Cfas Module Hala
Cfas Module Hala
Cfas Module Hala
COMPILED BY:
Concepcion M. Vedasto
Jonathan P. Binaluyo
Ruth P. Carlos
Gerwin M. Ortega
Dale C. Ison
Edelwin T. Fajutagana
Noel A. Bergonia
MODULE 1
DEVELOPMENT OF FINANCIAL REPORTING FRAMEWORK
AND STANDARD SETTING BODY
Overview:
This module describes the environment that has influenced both the development and use
of the financial accounting process. The chapter traces the development of financial accounting
standards, focusing on the groups that have had or currently have the responsibility for developing
such standards. Certain groups other than those with direct responsibility for developing financial
accounting standards have significantly influenced the standard-setting process.
World markets are becoming increasingly intertwined. And, due to technological advances
and less onerous regulatory requirements, investors can engage in financial transactions across
national borders, and to make investment, capital allocation, and financing decisions involving
many foreign companies. As a result, an increasing number of investors are holding securities of
foreign companies, and a significant number of foreign companies are found on national exchanges.
The move toward adoption of international financial reporting standards has and will continue to
facilitate this movement.
Accounting is important for markets, free enterprise, and competition because it assists in
providing information that leads to capital allocation. Reliable information leads to a better, more
effective process of capital allocation, which in turn is critical to a healthier economy.
Financial accounting is the process that culminates in the preparation of financial reports
on the enterprise for use by both internal and external parties.
Financial statements are the principal means through which a company communicates
its financial information to those outside it. The financial statements most frequently provided are
(1) the statement of financial position, (2) the income statement or statement of comprehensive
income, (3) the statement of cash flows, and (4) the statement of changes in equity. Note
disclosures are an integral part of each financial statement. Other means of financial reporting
include the president’s letter or supplementary schedules in the corporate annual report,
prospectuses, and reports filed with government agencies.
The major standard-setters of the world, coupled with regulatory authorities, now
recognize that capital formation and investor understanding is enhanced if a single set of high-
quality accounting standards is developed.
Module Objectives:
❖ describe the purpose of accounting and financial reporting;
❖ identify the need for information of the users of accounting information;
❖ describe the branches of accounting;
❖ discuss the development of accounting standards and financial reporting standards;
❖ identify the organizations involved in the promulgation of the accounting standards;
❖ describe the due process of developing the international financial reporting standards; and
❖ describe the due process of developing and promulgating Philippine Financial Reporting
Standards.
To facilitate efficient capital allocation, investors need relevant information and a faithful
representation of that information to enable them to make comparisons across borders. A
single, widely accepted set of high-quality accounting standards is a necessity to ensure
adequate comparability. In order to achieve this goal the following element must be present:
a. A single set of high-quality accounting standards established by a single standard-
setting body.
b. Consistency in application and interpretation.
c. Common disclosures.
d. Common high-quality auditing standards and practices.
e. A common approach to regulatory review and enforcement.
f. Education and training of market participants.
g. Common delivery systems (e.g., extensible Business Reporting Language—XBRL).
h. A common approach to corporate governance and legal frameworks around the world.
BRANCHES OF ACCOUNTING
❖ Financial Accounting is focused on the recording of business transactions and the
periodic preparation of reports on financial position and results of operations. Financial
accountants accord importance to existing accounting standards.
❖ Management Accounting, as defined by Institute of Management Accountants (IMA) is
a profession that involves partnering in management decision making, devising planning
and performance management systems, and providing expertise in financial reporting and
control to assist management in the formulation and implementation of organization’s
strategy.
❖ Cost Accounting deals with the collection, allocation and control of the cost of producing
specific goods and services.
❖ Auditing is an independent examination that ensures the fairness and reliability of the
reports that management submits to users outside the business entity.
❖ Government Accounting is concerned with the identification of the sources and uses of
government funds.
❖ Tax Accounting includes preparation of tax returns and the consideration of tax
consequences of proposed business transactions.
❖ Accounting Education employs accountants either as researchers, professors or
reviewers. They guarantee the continued development of the profession.
STANDARD-SETTING ORGANIZATIONS
The main international standard setting organization is the International Accounting
Standards Board (IASB), based in London, United Kingdom. The IASB issues International
Financial Reporting Standards (IFRS) which are used by most foreign exchanges.
The two organizations that have a role in international standard-setting are the
International Organization of Securities Commissions (IOSCO) and the IASB.
a. The IOSCO does not set accounting standards; it is dedicated to ensuring that the global
markets can operate in an efficient and effective basis.
b. The member agencies have agreed to:
1. Cooperate to promote high standards of regulation in order to maintain just,
efficient, and sound markets.
2. Exchange information on their respective experiences in order to promote the
development of domestic markets.
3. Unite their efforts to establish standards and an effective surveillance of
international securities transactions.
4. Provide mutual assistance to promote the integrity of the markets by a rigorous
application of the standards and by effective enforcement against offenses.
IOSCO recommends that its members allow multinational issuers to use IFRS in cross-
folder offerings and listings, as supplemented by reconciliation, disclosure, and interpretation
where necessary, to address outstanding substantive issues at a national or regional level.
d. The IFRS Interpretations Committee (22 members) assists the IASB through the
timely identification, discussion, and resolution of financial reporting issues within the
framework of IFRS.
To implement its due process, the IASB follows specific steps to develop a typical IFRS.
a. Topics are identified and placed on the Board’s agenda.
b. Research and analysis are conducted, and preliminary views of pros and cons are
issued.
c. Public hearings are held on the proposed standard.
d. The Board evaluates research and public responses and issues an exposure draft.
e. The Board evaluates the responses and changes the exposure draft, if necessary. Then
the final standard is issued.
The following characteristics of the IASB are meant to reinforce the importance of an open,
transparent, and independent due process.
a. Membership: The Board consists of 16 well-paid members, from different countries,
serving 5-year renewable terms.
b. Autonomy: The IASB is not part of any professional organization. It is appointed by
and answerable only to the IFRS Foundation.
c. Independence: Full-time IASB members must sever all ties with their former employer.
Members are selected for their expertise in standard-setting rather than to represent a
given country.
d. Voting: Nine of 16 votes are needed to issue a new IFRS.
The IASB has no regulatory mandate and no enforcement mechanism. It relies on other
regulators to enforce the use of its standards. For example, the European Union requires publicly
traded member country companies to use IFRS. Any company indicating that it prepares its
financial statements in conformity with IFRS must use all of the standards and interpretations. The
hierarchy of authoritative pronouncements is: IFRS, IAS, Interpretations issued by either the IFRS
Interpretation Committee or its predecessor the IAS Interpretations Committee, the Conceptual
Framework for Financial Reporting, and pronouncements of other standard-setting bodies that
use a similar conceptual framework to develop accounting standards (e.g., U.S. GAAP).
The significant financial reporting challenges facing the accounting profession are:
a. Non-financial measurements such as customer satisfaction indexes, backlog infor-
mation, and reject rates on goods purchased.
b. Forward-looking information.
c. Soft assets (intangibles).
d. Timeliness.
In accounting, ethical dilemmas are encountered frequently. The whole process of ethical
sensitivity and selection among alternatives can be complicated by pressures that may take the
form of time pressure, job pressures, client pressures, personal pressures, and peer pressures.
And, there is no comprehensive ethical system to provide guidelines.
Convergence to a single set of high-quality global financial reporting standards is a real
possibility. For example, the IASB and the FASB (of the United States) have spent the last 12
years working to converge their standards.
In addition, U.S. and European regulators have agreed to recognize each other’s standards
for listing on the various world securities exchanges. As a result, costly reconciliation re-
quirements have been eliminated and hopefully will lead to greater comparability and transparency.
Why the need for high-quality standards?
1. To facilitate efficient capital allocation.
2. In order to ensure adequate comparability across borders, a single, widely accepted set
of high-quality accounting standards is a necessity.
3. Identify the elements involved:
a. A single set of high-quality accounting standards established by a single standard-
setting body.
b. Consistency in application and interpretation.
c. Common disclosures.
d. Common high-quality auditing standards and practices.
e. Common approach to regulatory review and enforcement.
f. Education and training of market participants.
g. Common delivery systems.
h. Common approach to corporate governance and legal frameworks around the world.
Major standard-setters and regulatory authorities around the world recognize that capital
formation and investor understanding will be enhanced by a single set of high-quality accounting
standards.
Assessment Activities
TRUE-FALSE
1. Financial statements are the principal means through which financial information is
communicated to those outside an enterprise.
2. The major financial statements used under International Financial Reporting Standards
(IFRS) include the statement of changes in financial position and the statement of
stockholders’ equity.
3. In order to provide information that is useful in decision making and capital allocation, the
International Financial Reporting Standards (IFRS) requires all companies to use a common
currency.
4. Users of the financial information provided by a company use that information to make
capital allocation decisions.
5. The passage of a new International Financial Reporting Standards Statement requires the
support of ten of the sixteen board members.
6. International Financial Reporting Standards preceded International Accounting Standards.
7. The standard-setting structure used by the International Accounting Standards Board is very
similar to that used by the Financial Accounting Standards Board.
8. The International Accounting Standards Board issues International Financial Reporting
Standards.
9. International Accounting Standards are no longer considered applicable because they have
been replaced by International Financial Reporting Standards.
10. The two major standard-setting organizations in the world are the International Accounting
Standards Board (IASB) and International Organization of Securities Commission (IOSCO).
11. IFRS is considered more comprehensive than U.S. GAAP and the standards contain more
implementation guidance than U.S. GAAP.
12. The International Accounting Standards Board (IASB) follows specific steps in developing
International Financial Reporting Standards (IFRS); the first step in the process is holding a
public hearing.
13. The International Accounting Standards Board (IASB) has 16 members and each member
of the IASB must come from a different country.
14. Interpretations issued by the IFRS Interpretations Committee are more authoritative than
IASB Standards and Interpretations.
15. The International Accounting Standards Board (IASB) is a regulatory agency with
enforcement powers for its International Financial Reporting Standards (IFRS).
16. Accounting standards are now less likely to require the recording or disclosure of fair value
information due to its inherent subjectivity.
17. IFRS are a product of careful logic or empirical findings and are not influenced by political
action.
18. The expectations gap is caused by what the public thinks accountants should be doing and
what accountants think they can do.
19. Significant financial reporting issues facing global financial reporting and efficient capital
allocation include how to provide backward-looking information.
20. The IASB relies primarily on the International Organization of Securities Commissions
(IOSCO) for regulation and enforcement of its standards.
MULTIPLE CHOICE
1. The financial statements most frequently provided include all of the following except the
2. All the following are differences between financial and managerial accounting in how
accounting information is used except to
a. plan and control company's operations.
b. decide whether to invest in the company.
c. evaluate borrowing capacity to determine the extent of a loan to grant.
d. All of these answers are differences.
3. Which of the following represents a form of communication through financial reporting but
not through financial statements?
a. Statement of financial position.
b. President's letter.
c. Income statement.
d. Notes to financial statements.
6. How does accounting help the capital allocation process attract investment capital?
a. Provides timely, relevant information.
b. Encourages innovation.
c. Promotes productivity.
d. Provides timely, relevant information and encourages innovation.
7. What would be an advantage of having all countries adopt and follow the same accounting
standards?
a. Consistency.
b. Comparability.
c. Lower preparation costs.
d. Comparability and lower preparation costs
a. issue enforceable standards which regulate the financial accounting and reporting of
multinational corporations.
b. develop a uniform currency in which the financial transactions of companies through-
out the world would be measured.
c. develop a single set of high-quality IFRS.
d. arbitrate accounting disputes between auditors and international companies.
16. In the past, many countries have relied on their own standard-setting organizations. The
standards issued by these various standard-setting organizations around the world
include
a. Tax-oriented standards.
b. Business-based standards.
c. Principles-based standards.
d. All of these answers are correct.
18. Which of the following organizations is not among the four-international standard-setting
organizations?
a. IFRS Foundation.
b. IFRS.
c. IFRS.
d. International Organization of Securities Commissions (IOSCO).
20. Which of the following is not one of the major types of pronouncements issued by the
International Accounting Standards Board (IASB)?
a. International financial reporting standard.
b. Memorandum of understanding.
c. Framework for financial reporting.
d. International financial reporting interpretations.
