OVERVIEW OF ACCOUNTING

•Accounting standard setting bodies and other relevant organizations

1. Financial Reporting Standards Council (FRSC)

- is the official accounting standard setting body in the Philippines created under the Philippine
Accountancy Act of 2004 (R.A. No. 9298). The FRSC is composed of fifteen (15) individuals
- a chairperson who had been or presently a senior accounting practitioner in any of the scope
of accounting practice

2. Philippine Interpretations Committee (PIC)

- is a committee formed by the Accounting Standards Council (ASC), the predecessor of FRSC,
with the role of reviewing the interpretations of the International Financial Reporting
Interpretations Committee (IFRIC) for approval and adoption by the FRSC.

3. The International Accounting Standards Board (IASB)

-is the standard-setting body of the IFRS Foundation with the main objectives of developing and
promoting global accounting standards.
- established in April 1, 2001 as part of the International Accounting Standards Committee
(IASC) Foundation.

4. International Accounting Standards Committee (IASC) Foundation

- is a non-profit organization based in Delaware, USA and is the parent of the IASB, which is
based in London.

*On July 1, 2010, the IASC Foundation was renamed to International Financial Reporting
Standards Foundation or IFRS Foundation.

5. International Financial Reporting Interpretations Committee (IFRIC)

- is a committee that prepares interpretations of how specific issues should be accounted for.

CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING

Purpose of 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.

Status of the Conceptual Framework

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

*Hierarchy of reporting standards

1. PFRSs
2. Judgment When making the judgment:
➤ Management shall consider the following:
a. Requirements in other PFRSs dealing with similar transactions
b. Conceptual Framework
➤ Management may consider the following:
a. Pronouncements issued by other standard-setting bodies
b. Other accounting literature and industry practices

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 Objective of Financial Reporting

"The objective of general purpose financial reporting is to provide financial information about the
reporting entity that is useful to existing and potential investors, lenders and other creditors in
making decisions about providing resources to the entity."

This objective is the foundation of the Conceptual Framework. All the other aspects of the
Conceptual Framework revolve around this objective.

Qualitative Characteristics

1. Fundamental qualitative characteristics

a. Relevance (predictive value & confirmatory value)
➤ Materiality (entity-specific aspect of relevance)
b. Faithful representation (completeness, neutrality, & free from error)

2. Enhancing qualitative characteristics

a. Comparability
b. Verifiability
c. Timeliness
d. Understandability

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.

Both the criteria above must be met before an item is recognized.

DERECOGNITION

Derecognition occurs when the item no longer meet the definition of an asset or liability.
On derecognition, the entity:

a. derecognizes the assets or liabilities that have expired or have been consumed, collected,
fulfilled or transferred , and recognizes any resulting income and expenses.
b. continues to recognize any assets or liabilities retained after the derecognition.

MEASUREMENT BASES

The Conceptual Framework describes the following measurement bases:

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

CONCEPTS OF CAPITAL AND CAPITAL MAINTENANCE

The Conceptual Framework mentions two concepts of capital namely:

a. Financial concept of capital - capital is regarded as the invested money or invested
purchasing power.
b. Physical concept of capital - capital is regarded as the entity, productive capacity.

The concepts of capital give rise to the following concepts of capital maintenance:
a. Financial capital maintenance - Under this concept, profitt earned if the net assets at the
end of the period exceeds the net assets at the beginning of the period, after excluding any
distributions to, and contributions from, owners during the period. Financial capital maintenance
can be measured in either nominal monetary units or units of constant purchasing power.
b. Physical capital maintenance - Under this concept, profit is earned only if the entity's
productive capacity at the end of the period exceeds the productive capacity at the beginning of
the C period, after excluding any distributions to, and contributiore from, owners during the
period.
*The concept of capital maintenance is essential in distinguishing between a return on capital
and a return of capital.

ACCOUNTING PROCESS
The accounting process involves several steps:

1. Identifying and recording transactions, such as sales, purchases, and cash receipts.
2. Using special journals to record repetitive or frequent transactions, such as cash receipts and
cash payments.
3. Using the general journal to record all transactions that are not recorded in special journals.
4. Using subsidiary ledgers to record specific types of transactions, such as accounts receivable
and inventory.
5. Summarizing all transactions in the general ledger, which is organized into accounts such as
assets, liabilities, equity, revenues, and expenses.
6. Completing the accounting cycle by preparing a worksheet, making adjusting entries, closing
entries, and reversing entries.

