Compressed Files Cfas

CONCEPTUAL FRAMEWORK
&
ACCOUNTING STANDARDS
Lecture Aid
2020 Edition
By: Zeus Vernon B. Millan
Conceptual Framework & Acctg.

1
Standards (by: Zeus Vernon B. Millan)
Overview of Accounting
Learning Objectives
• Define accounting and state its basic purpose.
• Explain the basic concepts applied in accounting.
• State the branches of accounting and the sectors in the
practice of accountancy.
• Explain the importance of a uniform set of financial
reporting standards.
Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 2

Definition of Accounting
• Accounting is “the process of identifying,

measuring, and communicating economic
information to permit informed judgment and
decisions by users of information.”
(American Association of Accountants)

Three important activities
1. Identifying - the process of analyzing events and transactions to

determine whether or not they will be recognized. Only
accountable events are recognized.
2. Measuring - involves assigning numbers, normally in monetary
terms, to the economic transactions and events.
3. Communicating - the process of transforming economic data
into useful accounting information, such as financial statements
and other accounting reports, for dissemination to users.

Types of Events
1. External events – events that involve an external party.
a. Exchange (reciprocal transfer) – reciprocal giving and
receiving
b. Non-reciprocal transfer – “one way” transaction
c. 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.
2. Internal events – events that do not involve an external party.

a. Production – the process by which resources are transformed
into finished goods.
b. Casualty – an unanticipated loss from disasters or other
similar events.

Measurement
• The several measurement bases used in accounting include, but not
limited to, the following:
1. historical cost,
2. fair value,
3. present value,
4. realizable value,
5. current cost, and
6. sometimes inflation-adjusted costs.
• The most commonly used is historical cost. This is usually combined
with the other measurement bases. Accordingly, financial statements
are said to be prepared using a mixture of costs and values.

Valuation by fact or opinion
• When measurement is affected by estimates, the items

measured are said to be valued by opinion.
• When measurement is unaffected by estimates, the items
measured are said to be valued by fact.

Basic purpose of accounting
• The basic purpose of accounting is to provide

information about economic activities intended to be
useful in making economic decisions.

Types of accounting information classified as to
users’ needs
• General purpose accounting information - designed to
meet the common needs of most statement users. This
information is governed by the Philippine Financial
Reporting Standards (PFRSs).
• Special purpose accounting information - designed to

meet the specific needs of particular statement users.
This information is provided by other types of
accounting, e.g., managerial accounting, tax basis
accounting, etc.

Basic Accounting Concepts
• Double-entry system – each accountable event is recorded in two parts
– debit and credit.
• Going concern - the entity is assumed to carry on its operations for an
indefinite period of time.
• Separate entity – the entity is treated separately from its owners.
• Stable monetary unit - amounts in the financial statements are stated
in terms of a common unit of measure; changes in purchasing power are
ignored.
• Time Period – the life of the business 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.
Basic Accounting Concepts - Continuation
• Accrual Basis of accounting – effects of transactions are
recognized when they occur (and not as cash is received or paid) and
they are recognized in the accounting periods to 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 – financial statements provide
sufficient detail to disclose matters that make a difference to users,
yet sufficient condensation to make the information
understandable, keeping in mind the costs of preparing and using it.
• Consistency concept – financial statements are prepared on the
basis of accounting policies which are applied consistently from one
period to the next.

Basic Accounting Concepts - Continuation
• Matching – costs are recognized as expenses when the related
revenue is recognized.
• Residual equity theory – this theory is applicable where there
are two classes of shares issued, ordinary and preferred. The
equation is “Assets – Liabilities – Preferred Shareholders’ Equity =
Ordinary Shareholders’ Equity.”
• Fund theory – the accounting objective is the custody and
administration of funds.
• Realization – the process of converting non-cash assets into cash
or claims for cash.
• Prudence (Conservatism) – the inclusion of a degree of caution in
the exercise of the judgments needed in making the estimates
required under conditions of uncertainty , such that assets or
income are not overstated and liabilities or expenses are not
understated.