22. Which of the following is not a major challenge facing the accounting profession?
a. Nonfinancial measurements.
b. Timeliness.
c. Accounting for hard assets.
d. Forward-looking information.
23. Significant financial reporting issues facing global financial reporting and efficient capital
allocation include all of the following except:
a. How to provide backward-looking information.
b. How to report nonfinancial measures such as customer satisfaction.
c. How to provide forward-looking information.
d. How to provide real-time financial statement information.
Module 2
CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING
Overview
A conceptual framework can be defined as a system of ideas and objectives that lead to
the creation of a consistent set of rules and standards. Specifically, in accounting, the rule and
standards set the nature, function and limits of financial accounting and financial statements.
Different companies and countries follow different methods of financial accounting and
reporting. This might not always be due to choose but also a requirement of the business model
itself. For example, a company working with the distributorship model records its sale when the
goods leave the factory against a purchase order from the distributor. On the other hand, a
company working under the consignment sale model can record a sale only when goods are sold
to customer (and not the sale channel intermediaries). As such, there arise differences in financial
accounting and reporting, which magnify upon reaching the analysis and reporting stage.
The main reasons for developing an agreed conceptual framework are that it provides:
• a framework for setting accounting standards;
• a basis for resolving accounting disputes; and
• fundamental principles which then do not have to be repeated in accounting standards.
Having a fixed set of definitions of each line item, hence, becomes useful and rather
indispensable to ensure conceptual consistency amongst the audience of the report. It also helps
the potential investor better gauge and compare the performances of target companies,
regardless of their physical location and differences in business models.
The International Accounting Standards Board (Board) issued the revised Conceptual
Framework for Financial Reporting (Conceptual Framework), a comprehensive set of concepts
for financial reporting, in March 2018. It sets out, the objective of financial reporting; the qualitative
characteristics of useful financial information; a description of the reporting entity and its
boundary; definitions of an asset, a liability, equity, income and expenses; criteria for including
assets and liabilities in financial statements (recognition) and guidance on when to remove them
(derecognition); measurement bases and guidance on when to use them; and concepts and
guidance on presentation and disclosure.
Module Objectives:
After successful completion of this module, you should be able to:
❖ Understand the objective of financial reporting;
❖ Identify the qualitative characteristics of financial information;
❖ Describe the objective of financial statement;
❖ Identify the elements of financial statements;
❖ Understand the criteria for recognition and derecognition of the elements of financial
statement;
❖ Understand the measurement principles of financial reporting;
❖ Understand the presentation and disclosure principles of financial reporting; and
❖ Understand the concepts of capital and capital maintenance
Course Materials
The decisions described depend on the returns that existing and potential investors,
lenders and other creditors expect, for example, dividends, principal and interest payments or
market price increases. Investors’, lenders’ and other creditors’ expectations about returns
depend on their assessment of the amount, timing and uncertainty of (the prospects for) future
net cash inflows to the entity and on their assessment of management’s stewardship of the entity’s
economic resources. Existing and potential investors, lenders and other creditors need
information to help them make those assessments. To make the assessments described in
paragraph 1.3, existing and potential investors, lenders and other creditors need information
about:
a) the economic resources of the entity, claims against the entity and changes in those
resources and claims; and
b) how efficiently and effectively the entity’s management and governing board have
discharged their responsibilities to use the entity’s economic resources.
Many existing and potential investors, lenders and other creditors cannot require reporting
entities to provide information directly to them and must rely on general purpose financial reports
for much of the financial information they need. Consequently, they are the primary users to whom
general purpose financial reports are directed. To a large extent, financial reports are based on
estimates, judgements and models rather than exact depictions. The Conceptual Framework
establishes the concepts that underlie those estimates, judgements and models. The concepts
are the goal towards which the Board and preparers of financial reports strive. As with most goals,
the Conceptual Framework’s vision of ideal financial reporting is unlikely to be achieved in full, at
least not in the short term, because it takes time to understand, accept and implement new ways
of analyzing transactions and other events. Nevertheless, establishing a goal towards which to
strive is essential if financial reporting is to evolve to improve its usefulness.
Relevance
Relevant financial information can make a difference in the decisions made by users.
Information may be capable of making a difference in a decision even if some users choose not
to take advantage of it or are already aware of it from other sources. Financial information can
make a difference in decisions if it has predictive value, confirmatory value or both.
Faithful representation
Financial reports represent economic phenomena in words and numbers. To be useful,
financial information must not only represent relevant phenomena, but it must also faithfully
represent the substance of the phenomena that it purports to represent. In many circumstances,
the substance of an economic phenomenon and its legal form are the same. If they are not the
same, providing information only about the legal form would not faithfully represent the economic
phenomenon. To be a perfectly faithful representation, a depiction would have three
characteristics. It would be complete, neutral and free from error. Of course, perfection is seldom,
if ever, achievable. The Board’s objective is to maximize those qualities to the extent possible.
Comparability
Users’ decisions involve choosing between alternatives, for example, selling or holding an
investment, or investing in one reporting entity or another. Consequently, information about a
reporting entity is more useful if it can be compared with similar information about other entities
and with similar information about the same entity for another period or another date.
Comparability is the qualitative characteristic that enables users to identify and understand
similarities in, and differences among, items. Unlike the other qualitative characteristics,
comparability does not relate to a single item. A comparison requires at least two items.
Verifiability
Verifiability helps assure users that information faithfully represents the economic
phenomena it purports to represent. Verifiability means that different knowledgeable and
independent observers could reach consensus, although not necessarily complete agreement,
that a depiction is a faithful representation. Quantified information need not be a single point
estimate to be verifiable. A range of possible amounts and the related probabilities can also be
verified.
Timeliness
Timeliness means having information available to decision-makers in time to be capable
of influencing their decisions. Generally, the older the information is the less useful it is. However,
some information may continue to be timely long after the end of a reporting period because, for
example, some users may need to identify and assess trends.
Understandability
Classifying, characterizing and presenting information clearly and concisely makes it
understandable. Financial reports are prepared for users who have a reasonable knowledge of
business and economic activities and who review and analyze the information diligently. At times,
even well-informed and diligent users may need to seek the aid of an adviser to understand
information about complex economic phenomena.
Financial statements
Financial statements provide information about economic resources of the reporting entity,
claims against the entity, and changes in those resources and claims, that meet the definitions of
the elements of financial statements. The objective of financial statements is to provide financial
information about the reporting entity’s assets, liabilities, equity, income and expenses that is
useful to users of financial statements in assessing the prospects for future net cash inflows to
the reporting entity and in assessing management’s stewardship of the entity’s economic
resource. That information is provided:
a) in the statement of financial position, by recognizing assets, liabilities and equity;
b) in the statement(s) of financial performance, by recognizing income and
expenses; and
c) in other statements and notes, by presenting and disclosing information about:
i. recognized assets, liabilities, equity, income and expenses, including information
about their nature and about the risks arising from those recognized assets and
liabilities;
ii. assets and liabilities that have not been recognized, including information about
their nature and about the risks arising from them;
iii. cash flows;
iv. contributions from holders of equity claims and distributions to them; and
v. the methods, assumptions and judgements used in estimating the amounts
presented or disclosed, and changes in those methods, assumptions and
judgements.
Reporting period
Financial statements are prepared for a specified period of time (reporting period) and
provide information about:
a) assets and liabilities—including unrecognized assets and liabilities—and equity that
existed at the end of the reporting period, or during the reporting period; and
b) income and expenses for the reporting period.
To help users of financial statements to identify and assess changes and trends, financial
statements also provide comparative information for at least one preceding reporting period.
An 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. This section
discusses three aspects of those definitions:
a) right;
b) potential to produce economic benefits; and
c) control.
Equity is the residual interest in the assets of the entity after deducting all its liabilities.
Equity claims are claims on the residual interest in the assets of the entity after deducting all its
liabilities. In other words, they are claims against the entity that do not meet the definition of a
liability. Such claims may be established by contract, legislation or similar means, and include, to
the extent that they do not meet the definition of a liability:
a) shares of various types, issued by the entity; and
b) some obligations of the entity to issue another equity claim.
Income and expenses are the elements of financial statements that relate to an entity’s
financial performance. Users of financial statements need information about both an entity’s
financial position and its financial performance. Hence, although income and expenses are
defined in terms of changes in assets and liabilities, information about income and expenses is
just as important as information about assets and liabilities.
The statements are linked because the recognition of one item (or a change in its carrying
amount) requires the recognition or derecognition of one or more other items (or changes in the
carrying amount of one or more other items). For example:
a) the recognition of income occurs at the same time as:
i. the initial recognition of an asset, or an increase in the carrying amount of an
asset; or
ii. the derecognition of a liability, or a decrease in the carrying amount of a liability.
Recognition criteria
Only items that meet the definition of an asset, a liability or equity are recognized in the
statement of financial position. Similarly, only items that meet the definition of income or expenses
are recognized in the statement(s) of financial performance. However, not all items that meet the
definition of one of those elements are recognized. Not recognizing an item that meets the
definition of one of the elements makes the statement of financial position and the statement(s)
of financial performance less complete and can exclude useful information from financial
statements. On the other hand, in some circumstances, recognizing some items that meet the
definition of one of the elements would not provide useful information. An asset or liability is
recognized only if recognition of that asset or liability and of any resulting income, expenses or
changes in equity provides users of financial statements with information that is useful.
Derecognition
Derecognition is the removal of all or part of a recognized asset or liability from an entity’s
statement of financial position. Derecognition normally occurs when that item no longer meets the
definition of an asset or of a liability:
a) for an asset, derecognition normally occurs when the entity loses control of all or part
of the recognized asset; and
b) for a liability, derecognition normally occurs when the entity no longer has a present
obligation for all or part of the recognized liability.
MEASUREMENT BASES
Elements recognized in financial statements are quantified in monetary terms. This
requires the selection of a measurement basis. A measurement basis is an identified feature—for
example, historical cost, fair value or fulfilment value—of an item being measured. Applying a
measurement basis to an asset or liability creates a measure for that asset or liability and for
related income and expenses.
Historical cost
Historical cost measures provide monetary information about assets, liabilities and related
income and expenses, using information derived, at least in part, from the price of the transaction
or other event that gave rise to them. Unlike current value, historical cost does not reflect changes
in values, except to the extent that those changes relate to impairment of an asset or a liability
becoming onerous.
Current value
Current value measures provide monetary information about assets, liabilities and related
income and expenses, using information updated to reflect conditions at the measurement date.
Because of the updating, current values of assets and liabilities reflect changes, since the
previous measurement date, in estimates of cash flows and other factors reflected in those current
values. Unlike historical cost, the current value of an asset or liability is not derived, even in part,
from the price of the transaction or other event that gave rise to the asset or liability. Current value
measurement bases include:
a) fair value;
b) value in use and fulfilment value for liabilities; and
c) current cost
Measurement of equity
The total carrying amount of equity (total equity) is not measured directly. It equals the
total of the carrying amounts of all recognized assets less the total of the carrying amounts of all
recognized liabilities.
Classification
Classification is the sorting of assets, liabilities, equity, income or expenses based on
shared characteristics for presentation and disclosure purposes. Such characteristics include—
but are not limited to—the nature of the item, its role (or function) within the business activities
conducted by the entity, and how it is measured.
Offsetting
Offsetting occurs when an entity recognizes and measures both an asset and liability as
separate units of account, but groups them into a single net amount in the statement of financial
position. Offsetting classifies dissimilar items together and therefore is generally not appropriate.
Classification of equity
To provide useful information, it may be necessary to classify equity claims separately if
those equity claims have different characteristics
The statement of profit or loss is the primary source of information about an entity’s
financial performance for the reporting period. That statement contains a total for profit or loss
that provides a highly summarized depiction of the entity’s financial performance for the period.
Many users of financial statements incorporate that total in their analysis either as a starting point
for that analysis or as the main indicator of the entity’s financial performance for the period.
Nevertheless, understanding an entity’s financial performance for the period requires an analysis
of all recognized income and expenses—including income and expenses included in other
comprehensive income—as well as an analysis of other information included in the financial
statements.
Aggregation
Aggregation is the adding together of assets, liabilities, equity, income or expenses that
have shared characteristics and are included in the same classification. Aggregation makes
information more useful by summarizing a large volume of detail. However, aggregation conceals
some of that detail. Hence, a balance needs to be found so that relevant information is not
obscured either by a large amount of insignificant detail or by excessive aggregation.