ACCOUNTING CYCLE

* Preparing a worksheet to summarize the balance of all accounts in the general ledger.
* Making adjusting entries to ensure that financial statements accurately reflect the company's
financial position.
* Making closing entries to transfer net income or net loss to retained earnings.
* Reversing adjusting entries at the beginning of the next accounting period.

PRESENTATION OF FINANCIAL STATEMENTS

General Features:

1.Fair Presentation and Compliance with PFRSs

-Fair presentation is faithfully representing, in the financial statements, the effects of
transactions and other events in accordance with the definitions and recognition criteria for
assets, liabilities, income and expenses set out in the Conceptual Framework. Compliance with
the PFRSs is presumed to result in fairly presented financial statements.
2. Going Concern
-management shall assess the entity's ability to continue as a going concern, taking into
account all available information about the future, which is at least, but not limited to, 12 months
from the reporting date.
3. Accrual Basis of Accounting
-All financial statements shall be prepared using the accrual basis of accounting except for
the statement of cash flows, which is prepared using cash basis.
4. Materiality and Aggregation
-Each material class of similar items is presented separately. A class of similar items is
called a "line item." Dissimilar items are presented separately unless they are immaterial.
Individually immaterial items are aggregated with other items.
5. Offsetting
-Assets and liabilities or income and expenses are presented separately and are not offset,
unless offsetting is required or permitted by a PFRS.
6. Frequency of reporting
-Financial statements are prepared at least annually.
7. Comparative Information
-PAS 1 requires an entity to present comparative information in respect of the preceding
periodentity presents two of each of the statements and related notes.
8. Consistency of presentation
-The presentation and classification of items in the financial statements is retained from one
period to the next unless a change in presentation:
a. is required by a PFRS; or
b. results in information that is reliable and more relevant.

The Elements of Financial Statements

1. Assets
a. Right
b. Potential to economic benefits produce
c. Control
2. Liabilities
a. Obligation
b. Transfer of an economic resource
c. Present obligation as result of past events
3. Equity
"Equity is the residual interest in the assets of the entity after deducting all its liabilities."
4. Income
"increases in assets, or decreases in liabilities, that result in increases in equity, other than
those relating to contributions from holders of equity claims."
5. Expenses
"decreases in assets, or increases in liabilities, that result in decreases in equity, other than
those relating to distributions to holders of equity claims.”

Presentation of statement of financial position

A classified presentation shows distinctions between current and noncurrent assets and current
and noncurrent liabilities.
A classified presentation shall be used except when an unclassified presentation provides
information that is reliable and more relevant.
PAS 1 also permits a mixed presentation.

Presentation of Expenses
a. Nature of expense method
- Under this method, expenses are aggregated according to their natureb.
b. Function of expense method (Cost of sales method)
- Under this method, an entity classifies expenses according to their function
The nature of expense method is simpler to apply.If the function of expense method is used,
additional disclosures.

PAS 7 Statement of Cash Flows

Statement of cash flows

-a basic component of the financial statements whichsummarizes the operating, investing and
financing activities of an entity.
-It provides information about the sources and utilization of cash and cash equivalents during
the period. It can only be prepared in cash basis.
Cash flows inflows (sources) and outflows (uses) of cash and cash equivalents.

*Classification of Cash Flows

1. Operating activities
-activities that affect profit or loss revenue-producing
Example: cash receipts from sale of goods Cash flows from operating activities may be
presented using either:
➤ Direct method- lshows each major class of gross receipts and gross cash payments
➤Indirect method- P/L is adjusted for the effects of non-cash items and changes in operating
assets and liab.

2. Investing activities
- involve the acquisition and disposal of NCA and other investments
Example: cash receipts and cash payments in the acquisition of PPE

3. Financing activities affect the entity's borrowings and equity.

Example: cash receipts from issuing shares or other equity instruments and cash payments to
redeem them

*Non-cash transactions are excluded and disclosed only.

DISCLOSURES
a. Components of cash and cash equivalents
b. Significant cash and cash equivalents held by the entity that are not available for use by the
group

PAS 2 Inventories

PAS 2 applies to all inventories except for the following:

➤ Assets accounted for under other standards
a. Financial instruments (PAS 32 and PFRS 9)
b. Biological assets and agricultural produce at the point of harvest (PAS 41).
➤ Assets not measured under the lower of cost or net realizable value under PAS 2
a. Inventories of producers of agricultural, forest, and mineral products measured at NRV
b. Inventories of commodity broker-traders measured at fair value less costs to sell.