Common branches of accounting
• Financial accounting - focuses on general purpose financial
statements.
• Management accounting – focuses on special purpose financial
reports for use by an entity’s management.
• Cost accounting - the systematic recording and analysis of the costs
of materials, labor, and overhead incident to production.
• Auditing - the process of evaluating the correspondence of certain
assertions with established criteria and expressing an opinion thereon.
• Tax accounting - the preparation of tax returns and rendering of tax
advice, such as the determination of tax consequences of certain
proposed business endeavors.
• Government accounting - refers to the accounting for the
government and its instrumentalities, placing emphasis on the custody
of public funds, the purposes for which those funds are committed, and
the responsibility and accountability of the individuals entrusted with
those funds.

Four sectors in the practice of accountancy
1. Practice of Public Accountancy - involves the rendering of audit
or accounting related services to more than one client on a fee basis.
2. Practice in Commerce and Industry - refers to 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 CPA.
3. Practice in Education/Academe – employment in an educational
institution which involves teaching of accounting, auditing,
management advisory services, finance, business law, taxation, and
other technically related subjects.
4. Practice in the Government – employment or appointment to a
position in an accounting professional group in the government or in a
government–owned and/or controlled corporation where decision
making requires professional knowledge in the science of accounting,
or where civil service eligibility as a CPA is a prerequisite.

Accounting standards in the Philippines
• Philippine Financial Reporting Standards (PFRSs) are

Standards and Interpretations adopted by the Financial Reporting
Standards Council (FRSC). They comprise:
1. Philippine Financial Reporting Standards (PFRSs);
2. Philippine Accounting Standards (PASs); and
3. Interpretations

The need for reporting standards
• Entities should follow a uniform set of generally acceptable reporting
standards when preparing and presenting financial statements;
otherwise, financial statements would be misleading.
• The term “generally acceptable” means that either:
a. the standard has been established by an authoritative accounting
rule-making body; or
b. the principle has gained general acceptance due to practice over time
and has been proven to be most useful.
• The process of establishing financial accounting standards is a
democratic process in that a majority of practicing accountants must
agree with a standard before it becomes implemented.

APPLICATION OF
CONCEPTS
PROBLEM 4: FOR CLASSROOM DISCUSSION

 QUESTIONS????
 REACTIONS!!!!!

END
&
2020 Edition
Lecture Aid
1
Conceptual Framework for Financial Reporting
Learning Objectives
• State the purpose, status, and scope of the Conceptual
Framework.
• State the objective of financial reporting.
• Identify the primary users of financial statements.
• Explain briefly the qualitative characteristics of useful
information and how they are applied in financial
reporting.
• Define the elements of financial statements and state their
recognition criteria and their derecognition.
• State the measurement bases used in financial reporting.

2
Purpose of the Conceptual Framework
• The Conceptual Framework prescribes the concepts for general

purpose financial reporting. Its purpose is to:
a. assist the International Accounting Standards Board (IASB) in
developing Standards that are based on consistent concepts;
b. assist 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. assist all parties in understanding and interpreting the
Standards.

3
Status of the Conceptual Framework
• The Conceptual Framework is not a PFRS. When there is a
conflict between the Conceptual Framework and a PFRS, the
PFRS will prevail.
• In the absence of a standard, management shall consider the
Conceptual Framework in making its judgment in developing
and applying an accounting policy that results in useful
information.

4
Scope of the Conceptual Framework
The Conceptual Framework is concerned with general purpose
financial reporting. General purpose financial reporting involves the
preparation of general purpose financial statements. The Conceptual
Framework provides the concepts regarding 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

5
Objective of general purpose financial reporting
• The objective of general purpose financial reporting
is to provide financial information about the reporting entity
that is useful to primary users in making decisions about
providing resources to the entity.
• The objective of general purpose financial reporting forms
the foundation of the Conceptual Framework.

6
Primary Users
• Primary users – are those who cannot demand information

directly from reporting entities. The primary users are:
(a) Existing and potential investors
(b) Lenders and other creditors.
• Only the common needs of primary users are met by the financial
statements.

