shall be properly
accounted for and reported in the
financial statements
➢ Completeness- information
should be presented in a
way that facilitates
understanding and avoids
erroneous implications;
includes all the information
necessary for a user to
understand the
phenomenon being depicted
including all necessary
descriptions and
explanations
➢ Neutrality- without bias; not
slanted, weighted,
emphasized, de-
emphasized or otherwise
manipulated to increase the
probability that financial
information will be received
favorably or unfavorably by
users
Prudence- exercise of care and caution when dealing with
the uncertainties in the measurement process such that
assets or income are not overstated, and liabilities or
expenses are not understated
Conservatism- when alternatives exist, the alternative
which has the least effect on equity should be chosen; in
case of doubt, record any loss (contingent loss is
recognized as a provision, if it is probable and the amount
is reliably measured) and do not record any gain
(contingent gain is only disclosed)
➢ Free from error
(transparency)- no error or
omissions on the
description of the
phenomenon; does not
mean perfectly accurate in
all respect but an estimate
should be disclosed as an
estimate
Measurement uncertainty- arises when monetary
amounts in financial reports cannot be observed directly
and must instead be estimated
Substance over form- if information is to represent
faithfully the transactions it purports to represent, it is
necessary that the transactions are accounted in
accordance with their substance and reality and not
merely their legal form; economic substance of
transactions are emphasized when economic substance
differs from legal form
- Enhancing qualitative characteristics- relate
to the presentation or form; intend to increase
the usefulness of the financial information
that is relevant and faithfully represented
o Comparability- ability to bring
together for the purpose of noting
points of likeness and difference;
enable users to identify and
understand similarities and
dissimilarities among items
➢ Intracomparability
(horizontal comparability)-
comparability within an
entity
➢ Intercomparability
(dimensional
comparability)-
comparability across
entities
Consistency- use of the same method for the same item;
uniform application of accounting method
o Understandability- information must
be comprehensible or intelligible if it
is to be most useful; information
should be presented and expressed
in terminologies that users
understands
o Verifiability- different
knowledgeable and independent
observers could reach consensus; it
is supported by evidence so that an
accountant that would look into the
same evidence would arrive at the
same economic decision or
conclusion
➢ Direct verification- through
direct observation
➢ Indirect verification-
checking the inputs to a
model, formula or other
technique and recalculating
the inputs using the same
methodology
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 o Timeliness- financial information
must be available/ communicated
early enough when a decision is to be
made
Cost constraint- cost is a pervasive constraint on the
information that can be provided by financial reporting;
cost is justified by the benefit derived from the financial
information; consideration of the cost incurred in
generating financial information against the benefit to be
obtained from having the information; benefit should
exceed the cost incurred; judgmental process
3. Financial statements and reporting entity
Financial statements- means by which information
accumulated and processed in financial accounting is
periodically communicated to the users; end product/ main
output of financial accounting process; provide
information about economic resources of the reporting
entity, claims against the entity and changes in the
economic resources and claims; it provides financial
information useful to users in:
• Assessing future cash flows
• Assessing management stewardship of the
entity’s economic resources
Financial information is provided in:
• Statement of financial position- recognizing
assets, liabilities and equity
• Statement of financial performance- recognizing
income and expense
• Other statements and notes by presenting and
disclosing information about:
o Recognized assets, liabilities, equity,
income and expenses
o Unrecognized assets and liabilities
o Statement of cash flows
o Statement of changes in equity
o Notes to the financial statement-
method, assumption and judgement
in estimating amount presented
Types of financial statements:
1. Consolidated financial statements- comprises of
both the parent and its subsidiaries as a single
entity; it is useful for the primary users of the
parents for the assessment of future net cash
inflows to the parent
Parent- entity that exercises control over the subsidiaries
2. Unconsolidated financial statements- financial
statement of the parent alone, not about those of
its subsidiaries
3. Combined financial statements- provide financial
information of two or more entities not linked as a
parent and subsidiary relationship
Reporting entity- entity required or chooses to prepare
financial statements; it can be a single entity, a portion of
an entity or can comprise more than one entity; not