CONCEPTS OF CAPITAL
A financial concept of capital is adopted by most entities in preparing their financial
statements. Under a financial concept of capital, such as invested money or invested purchasing
power, capital is synonymous with the net assets or equity of the entity. Under a physical concept
of capital, such as operating capability, capital is regarded as the productive capacity of the entity
based on, for example, units of output per day.
Course Assessment
1. The standard-setting body who issues the International Financial Reporting Standards
2. The standard-setting organization who issues the U.S. GAAP
3. The process of identifying, measuring and communicating economic information to permit
informed judgment and decision by users of the information.
4. This was created to issue implementing guidelines on PFRS.
5. The amount of time that is expected to elapse until an asset is realized or otherwise converted
into cash
6. The financial report that shows the reporting entity’s economic resources and claims
7. The financial report that shows the changes due to events and transactions other than
financial performance such as the issue of equity instruments and distributions of cash or
other assets to shareholders
8. This is used when assets are recorded at the amount of cash or cash equivalents or the fair
value of the consideration given to acquire them at the time of their acquisition.
9. Refers to the ability of the business to raise cash to meet unexpected cash requirements.
10. Those responsible for the preparation and presentation of financial statements.
11. The standard that sets out the requirements for the presentation of the cash flow statement
and related disclosures.
12. Portray the financial effects of transactions and other events by grouping them into broad
classes according to their economic characteristics.
13. Result if an asset is sold more than book value.
14. One of its recognition criteria is that it is probable that the future economic events will flow to
the enterprise.
15. Under this concept a profit is earned only if the physical productive capacity (or operating
capability) of the entity (or the resources or funds needed to achieve that capacity) at the end
of the period exceeds the physical productive capacity at the beginning of the period, after
excluding any distributions to, and contributions from, owners during the period.
B. Fill in the Blanks - Write the word(s) to make the statements complete and correct.
10. The conceptual framework specifically mentions one underlying assumption, namely,
_______________.
11. The four sectors of accountancy under PICPA are: _______________, _______________,
_______________, _______________.
12. One constraint on useful financial reporting is that costs should be justified by the
_______________ of the reported financial information.
13. Assets that are carried at the amount of cash or cash equivalents that would have to be paid
if the same or an equivalent asset was acquired currently is measured using the
_______________.
14. Under the _______________ approach, investment must be recovered before a company
can have income.
15. The objective of PAS 1 is to prescribe the basis for presentation of general-purpose financial
statements in order to ensure _______________.
C. Matching – Write the letter of the term under List B that corresponds to the statement
indicated under List A.
LIST A LIST B
Concerns the relative size of an item and its effect on
1 a. Predictive value
decisions.
2 Information confirms expectations. b. Relevance
3 Important for making inter-firm comparisons. c. Timeliness
Accrual basis of
4 Applying the same accounting practices over time. d.
accounting
5 Implies consensus among different measures. e. Feedback value
A complete set of financial statements (including
6 comparative information) should be presented at least f. Frequency of reporting
annually.
7 Information is available prior to the decisions. g. Faithful representation
8 Pertinent to the decision at hand. h. Understandability
Along with relevance, a fundamental qualitative
9 i. Materiality
characteristic.
Requires consideration of the cost and value of
10 j. Comparability
information.
The process of admitting information into financial
11 k. Offsetting
statements.
An entity reports separately both assets and liabilities,
12 l. Recognition
and income and expenses.
13 Information is useful in determining the future m. Consistency
Effects of transactions on an entity’s economic
resources and claims are recognized in the periods in
14 n. Cost effectiveness
which those effects occur, even if the resulting cash
receipts and payments occur in a different period.
It requires that users have some knowledge of the
complex economic activities of enterprises, the
15 o. Verifiability
accounting process and the technical terminology in the
statements.
p. Prudence
q. Substance over form
F. Multiple Choices: Select the best answer for each of the following.
1. According to the Preface to International Financial Reporting Standards, which of the following
are objectives of the IASB?
I. To harmonize financial reporting between IFRS and US GAAP and European
II. To work actively with national standard setters
III. To promote the use and strict application of financial accounting standards
A. I and II C. II and III
B. I and III D. I, II and III
2. Which of the following are parts of the “due process” of the IASB in issuing a new International
Financial Reporting Standard?
I. Establishing an advisory committee to give advice
II. Developing and publishing a discussion document for public comment
III. Issuance of an interpretation as authoritative guidance
IV. Reviewing compliance and enforcement procedures
V. Issuance of the final standard with number and title
A. I, II and III only C. I, II, III & IV only
B. I, II and V only D. I, II, III, IV & V
3. Which of the following bodies is responsible for reviewing accounting issues that are likely to
receive divergent or unacceptable treatment in the absence of authoritative guidance, whit a
view to reaching consensus as to the appropriate accounting treatment?
A. Standards Advisory Council (SAC)
B. International Accounting Standards Board (IASB)
C. International Financial Reporting Interpretations Committee (IFRIC)
D. International Accounting Standards Committee Foundation (IASC Foundation)
6. Which body appoints the members of International Accounting Standards Board (IASB) that
make the present IFRS?
A. IFRS Foundation.
B. IFRS Advisory Council.
C. International Accounting Standards Committee.
D. International Financial Reporting Interpretations Committee.
11. The IASB declared that the merits of proposed standards are assessed
A. from a position of neutrality.
B. from a position of materiality.
C. based on arguments of lobbyist.
D. based on possible impact on behavior.
14. Under Section 5 of RA 9298, who shall appoint the members of the Professional Regulatory
Board of Accountancy?
A. The chairman of the Board of Accountancy.
B. The president of the Republic of the Philippines.
C. The chairperson of Professional Regulations Commission.
D. The president of Philippine Institute of Certified Public Accountants.
15. The following statements relate to the Board of Accountancy. Select the incorrect statement:
A. The Board consists of a Chairman and six members.
B. The chairman and members of the Board are appointed by the President of the
Philippines upon recommendation of the Professional Regulation Commission.
C. The Professional Regulation Commission may remove from the Board of
Accountancy, any member whose certificate to practice has been revoked or
suspended.
D. All sectors of accountancy practice shall as much as possible be equitably
represented in the Board.
17. This accounting objective emphasizes the importance of the Income Statement as it is geared
toward proper income or performance determination of the enterprise.
A. Entity theory. C. Proprietary theory.
B. Fund theory D. Residual equity theory.
18. Which of the following is not a description or a function of the Financial Reporting Standards
Council (FRSC)?
A. It establishes generally accepted accounting principles in the Philippines.
B. It receives financial support principally from the Professional Regulations Commission
(PRC).
C. It is the successor of Accounting Standards Council (ASC) and the creator of Philippine
Interpretations Committee (PIC).
D. It assists the Professional Regulatory Board of Accountancy (BOA) in carrying out its
power and function to promulgate accounting standards in the Philippines.
21. Under the Conceptual Framework for Financial Reporting which of the following statements
is not a feature of financial information’s “comparability” characteristics?
A. Comparability is uniformity.
B. A comparison requires at least two items.
C. Consistency, although related to comparability, is not the same.
D. Comparability is the goal; consistency helps to achieve that goal.
22. When fair value is used in measuring assets in the financial statements, current GAAP
provides following references as basis of fair value, except
A. Price in active market.
B. Price in recent transaction.
C. Price taken from industry or sector benchmarks.
23. The objectives of financial reporting for business enterprises are based on
A. the need for conservative information
B. the needs of the users of the information
C. the need to report on management’s stewardship
D. the need to comply with financial accounting standards
24. Which of the following statements regarding users of financial information is correct?
A. Managers of an entity are considered to be internal decision makers.
B. Accounting information is prepared for and useful to only outside decision makers.
C. External decision makers can obtain whatever financial data they need and whenever
they need it.
D. The members of the Board of Directors are not internal rather than external users of
financial information.
25. Which of the following statements is (are) true, concerning the Going Concern assumption?
I. When preparing financial statements, management is required to make an assessment
of an enterprise’s ability to continue as a going concern which should be at least twelve
months from balance sheet date.
II. When an enterprise has a history of profitable operations and ready access to financial
resources it is not a detailed analysis as to is ability to operate as a going concern is not
necessary.
III. When the financial statements are not prepared on a going-concern basis, this fact should
disclose
A. I and II only C. II and III
B. II and III only D. I, II, and III
26. If accounting information is timely, and has predictive as well as feedback value, then it is
considered to be
A. relevant C. understandable
B. reliable D. verifiable
27. In the first week of December 2016, Elisa Company signs a major contract to develop an
accounting information system for Edward Inc. No work is begun the current year, yet the
notes to the financial statements discuss the nature and peso amount of the contract. This is
an example of:
A. completeness or full disclosure C. historical cost
B. conservatism D. relevance
28. Which of the following statements best describes the term “going concern”?
A. The expenses of an entity exceed its income
B. When current liabilities of an entity exceed current assets
C. The ability of the entity to continue in operation for the foreseeable future
D. The potential to contribute to the flow of cash and cash equivalents to the entity
29. Which TWO of the following are listed in the IASB Framework as ‘underlying assumptions’
regarding financial statements?
A. The financial statements are prepared under the accrual basis
B. The entity can be viewed as a going concern
C. The financial statements are reliable
31. Which of the following is the best description of reliability in relation to information in financial
statements?
A. Comprehensibility to users C. Influence on the economic decisions
B. Freedom from material error and bias D. Inclusion of degree of caution of
users
32. According to the IASB Framework for the preparation and presentation of financial
statements, which TWO of the following are examples of expenses?
I. A loss on the disposal of a non-current asset
II. A decrease in equity arising from a distribution to equity participants
III. A decrease in economic benefits during the accounting period
IV. A reduction in income for the accounting period
A. I and II C. II and III
B. I and III D. III and IV
33. An expiration of cost which is incurred without compensation or return and is not absorbed as
cost of revenue is called
A. Deferred charge C. Indirect cost
B. Deferred credit D. Loss
34. Which of the following best describes the distinction between expenses and losses?
A. Losses are material items whereas expenses are immaterial items
B. Losses are extraordinary charges whereas expenses are ordinary charges
C. Losses are reported net-of-related-tax effect whereas expenses are not reported not-of-
tax
D. Losses results from peripheral or incidental transactions whereas expenses result from
ongoing major or central operations of the entity
35. Which of the following statements about accounting recognition is (are) true?
I. In accounting, there are instances when a gain/loss would arise upon initial recognition
of an asset.
II. No asset can simultaneously be an asset of more than one entity
III. At times, two or more entities may share the benefits that an asset provides
IV. An appropriate basis for recognizing an asset is when a particular enterprise acquires the
right to utilize and control access to the asset’s benefits
36. Which one of the following terms best describes the amount of cash or cash equivalents that
could currently be obtained by selling an asset in an orderly disposal?
A. Fair value C. Residual value
B. Realizable value D. Value in use
37. Which of the following assets are initially and subsequently measured at Fair Value?
I. Biological assets IV. Property and Equipment
II. Available for sale securities V. Held for trading securities
III. Inventories VI. Intangible assets
39. What concept is critical in distinguishing an enterprise’s return on investment from return of
its investment?
A. Capital maintenance concept C. Current operating performance concept
B. Comprehensive income concept D. Return on investment concept
40. Under the Conceptual Framework of Financial Reporting, users of financial information may
be classified into
A. Heavy users (management) and slight users (public, government).
B. Primary users (existing and potential investors and creditors) and other users.
C. Internal users (employees, customers) and external users (investors, creditors).
D. Main users (existing investors, creditors) and incidental users (potential investors,
creditors)
43. Which of the following is the first step within hierarchy of guidance to which management
refers, and whose applicability at considers, when selecting accounting policies?
A. Apply the requirements in PFRS dealing with similar and related issues.
B. Apply a standard from PFRS if it specifically relates to the transaction, event, or condition.
C. Consider the applicability of the definitions, recognition criteria, and measurement
concepts in the Conceptual Framework.
D. Consider the most recent pronouncements of other standard-setting bodies to the extent
they do not conflict with PFRS or the Conceptual Framework?
44. Under the Conceptual Framework for Financial Reporting 2010, which of the following is a
new item added in its scope but is still a work-in-progress?