7
Qualitative Characteristics
I. Fundamental qualitative characteristics
(1) Relevance
(a) Predictive value
(b) Feedback value
 Materiality – entity-specific aspect of relevance
(2) Faithful representation
(a) Completeness
(b) Neutrality
(c) Free from error
II. Enhancing qualitative characteristics

(1) Comparability
(2) Verifiability
(3) Timeliness
(4) Understandability
8
Fundamental vs. Enhancing
• The fundamental qualitative characteristics are the

characteristics that make information useful to users.
• The enhancing qualitative characteristics are the
characteristics that enhance the usefulness of information

9
Relevance
• Information is relevant if it can affect the decisions of users.

• Relevant information has the following:
a. Predictive value – the information can be used in making predictions
b. Confirmatory value – the information can be used in confirming
past predictions
 Materiality – is an ‘entity-specific’ aspect of relevance.

10
Faithful Representation
• Faithful representation means the information provides a true,

correct and complete depiction of what it purports to represent.
• Faithfully represented information has the following:
a. Completeness – all information necessary for users to
understand the phenomenon being depicted is provided.
b. Neutrality – information is selected or presented without bias.
c. Free from error – there are no errors in the description and in
the process by which the information is selected and applied.

11
Enhancing Qualitative Characteristics
1. Comparability – the information helps users in identifying

similarities and differences between different sets of information.
2. Verifiability – different users could reach consensus as to what
the information purports to represent.
3. Timeliness – the information is available to users in time to be
able to influence their decisions.
4. Understandability – users are expected to have:
a. reasonable knowledge of business activities; and
b. willingness to analyze the information diligently.

12
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,
equity, income and expenses that is useful in assessing:
a. the entity’s ability to generate future net cash inflows; and
b. management’s stewardship over economic resources.

13
Reporting period
• Financial statements are prepared for a specific period of time (i.e., the
reporting period) and include comparative information for at least
one preceding reporting period.
Going concern
• Financial statements are normally prepared on the assumption that the
reporting entity is a going concern, meaning the entity has neither
the intention nor the need to end its operations in the foreseeable
future.

14
Reporting entity
• A reporting entity is one that is required, or chooses, to prepare
financial statements, and is not necessarily a legal entity. It can be a
single entity or a group or combination of two or more entities.

15
Elements of Financial Statements

16
Asset
• Asset is “a present economic resource controlled by the

entity as a result of past events. An economic resource is
a right that has the potential to produce economic
benefits.” (Conceptual Framework 4.3 & 4.4)

17
Three aspects in the definition of an asset
1. Right – asset refers to a right, and not necessarily to a physical
object, e.g., the right to use, sell, lease or transfer a building.
2. Potential to produce economic benefits – the right has a
potential to produce economic benefits for the entity that are
beyond the benefits available to all others. Such potential need
not be certain or even likely – what is important is that the right
already exists and that, in at least one circumstance, it would
produce economic benefits for the entity.
3. Control – means the entity has the exclusive right over the
benefits of an asset and the ability to prevent others from
accessing those benefits.

18
Liability
• Liability is “a present obligation of the entity to transfer

an economic resource as a result of past events.” (Conceptual
Framework 4.26)

19
Three aspects in the definition of a liability
1. Obligation – An obligation is “a duty or responsibility that an
entity has no practical ability to avoid.” (CF 4.29) An obligation can be
either legal obligation or constructive obligation.
2. Transfer of an economic resource – the obligation has
the potential to require the transfer of an economic resource
to another party. Such potential need not be certain or even
likely – what is important is that the obligation already exists
and that, in at least one circumstance, it would require the
transfer of an economic resource.

20
Three aspects …… liability (continuation)
3. Present obligation as a result of past events – A present
obligation exists as a result of past events if:
a. the entity has already obtained economic benefits or taken an
action; and
b. as a consequence, the entity will or may have to transfer an
economic resource that it would not otherwise have had to
transfer.
(Conceptual Framework 4.43)

21
Executory contracts
• An executory contract “is a contract that is equally unperformed –
neither party has fulfilled any of its obligations, or both parties have
partially fulfilled their obligations to an equal extent.” (CF 4.56)
• An executory contract establishes a combined right and obligation to
exchange economic resources.
• The contract ceases to be executory when one party performs its
obligation.
 If the entity performs first, the entity’s combined right and
obligation changes to an asset.
 If the other party performs first, the entity’s combined right and
obligation changes to a liability.