necessarily a legal entity
Reporting period
- Interim basis (e.g. 3 months, 6 months, 9
months) optional
- Annual basis- period of 12 months
Assets, liabilities and equity at the end of the reporting
period
Income and expense during the reporting period
Underlying assumptions (postulates)- basic notions or
fundamental premises on which the accounting process is
based; serve as a foundation of accounting in order to avoid
misunderstanding but rather enhance the understanding
and usefulness of the financial statements
Going concern (continuity assumption)- in the absence of
evidence to the contrary, the entity is continuing in
operation indefinitely; financial statements are prepared
in the assumption that the entity will continue in operations
for the foreseeable future; going concern is the very
foundation of the cost principle
4. Elements of financial statements- quantitative
information; involves a process of classification
and subclassification
Asset- present economic resource controlled by the entity
as a result of past events
o Economic resource- a present right that has the
potential to produce economic benefits (not
future)
Essential characteristics:
a. Present economic resource
b. Right that has the potential to produce economic
benefits
• Right that correspond to an obligation of
another entity
- Receive cash, goods and
services
- Exchange economic resources
with another party in favorable
terms
- Benefit from an obligation if a
specified uncertain future event
occurs
• Right that des not correspond to an
obligation of another entity
- Right over physical objects
- Over intellectual property
• Rights established by contract or
legislation
c. Controlled by an entity as a result of past events
Liability- present obligation to transfer an economic
resource as a result of past events
Essential characteristics:
a. Entity has an obligation
b. Obligation to transfer an economic resource
c. Present obligation that exists as a result of past
event
Obligation- duty/ responsibility that an entity has no
practical ability to avoid; can either be legal (enforceable
as a consequence of a binding contract or statutory
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requirement) or constructive (arise from normal business
practice, custom and a desire to maintain good business
relations or act in equitable manner)
Equity- the residual interest in the assets of the entity after
deducting all the liabilities
Income- increase in assets, decrease in liabilities that
result in increases in equity, other than those relating to
contributions from equity holders
o Revenue- arises in the course of the ordinary
regular activities
o Gain- other items that meet the definition of
income and do not arise in the course of the
ordinary regular activities
Expense- decreases in assets, increases in liabilities that
result in decreases in equity, other than those relating to
distributions to equity holders; arise in the course of
ordinary business activities
o Losses- do not arise in course of ordinary
business activities
5. Recognition and derecognition
Recognition- process of capturing for inclusion in the
financial statements an item that meets the definition of an
asset, liability, equity, income or expense; items are
recognized only when their recognition provides users
with information both relevant and faithfully represented
Derecognition- removal of all part or part of a recognized
asset or liability from the statement of financial position;
occurs when an item no longer meets the definition of an
asset or a liability; occurs when n entity loses control of all
or part of an asset/ liability
6. Measurement- quantifying in monetary terms the
elements in the financial statements
a. Historical cost (entry value)- asset: cost incurred
in acquiring or creating the asset comprising the
consideration paid plus transaction cost; liability:
consideration received to incur the liability minus
transaction cost; application is to measure
financial asset and liability at amortized cost—
estimate future cash flows discounted at a rate
determined at initial recognition
b. Current value
• Fair value (exit value)- asset: price that
would be received to sell an asset in an
orderly transaction between market
participants at measurement date;
liability: price that would be paid to
transfer a liability in an orderly
transaction between market participants
at measurement date
• Value in use (exit value)- present value of
the cash flows that an entity expects to
derive from the use of an asset and from
the ultimate disposal
• Fulfillment value (exit value)- present
value of cash that an entity expects to
transfer in paying or settling a liability
• Current cost (entry value)- asset: cost of
an equivalent asset at the measurement
date comprising the consideration paid
and transaction cost; liability:
consideration that would be received
less any transaction cost at
measurement date
7. Presentation and disclosure
Classification- sorting of assets, liabilities, equity, income
and expenses based on shared or similar characteristics
Aggregation- adding together assets, liabilities, equity,
income and expenses that have similar or shared
characteristics and are included in the same classification;