A. Consolidated financial statements. C. The government entity.
B. Mergers and acquisitions. D. The reporting entity.
45. What is the qualitative characteristic of financial statements according to the Framework?
A. Qualitative characteristics are broad classes of financial effects of transactions and other
events.
B. Qualitative characteristics are the attributes that make the information provided in
financial statements useful to others.
C. Qualitative characteristics measure the extent to which an entity has complied with all
relevant Standards and Interpretations.
D. Qualitative characteristics are non-quantitative aspects of an entity’s position and
performance and changes in financial position.
MODULE 3
REVIEW OF ACCOUTING PROCESS
Overview:
The accounting process also known as accounting cycle is a series of steps to be
completed during an accounting period or reporting period. This process is a set of steps that are
repeated in the same order every reporting period and demonstrates the purpose of financial
accounting–to create useful financial information in the form of financial statements
The end results of the accounting process is the financial statements such as a statement
of financial position, a statement of profit or loss and other comprehensive income; a statement
of changes in equity for the period; a statement of cash flows for the period and notes, comprising
significant accounting policies and other explanatory information.
For some entities, financial statements are prepared on a monthly, quarterly, and / or
annually depending on the purpose of reporting. Financial statements are the main source of
financial information for most decision by the management. That is why financial
accounting and reporting places such a high emphasis on the accuracy, reliability, and relevance
of the information on these financial statements. On the other hand, these statements are also
prepared to give users outside of the entity like investors and creditors for more information about
the entity’s financial positions and financial performance. along with other users such as
regulatory agencies on a timely manner.
The entities have various options on how the accounting process shall be made. In the
past they used manual systems process but now in this time of globalization various technology.
arises using the computerized accounting system. However, the manner the entity chose the
accounting process, they are being observed to capture the transactions for financial reporting
purposes.
Module Objectives:
After successful completion of this module, you should be able to:
❖ review the phases of accounting process;
❖ acquire mastery in preparing year-end adjusting entries; and
❖ understand the nature of reversing entries.
Course Materials:
The accounting system that requires every business transactions or event to be recorded
in at least two accounts is called double entry accounting system. This is the same concept behind
the accounting equation. Every debit that is recorded must be matched with a credit and must be
equal in every accounting transaction in their total There are two general classification of journal,
the General Journal and the Special Journal
The general journal is often used by small entity with only few transactions and also called
two column journals. For an entity with numerous transactions, special journals are being used in
addition to general journal that are used to help divide and organize business transactions.
Here’s a list of the special accounting journals used:
• Cash Receipts Journal
• Cash Disbursements Journal
• Purchases Journal
• Sales Journal
Each of the journals has a specific purpose and are used for recording specific types of
transactions. For example, the cash receipts journal contains all of the cash sale transactions.
The accounts receivable or credit sales journal contains all the transactions for credit sales.
Purchases Journal are used for all credit purchase, while cash purchases transactions are
recorded in cash disbursement journal. All other transactions such as adjusting and closing, and
reversing entries are recorded in the general journal. The use of special journal the help
management organize and analyze accounting information.
for accounts with various details. For instance, the customers account serves as subsidiary ledger
for accounts receivable, creditors accounts for accounts payable, raw materials inventory
accounts and different property items for property and equipment accounts.
Most entities have computerized accounting systems that update ledger accounts as soon
as the journal entries are input into the accounting system. Manual accounting systems are
usually posted weekly or monthly. Just like journalizing, posting entries is done throughout each
accounting period.
Prepayments
Prepaid expenses are goods or services used in the operations of the entity that have
been paid for but have not been consumed at the end of accounting period. Upon purchase the
amount is initially recorded either asset or expense account. As the time passes its operations, it
is necessary to determine the portion of used up during the current period and the unused portion
for use to subsequent period. If the prepayment was originally recorded to expense account, the
year end adjustment recognizes the asset portion or the unused balance. While if the prepayment
was originally recorded as an asset, the year end adjustment recognizes the expense and
recognizes the expenses or used portion. Both instances needed adjusting entries for the asset
account would represent the unused portion while the expense account reports the balance
representing the used portion during the accounting period.
On the other hand, unearned revenues consist of income received from customers, but
no goods or services have yet been provided to them. In this case, the entity owes the customers
a good or service and must record the liability in the current period until the goods or services are
provided. The entity that received cash before the sale of goods and services may record the
collection with the option of recording using the revenue method or the liability method. At the end
of accounting period, the portion of amount collected that is not yet earned and for deliver on
future date, the account originally credited represents mixed account- revenue and liability. This
needed adjustment before preparing the financial statements to adjust the mixed account and
identify revenue earned in the current period and the amount deferred for future period.
Accruals
Some expenses accrue from day to day, but the company ordinarily records them only
when they are paid. Accrued expenses are expenses incurred but are not yet paid at the end of
the fiscal period. They are both an expense and a liability. Hence, they are referred to as accrued
liability, accrued payable, or accrued expense.
On the other hand, accrued revenues are revenues earned but not yet received at the end
of the period. An example of this type of adjustment would be services that have been performed
but have not been billed or collected. To present an accurate picture of the affairs of the business,
the revenue earned must be recognized on the income statement and the asset on the balance
sheet.
Non-cash expenses
Adjusting journal entries are also used to record expenses like depreciation, amortization,
and depletion. These expenses are often recorded at the end of accounting period because they
are usually calculated on a period basis. For example, depreciation is usually calculated on an
annual basis. Thus, it is recorded at the end of the year. This also relates to the matching principle
where the assets are used during the year and written off after they are used.
Property Plant and Equipment (PPE) and Intangible asset (IA) accounts are assets of the
entities that are being used for its operations and recorded that must be also adjusted to reflect
its value. The recognition of depreciation for PPE and amortization of IA applies the recognition
principle of systematic and rational allocation. Depreciation is the systematic allocation of expense
on the life or usefulness of the asset. The adjustment recognizes the Depreciation Expense and
the decrease is recorded by crediting the contra asset account – Accumulated Depreciation.
For intangible assets (IA), the charge to operation for its utilization is recorded by crediting
Accumulated Amortization. Such as amortization is the systematic and rational allocation of cost
of the intangible assets over its economic benefits. The cost of these assets is initially recognized
as an asset and systematically spread the expense portion over its period of benefit or usefulness.
For impairment of asset, accounts such as loans and receivables should be appropriately
reported at net realizable value. The significant portion of credit sales regardless the entities effort
of its collection, there is always a probability of not being collected at its full amount. At the end of
accounting period the unrecoverable amount is recognized as impairment loss or also known as
Bad debts or Uncollectibles. Based on this, an adjusting entry is made by debit to Uncollectible
Accounts Expense and credit the contra asset account Allowance for Uncollectible (if using the
allowance method).
As to inventories, there are two methods of inventory systems – the Perpetual Inventory
and Periodic Inventory system. When the entity uses periodic (physical system) in recording
inventory, an adjustment is necessary to set-up the ending inventory. Before the end of
accounting period adjustments, the inventory account still reflects its beginning balances since
the purchases of merchandise are recorded using Purchases account. Thus, the amount of
ending inventory are cannot be determined unless a physical count is made for the period. The
adjustment of inventory is accompanied by recognizing the Cost of Goods Sold using the function
expense method for presentation for operating expenses in the Statement of Income and
Expenses. The other alternative of the entity to record the adjustment for inventory that does not
establish the Cost of Goods Sold in the accounts but merely adjust the Inventory account is in the
Closing entry using the temporary account Income Summary. When perpetual inventory records
are maintained, the Inventory and the Cost of Goods Sold balance that appears in the ledger
reflects the updated amounts and does not need to require further adjusting entry. Inventories
are required to be stated at lower of cost or market and reduced to net realizable value.
An entity should account for the tax consequences of each transaction and other events
in the same way it accounts for other events or transactions. For proper measurement of the profit
or loss of an entity, adjustments for income taxes must be made. Income taxes may not be paid
within the same accounting period, but this represents liability for the current period. Normally the
adjusting entries for income taxes is prepared after all the accounts have been adjusted and the
profit and loss are computed. The computed tax expense is to be debited to Income Tax Expense
and credited to Income Tax Payable. Additional adjusting entries for the recognition of deferred
tax asset and deferred tax liability coming from the existence of taxable temporary differences
and deductible temporary differences.
In general, recording adjusting journal entries is quite simple and involves these three
main steps as follows:
1. Determine current account balance
2. Determine what current balance should be
3. Record adjusting entry
These adjustments are then made in journals and carried over to the account ledgers and
accounting worksheet. This accounting worksheet is a tool and optional in the process but will
help the preparation of the financial reports.
After the balances on the unadjusted trial balance, the entity can then make end of period
adjustments like depreciation expense and expense accruals. These adjusted journal entries are
posted to the trial balance turning it into an adjusted trial balance.
IAS 1 sets out framework and overall requirements for the preparation and presentation
of financial statements. These guidelines are for their structure and minimum requirements of the
content of financial statements. The requirement for an entity to present a complete set of financial
statements Summary, Profit and Loss Summary, or Expenses and Revenue Summary which
summarizes the net effect of total income and expenses. The balance of these accounts
represents the profit or loss for the period. If the result is credit balance there is profit, if debit
balance there is loss.
When the adjusting entries made for accrued income or expense account, a reversing
entry must be made to eliminate the need for monitoring their respected balances of the receivable
and payable which are created during the adjusting entries. The collection and payment in the
ensuing period are recorded in the usual revenue and expense account.
Assessment activities
1. At the beginning of 2020, Wayo Company’s assets amount to P 11,000,000 and the liabilities
amounting to P5,000,000. During the year, assets increased by P3,000,000, while the liabilities
decreased by P500,000. How much is the owner’s equity at the end of the year?
2. The Rent Expense account had a balance of P30,000, representing five months’ rent beginning
December 1, 2020. The adjusting entry on December 31, 2020 will include
3. Phana Printing distributes a monthly sports magazine. On July 1, 2020, the entity sold 1,000
1-year subscriptions for P100 each. On December 31, 2020, the amount reported as liability
on the balance sheet and the amount reported as revenue on the income statement are,
respectively:
4. Kit Organizers purchased an equipment costing P100,000 on July 1, 2019. The equipment has
an estimated useful life of 10 years with an estimated residual value of P10,000. How much is
the depreciation expense on December 31, 2020?
5. On December 31, 2020, the end of Ming Company’s accounting period, the company has
outstanding Accounts Receivable of P400,000. The company estimates that 5% of these
receivables might not be collected. Assuming that there is P12,000 (debit) balance for Allowance
for Uncollectible Accounts, how much is the debited Uncollectible Accounts Expense for the
December 31, 2020 adjusting entry?
6. Forth Company incurs salaries at a rate of P4,200 per day. The last payday in January is Friday,
January 28 and no work for Saturday and Sunday. How much is the Salaries Payable on
January 31?
7. Beam Company has a P180,000, 10%, 120-day note receivable outstanding on December 31.
The note is dated October 1, 2020. What is the adjusting entry on December 31, 2020?
8. The cost of goods available for sale is P1,300,000. The gross profit is P300,000, net sales
amounted to P1,000,000, net purchases are P1,100,000 and operating expenses are P220,000.
How much is the ending inventory of the company?
9. The balances of the following accounts were closed to the Income Summary account: Salary
Expense, P50,000 debit; Cost of Goods Sold, P80,000 debit; Utilities Expense, P25,000 debit;
Sales, P200,000 credit; Interest Revenue, P110,000 credit. The entry to close Income
Summary to the capital account would be
10. Fuse Organizers purchased an equipment costing P100,000 on July 1, 2019. The equipment
has an estimated useful life of 10 years with an estimated residual value of P10,000. What is the
appropriate adjusting entry on December 31, 2019?
11. On December 31, 2020, the end of Tee Company’s accounting period, the company has
outstanding Accounts Receivable of P400,000. The company estimates that 3% of these
receivables might not be collected. If there is P12,000 (credit) balance for Allowance for
Uncollectible Accounts, how much is the net realizable value of the accounts receivable?
11. Below are selected items from Frame Merchandising for the year ended December 31, 2020.
Account Title Debit Credit
Sales P 974,250
Sales returns and allowances P 12,750
Sales discount 8,050
Purchases 528,700
Purchase returns and allowances 7,450
Purchase discount 3,550
Freight in 7,400
Selling expense 120,125
General and administrative expense 95,300
Beginning and ending merchandise inventories are P56,500 and P45,500, respectively. How
much is the Net Loss to be closed to the Frame, capital?