3 TYPES OF INVENTORIES
✓ Held for sale in the ordinary course of business (finished goods)
✔In the process of production for such sale (work in process)
✔Raw materials and manufacturing supplies
Measurement: LCNRV
Cost of inventories should include:
a. Purchase cost
b. Conversion costs
c. Other costs necessary in bringing the inventories to their present location and condition.

The following are excluded from the cost of inventories

a. Abnormal costs
b. Storage costs, unless necessary
c. Administrative overheads that do not contribute to bringing inventories to their present
location and condition
d. Selling costs.

Cost Formulas

1. Specific identification - this shall be used for inventories that are not ordinarily
interchangeable (i.e., those that are individually unique) and those that are segregated for
specific projects.
2. First-In, First-Out (FIFO) - Under this formula, it is assumed that inventories that were
purchased or produced first are sold first that therefore unsold inventories at the end of the
period are those most recently purchased or produced.
3. Weighted Average - Under this formula, cost of sales and ending inventory are determined
based on the weighted average cost of beginning inventory and all inventories purchased or
produced during the period.

PAS 16 PROPERTY, PLANT, AND EQUIPMENT

Property, Plant, and Equipment are:

a. Tangible assets (have physical substance)
b. Used in business (used in the production or supply of goods or services, for rental, or for
administrative purposes); and
c. Long term in nature (expected to be used for more than a period)

Recognition:

An item of PPE is recognized if;

a. it is probable that future economic benefits associated with the item will flow to the entity; and
b. the cost of the item can be measured
reliably

Initial Measurement

An item of PPE is initially measured at cost. Cost comprises the following;

a. Purchase price, including import duties,
non-refundable purchase taxes, less trade
discounts and rebates.
b. Direct cost of bringing the asset to the
location and condition necessary for it to
be used in the manner intended by the
management.
c. Initial estimate of dismantlement, removal and site restoration costs for which the entity incurs
an obligation by acquiring orusing the asset other than to produce inventories.

Subsequent Measurement

After initial recognition, an entity chooses

either the cost model or the revaluation model as its accounting policy and applies that policy to
an entire class of PPE.
COST MODEL – a PPE is carried at its cost less any accumulated depreciation and any
accumulated impairment losses.
REVALUATION MODEL - a PPE is carried at its fair value at the date of the revaluation less
any subsequent accumulated depreciation and subsequent accumulated impairment losses.

Subsequent expenditures on recognized PPE

Capitalization of costs ceases when the PPE is in the location and condition necessary for it to
be capable of operating in the manner intended by management. Therefore, costs incurred in
using or redeploying a PPE are not capitalized.

The following subsequent expenditures on PPE are recognized as expenses:

a. Costs of day-to-day servicing of a PPE (i.e., repairs and maintenance expense).
b. Costs incurred while an item capable of operating in the manner intended by management
has yet to be brought into use or is operated at less than full capacity..
d. Costs of relocating or reorganizing part or all of the entity's operations.

DERECOGNITION

On derecognition, the difference between the carrying amount of the derecognized PPE and the
net disposal proceeds if any, is recognized as gain or loss in profit or loss. If the asset
derecognized is revalued, any balance in the related revaluation surplus is transferred directly to
retained earnings and will not affect the amount of gain or loss recognized in profit or loss.

Recognition and Measurements of Government Grants and Borrowing Cost

Government grants are recognized if there is reasonable assurance that:

a. the attached conditions will be complied with; and
b. the grants will be received

Measurement
*Monetary grants
a. amount of cash received; or
b. fair value of amount receivable

*Non-monetary grants (e.g., land and other resources)

a. fair value of the non- monetary asset received; or
b. alternatively, nominal amount

Borrowing costs that are directly attributable to the acquisition, construction or production of a
qualifying asset are capitalized as cost of that asset. Other borrowing costs are expensed when
incurred.

PAS 40 Investment Property

PAS 40 prescribes the accounting and disclosure requirements for investment property.

Investment property - is a property (land or a building or part of a building or both) held (bythe
owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both.

Recognition

Recognized when it meets the definition of an investment property as well as the asset
recognition criteria.

Initial Measurements
•At cost
Subsequent Measurements
•either cost model or fair value model

*The measurement of cost depends on the

mode of acquisition.

Transfers or Reclassification
Transfers to or from investment property are made only when there is a change in use, as
evidenced by the following:
a. Commencement of owner-occupation, for a transfer from investment property to PPE;
b. End of owner-occupation, for a transfer from PPE to investment property;
c. Commencement of an operating lease to another party, for a transfer from inventories to
investment property; or
d. Commencement of development with a view to sale, for a transfer from investment property
to inventories.