makes information more useful by summarizing a large
volume of detail
8. Concepts of capital and capital maintenance
Capital maintenance approach- net income occurs only
after the capital used from the beginning of the period is
maintained; net income is the amount an entity can
distribute to its owners and be as well of at the end of the
year as at the beginning
o Return of capital- erosion of the capital invested
in the entity
o Return on capital- amount in excess of the
shareholder’s original investment
Financial capital- monetary amount of the net assets
contributed by shareholders and the amount of the
increase in net assets resulting from earning retained by
the entity; capital is synonymous with net assets or equity
of the entity
Physical capital- quantitative measure of the physical
productive capacity to produce goods and services; should
be adopted if the main concern of the users is the operating
capability of the entity—the resource or fun needed to
achieve that operating capability/capacity; net income
occurs when the productive capital of the entity exceeds
the productive capital at the beginning of the period
PAS 1 Presentation of financial statements
*general purpose financial statements are directed to
common users and not to specific users
Components of financial statements
1. Statement of financial position
2. Income statement
3. Statement of comprehensive income
4. Statement of changes in equity
5. Statement of cash flows
6. Notes comprising a summary of significant
accounting policies and other explanatory notes
Frequency of reporting
Financial statements should be presented at least
annually. If not (longer or shorter than a year), the entity
shall disclose:
1. Period covered by the financial statement
2. Reason
3. Fact that amount presented are not comparable
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*operating cycle (if silent, assumed to be 12 months)- time
between the acquisition of assets for processing and their
realization in cash or cash equivalents
PAS 1, par. 66 classification of current assets are:
a. Asset is cash or cash equivalent unless restricted
for more than 12 months after the reporting period
b. Entity holds the asset primarily for trading
c. Expects to realize the asset within 12 months after
reporting period
d. Intends to sell or consume within the entity’s
normal operating cycle
PAS 1, par. 54 as a minimum, the line items under current
assets are:
a. Cash and cash equivalents
b. Financial at fair value and other investments in
quoted equity instruments
c. Trade and other receivables
d. Inventories
e. Prepaid expenses
Noncurrent assets include:
a. Property, plant and equipment
PAS 16, par. 6 defines PPE as tangible assets which are held
by an entity for use in production or supply of goods and
services, rental, administrative purposes and are
expected to be used more than one period; most PPE
except land are presented at cost less accumulated
depreciation
b. Long term investments
IASC defines investment as an asset held by an entity for
the accretion of wealth through capital distribution, such
as interest, royalties, dividends and rentals, capital
appreciation or other benefits to the investing entity such
as those obtained through trading relationships
c. Intangible assets
Identifiable nonmonetary asset without physical
substance—franchise, copyright, lease, right, trademark
d. Deferred tax assets
e. Other noncurrent assets
PAS 1, par. 69 classification of current liabilities:
a. The entity expects to settle the liability within the
entity’s normal operating cycle
b. Holds the liability primarily for trading
c. Due to be settled within 12 months after reporting
period
d. Does not have an unconditional right to defer
settlement of the liability 12 months after
reporting period
It is still classified as current even if:
a. original term was for a period longer than 12
months
b. agreement to refinance/reschedule payment
after the reporting period/ before the financial
statements are authorized for issue
Noncurrent liabilities:
a. Noncurrent portion of long-term debt
b. Finance lease liability
c. Deferred tax liability
d. Long-term obligations to co. officers
e. Long-term deferred revenue
Presentation (as a minimum);
a. Trade and other payables- line item
b. Current provisions
c. Short term borrowings
d. Current portion of long-term debt
e. Current tax liability
Discretion to refinance
Refinancing on a long-term basis on or before the
reporting period, refinancing is an adjusting event and
therefore obligation is classified as noncurrent
Discretion to refinance (MUST BE AT THE DISCRETION OF
THE ENTITY—otherwise, it is classified as a current liability)
for at least 12 months after the reporting period, obligation
is classified as noncurrent even if it would otherwise be
due within a shorter period
Reason; obligation is considered to form part of the entity’s
long-term refinancing because the entity has an
unconditional right under the loan agreement to defer
payment for 12 months after the end of the reporting period
Covenants- attached to borrowing agreements which
represent undertakings by the borrower
• Restrictions on the borrower as to undertaking
further borrowings, paying dividends, maintaining
specified level of working capital, etc.
