Intermediate Accounting 3 (Reviewer)

CHAPTER 1: STATEMNT OF FINANCIAL POSITION

Financial Statements- ‘structured representation of an entity’s financial position and

results of its operation.’
 End product of the reporting process; the information gathered and processed is
periodically communicated to users.

General Purpose Financial Statements (Financial Statements)- ‘those intended to

meet the needs of users who are not in a position to require an entity to prepare
reports tailored to their particular information needs.’
 Cater to most of the common needs of a wide range of external users.
 Subject matter of Conceptual Framework and PFRSs.

Purpose of Financial Statements

1. Primary objective: provide information about the Financial Position, Financial
Performance and Cash Flow of a entity that is useful to a wide range of users in
making economic decisions.
2. Secondary Objective:show the results of management stewardship over the
entity’s resources.

FS provide the information about an entity’s: Assets (Economic Resources),

Liabilities (Economic Obligations), Equity, Income, Expenses, Contribution by and
distribution to owners, Cash Flows.

Complete Set of Financial Statements

1. Statement of Financial Position (or Balance Sheet)
2. Statement of Profit or Loss and Other Comprehensive Income (SoCI)
3. Statement of Changes in Equity
4. Statement of Cash Flows
5. Notes; (Comparative Information)
6. Additional Statement of Financial Position (required only when certain instances
occur)

Reports that presented outside the FS are: Financial Review’s by management,

Environmental Reports, Value added statements, are outside the scope of PFRS.

General Features of Financial Statements

1. Fair Presentation- faithfully representing; fairly presented financial statements;
proper selection and application of accounting policies; proper presentation of
information; provision of additional disclosures.
 Inappropriate accounting policies cannot be rectified by mere disclosure.
 PAS1 requires Explicit and Unreserved Statement of such compliance in the
notes. Permits departure from a PFRS requirement if the relevant regulatory
framework requires or allows such a departure.

2. Going Concern- GC basis unless the entity has an intention to liquidate or has no
other alternative but to do so; taking into account all available information about the
future, which is at least, but not limited to, 12 months from the reporting period.

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 3. Accrual Basis of Accounting- All FS shall be prepared using this except for the
Statement of Cash Flows (Cash Basis).

4. Materiality and Aggregation- Each material class of similar items (called Line
Item) is presented separately. Dissimilar items are presented separately unless they
are immaterial.

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.
 Presenting Gains or Losses (ex. Gain/Loss on disposal)
 Net amount the unrealized Gains and Losses Foreign Currency (ex. Gain/Loss on
Foreign Exchange)
 Loss from a provision net (Ex. Loss from provision)
 Measuring assets net of valuation allowances is not offsetting.

6. Frequency of Reporting- FS are prepared at least annually. If an entity changes

its reporting period to a period longer or shorter than 1 year, it shall disclose the ff:
Period Covered, Reason, and Fact.

7. Comparative Information- PAS1 requires the entity to resent comparative

information and in addition to the minimum requirement.

Additional Statement of Financial Position

 Applies an accounting policy Retrospectively, makes retrospective restatement
of items, or Reclassifies items in its FS.
 Has a material effect on the information in the SFP at the beginning of the
preceding period.

8. Consistency of Presentation- presentation and classification of items in the FS is

retained from one period to the next unless a change in presentation. Required by
PFRS or Results in information that is reliable and more relevant.

Structure and Content of Financial Statements

1. Name of the reporting Entity
2. Statements are for the Individual entity or group of entities
3. Date (At the end of the reporting period or the period covered)
4. Presentation Currency
5. Level of rounding (e.g. Thousands, Millions, etc.)

Management’s Responsibility over Financial Statements

 Responsible for an entity’s Financial Statements.
 Statement of Management’s Responsibility for Financial Statements. This
document is signed by: Chairman of the Board, CEO, and CFO.

Statement of Financial Position

 PAS1 does not prescribe the order or format presenting items in the SFP.
 May modify the descriptions used and the sequence of their presentation.
 Additional line items may be presented whenever relevant to the understanding of
the entity’s SFP.

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 Presentation
 Classified presentation shows distinction between current and non-current assets
and liabilities; shall be used except when an unclassified presentation provides
information that is reliable and more relevant. Highlights: Entity’s working
capital; computation of liquidity; solvency ratios.
Working Capital= Current Assets - Current Liabilities
 Unclassified presentation (or based on liquidity) shows no distinction.
 Mixed presentation- PAS1 permits when the entity has diverse operation.

Current Assets and Current Liabilities- expected to be realized, sold, consumed, or

settled within 12 months.
Non-current Assets and Non-current Liabilities- expected to be realized sold,
consumed,or settled more than 12 months.
Deferred tax assets and liabilities- always presented as non-current items in a
classified SFP ( regardless of their expected date of reversal.)