Derecognition
An investment property is derecognized when it is disposed of or when no future economic
benefits are expected from it.

PAS 38 Intangible Assets

Intangible asset - is an identifiable non-monetary asset without physical substance.

Essential elements of an intangible asset:
● Identifiability
● Control
● Future economic benefits

Recognition
✓when it meets the definition of an intangible asset as well as the asset recognition criteria.

Initial Measurements
✓ Cost

Subsequent Measurements
✓ Cost or Revaluation model

Subsequent expenditures
✓Capitalization of costs ceases when the intangible asset is in the condition necessary for it to
be capable of operating in the manner intended by management.

Finite useful life if the entity can determine reliably the length of, or number of production or
similar units constituting, the intangible asset's useful life.
Indefinite useful life if there is no foreseeable limit to the period over which the asset is
expected to provide future economic benefits.

Amortization

Amortization is "the systematic allocation of the depreciable amount of an intangible asset over
its useful life.”
The depreciable amount of an intangible asset with a finite useful life is amortized over the
shorter of its useful life and legal life, if any.

✓Starts when the asset is available for use, in the manner intended by management.
✓Stops when the asset is derecognized (i.e., sold or disposed of), classified as held for sale
under PFRS 5, or becomes fully depreciated.
✓Does Not Cease when the asset is no longer used, unless one of the conditions above are
met.
•Amortization is recognized as expense (in profit or loss).

Impairment
Intangible assets are tested for impairment using PAS 36.

Derecognition
An intangible asset is derecognized when it is disposed of or when no future economic benefits
are expected from it.

PAS 41 AGRICULTURE

Relates to agricultural activities:

a. Biological assets, except bearer plants
b. Agricultural produce at the point of harvest
c. Unconditional government grant related to biological assets measured at its fair value less
cost to sell

Biological assets - a living animal or plant

a. Consumable biological assets – those that are to be harvested as agricultural produce or sold
as biological assets

b. Bearer biological assets – those that are held to bear produce. Only the produce is harvested
while the bearer biological asset remains.

Items Applicable Strandard

Bearer and
Consumable animals PAS 41
Consumable plants PAS 41
Bearer plants PAS 16
Produce growing on
bearer plants PAS 41

RECOGNITION
Biological asset or agricultural produced is recognized when it meets the asset recognition
criteria, including the reliable measurement of its fair value or cost.
MEASUREMENT
Biological assets are initially and subsequently measured at fair value less cost to sell at the
point of harvest.
Gain or loss arising from the measurement are recognized in profit or loss.
A gain may arise on the initial recognition. A loss may arise one the initial recognition because
cost to sell are deducted from fair value.

PFRS 5 Non-current Assets Held for Sale and Discontinued Operations

Assets classified as noncurrent (PAS 1) are classified as current assets only if they meet the
criteria to be classified as held for sale under PFRS 5.
PFRS 5 prescribes the accounting for assets held for sale, including disposal groups, and the
presentation and disclosure of discontinued operations.

✓ NCA within the scope of PFRS 5:

a. PPE
b. Investment Property under Cost Model
c. Investment in associate
d. Intangible assets

A noncurrent asset is classified as held for sale or held for distribution to owners if its carrying
amount will be recovered principally through a sale transaction.

✓Requirements for classification as held for sale:

1. The NCA should be readily available for use.
2. The sale is highly probable.
a. The management is committed in selling the asset.
b. The entity is actively locating a buyer.
c. The sale price is reasonable.
d. The sale is expected to be completed w/in 1 year.
* Exceptions:
1. Reason for delay is outside of control
2. Entity stays committed
e. It is unlikely that the management withdraws selling.

Measurement
✓Lower of CA and FVLCTS

°Held for sale assets are not depreciated.

PFRS 9 FINANCIAL INSTRUMENTS ( FINANCIAL LIABILITIES)

Classification of Financial Liabilities

All financial liabilities are classified as subsequently measured at amortized cost, except for the
following:
a. Financial liabilities at fair value through profit or loss (FVPL) edi and derivative liabilities -
subsequently measured at fair value (e.g., designated or held for trading).
b. Financial liabilities that arise when a transfer of a financial asset does not qualify for
derecognition - subsequently measured on a basis that reflects the rights and obligations that
the entity has retained.
c. Financial guarantee contracts and Commitments to provide a loan at a below-market interest
rate subsequently measured at the higher of:
i. the amount of the loss allowance (12-month expected credit losses) and
ii. the amount initially recognized less, when appropriate, the cumulative amount of income
recognized in accordance with the principles of PFRS 15.