• If certain conditions are breached, liability
becomes payable on demand
o Effect; PAS 1 par. 74, liability is classified
as current even if the lender has agreed,
before and after the reporting period not
to demand payment because of the
breach; borrower does not have an
unconditional right to defer payment 12
months after the reporting period
o Par. 75 liability is classified as
noncurrent if the lender has agreed on or
before the end of reporting period to
provide a grace period ending 12 months
after the end of the reporting period
Notes to the financial statements- narrative description or
disaggregation of items presented in the financial
statements and info about items that do not qualify for
recognition; used to report info that do not fit into the body
of the financial statements in order to enhance the
understandability ; its purpose is to provide necessary
disclosures required by the PFRS
Forms of the statement of financial position
a. Report form- sets forth the 3 major sections in a
downward form
b. Account form- assets on the left side; liabilities
and equity on the right side
Income statement- presents income, expenses, gains,
losses and net income or loss recognized during a period
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Comprehensive income- change in equity during a period
resulting from transactions and other events, other than
changes resulting from transactions with owners in their
capacity as owners; it includes
o Components of profit or loss- total income less
expenses; bottom line in the traditional income
statement
o Components of other comprehensive income-
items of income and expenses including
reclassification adjustment that are not
recognized in profit or loss
Transaction approach- traditional preparation of the
income statement in conformity with accounting
standards
PAS 1, par 82A, presentation of OCI shall present line items
for amounts during the period classified by nature;
a. OCI that will be reclassifies subsequently to
profit/loss when specific conditions are met
o Unrealized gain/loss on debt investment
at fair value
o Gain/loss from translation of financial
statements of a foreign operation
o Unrealized gain/loss from derivative
contracts designated as cash flow hedge
b. OCI that will not be reclassified subsequently to
profit/loss but to retained earnings
o Unrealized gain/loss on equity
investment measured at fair value
o Revaluation surplus
o Remeasurements of defined benefit plan;
actuarial gain or loss
o Change in fair value attributable to credit
risk of a financial liability at fair value
PAS 1 par. 87, mandates that an entity shall not present any
items of income and expense as extraordinary either on
the face of the income statement/comprehensive income
or notes
Items to disclose on the face of the income
statement/comprehensive income;
a. Profit or loss for the period attributable to
noncontrolling interest and owners of the parent
b. Total comprehensive income for the period
attributable to noncontrolling interest and
owners of the parent
PAS 1, par 99, entity shall present an analysis of expenses
recognized in profit or loss using a classification based on
function or nature, whichever provides a more reliable or
relevant info
Statement of retained earnings- changes affecting
directly the retained earnings and relates the income
statement to the statement of financial position
Data affecting the retained earnings that should be clearly
disclosed;
a. Profit or loss
b. Prior period errors
c. Dividends declared and paid
d. Effects of change in accounting policy
e. Appropriation of retained earnings
Statement of changes in equity- shows the movements in
the elements or components of the shareholders’ equity;
statement of retained earnings is no longer a required
basic but a part of the statement of changes in equity
Statement of cash flows- summarizes the operating
(current), investing (equity based) and financing
(noncurrent) activities of an entity
GENERAL GUIDES TO FINANCIAL STATEMENTS
PREPARATION
A. Financial Reporting Framework
The financial statements that shall be prepared and filed
by entities covered by this Rule shall be in accordance with
the financial reporting framework as prescribed under this
section.
• LARGE AND/OR PUBLICLY-ACCOUNTABLE
ENTITIES
1. Total assets of more than P350 Million or total
liabilities of more than P250 Million
2. required to file financial statements under Part II
of SRC Rule 68
3. in the process of filing their financial statements
for the purpose of issuing any class of instruments
in a public market
4. holders of secondary licenses issued by
regulatory agencies.