12. Rodtang Merchandising sold products to Book Co. amounting to P50,000 in cash. Two days
after, Book returned defective products amounting to P5,000 and Rodtang refunded the amount.
Based on the facts, how much is the net sales that could be presented in Rodtang
Merchandising’s Income Statement?
MODULE 4
PRESENTATION OF FINANCIAL STATEMENTS
Overview:
Financial statements are a structured representation of the financial position and financial
performance of an entity. General purpose financial statements (referred to as ‘financial
statements’) are 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.
IAS 1 sets out overall requirements for the presentation of financial statements, guidelines
for their structure and minimum requirements for their content. It requires an entity to present a
complete set of financial statements at least annually, with comparative amounts for the preceding
year (including comparative amounts in the notes).
An entity whose financial statements comply with IFRS Standards must make an explicit
and unreserved statement of such compliance in the notes. An entity must not describe financial
statements as complying with IFRS Standards unless they comply with all the requirements of
the Standards. The application of IFRS Standards, with additional disclosure when necessary, is
presumed to result in financial statements that achieve a fair presentation. IAS 1 also deals with
going concern issues, offsetting and changes in presentation or classification.
Module Objectives:
After successful completion of this module, you should be able to:
❖ describe the objective of the financial statements;
❖ enumerate the components of financial statements and their respective uses;
❖ describe the hierarchy in the formation of accounting policies by the management;
❖ state and apply the general features in the presentation of the financial statements;
❖ explain the limitations of the financial statements;
❖ state the function of the Securities and Exchange Commissions (SEC);
❖ classify the entities based on applicability of financial reporting frameworks; and
❖ identify the different Philippine financial reporting frameworks and their applicability.
Course Materials:
That information, along with other information in the notes, assists users of financial statements
in predicting the entity's future cash flows and their timing and certainty.
Assets
An entity must normally present a classified statement of financial position, separating
current and noncurrent assets and liabilities. Only if a presentation based on liquidity provides
information that is reliable and more relevant may the current/noncurrent split be omitted. An entity
shall classify an asset as current when:
• It expects to realize the asset, or intends to sell or consume it, in its normal operating
cycle
• It holds the asset primarily for the purpose of trading
• It expects to realize the asset within twelve months after the reporting period
• The asset is cash or a cash equivalent (as defined in IAS 7) unless the asset is
restricted from being exchanged or used to settle a liability for at least twelve months
after the reporting period.
Normal Operating Cycle – The time between the acquisition of assets for processing and their
realization cash or cash equivalents. When the entity’s normal operating cycle is not clearly
identifiable, its duration is assumed to be twelve months.
The caption “noncurrent assets” is a residual definition. PAS 1 provides that an entity shall classify
all other assets as non-current.
Liabilities
An entity shall classify a liability as current when:
• It expects to settle the liability in its normal operating cycle
• It holds the liability primarily for the purpose of trading
• The liability is due to be settled within twelve months after the reporting period
• The entity does not have an unconditional right to defer settlement of the liability for
at least twelve months after the reporting period
An entity classifies its financial liabilities as current when they are due to be settled within
twelve months after the end of the reporting period, even if:
• The original term was for a period longer than twelve months; and
• The intention is supported by an agreement to refinance, or reschedule the
payments, on a long-term basis is completed after the end of the reporting period
and completed before the financial statements are authorized for issue.
If the entity has the discretion to refinance, or to roll over the obligation for at least twelve
months after the end of the reporting period under an existing loan facility, it classifies the
obligation as non-current, even if it would be due within a shorter period.
If a liability has become payable on demand because an entity has breached an
undertaking under a long-term loan agreement on or before the end of the reporting period, the
liability is current, even if the lender has agreed, after the end of the reporting period and before
the authorization of the financial statements for issue, not to demand payment as a consequence
of the breach. However, the liability is classified as non-current if the lender agreed by the end of
the reporting period to provide a period of grace ending at least 12 months after the end of the
reporting period, within which the entity can rectify the breach and during which the lender cannot
demand immediate repayment.
Equity
Equity is the residual interest in the assets of the entity after deducting all the liabilities.
Simply put, equity means net asset or total assets minus total liabilities.
The account name in reporting the equity of an entity depends on the form of the business
organization:
Sole proprietorship Owner’s equity
Partnership Partner’s equity
Corporation Stockholders’ equity or shareholders’ equity
An entity shall disclose the following items in the statement of comprehensive income as
allocations of profit or loss for the period:
• Profit or loss for the period attributable to Minority interest and Owners of the parent.
• Total comprehensive income for the period attributable to Minority interest and
Owners of the parent.
Statement of comprehensive income present income and expense for a given reporting
period. An entity shall present all items of income and expense recognized in a period:
• In a single statement of comprehensive income, or
• In two statements: a statement displaying components of profit or loss (separate
income statement) and a second statement beginning with profit or loss and
displaying components of other comprehensive income (statement of
comprehensive income).
An entity shall present either an analysis of expenses using a classification based on either
the nature of expenses or their function within the entity, whichever provides information that is
reliable and more relevant.
Nature of expense method – Expenses are aggregated in the income statement according
to their nature and are not reallocated among various functions within the entity.
Revenue X
Other income X
Changes in inventories of finished goods and work in progress X
Raw materials and consumables used X
Employee benefit costs X
Depreciation and amortization X
Other expense X
Total expense (X)
Profit X
An entity shall present, either in the statement of changes in equity or in the notes, the
amount of dividends recognized as distributions to owners during the period, and the related
amount per share.
Classification
The statement of cash flows presents information on the inflows and outflows of cash and
cash equivalent classified into operating activities, investing activities, and financing activities.
Cash flows from operating activities are primarily derived from the principal
revenue‑producing activities of the entity. Examples of cash flows from operating activities are:
• cash receipts from the sale of goods and the rendering of services;
• cash receipts from royalties, fees, commissions and other revenue;
• cash payments to suppliers for goods and services;
• cash payments to and on behalf of employees;
• cash payments or refunds of income taxes unless they can be specifically identified
with financing and investing activities; and
• cash receipts and payments from contracts held for dealing or trading purposes.
An entity may hold securities and loans for dealing or trading purposes, in which case they
are similar to inventory acquired specifically for resale. Therefore, cash flows arising from the
purchase and sale of dealing or trading securities are classified as operating activities. Similarly,
cash advances and loans made by financial institutions are usually classified as operating
activities since they relate to the main revenue‑producing activity of that entity.
Investing activities are the cash flows derived from the acquisition and disposal of long-
term assets and other investment not included in cash equivalents. Only expenditures that result
in a recognized asset in the statement of financial position are eligible for classification as
investing activities. Examples of cash flows arising from investing activities are:
• cash payments to acquire property, plant and equipment, intangibles and other
long‑term assets. These payments include those relating to capitalized development
costs and self‑constructed property, plant and equipment;
• cash receipts from sales of property, plant and equipment, intangibles and other
long‑term assets;
• cash payments to acquire equity or debt instruments of other entities and interests in
joint ventures (other than payments for those instruments considered to be cash
equivalents or those held for dealing or trading purposes);
• cash receipts from sales of equity or debt instruments of other entities and interests
in joint ventures (other than receipts for those instruments considered to be cash
equivalents and those held for dealing or trading purposes);
• cash advances and loans made to other parties (other than advances and loans made
by a financial institution);
• cash receipts from the repayment of advances and loans made to other parties (other
than advances and loans of a financial institution);
• cash payments for futures contracts, forward contracts, option contracts and swap
contracts except when the contracts are held for dealing or trading purposes, or the
payments are classified as financing activities; and
• cash receipts from futures contracts, forward contracts, option contracts and swap
contracts except when the contracts are held for dealing or trading purposes, or the
receipts are classified as financing activities.
Received Paid
Interest Operating (or Investing) Operating (or Financing)
Dividends Operating (or Investing) Financing (or Operating)
Taxes on income
Cash flows arising from taxes on income shall be separately disclosed and shall be
classified as cash flows from operating activities unless they can be specifically identified with
financing and investing activities.
Under the direct method, information about major classes of gross cash receipts and gross
cash payments may be obtained either:
• from the accounting records of the entity; or
• by adjusting sales, cost of sales (interest and similar income and interest expense
and similar charges for a financial institution) and other items in the statement of
comprehensive income for:
– changes during the period in inventories and operating receivables and
payables;
– other non‑cash items; and
– other items for which the cash effects are investing or financing cash flows.
Under the indirect method, the net cash flow from operating activities is determined by
adjusting profit or loss for the effects of:
• changes during the period in inventories and operating receivables and payables;
• non‑cash items such as depreciation, provisions, deferred taxes, unrealized foreign
currency gains and losses, and undistributed profits of associates; and
• all other items for which the cash effects are investing or financing cash flows.
Based on the foregoing, the following guidelines may be used in adjusting accrual basis
net income to the cash basis net income under the indirect method:
Net Income
+ Depreciation, amortization, and other noncash expenses
- All increases in trade noncash current assets
+ All decreases in trade noncash current assets
+ All increases in trade current liabilities
- All decreases in trade current liabilities
- Gain on disposal of property
+ Loss on disposal of property
Investing and financing activities are presented using direct method, separating major
classes of gross cash receipts and gross cash payments arising from these activities.
Notes should be cross-referenced from the face of the financial statements to the relevant
note. The notes should normally be presented in the following order:
• A statement of compliance with PFRSs
• A summary of significant accounting policies applied, including:
– The measurement basis (or bases) used in preparing the financial
statements; and
– The other accounting policies used that are relevant to an understanding of
the financial statements.
• Supporting information for items presented on the face of the statement of financial
position, income statement, statement of changes in equity, and statement of ash
flows, in the order in which each statement and each line item is presented.
• Other disclosures, including:
– Contingent liabilities and unrecognized contractual commitments
– Non-financial disclosures, such as the entity's financial risk management
objectives and policies.
Disclosure of judgments - an entity must disclose, in the summary of significant accounting
policies or other notes, the judgments, apart from those involving estimations, that management
has made in the process of applying the entity's accounting policies that have the most significant
effect on the amounts recognized in the financial statements.
In making the judgement described above, management shall refer to, and consider the
applicability of, the following sources in descending order:
• the requirements in IFRSs dealing with similar and related issues; And
• the definitions, recognition criteria and measurement concepts for assets, liabilities,
income and expenses in the Conceptual Framework for Financial Reporting
(Conceptual Framework).
Management may also consider the most recent pronouncements of other
standard‑setting bodies that use a similar conceptual framework to develop accounting standards,
other accounting literature and accepted industry practices, to the extent that these do not conflict
with the sources mentioned above.
Going concern
An entity shall prepare financial statements on a going concern basis unless management
either intends to liquidate the entity or to cease trading or has no realistic alternative but to do so.
An entity preparing PFRS financial statements is presumed to be a going concern. Going concern
means that the accounting entity is viewed as continuing in operation indefinitely in the absence
of evidence to the contrary.
Accrual basis
An entity shall prepare its financial statements, except for cash flow information, using the
accrual basis of accounting. When the accrual basis of accounting is used, an entity recognizes
items as assets, liabilities, equity, income and expenses (the elements of financial statements)
when they satisfy the definitions and recognition criteria for those elements in the Conceptual
Framework.
Offsetting
An entity shall not offset assets and liabilities or income and expenses, unless required or
permitted by an IFRS. An entity reports separately both assets and liabilities, and income and
expenses. Measuring assets net of valuation allowances—for example, obsolescence allowances
on inventories and doubtful debts allowances on receivables—is not offsetting.
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, in
addition to the period covered by the financial statements:
• the reason for using a longer or shorter period, and
• the fact that amounts presented in the financial statements are not entirely
comparable.
Normally, an entity consistently prepares financial statements for a one‑year period.
However, for practical reasons, some entities prefer to report, for example, for a 52‑week period.
This Standard does not preclude this practice.
Comparative information
Minimum Comparative Information
Except when IFRSs permit or require otherwise, an entity shall present comparative
information in respect of the preceding period for all amounts reported in the current period’s
financial statements.