22
Equity
• “Equity is the residual interest in the assets of the entity after

deducting all its liabilities.” (Conceptual Framework 4.63)
• Equity equals Assets minus Liabilities

23
Income and Expenses
• Income
Income is “increases in assets, or decreases in liabilities, that result in
increases in equity, other than those relating to contributions from
holders of equity claims.” (Conceptual Framework 4.68)
• Expenses
Expenses are “decreases in assets, or increases in liabilities, that result
in decreases in equity, other than those relating to distributions to
holders of equity claims.” (Conceptual Framework 4.69)

24
Recognition & Derecognition
The recognition process

• Recognition is the process of including in the statement of financial
position or the statement(s) of financial performance an item that
meets the definition of one of the financial statement elements (i.e.,
asset, liability, equity, income or expense). This involves recording
the item in words and in monetary amount and including that
amount in the totals of either of those statements.

25
Recognition criteria
• An item is recognized if:
a. it meets the definition of an asset, liability, equity, income or
expense; and
b. recognizing it would provide useful information, i.e., relevant and
faithfully represented information.

26
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. (Conceptual Framework 5.12)
However, the presence of one or both of the foregoing does not

automatically lead to the non-recognition of an item. Other factors
should also be considered.

27
Faithful representation
• The level of measurement uncertainty and other factors can affect an
item’s faithful representation, but not necessarily its relevance.
Measurement uncertainty
• Measurement uncertainty exists if the asset or liability needs to be
estimated. A high level of measurement uncertainty does not
necessarily lead to the non-recognition of an asset or liability if the
estimate provides relevant information and is clearly and accurately
described and explained.
• However, measurement uncertainty can lead to the non-recognition of
an asset or a liability if making an estimate is exceptionally difficult
or exceptionally subjective.
28
Derecognition
• Derecognition is the removal of a previously recognized asset or
liability from the entity’s statement of financial position.
• Derecognition occurs when the item ceases to meet the definition
of an asset or liability.

29
Unit of account
• Unit of account is “the right or the group of rights, the obligation or

the group of obligations, or the group of rights and obligations, to
which recognition criteria and measurement concepts are applied.”

30
Measurement bases
1. Historical cost
2. Current value
a. Fair value
b. Value in use and fulfilment value
c. Current cost

31
Historical cost
• The historical cost of:

a. an asset is the consideration paid to acquire the asset plus
transaction costs.
b. a liability is the consideration received to incur the liability minus
transaction costs.
• Historical cost is updated over time to depict the following:
 Depreciation, amortization, or impairment of assets
 Collections or payments that extinguish part or all of the asset or
liability
 Unwinding of discount or premium when the asset or liability is
measured at amortized cost

32
Fair value
• Fair value is “the price that would be received to sell an asset, or

paid to transfer a liability, in an orderly transaction between market
participants at the measurement date.” (Conceptual Framework 6.12)

33
Value in use and fulfilment 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.” (Conceptual Framework 6.17)
• Fulfilment value is “the present value of the cash, or other economic
resources, that an entity expects to be obliged to transfer as it fulfils
a liability.” (Conceptual Framework 6.17)

34
Current cost
• The current cost of:

a. 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.”
b. 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.”

35
Entry values vs. Exit values
• Current cost and historical cost are entry values (i.e., they reflect
prices in acquiring an asset or incurring a liability), whereas fair
value, value in use and fulfilment value are exit values (i.e., they
reflect prices in selling or using an asset or transferring or fulfilling a
liability).

36
Considerations when selecting a measurement basis
• When selecting a measurement basis, it is important to consider the

following:
a. The nature of information provided by a particular
measurement basis (e.g., measuring an asset at historical cost may
lead to the subsequent recognition of depreciation or impairment, while
measuring that asset at fair value would lead to the subsequent
recognition of gain or loss from changes in fair value).
b. The qualitative characteristics, the cost-constraint, and
other factors (e.g., a particular measurement basis may be more
verifiable or more costly to apply than the other measurement bases).

37
Measurement of Equity
• Total equity is not measured directly. It is simply equal to difference

between the total assets and total liabilities.
• Because different measurement bases are used for different assets
and liabilities, 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.
• Equity is generally positive, although some of its components can be
negative. In some cases, even total equity can be negative such as
when total liabilities exceed total assets.