Refinancing Agreement
 Long-term obligation that is maturing within 12 months after the reporting perios
is classified as current.
 If the obligation is classified as non-current, 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.

Refinancing- replacement of an existing debt with a new one. Under financial

distress (called troubled debt restructuring).

Loan Facility- credit line.

Liabilities Payable on demand

 On the lender, classified as current.
 A long-term become payable on demand as a result of a breach of a loan
provision.
 Non-current, if the lender provides the entity by the end of the reporting
period. A grace period ending at least 12 months after the reporting period.

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 CHAPTER 2: STATEMENT OF COMPREHENSIVE INCOME

Statement of Profit or Loss and Other Comprehensive Income

 Single Statement of Profit or Loss and Other Comprehensive Income (SoCI)
 Two Statements- (1) Statement of P/L (Income Statement) and (2) Statement
presenting Comprehensive Income.

PAS1 requires an entity to present information of the following: Profit or Loss, Other
Comprehensive Income, and Comprehensive Income.

Profit or Loss
Profit (Loss)= Income - Expenses
 Excluding the components of other comprehensive income.
 Transaction Approach- the method of computing profit or loss.
 Income and expenses are usually recognized in P/L unless: They are items in OCI
or required by other PFRSs to be recognized outside of P/L.

Not included in determining Profit or Loss for the period:

1. Correction of Prior period error- direct adjustment to the beginning balance of
retained earnings. (Statement of Changes in Equity)
2. Change in Accounting Policy- similar to no.1
3. Other Comprehensive Income- Changes during the period (OCI) section of the
SoCI. Cumulative balances are in the section of the SFP.
4. Transaction with owners (e.g. issuance of share capital, declaration of
dividends, and the like)- recognized directly in equity. Transactions during the
period are in the SoCiE.

Extraordinary Items
PAS1 prohibits the presentation of this in the Statement of Profit or Loss and Other
Comprehensive Income or in the notes.

Presentation of Expenses
1. Nature of Expense Method- expenses are aggregated according to their nature and
are not reallocated according to their functions within the entity; Eliminates
considerable judgement. (e.g. Depreciation, purchases of materials, transport costs,
employee benefits and advertising costs)
2. Function of Expense Method (Cost of Sales Method)- entity classifies expenses
and other functional classifications. At a minimum, cost of sales shall be presented
separately from other expenses.
 If the function of expense is used, additional disclosures on the nature of
expense shall be provided.

Categories of Expenses under the Function of Expense Method: Cost of Sales,

Distribution Costs (Selling Expenses), Administrative Expenses (General and
Administrative Expenses), Other Expenses (e.g. Losses), Finance Costs (Interest
Expense), and Income tax expense.

Administrative Expenses- residual category of expenses. (included in this category if

it does not qualify for classification under the other categories.

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 Other Comprehensive Income (OCI)
Comprises items of income and expenses (including reclassification adjustments) that
are not recognized in profit or loss as required or permitted by other PFRSs.

Reclassification Adjustments
 Are amounts reclassified to P/L in the current period that were recognized in OCI
in the current or previous periods.
 Arise when disposal of a foreign operation, derecognition of debt instruments
measure a FVOCI, or when a cash flow hedge becomes ineffective or affects P/L.
 Derecognition: the cumulative gains and losses that were accumulated in equity
on these items are reclassified from OCI to P/L.
 Gain: deduction in OCI and an addition to P/L. Loss: addition to OCI and a
deduction from P/L.
 Do not arise on Changes in Revaluation Surplus, derecognition of equity
instruments (designated at FVOCI), and re-measurements of the defined benefit
liability (asset).
 Derecognition: the cumulative gains and losses that were accumulated in equity
on these items are transferred directly to retained earnings.

Presentation of OCI
Type of OCI Reclassification of Adjustment?
1. Changes in revaluation surplus No
2. Re-measurements of the net defined No
benefit liability (asset)
3. FV changes in FVOCI
 Equity Instrument (election) No
 Debt Instrument (mandatory) Yes
4. Translation differences on foreign Yes
operations
5. Effective portion of Cash flow hedges Yes

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

Tax or Gross of Tax.

Total Comprehensive Income

Total Comprehensive Income= P/L + OCI
 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.

Accounts Receivable Turnover- financial ratio used to quantify an entity’s

effectiveness in extending credit and its efficiency in collecting receivables.

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 Inventory Turnover- financial ratio that shows the number of times an entity’s
inventory is sold and replaced over a period.

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Gross Profit= Net Credit Sales - Cost of Sales

VOTE ALY FOR PRESIDENT

NEXT SEM/ SCHOOL YEAR!
CHAR. GALINGAN MO
PAGRE-REVIEW,
PAPAKOPYAHIN MO PA KO. :)
-ALY

-END-

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