Measurement of Financial Liabilities

Initial Measurements
Fair value minus mansaction costs, except financial liabilities at FVPL whose ansaction costs
are expensed immediately.
Subsequent measurement
Financial liabilities classified as amortized cost are subsequently measured at amortized cost.

PAS 37 PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSET

A provision is "a liability of uncertain timing or amount.”

Recognition
A provision is recognized when all of the following conditions are met:
a. The entity has a present obligation (legal or constructive) resulting from a past event;
b. It is probable that an outflow of resources embody economic benefits will be required to settle
the obligation; and
c. The amount of the obligation can be reliably estimated.

Contingent Asset

Contingent assets include possible inflows of economic benefits from unplanned or unexpected
events.

Contingent Liabilities

A possible obligation whose existence will be confirmed/ only by the occurrence or non-
occurrence of one or more uncertain future events not wholly within the control of the entity.
 Contingent Probable Possible Remote

● Liability Recognize and Disclose Disclose only Ignore

● Asset Disclose only Ignore Ignore

Measurements
(1) best estimate,
(2) expected value, or
(3) mid-point, whichever is appropriate.

• Changes in provisions are accounted for prospectively.

PAS 8 ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERROR

Accounting policies

Accounting policies are "the specific principles, bases, conventions, rules and practices applied
by an entity in preparing and presenting financial statements.”

*Hierarchy of reporting standards

1. PFRSs
2. Judgment When making the judgment:
➤ Management shall consider the following:
a. Requirements in other PFRSs dealing with similar transactions
b. Conceptual Framework
➤ Management may consider the following:
a. Pronouncements issued by other standard-setting bodies
b. Other accounting literature and industry practices

Changes in Accounting Policies

PAS 8 requires the consistent selection and application of accounting policies. PAS 8 permits a
change in accounting policy only if the change:
a. is required by a PFRS; or
b. results in reliable and more relevant information

Accounting for Changes in Accounting Policies

Changes in accounting policies are accounted for using the following order of priority:
1. Transitional provision in a PFRS, if any.
2. Retrospective application, in the absence of a transitional provision.
3. Prospective application, if retrospective application is impracticable.

Changes in Accounting Estimates

Accounting estimates are "monetary amounts in financial statements that are subject to
measurement uncertainty.”

Accounting for Changes in Accounting Estimates

Changes in accounting estimates are accounted for by prospective application.

Prospective application means recognizing the effects of the change in profit or loss, either in:
a. the period of change; or
b. the period of change and future periods, if both are affected.

Errors

Errors include misapplication of accounting policies mathematical mistakes, oversights or

misinterpretations and fraud.

These are corrected by retrospective restatement.

Retrospective Restatement

Retrospective restatement means:

a. restating the comparative amounts for the prior period(s) presented in which the error
occurred; or
b. if the error occurred before the earliest prior period presented, restating the opening balances
of assets, liabilities and equity for the earliest prior period presented.

Retrospective restatement Retrospective application

✓ correcting a prior period error as if ✓ applying a new accounting policy as if

the error had never occurred. the policy had always been applied.

If it is impracticable, the entity is allowed to correct the error prospectively from the earliest date
practicable.

PFRS 2 SHARE-BASED PAYMENT

Share-based payment transactions

✓ is a transaction in which the entity acquires goods or services and pays by issuing its own
equity instrument or cash based --- value of its own equity instruments.

They can be:

1. Equity-settled share-based payment transaction entity receives goods or services and pays
for them by issuing its shares of stock or share options.

Non-employees Employees
Order of priority(measurement):
1. Fair value of goods or services
received
2. Fair value of equity instruments
granted

Employees and Other providing similar services

Order of priority(measurement):
1. Fair value of equity instruments granted
2. Intrinsic value

2. Cash-settled share-based payment transaction

● entity acquires goods or services and incurs an obligation to pay cash at an amount that
is based on the fair value of equity instruments.
● end of reporting period, on settlement date, liability shall be measured to fair value.
Changes in fair value are recognized in profit or loss
3. Equity-settled share-based payment transaction with cash alternatives
✓Transaction that can be settled either thru equity instrument of cash
Right of choice of settlement:
a. Counterparty has the right choice of settlement
● The entity has granted a compound instrument