38
Presentation and Disclosure
• Information 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 it is not obscured
either by excessive detail or by excessive summarization.

39
Presentation and disclosure objectives and principles
• The objectives are specified in the Standards.

• The principles include:
a. the use of entity-specific information is more useful that
standardized descriptions, and
b. duplication of information is usually unnecessary.

40
Classification
• Classifying means combining similar items and separating

dissimilar items.
• Offsetting of assets and liabilities is generally not appropriate.
Classification of income and expenses

• Income and expenses are classified as recognized either in:
a. profit or loss; or
b. other comprehensive income.

41
Aggregation
• Aggregation is “the adding together of assets, liabilities, equity,

income or expenses that have shared characteristics and are
included in the same classification.” (Conceptual Framework 7.20)

42
Concepts of Capital and Capital Maintenance
• Financial concept of capital – capital is regarded as

the invested money or invested purchasing power.
Capital is synonymous with equity, net assets, and net
worth.
• Physical concept of capital – capital is regarded as

the entity’s productive capacity, e.g., units of output per
day.

43
APPLICATION OF
CONCEPTS

 QUESTIONS????
 REACTIONS!!!!!

45
END
&
2020 Edition
Lecture Aid
1
PAS 1 Presentation of Financial
Statements
Learning Objectives
• Enumerate and describe the general features of financial
statement presentation.
• Enumerate and describe the components of a complete set of
financial statements.
• State the acceptable methods of presenting items of income and
expenses.
• Differentiate between the statement of profit or loss and other
comprehensive income and the statement of changes in equity.
• State the relationship of the notes with the other components of
a complete set of financial statements.
Objective of PAS 1
PAS 1 prescribes the basis for presentation of

general purpose financial statements to
improve comparability both with the entity's
financial statements of previous periods (intra-
comparability) and with the financial statements
of other entities (inter-comparability).

General purpose financial statements
• General purpose financial statements are those intended to

serve users who do not have the authority to demand financial
reports tailored for their own needs. General purpose financial
statements cater to most of the common needs of a wide range of
external users. General purpose financial statements are the subject
matter of the Conceptual Framework and the PFRSs.

4
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
(5a) comparative information in respect of the preceding period; and
6. Additional statement of financial position (required only

when certain instances occur)
Conceptual Framework & Acctg. Standards
(by: Zeus Vernon B. Millan) 5
General features
1. Fair Presentation and Compliance with PFRSs - The
application of PFRSs, with additional disclosure when necessary, is
presumed to result in financial statements that achieve a fair
presentation.
2. Going concern - An entity is not a going concern if, as of the

financial reporting date or prior to the date of authorization of the
financial statements for issue, management either:
a. Intends to liquidate the entity or to cease trading, or
b. Has no realistic alternative but to do so.
• The assessment of going concern is at least 12 months.
Conceptual Framework & Acctg. Standards (by: Zeus 6

Vernon B. Millan)
General features (Continuation)
3. Accrual Basis of Accounting - An entity shall prepare its financial
statements, except for cash flow information, using the accrual basis of
accounting.
4. Materiality & Aggregation - Each material class of similar items

must be presented separately in the financial statements.
5. Offsetting - Assets and liabilities, and income and expenses, shall not
be offset unless required or permitted by a PFRS.
• Measuring assets net of valuation allowances, for example, obsolescence
allowances on inventories, allowances for doubtful accounts on
receivables, and accumulated depreciation on property, plant, and
equipment are not offsetting.

Vernon B. Millan)
6. Frequency of reporting – An entity shall present a complete set
of financial statements (including comparative information) at least
annually.
• When an entity changes the end of its reporting period and presents
financial statements for a period longer or shorter than one year, an
entity shall disclose the following:
1. The period covered by the financial statements,
2. The reason for using a longer or shorter period, and
3. The fact that amounts presented in the financial statements are
not entirely comparable.