An entity shall present, as a minimum, two statements of financial position, two statements
of profit or loss and other comprehensive income, two separate statements of profit or loss (if
presented), two statements of cash flows and two statements of changes in equity, and related
notes.
An entity shall include comparative information for narrative and descriptive information if
it is relevant to understanding the current period’s financial statements. In some cases, narrative
information provided in the financial statements for the preceding period(s) continues to be
relevant in the current period. For example, an entity discloses in the current period details of a
legal dispute, the outcome of which was uncertain at the end of the preceding period and is yet
to be resolved. Users may benefit from the disclosure of information that the uncertainty existed
at the end of the preceding period and from the disclosure of information about the steps that
have been taken during the period to resolve the uncertainty.
Consistency of presentation
An entity shall retain the presentation and classification of items in the financial statements
from one accounting period to the next. Change is allowed under the following circumstances:
• it is apparent, following a significant change in the nature of the entity’s operations or
a review of its financial statements, that another presentation or classification would
be more appropriate having regard to the criteria for the selection and application of
accounting policies in IAS 8; or
• an IFRS requires a change in presentation.
• Inflationary effects. Assets measured at historical costs reflect the level of purchasing
power when those assets are acquired at different dates. Such purchase costs albeit
at different dates are the basis of the presentation of these assets in the statement of
financial position and of the computation of depreciation expenses in the statement of
comprehensive income. If the inflation rate is relatively high, the amounts reported in
the financial statements will appear inordinately low since under the cost model, the
assets are not adjusted for inflation. Hence, the amounts reflected in the financial
statements are mixture of pesos with different levels of purchasing power.
• Measurement uncertainty. The use of reasonable estimates is an essential part of the
preparation of financial information. In some cases, the level of uncertainty involved
in estimating a measure of an asset or liability may be so high that it may be
questionable whether the estimate would provide a sufficiently faithful representation
of that asset or liability and of any resulting income, expenses or changes in equity.
• Now always comparable across companies. Different companies may apply different
accounting policies and use different accounting periods. While accounting policies
are disclosed in the financial statements, the users of financial statements can hardly
adjust the reported figures in the financial statements for comparability. Any one
period may vary from the normal operating results of a business due to seasonality
effects.
• Non-financial information is not reported. The notes to financial statements provide
textual description of what was reported in the face of the financial statements.
However, the financial statements do not report the level of corporate governance of
the company, the moral and efficiency of company personnel or business ethics, the
effect of the business to the environment, or the company’s contribution to the local
community. Financial statements may report high net income but fail to indicate its
degrading effect to the environment.
• No predictive value. The financial statements report past events, but they do not
provide any value that predict what will happen in the future. A company may report
billions of incomes in the preceding years, yet a newly elected president of the country
cancels its contract on which it was relying.
(g) Prepare, approve, amend or repeal rules, regulations and orders, and issue opinions and
provide guidance on and supervise compliance with such rules, regulations and orders;
(h) Enlist the aid and support of and/or deputize any and all enforcement agencies of the
Government, civil or military as well as any private institution, corporation, firm, association
or person in the implementation of its powers and functions under this Code;
(i) Issue cease and desist orders to prevent fraud or injury to the investing public;
(j) Punish for contempt of the Commission, both direct and indirect, in accordance with the
pertinent provisions of and penalties prescribed by the Rules of Court;
(k) Compel the officers of any registered corporation or association to call meetings of
stockholders or members thereof under its supervision;
(l) Issue subpoena duces tecum and summon witnesses to appear in any proceedings of the
Commission and in appropriate cases, order the examination, search and seizure of all
documents, papers, files and records, tax returns, and books of accounts of any entity or
person under investigation as may be necessary for the proper disposition of the cases
before it, subject to the provisions of existing laws;
(m) Suspend, or revoke, after proper notice and hearing the franchise or certificate of
registration of corporations, partnerships or associations, upon any of the grounds
provided by law; and
(n) Exercise such other powers as may be provided by law as well as those which may be
implied from, or which are necessary or incidental to the carrying out of, the express
powers granted the Commission to achieve the objectives and purposes of these laws.
Under Section 5.2 of the Securities Regulation Code, the Commission’s jurisdiction over
all cases enumerated under Section 5 of PD 902-A has been transferred to the Courts of general
jurisdiction or the appropriate Regional Trial Court. The Commission shall retain jurisdiction over
pending cases involving intra-corporate disputes submitted for final resolution which should be
resolved within one (1) year from the enactment of the Code. The Commission shall retain
jurisdiction over pending suspension of payments/rehabilitation cases filed as of 30 June 2000
until finally disposed.
Considering that only Sections 2, 4, and 8 of PD 902-A, as amended, have been expressly
repealed by the Securities Regulation Code, the Commission retains the powers enumerated in
Section 6 of said Decree, unless these are inconsistent with any provision of the Code.
Large and/or public interest entities shall use the PFRS, as adopted by the Commission,
as their financial reporting framework. However, a set of financial reporting framework other than
the full 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.
Medium-sized entities
Medium-sized entities are those that meet all of the following criteria:
• Total assets of more than P100 million to P350 million or total liabilities of more than
P100 million to P250 million. If the entity is a parent company, the said amounts shall
be based on the consolidated figures.
• Not required to file financial statements under Part II of SRC Rule 68
• Not in the process of filing their financial statements for the purpose of issuing any
class of instrument in a public market
• Not holders of secondary licenses issues by regulatory agencies
Medium-sized entities shall use as their financial reporting framework the PFRS for SMEs
as adopted by the SEC. However, the following medium-sized entities shall be exempt from the
mandatory adoption of the PFRS for SME’s and may instead apply, at their option, the full PFRS:
• An SME which is a subsidiary of a foreign parent company reporting under the full
PFRS
• An SME which is a subsidiary of a foreign parent company which will be moving
towards International Financial Reporting Standards pursuant to the foreign country’s
published convergence plan
• An SME either as a significant joint venture or associate, which is part of a group that
is reporting under the full PFRS
• An SME which is a branch office or regional operating headquarter of a foreign
company reporting under the full PFRS
• An SME which has a subsidiary that is mandated to report under the full PFRS
• An SME which has a short-term projection that shows that it will breach the
quantitative thresholds set in the criteria for an SME. The breach is expected to be
significant and continuing due to its long-term effect on the company’s asset or liability
size
• An SME which has c concrete plan to conduct an initial public offering within the next
two years
• An SME which has been preparing financial statements using full PFRS and has
decided to liquidate
• Such other cases that the Commission may consider as valid exceptions from the
mandatory adoption of PFRS for SMEs
Small entities
Small entities are those that meet all of the following criteria:
• Total assets of between P3 million to P100 million or total liabilities between P3 million
to P100 million. If the entity is a parent company, the said amounts shall be based on
the consolidated figures.
• Are not required to file financial statements under Part II of SRC Rule 68
• Are not in the process of filing their financial statements for the purpose of issuing any
class of instruments in a public market
• Are not holders of secondary licenses issues by regulatory agencies
Small entities shall use their financial reporting framework the PFRS for SEs as adopted
by the Commission. However, entities who have operations or investments that are based or
conducted in a different country with different functional currency shall not apply this framework
and should instead apply the full PFRS or PFRS for SMEs.
The following small entities shall also be exempt from the mandatory adoption of the PFRS
for SEs and may instead apply, as appropriate, the full PFRS or PFRS for SMEs:
• A small entity which is a subsidiary of a foreign parent company reporting under the full
PFRS or PFRS for SMEs
• A small entity which is a subsidiary of a foreign parent company which will be moving
towards International Financial Reporting Standards or IFRS for SMEs pursuant to the
foreign country’s published convergence plan
• A small entity either as a significant joint venture or associate, which is part of a group that
is reporting under the full PFRS or PFRS for SMEs
• A small entity which is a branch office or regional operating headquarter of a foreign
company reporting under the full PFRS or PFRS for SMEs
• A small entity which has a subsidiary that is mandated to report under the full PFRS or
PFRS for SMEs
• A small entity which has a short-term projection that shows that it will breach the
quantitative thresholds set in the criteria for a small entity. The breach is expected to be
significant and continuing due to its long-term effect on the company’s asset size
• A small entity which has been preparing financial statements using full PFRS or PFRS for
SMEs and has decided to liquidate
• Such other cases that the Commission may consider as valid exceptions from the
mandatory adoption of PFRS for SMs
Micro entities
Micro entities are those that meet all of the following criteria:
• Total assets and liabilities are below P3 million
• Are not required to file financial statements under Part II of SRC Rule 68
• Are not in the process of filing their financial statements for the purpose of issuing any
class of instruments in a public market
• Are not holders of secondary licenses issues by regulatory agencies
Micro entities have the option to use as their financial reporting framework either the
income tax basis or PFRS for SEs, provided however, that the financial statements shall at least
consist of the Statement of Management’s Responsibility (SMR), Auditor’s Report, Statement of
Financial Position, Statement of Income and Notes to Financial Statements, all of which cover the
2-year comparative periods, if applicable.
In the event where an entity breaches the prescribed threshold in terms of total assets or
total liabilities and thus it falls within a different classification, the Audited Financial Statements of
said entity shall be prepared in accordance with the higher framework.
Activities/Assessments:
You are the Accounting Manager of XYZ Company, Inc. The Chief Finance Officer asked you to
prepare a complete set of financial statements based on the information provided below.
Chart of Accounts
Year 2019 Year 2018
Accrued expenses - Collection fees 18,000 35,000
Accrued expenses - Management and professional
fees 206,000 236,000
Accrued expenses - Occupancy costs 39,000 35,000
Accrued expenses - Others 97,000 96,000
Accrued expenses - Repairs and maintenance 297,000 235,000
Accrued expenses - Salaries, wages and employee
benefits 445,000 428,000
Accrued expenses - Utilities 98,000 135,000
Actuarial loss on pension liabilities, for the year -66,000 -75,000
Additional paid-in capital 4,590,000 4,518,000
Advances to contractors 87,000 78,000
Advances to contractors 718,000 617,000
Advertising 45,000 11,000
Allowance for doubtful accounts 608,000 612,000
Amortization of deferred credits 14,000 13,000
Appropriated Retained Earnings 35,495,000 32,444,000
Business meetings and representation 27,000 35,000
Capital Stock 2,465,000 2,465,000
Cash equivalents 6,177,000 6,408,000
Cash on hand and in banks 539,000 342,000
Collection fees 118,000 117,000
Collections of Subscription receivable during the
year 87,000 75,000
Common Stock Option Exercised 72,000 900
Common Stock Option Outstanding 0 51,800
Contractors payable 293,000 72,000
Contractual services 293,000 217,000
Cost of share-based payment 20,200 24,000
Current portion of Lease liabilities 36,000 0
Current portion of Long-term debt 9,923,000 4,971,000
Deferred Charges 1,491,000 2,420,000
Deferred tax assets 976,000 1,194,000
Deposits 72,000 76,000
Depreciation and amortization 2,405,000 2,177,000
Foreign exchange gains (losses) 601,000 -1,732,000
Gain on disposal of property and equipment – net 7,000 16,000
Additional information
a. Balances of selected accounts as of beginning of 2018 are as follows:
Additional paid-in capital 4,231,000
Appropriated Retained Earnings 28,698,000
Common Stock Option Outstanding 28,700
Remeasurement loss on defined benefit plans 1,000
Subscription receivable 235,0000
Unappropriated Retained Earnings 8,460,000
b.
c. 70% of the following accounts were directly related to the provision of services to
customers.
• Depreciation and amortization
• Power, light, and water
• Salaries, wages, and employee benefits
• Repairs and maintenance
• Contractual services
• Management, technical and professional fees
• Collection fees
• Occupancy Costs
• Printing and communication
• Transportation and travel
d. 1% of the above direct costs are other direct costs. All other operating costs whether direct
or indirect were booked in Other Expenses account.
e. The Company declared dividends amounting to P2,243,000 and 2,151,000 in 2019 and
2018, respectively.
f. PPE consists of land, leasehold improvements, plan and technical equipment, office
furniture and equipment, and transportation equipment. Additions to PPE were as follows:
P10 million in 2019 and P8 million in 2018.