Large and/or publicly-accountable entities shall use as
their financial reporting framework the Philippine
Financial Reporting Standards (“PFRS”) as adopted by the
Commission. However, a set of financial reporting
framework other than the PFRS may be allowed by the
Commission for certain sub-class (e.g., banks, insurance
companies) of these entities upon consideration of the
pronouncements or interpretations of any of the bodies
• SMALL AND MEDIUM-SIZED ENTITIES
1. Total assets of between P3M to P350 Million or
total liabilities of between P3M to P250 Million. If
the entity is a parent company, the said amounts
shall be based on the consolidated figures
2. not required to file financial statements under
Part II of SRC Rule 68
3. not in the process of filing their financial
statements for the purpose of issuing any class of
instruments in a public market
4. not holders of secondary licenses issued by
regulatory agencies.
SMEs shall use as their financial reporting framework the
Philippine Financial Reporting Standards for SMEs (“PFRS
for SMEs”) as adopted by the Commission. However, the
following SMEs shall be exempt from the mandatory
adoption of the PFRS for SMEs and may instead apply, at
their option, the PFRS:
- An SME which is a subsidiary of a parent
company reporting under the PFRS
CFAS REVIEWER
ASTI
 - subsidiary of a foreign parent company which total assets or total liabilities would be
will be moving towards International considered significant.
Financial Reporting Standards (“IFRS”) • MICRO ENTITIES
pursuant to the foreign country’s published 1. Total assets and liabilities are below P3 Million
convergence plan 2. not required to file financial statements under
- subsidiary of a foreign parent company and Part II of SRC Rule 68
has been applying the standards for a non- 3. not in the process of filing their financial
publicly accountable entity for local reporting statements for the purpose of issuing any class of
purposes. It is considering moving to PFRS instruments in a public market
instead of the PFRS for SMEs in order to align 4. not holders of secondary licenses issued by
its policies with the expected move to full regulatory agencies.
IFRS by its foreign parent company pursuant - Micro entities have the option to use as their
to its country’s published convergence plan financial reporting framework either the
- significant joint venture or associate, is part income tax basis, accounting standards in
of a group that is reporting under the PFRS effect as of December 31, 2004 or PFRS for
- branch office or regional operating SMEs, provided however, that the financial
headquarter of a foreign company reporting statements shall at least consist of the
under the IFRS Statement of Management’s Responsibility,
- has a subsidiary that is mandated to report Auditor’s Report, Statement of Financial
under the PFRS Position, Statement of Income and Notes to
- has a short term projection that show that it Financial Statements, all of which cover the
will breach the quantitative thresholds set in two-year comparative periods, if applicable.
the criteria for an SME. The breach is expected - if an entity uses a basis of accounting other
to be significant and continuing due to its than the PFRS for SMEs in the preparation of
long-term effect on the company’s asset or its financial statements, its management
liability size shall assess the acceptability of such basis of
- has a concrete plan to conduct an initial public accounting in the light of the nature of the
offering within the next two years entity and the objective of the financial
- has been preparing financial statements statements, or the requirements of the law or
using PFRS and has decided to liquidate; regulators.
Such other cases that the Commission may consider as
valid exceptions from the mandatory adoption of PFRS for
SMEs.
- An SME availing of any of the above-
mentioned grounds for exemption shall
provide a discussion in its notes to financial
statements of the facts supporting its
adoption of the PFRS instead of the PFRS for
SMEs.
- If an SME that uses the PFRS for SMEs in a
current year breaches the floor or ceiling of
the size criteria at the end of that current
year, and the event that caused the change is
considered “significant and continuing”, the
entity shall transition to the applicable
financial reporting framework in the next
accounting period. If the event is not
considered “significant and continuing”, the
entity can continue to use the same financial
reporting framework it currently uses.
- The determination of what is “significant and
continuing” shall be based on management’s
judgment taking into consideration relevant
qualitative and quantitative factors. As a
general rule, 20% or more of the consolidated

CFAS REVIEWER
ASTI