Vernon B. Millan)
7. Comparative Information
An entity shall present comparative information in respect of the preceding
period for all amounts reported in the current period’s financial statements,
unless other standards permit or require otherwise.
8. Consistency of presentation - An entity shall retain the presentation

and classification of items in the financial statements from one period to
the next unless:
a. it is apparent that another presentation or classification would be
more appropriate following a significant change in the nature of
the entity’s operations or a review of its financial statements; or
b. a PFRS requires a change in presentation.
Vernon B. Millan)
Additional Statement of financial position
• An additional statement of financial position is presented as at the

beginning of the preceding period when an entity:
1. Applies an accounting policy retrospectively, or
2. Makes a retrospective restatement of items in its financial
statements, or
3. reclassifies items in its financial statements.
…..and the effect of the event to the statement of financial position

as at the beginning of the preceding period is material.
Conceptual Framework & Acctg. Standards (by:

Zeus Vernon B. Millan) 10
Statement of financial position
• A statement of financial position may be presented as either

1. Classified – showing distinctions between current and noncurrent
assets and liabilities, or
2. Unclassified (based on liquidity) – showing no distinction between
current and noncurrent items

11
Current Assets
• An entity shall classify an asset as current when:

1. it expects to realize the asset or intends to sell or consume it, in
its normal operating cycle;
2. it holds the asset primarily for the purpose of trading;
3. it expects to realize the asset within twelve months after the
reporting period; or
4. the asset is cash or a cash equivalent unless the asset is restricted
from being exchanged or used to settle a liability for at least
twelve months after the reporting period.

12
Current Liabilities
• An entity shall classify a liability as current when:

1. it expects to settle the liability in its normal operating cycle;
2. it holds the liability primarily for the purpose of trading;
3. the liability is due to be settled within twelve months after the
reporting period; or
4. the entity does not have an unconditional right to defer
settlement of the liability for at least twelve months after the
reporting period.

13
Currently maturing long-term liabilities
• General rule: Currently maturing long term liabilities are

presented as current liabilities.
• Exceptions:
1. Refinancing agreement is fully completed on or before the
balance sheet date – non-current liability
2. Refinancing agreement after the balance sheet date but before
the financial statements are authorized for issue – noncurrent
liability if the entity expects, and has the discretion, to
refinance it on a long-term basis under an existing loan facility.

14
Breach of loan agreement
• General rule: A liability that is payable on demand is a current

liability.
• Exception: It is presented as non-current liability if the lender

provides the entity, on or before the balance sheet date, a
grace period ending at least 12 months after the balance sheet date
to rectify a breach of loan covenant.

15
Presentation of Deferred taxes
• Deferred tax liabilities (assets) are presented as noncurrent items

in a classified statement of financial position, irrespective of their
expected dates of reversal.

16
Minimum line items in the statement of financial position
a. Property, plant and equipment;

b. Investment property;
c. Intangible assets;
d. Financial assets (excluding amounts shown under (e), (h) and (i));
e. Investments accounted for using the equity method;
f. Biological assets;
g. Inventories;
h. Trade and other receivables;
i. Cash and cash equivalents;
j. Assets (or disposal groups) classified as held for sale in accordance
with PFRS 5;

17
Minimum line items (Continuation)
k. Trade and other payables;

l. Provisions;
m. Financial liabilities (excluding amounts shown under (k) and (l));
n. Liabilities and assets for current tax, as defined in PAS 12 Income
Taxes;
o. Deferred tax liabilities and deferred tax assets, as defined in PAS
12;
p. Liabilities included in disposal groups classified as held for sale in
accordance with PFRS 5;
q. Non-controlling interests, presented within equity; and
r. Issued capital and reserves attributable to owners of the parent

18
Order/ Format of Presentation
• PAS 1 does not prescribe the order or format in which an entity

presents items.

19
Statement of profit or loss and other
comprehensive income
• An entity shall present all items of income and expense recognized
in a period:
1. in a single statement of profit or loss and other comprehensive
income; or
2. in two statements: (1) a statement displaying the profit or loss
section only (separate ‘statement of profit or loss’ or ‘income
statement’) and (2) a second statement beginning with profit or
loss and displaying components of other comprehensive income.

20
Extraordinary items
• PAS 1 prohibits the presentation of any items of income or expense

as extraordinary items in the statement(s) presenting profit or loss
and other comprehensive income or in the notes.