• Summary of Significant Polices based on the chart of accounts and additional information
provided in the succeeding paragraphs
• Significant Accounting Judgments, Estimates and Assumptions
• Supporting computations and other information on account presented on the face of the
financial statements as required by PAS 1
Evaluation: Upon submission of the complete set of financial statements, you get 100 points. Your
work will be evaluated based on the requirements of PAS 1. You will get a demerit for every non-
compliance with PAS 1.
Module 5
INTERIM FINANCIAL REPORTING
Overview:
An interim financial report is a complete or condensed set of financial statements for a
period shorter than a financial year. IAS 34 does not specify which entities must publish an interim
financial report. That is generally a matter for laws and government regulations. IAS 34 applies if
an entity using International Financial Reporting Standards (IFRSs) in its annual financial
statements publishes an interim financial report that asserts compliance with IFRSs.
IAS 34 prescribes the minimum content of such an interim financial report. It also specifies the
accounting recognition and measurement principles applicable to an interim financial report.
The minimum content is a set of condensed financial statements for the current period and
comparative prior period information, i.e. statement of financial position, statement of
comprehensive income, statement of cash flows, statement of changes in equity, and selected
explanatory notes. In some cases, a statement of financial position at the beginning of the prior
period is also required. Generally, information available in the entity’s most recent annual report
is not repeated or updated in the interim report. The interim report deals with changes since the
end of the last annual reporting period.
The same accounting policies are applied in the interim report as in the most recent annual
report, or special disclosures are required if an accounting policy is changed. Assets and liabilities
are recognized and measured for interim reporting based on information available on a year-to-
date basis. While measurements in both annual financial statements and interim financial reports
are often based on reasonable estimates, the preparation of interim financial reports will generally
require a greater use of estimation methods than annual financial statements.
Module Objectives:
After successful completion of this module, you should be able to:
❖ Define interim financial statements and understand its purpose;
❖ Enumerate the components of interim financial statements;
❖ Recognize and measure items reported in the interim financial statements
Course Materials:
OBJECTIVE OF IAS 34
The objective of this Standard is to prescribe the:
• minimum content of an interim financial report
• recognition and measurement in complete or condensed financial statements in an
interim period.
Timely and reliable interim financial reporting improves the ability of stakeholders
(investors, creditors, and others) to understand an entity’s capacity to generate earnings and cash
flows and its financial condition and liquidity.
SCOPE OF IAS 34
This Standard does not mandate which entities should produce interim financial reports,
how frequently, or how soon after the end of an interim period. IAS 34 is applied when an entity
chooses, or is required by the government or other institution, to publish interim financial report
that complies with IFRSs.
This Standard applies if an entity is required or elects to publish an interim financial report
in accordance with IFRSs.
IAS 34, however, encourages publicly listed entities to provide at least a semi-annual
financial report for the first half the year to be issued not later than 60 days after the end of the
interim period.
Financial reports, whether annual or interim, are evaluated for conformity to the IFRSs on
their own. Non-preparation of interim reports or non-compliance with IAS 34 does not necessarily
prevent the entity’s annual financial statements from conforming to the IFRS. If an entity’s interim
financial reporting is described as conforming with IFRSs, it must comply with all the requirements
of this Standard.
DEFINITIONS
❖ Interim period is a financial reporting period shorter than a full financial year.
❖ Interim financial report means a financial report containing either a complete set of
financial statements (IAS 1) or a set of condensed financial statements (IAS 34) for an
interim period.
Other disclosures
The following disclosures shall be given either in the interim financial statements or
incorporated by cross-reference form the interim financial statements to some other statement
that is available to users of the financial statements on the same terms as the interim financial
statements and at the same time. If users of the financial statements do not have access to the
information incorporated by cross-reference on the same terms and at the same time, the interim
financial report is incomplete.
In addition to significant events and transactions, the following are also disclosed in the
interim financial report:
a. a statement that the same accounting policies were used in the interim financial
statements as those used in the latest annual financial statements. If there have been
changes, those changes are disclosed.
b. explanation of seasonality or cyclicality of interim operations
c. unusual items affecting the financial statement elements
d. changes in accounting estimates
e. issuances and settlements of debt and equity securities
f. dividends paid
g. segment information (if the entity is covered by IFRS 8)
h. events after the reporting period
i. changes in the composition of the entity, e.g., business combinations, obtaining or
losing control of subsidiaries, restructurings, and discontinued operations
j. disclosures on the fair value of financial instruments
The entity discloses its compliances with IFRSs if it has complied with IAS 34 and all the
requirements of other IFRSs.
The entity’s financial year ends 31 December (calendar year). The entity will present the
following financial statements (condensed or complete) in its quarterly interim financial
report as of 30 June 20X1:
If an entity’s business is highly seasonal, financial information for the twelve months up
to the end of the interim period and comparative information for the prior twelve-month period
may be useful.
Materiality
Materiality shall be assessed in relation to the interim period financial data. In making
assessments of materiality, it shall be recognized that the interim measurements may rely on
estimates to a greater extent than measurements of annual financial data.
The overriding goal is to ensure that an interim financial report includes all information
that is relevant to understanding an entity’s financial position and performance during the interim
period.
2. Integral view – According to paragraph 29 of this Standard, “providing that the frequency
of an entity’s reporting shall not affect the measurement of its annual results, paragraph
28 acknowledges that an interim period is a part of a larger financial year.
The recognition principles of assets, liabilities, income and expenses under the
Conceptual Framework are applied in the interim period in the same way as in the annual period.
Thus, items that do not qualify as assets, liabilities, income or expenses in the annual period do
not also qualify as such in the interim period.
Use of estimates
While measurements in both annual and interim financial reports are based on reasonable
estimates, the preparation of interim financial reports generally will require greater use of
estimation methods than annual financial reports.
adjusting the financial statements of prior interim periods of the current financial year,
and comparable interim periods of prior financial years to apply the new accounting
policy prospectively from the earlies date practicable.
Assessment Activities:
Choose the letter of the best answer.
3. Interim financial report means a financial report containing ________ for an interim
period.
a. A complete set of financial statements
b. An adjusted set of financial statements
c. A set of condensed financial statements
d. A or B
e. A or C
4. Which of the following is true with regards to the disclosure of compliance with IFRSs
provided in IAS 34?
a. If an entity’s interim financial report is not in compliance with IAS 34, that fact shall
be disclosed
b. An interim financial report shall not be described as complying with IFRSs unless it
complies with all the requirements of IAS 34
c. An interim financial report shall not be disclosed as complying with IFRSs unless it
complies with all the requirements of IFRSs.
d. A and B
Module 6
OPERATING SEGMENTS
Overview:
IFRS 8 Operating Segments requires an entity whose debt or equity securities are publicly
traded to disclose information to enable users of its financial statements to evaluate the nature
and financial effects of the different business activities in which it engages and the different
economic environments in which it operates. It specifies how an entity should report information
about its operating segments in annual financial statements and in interim financial reports. It also
sets out requirements for related disclosures about products and services, geographical areas
and major customers.
Module Objectives:
At the end of the module, you will be able to:
❖ define operating segments;
❖ identify and apply the criteria for reportable segments; and
❖ understand the entity-wide disclosures in accordance with IFRS 8.
Course Materials:
REPORTABLE SEGMENTS
IFRS 8 requires an entity to report financial and descriptive information about its reportable
segments. Reportable segments are operating segments or aggregations of operating segments
that meet specified criteria (IFRS 8.13):
• its reported revenue, from both external customers and intersegment sales or transfers,
is 10 per cent or more of the combined revenue, internal and external, of all operating
segments, or
• the absolute measure of its reported profit or loss is 10 per cent or more of the greater,
in absolute amount, of (i) the combined reported profit of all operating segments that
did not report a loss and (ii) the combined reported loss of all operating segments that
reported a loss,
• or its assets are 10% or more of the combined assets of all operating segments.
Two or more operating segments may be aggregated into a single operating segment if
aggregation is consistent with the core principles of the standard, the segments have similar
economic characteristics and are similar in various prescribed respects (IFRS 8.12).
If the total external revenue reported by operating segments constitutes less than 75% of
the entity's revenue, additional operating segments must be identified as reportable segments
(even if they do not meet the quantitative thresholds set out above) until at least 75% of the entity's
revenue is included in reportable segments (IFRS 8.15).
Illustration:
ABS Company has the following segments for the year:
Revenue Profit
Segment 1 P6,000,000 P1,500,000
Segment 2 4,500,000 850,000
Segment 3 1,000,000 (300,000)
Segment 4 800,000 200,000
Solution:
Revenue:
(P6,000,000 + P4,500,000 + P1,000,000 + P800,000) = P12,300,000
P12,300,000 x 10% = P1,230,000; Qualify: 1, 2
▪ Interest expense
▪ Depreciation and amortization
▪ Material items of income and expense
▪ Interest in P/L of associates and joint venture
▪ Income tax expense or income
▪ Material non-cash items
• Provide an explanation of measurement basis of segment profit or loss, segment assets
and segment liabilities for each reportable segment:
▪ Basis of accounting for transaction between reportable segments
▪ Nature of differences between measurements of reportable segments’ P/L and
entity’s P/L after income tax + discounted operations
▪ Nature of differences between measurements of reportable segments’ assets and
entity’s assets
▪ Nature of differences between measurements of reportable segments’ liabilities
and entity’s liabilities
▪ Nature of any changes from prior periods in the measurement methods to
determine segment’s P/L and their effects
▪ Nature and effect of asymmetrical allocations to reportable segments
Reconciliations
• Total of reportable segments’ revenue to entity’s revenue
• Total of reportable segment’s profit or loss to entity’s profit or loss before and after tax and
discounted operations
• Total of reportable segment’s assets to entity’s assets
• Total of reportable segment’s liabilities to entity’s liabilities
• Total of reportable segment’s amounts for every other material item of information
disclosed to the corresponding amount of the entity
Entity-wide Disclosures
These are not at a segment level but at the entity level of all the segments
• Information about the products and services
• Information about geographical areas
✓ Revenue from external customers
o Attributed to entity’s country of domicile
o Attributed to all foreign countries
✓ Non-current assets
o Located in entity’s country of domicile
o Located in all foreign countries
• Information about major customers
- Report if revenue with single customer is 10% or more of the total revenue
Assessment Activities
Choose the letter of the best answer.
1. If financial report contains both the consolidated financial statements of a parent and the
parent’s separate financial statements, segment information is required in
A. The separate financial statement only
B. The consolidated financial statement only
C. Both the separate and consolidated financial statements
D. Neither the separate nor the consolidated financial statement
5. Which is true concerning the 75% overall size test for operating segments?
A. The total external and internal revenue of all reportable segments is 75% or more of
the entity’s external revenue
B. The total external revenue of all reportable segments is 75% or more of the entity’s
consolidated revenues
C. The total external revenue of all reportable segments is 75% or more of the entity’s
unconsolidated revenues.
D. Total internal revenue of all reportable segments is 75% or more of the entity’s internal
revenue
10. PFRS 8 (Operating Segments) requires that a company report all to the following, except.
A. Major customers
B. Segment assets and liabilities
C. Liquidity ratios
D. Segment profits and loss and related information
11. The sum of the reportable segment’s external sales must be at least equal to what percent of
total operating segment’s external sales?
A. 60%
B. 75%
C. 50%
D. 65%
12. Under PFRS 8, the management approach of identifying reportable operating segments
means that operating segments are identified on the basis of internal reports about the
components of an entity that are regularly reviewed by:
A. The chief accountant.
B. The chief audit executive
C. The chief operating decision maker
D. The respective head of each operating segment
Problem Solving:
1. An entity and its division are engaged solely in manufacturing. The following data pertain to the
industries for the year ended December 31, 2019
Operating Profit (Loss)
Segment 1 P20,000,000
Segment 2 (10,000,000)
Segment 3 ( 6,000,000)
Segment 4 ( 9,000,000)
Segment 5 ( 3,000,000)
To be reportable segment, the segment profit or loss should be at least what amount?
3. An entity reported the following segment profit or loss for the current year
Segment 1 7,000,000 Profit
Segment 2 3,000,000 Profit
Segment 3 4,000,000 (Loss)
Segment 4 1,000,000 Profit
Segment 5 500,000 (Loss)
What segments are qualified as reportable?
Module 7
RELATED PARTY DISCLOSURES
Overview:
In 2001 the International Accounting Standards Board (Board) adopted IAS 24 Related
Party Disclosures. The objective of this standard is to ensure that an entity’s financial statements
contain the disclosures necessary to draw attention to the possibility that its financial position and
profit or loss may have been affected by the existence of related parties and by transactions and
outstanding balances, including commitments, with such parties.