21
Other comprehensive income for the period
a. Changes in revaluation surplus

b. Unrealized gains and losses on investments in FVOCI securities
c. Remeasurements of the net defined benefit liability (asset)
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
• OCI may be presented either (a) net of tax or (b) gross of tax.

22
Reclassification adjustments
• Reclassification adjustments are amounts reclassified to profit
or loss in the current period that were recognized in other
comprehensive income in the current or previous periods.

23
Total comprehensive income
• Total comprehensive income comprises all components of

1. Profit or loss; and
2. Other comprehensive income.

24
Presentation of Expenses
1. Nature of expense method

2. Function of expense method
• If an entity classifies expenses by function, it shall disclose

additional information on the nature of expenses

25
Disclosure of dividends
• Dividends declared by an entity are disclosed either in the (a) notes

or (b) statement of changes in equity.

26
Order of presentation of disclosures in the Notes
1. Statement of compliance with PFRSs;

2. Summary of significant accounting policies applied;
3. Supporting information for items presented in the other financial
statements; and
4. Other disclosures.

27
APPLICATION OF
CONCEPTS

 QUESTIONS????
 REACTIONS!!!!!

29
END
&
2020 Edition
Lecture Aid
1
PAS 2 Inventories
Learning Objectives
• Define inventories.
• Measure inventories and apply the cost
formulas.
• State the accounting for inventory write-down
and the reversal thereof.

2
Inventories
Inventories are 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); or
c. In the form of materials or supplies to be consumed in
the production process or in the rendering of services
(Raw materials and manufacturing supplies).

3
Financial statement presentation
• All items that meet the definition of inventory are

presented on the statement of financial position as one
line item under the caption “Inventories.” The
breakdown of this line item (as finished goods, WIP and
Raw materials) is disclosed in the notes.
• Inventories are normally presented in a classified
statement of financial position as current assets.

4
Measurement
• Inventories are measured at the lower of cost and net
realizable value (NRV).
• The cost of inventories comprise all costs of purchase, costs of

conversion and other costs incurred in bringing the inventories
to their present location and condition.
• Net realizable value (NRV) is the estimated selling price in the
ordinary course of business less the estimated costs of completion
and the estimated costs necessary to make the sale.

5
Costs that are EXPENSED when incurred
1. Abnormal amounts of wasted materials, labor or other production

costs.
2. Selling costs, for example, advertising and promotion costs and
delivery expense or freight out.
3. Administrative overheads that do not contribute to bringing
inventories to their present location and condition.
4. Storage costs, unless those costs are necessary in the production
process before a further production stage, (e.g., the storage costs of
partly finished goods may be capitalized as cost of inventory, but the
storage costs of completed finished goods are expensed).

6
Cost Formulas
1. Specific identification - shall be used for inventories that are
not ordinarily interchangeable (i.e., used for inventories that are
unique). Cost of sales is the cost of the specific inventory that was
sold.
2. FIFO – cost of sales is based on the cost of inventories that were
purchased first. Consequently, ending inventory represents the cost
of the latest purchases.
3. Weighted Average Cost – cost of sales is based on the average
cost of all inventories purchased during the period.
 Wtd. Ave. Cost = (TGAS in pesos ÷ TGAS in units)

7
Write down of inventories
• Inventories are usually written down to net realizable value on an

item by item basis.
• If the cost of an inventory exceeds its NRV, the inventory is written
down to NRV, the lower amount. The excess of cost over NRV
represents the amount of write-down.

8
Reversal of write-downs
• The amount of reversal to be recognized should not

exceed the amount of the original write-down
previously recognized.

9
Recognition as an expense
• The carrying amount of an inventory that is sold is charged as

expense (i.e., cost of sales) in the period in which the related revenue
is recognized. Likewise, the write-down of inventories to NRV and
all losses of inventories are recognized as expense in the period the
write-down or loss occurs.

10
APPLICATION OF
CONCEPTS

 QUESTIONS????
 REACTIONS!!!!!

12
END
&
2020 Edition
Lecture Aid
1
PAS 7 Statement of Cash Flows
Learning Objectives
• Describe the statement of cash flows.
• Differentiate between the following: (1) Operating activities,
(2) Investing activities, and (3) Financing activities.
• State the classifications of the following in a statement of
cash flows: (a) dividends received, (b) dividends paid, (c)
interest paid and (d) interest received.

Statement of Cash Flows
• The statement of cash flows provides information

about the sources and utilization (i.e., historical changes)
of cash and cash equivalents during the period. The
statement of cash flows presents cash flows according to
the following classifications:
1. Operating activities
2. Investing activities
3. Financing activities

3
Activities
1. Operating activities include transactions that enter into

the determination of profit or loss. These transactions
normally affect income statement accounts.
2. Investing activities include transactions that affect long-

term assets and other non-operating assets.
3. Financing activities include transactions that affect

equity and non-operating liabilities.

4
Examples of cash flows from Operating Activities
a. cash receipts from the sale of goods, rendering of

services, or other forms of income
b. cash payments for purchases of goods and services
c. cash payments for operating expenses, such as
employee benefits, insurance, and the like, and
payments or refunds of income taxes
d. cash receipts and payments from contracts held for
dealing or trading purposes

5
Examples of cash flows from Investing Activities
a. cash receipts and cash payments in the acquisition and disposal of

property, plant and equipment, investment property, intangible
assets and other noncurrent assets
b. cash receipts and cash payments in the acquisition and sale of equity
or debt instruments of other entities (other than those that are
classified as cash equivalents or held for trading)
c. cash receipts and cash payments on derivative assets and liabilities
(other than those that are held for trading or classified as financing
activities)
d. loans to other parties and collections thereof (other than loans
made by a financial institution)

6
Examples of cash flows from Financing Activities
a. cash receipts from issuing shares or other equity

instruments and cash payments to redeem them
b. cash receipts from issuing notes, loans, bonds and
mortgage payable and other short-term or long-term
borrowings, and their repayments
c. cash payments by a lessee for the reduction of the
outstanding liability relating to a lease.

7
8
Core principle

9
Interests and Dividends

10
Reporting cash flows from operating activities
1. Direct method - shows each major class of gross cash receipts

and gross cash payments.
2. Indirect method - adjusts accrual basis profit or loss for the

effects of changes in operating assets and liabilities and effects of
non-cash items.

11
APPLICATION OF
CONCEPTS

 QUESTIONS????
 REACTIONS!!!!!

13
END

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CONCEPTUAL FRAMEWORK

By: Zeus Vernon B. Millan

Conceptual Framework & Acctg.

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 2

• Accounting is “the process of identifying,

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 3

1. Identifying - the process of analyzing events and transactions to

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 4

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

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 5

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 6

• When measurement is affected by estimates, the items

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 7

• The basic purpose of accounting is to provide

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 8

• Special purpose accounting information - designed to

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 9

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 11

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 12

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 13

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 14

• Philippine Financial Reporting Standards (PFRSs) are

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 15

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 16

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 17

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 18

Conceptual Framework & Acctg.

• The Conceptual Framework prescribes the concepts for general

Conceptual Framework & Acctg.

Conceptual Framework & Acctg.

Conceptual Framework & Acctg.

Conceptual Framework & Acctg.

• Primary users – are those who cannot demand information

Conceptual Framework & Acctg.

II. Enhancing qualitative characteristics

• The fundamental qualitative characteristics are the

Conceptual Framework & Acctg.

• Information is relevant if it can affect the decisions of users.

 Materiality – is an ‘entity-specific’ aspect of relevance.

Conceptual Framework & Acctg.

• Faithful representation means the information provides a true,

Conceptual Framework & Acctg.

1. Comparability – the information helps users in identifying

Conceptual Framework & Acctg.

Objective and scope of financial statements

Conceptual Framework & Acctg.

Conceptual Framework & Acctg.

Conceptual Framework & Acctg.

Conceptual Framework & Acctg.

• Asset is “a present economic resource controlled by the

Conceptual Framework & Acctg.

Conceptual Framework & Acctg.

• Liability is “a present obligation of the entity to transfer

Conceptual Framework & Acctg.

Conceptual Framework & Acctg.

Conceptual Framework & Acctg.

Conceptual Framework & Acctg.

• “Equity is the residual interest in the assets of the entity after

Conceptual Framework & Acctg.

Conceptual Framework & Acctg.