Module Objectives:
After successful completion of this module, you should be able to:
❖ understand the purpose of related party disclosures; and
❖ identify the required disclosures related to IAS 24.
Course Materials:
On the other hand, in considering each possible related party relationship, attention is
directed to the substance of the relationship and not merely the legal form. The following are not
related parties:
❖ two entities simply because they have a director or other member of key management
personnel in common or because a member of key management personnel of one entity
has significant influence over the other entity.
❖ two joint venturers simply because they share joint control of a joint venture.
❖ providers of finance, trade unions, public utilities, and departments and agencies of a
government that does not control, jointly control or significant influence the reporting entity,
simply by virtue of their normal dealings with an entity (even though they may affect the
freedom of action of an entity or participate in its decision‑making process).
❖ a customer, supplier, franchisor, distributor or general agent with whom an entity transacts
a significant volume of business, simply by virtue of the resulting economic dependence.
REQUIRED DISCLOSURES
Relationships between a parent and its subsidiaries shall be disclosed irrespective of
whether there have been transactions between them. An entity shall disclose the name of its
parent and, if different, the ultimate controlling party. If neither the entity’s parent nor the ultimate
controlling party produces consolidated financial statements available for public use, the name of
the next most senior parent that does so shall also be disclosed.
Moreover, an entity shall disclose key management personnel compensation in total and
for each of the short‑term employee benefits, post‑employment benefits, other long‑term benefits,
termination benefits and share‑based payment. Amounts incurred by the entity for the provision
of key management personnel services that are provided by a separate management entity shall
also be disclosed.
If an entity had related party transactions during the periods covered by the financial
statements, it shall disclose the nature of the related party relationship as well as information
about those transactions and outstanding balances, including commitments, necessary for users
to understand the potential effect of the relationship on the financial statements. At a minimum
the disclosure includes:
❖ the amount of the transactions.
❖ the amount of outstanding balances, including commitments, their terms and conditions
and details of any guarantees given or received.
Assessment Activities
Choose the letter of the best answer.
3. Which of the following is conclusively a party (or parties) related to the reporting entity?
a. A venture sharing joint control with the reporting enterprise over a joint venture.
b. Providers of finance, trade unions, public utilities and government departments and
agencies simply by virtue of their normal dealings with an entity.
c. A customer, supplier, franchisor of general agent with whom an entity transacts a
significant volume of business merely by virtue of the resulting economic dependence.
d. Post-employment benefit plan for the benefit of employees of the entity.
4. Which of the following falls within the definition of “related parties” as defined in IAS 24?
a. Providers of finance in the course of their normal dealings with an enterprise by virtue
only of those dealings
b. A supplier with whom the reporting entity has a one-year contract for the supply of raw
materials
c. Government department and agencies
d. The wife of a key management personnel who has the authority to plan, direct, and
control the activities of the reporting enterprise.
7. Under IAS 24, close family members of a person are those family members who may be
expected to influence or be influenced by that person in their dealings with the entity. Who,
among the following, is not included in this definition of close family members?
a. The individual’s spouse and children
b. Children of the individual’s spouse
c. Dependents of the individual or the individual’s spouse
d. Brothers and sisters.
8. Which of the following does not fall within the definition of an entity’s related party?
a. Joint party in which the entity is a venture
b. A post-employment benefit plan for the benefit of the employees of the entity’s parent
c. An executive director of the entity
d. The partner of a key manager is a major supplier of the entity
10. If there had been transactions between related parties, the entity shall disclose
a. The nature of the relationship only.
b. The information about the transaction and outstanding balances.
c. The nature of the relationship, information about the transaction and outstanding
balances.
d. Neither the nature of the relationship nor the information about the transaction and
outstanding balances.
12. Which of the following situations will require disclose as a related party?
a. In consolidated financial statements in respect to intra-group transactions.
b. In the financial statements of state-controlled enterprises of transactions with other
state-controlled enterprises
c. In the aren’t financial statements when they are made available or published with the
consolidated financial statements
d. In related party relationships where control exists, irrespective of whether there have
been transactions between related parties
13. Which of the following disclosures is not a mandated disclosure under IAS 24?
a. Relationships between parents and subsidiaries irrespective of whether there have
been transactions between those related parties.
b. Names of all the “associates: that an entity has dealt with during the year.
c. Name of the entity’s parent and, if different, the ultimate controlling party.
d. If neither the entity’s parent nor its ultimate controlling entity produces financial
statements available for public use, then the name of the next most senior parent that
does so.
14. If there had been related party transactions during the year, which of the following is not
a required minimum disclosure?
a. The amount of the related party transactions
b. The amount of the outstanding related party balances and their terms and conditions
along with details of guarantees given and received.
c. The amount of similar transaction with unrelated parties to establish the comparable
related party transactions have been entered at arm’s length.
d. Provisions for doubtful debts related to the amount of outstanding related party
balances and expense recognized during the year in respect of bad or doubtful debts
due from related parties.
15. Which of the following would not be considered “compensation” of key management
personnel?
a. Short-term benefits
b. Termination benefits
c. Share-based payments
d. Reimbursement of out-of-pocket expenses
Module 8
CASH TO ACCRUAL ACCOUNTING AND SINGLE-ENTRY SYSTEM
Overview:
Although predicting future cash flows is the primary goal of many users of financial
reporting, the model best able to achieve that goal is accrual accounting. A competing model is
cash-basis accounting. Each model produces a periodic measure of performance that could be
used by investors and creditors for predicting future cash flows. In this module, we will be
discussing about the cash and accrual basis of accounting and the underlying concept about
single-entry system.
Module Objectives:
After successful completion of this module, you should be able to:
❖ understand the features of a single-entry system of accounting and differentiate from
double entry system; and
❖ compute revenue and expense items on an accrual basis taken from the records of entities
using cash basis accounting and single-entry system.
Course Materials:
Bad debts No bad debts are recognized because Doubtful accounts are treated as
trade receivables are not recognized. bad debts.
❖ Decrease in Accounts/ Notes Receivable- trade (A,N/R, ending < A,N/R, beginning),
means that there was more collection than sales on account (this, Add the decrease to
the accrual basis to get the cash basis sales or deduct the decrease from the cash basis
to get the accrual basis sales)
Accrual basis sales XX Cash basis sales XX
Decrease in Accounts/ Notes Decrease in Accounts/ Notes
Receivable XX or Receivable (XX)
Cash basis sales XX Accrual basis sales XX
❖ Increase in the Accounts/ Notes Payable- trade (A,N/P, ending > A,N/P, beginning) ,
means that there were more purchases on account than payments to suppliers (thus, add
the increase to the cash basis purchases (payments made) to get the accrual basis
purchases or Deduct the increase from the accrual basis purchases to get the cash basis
purchases)
Accrual basis purchases XX Cash basis purchases XX
Increase in Accounts/ Notes Increase in Accounts/ Notes
Payable (XX) or Payable XX
Cash basis purchases XX Accrual basis purchases XX
❖ Decrease on Accounts/ Notes Payable- trade (A,N/P, ending < A,N/P, beginning),
means that there were more payments to supplies (cash basis purchases) than accrual
basis purchases (thus, add the decrease to the accrual basis purchases to get the cash
basis purchases or the total payments made or Deduct the decrease from the cash basis
purchases to get the accrual basis purchases).
Accrual basis purchases XX Cash basis purchases XX
Decrease in Accounts/ Notes Decrease in Accounts/ Notes
Payable XX or Payable (XX)
Cash basis purchases XX Accrual basis purchases XX
❖ The conversion of data from cash basis to accrual basis focuses on the recognition of
accruals and deferrals, since these are the items that are usually taken under the accrual
basis that are not considered under cash basis.
Computation for converting cash basis data to accrual would include the following:
Accrued Revenue
Beginning balance Collections (cash basis)
Recognized income (accrual basis)
Ending balance
Unearned Revenue
Recognized income (accrual basis) Beginning balance
Collections (cash basis)
Ending balance
Prepaid Expense
Beginning balance Recognized expense (accrual basis)
Payment of cash (cash basis)
Ending balance
Accrued Expense
Payment of cash (cash basis) Beginning balance
Recognized expense (accrual basis)
Ending balance
Bookkeeping System
Bookkeeping system is the systematic and chronological recording of transactions and
events in the books of accounts. It is also known as the recording phase of accounting.
Systems of Bookkeeping
1. Single-entry bookkeeping- as system of bookkeeping whereby, as a rule, only cash and
personal accounts are recognized. The system may range from mere narrative
transactions to one that approximates but does not completely adopt double entry system.
The use of the single-entry system is simple and economical. However, the accounting
record will be incomplete and the double entry automatic check (debit is equal to credit) is
missing. Below are some other characteristics of single-entry system:
❖ Accounting equation is disregarded
❖ Usually one effect of each transaction is recognized
❖ Typically, only cash is recording, and personal accounts are maintained
❖ Trial balance cannot be prepared
❖ Data needed for preparation of financial statement is incomplete
❖ Net income is determined by reconstructing revenue and expenses or comparing
beginning and ending capital.
Assessment Activities:
Compute for the following and show your solutions on a separate paper.
1. 2Moons Company reported the following balances at the end of each year:
2020 2019
Inventory P2,600,000 P2,900,000
Accounts Payable 750,000 500,000
The entity paid suppliers P4,900,000 during the year ended December 31, 2020. What should
be the amount to be reported for cost of goods sold in 2020?
2. For the year ended Dec. 31, 2020, Pha Company paid interest totaling P100,000. The prepaid
interest expense is P23,500 and P18,000, respectively, on December 31, 2019 and 2020. The
interest payable is P45,000 and P53,500, respectively, on December 31, 2019 and 2020. What
amount of interest expense should be reported on December 31, 2020?
3. During 2020, Wayo Corp. received P8,000,000 from tenants. The balance sheet contained the
following data:
2019 2020
Rentals receivable P 960,000 P1,240,000
Unearned rentals 3,200,000 2,400,000
What amount of rental revenue should be reported for 2020?
4. Forth owned a 20% royalty interest in an oil well. Forth received royalty payments on January
31 for the oil sold between the previous June 1 and November 30, an on July 31 for oil between
December 31 and May 31. Production revealed the following sales:
June 1, 2019 - November 30, 2019 3,000,000
December 1, 2019 - December 31, 2019 500,000
December 1, 2019 - May 31, 2020 4,000,000
June 1, 2020 - November 30, 2020 3,250,000
December 1, 2020 - December 31, 2020 700,000
What amount should be reported as royalty revenue for 2020?
5. Beam Company provided the following data for the current year:
Cash sales P2,500,000 Inventory - Jan 1 P 500,000
Sales on account 850,000 Inventory - Dec 31 600,000
Cash purchases 1,700,000 Accrued expenses - Dec 31 20,000
Credit purchases 400,000 Prepaid expense - Dec 31 30,000
Expenses paid 750,000 Equipment- Dec 31 1,000,000
Accounts receivable- Jan 1 250,000 Interest received 40,000
Accounts receivable- Dec 31 300,000 Interest receivable - Jan 1 10,000
Account payable - Jan 1 150,000 Interest receivable - Dec 31 20,000
Account payable - Dec 31 200,000
On July 1 of the current year, an equipment was acquired for P200,000. The terms are P50,000
down and the balance to be paid after one year. The useful life is 10 years with no residual value.
What is the net income under cash & accrual basis?
6. Tee Company reported the following changes in all the account balances for 2016, except for
retained earnings:
Increase (Decrease) Increase (Decrease)
Cash P 790,000 Accounts payable P (380,000)
Accounts receivable, net 2,400,000 Bonds payable 820,000
Inventory 1,270,000 Share capital 1,250,000
Investments (470,000) Share premium 130,000
There were no entries in retained earning account except for the net income and a divided
declaration of P190,000 which was paid in the current year. What is the net income in the
current year?
• Robles, Nenita S. and Empleo, Patricia M. The Intermediate Accounting Series, Volume 3 (2017
Edition). Millennium Books Inc.
• Robles, Nenita S. and Empleo, Patricia M., The Philippine Financial Reporting (2019 Edition).
Millennium Books Inc.