PAS 1 - PRESENTATION OF FINANCIAL STATEMENTS

Objective of PAS 1
Prescribes the basis for presentation of general purpose financial statements to improve comparability both
with the entity’s financial statements of previous periods (intra-comparability) with the financial statements
of other entities in the same line of business industry (inter-comparability)

Example:
Intra-comparability: Comparing the financial statement of Print Street in the year 2019 and 2020.

Inter-comparability: Comparing the financial statement of the University of Cebu and the University of San
Jose-Recoletos.
● Comparing the financial statements of two companies must be in the same type of business
industry. (Trader vs. trader; services vs. services).

General purpose financial statements

- Those intended to serve users who do not have the authority to demand financial reports tailored for
their own needs.
- Cater to most of the common needs of a wide range of external users.
- Are the subject matter of the Conceptual Framework and the Philippine Financial Reporting
Standards (PFRS).

Complete set of financial statements

1. Statement of financial position (balance sheet)
2. Statement of profit or loss and other comprehensive income (Income Statement)
3. Statement of changes in equity
4. Statement of cash flows
5. Notes (comparative information in respect to the preceding period)
6. Additional statement of financial position (required only when certain instances occur)

General features
1. Fair Presentation and Compliance with PFRSs - the application of PFRSs, with additional disclosure
when necessary, is presumed to result in financial statements that achieve a fair presentation

2. Going concern - to continue conducting business (lifetime)

- an entity is not going concern if, as of the financial reporting date or prior to the date of
authorization of the financial statements for issue, management either:
a. Intends to liquidate the entity or to cease trading, or
b. Has no realistic alternative but to do so.
The assessment of going concern is at least 12 months.

3. Accrual Basis of Accounting - an entity shall prepare its financial statements, except for cash flow
information (uses cash basis of accounting), using the accrual basis of accounting.
● Expenses is recorded when incurred or when use regardless of when paid.
● Income is recorded when earned regardless of when collected.

4. Materiality & Aggregation - each material class of similar items must be presented separately in the
financial statements.

5. Offsetting - assets and liabilities, and income and expenses, shall not be offset unless required or
permitted by a PFRS.

Measuring assets net of valuation allowances, for example, obsolescence allowances on inventories,
allowances for doubtful accounts on receivables, and accumulated depreciation on property, plant,
and equipment are not offsetting.

6. Frequency of reporting - an entity shall present a complete set of financial statements (including
comparative information) at least annually.
● When an entity changes the end of its reporting period and presents financial statements for
a period longer or shorter than one year, an entity shall disclose the following:
a. The period covered by the financial statements
b. The reason for using a longer or shorter period (interim period - less than one year),
and
c. The fact that amounts present in the FS are not entirely comparable
 Periods:
● Fiscal year: a 12-month accounting period that doesn’t need to start the
operation of business on January 1 and ends on December 31.
● Natural business year: starts the operation of business in a natural low point
in the sales activity of a business.
● Calendar year: a 12-month accounting period starting from January 1 and
ends on December 31. Interim period: making of financial statements in less
than one year.

7. Comparative information - an entity shall present comparative information in respect of the

preceding period for all amounts reported in the current period’s financial statements unless other
standards permit or require otherwise.

8. Consistency of presentation - an entity shall retain the presentation and classification of items in the
financial statements from one period to the next unless:
a. It is apparent that another presentation or classification would be more appropriate following
a significant change in the nature of the entity’s operations or a review of its financial
statements; or
b. A PFRS requires a change in presentation

Additional statement of financial position

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

Statement of financial position

A statement of financial position may be presented as either
1. Classified - showing distinctions between current and noncurrent assets and liabilities, or
2. Unclassified (based on liquidity: easily converted to cash) - showing no distinction between current
and noncurrent items.

Current Assets Current Liabilities

An entity shall classify an asset as current when: An entity shall classify a liability as current when:
1. It expects to realize the asset or intends to 1. It expects to settle the liability in its normal
sell or consume it, in its normal operating operating cycle
cycle; 2. It holds the liability primarily for the purpose
2. It holds the asset primarily for the purpose of trading;
of trading; 3. The liability is due to be settled within
3. It expects to realize the asset within twelve twelve months after the reporting period, or
months after the reporting period; or 4. The entity does not have an unconditional
4. The asset is cash or a cash equivalent right to defer settlement of the liability for at
unless the asset is restricted from being least twelve months after the reporting
exchanged or used to settle a liability for at period.
least 12 months after the reporting period.

Normal operating cycle: the time when you acquire

a raw material then put it into production to make it
a finished product, sell it, and collect the payment.

Currently maturing long-term liabilities

● General rule: currently maturing long-term
liabilities are presented as current liabilities
● Exceptions:
1. Refinancing agreement is fully completed on
or before the balance sheet date -
non-current liability.
2. Refinancing agreement after the balance
sheet date but before the financial
statements are authorized for issue -
non-current liability if the entity expects, and
has the discretion to refinance it on a
 long-term basis under an existing loan facility
Breach of loan agreement
● General rule: a liability that is payable on
demand is a current liability
● Exceptions:
1. It is presented as a non-current liability if the
lender provides the entity, on or before the
balance sheet date, a grace period ending at
least 12 months after the balance sheet date
to rectify a breach of loan covenant.

Presentation of Deferred Taxes

Deferred tax liabilities (assets) are presented as noncurrent items in a classified statement of financial
position, irrespective of their expected dates of reversal.

Minimum line items in the statement of financial position:

a. Property, plant, and equipment
b. Investment property;
c. Intangible assets;
d. Financial assets (excluding amounts shown under (e), (h), and (i));
e. Investments accounted for using the equity method;
f. Biological assets;
g. Inventories;
h. Trade and other receivables;
i. Cash and cash equivalents;
j. Assets (or disposal groups) classified as held for sale in accordance with PFRS 5;
k. Trade and other payables;
l. Provisions;
m. Financial liabilities (excluding amounts shown under (k) and (l));
n. Liabilities and assets for current tax, as defined in PAS 12 Income Taxes;
o. Deferred tax liabilities and deferred tax assets, as defined in PAS 12;
p. Liabilities included in disposal groups classified as held for sale in accordance with PFRS 5;
q. Non-controlling interests, presented within equity; and
r. Issued capital and reserves attributable to owners of the parent

Order/format of presentation
PAS 1 does not prescribe the order or format in which an entity presents items.

Statement of profit or loss and other comprehensive income

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

Extraordinary items
PAS 1 prohibits the presentation of any items of income or expense as extraordinary items in the
statement(s) presenting profit or loss and other comprehensive income or in the notes.

Other comprehensive income for the period

a. Changes in revaluation surplus
b. Unrealized gains and losses on investments in FVOCI securities
c. Remeasurements of the net defined benefit liability (asset)
d. Gains and losses arising from translating the financial statements of a foreign operation
e. Effective portion of gains and losses on hedging instruments in a cash flow hedge

Other CI may be presented either (a) net of tax or (b) gross of tax.

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

Types of other comprehensive income Reclassification of adjustment

 a. Changes in revaluation surplus No

b. Remeasurements of the net defined benefit liability (asset) No

c. Fair value changes in FVOCI

- Equity instrument (election) No
- Debt instrument (mandatory) Yes

d. Translation differences on foreign operation Yes

e. Effective portions of cash flow hedges Yes

Total comprehensive income

It comprises all components of
1. Profit or loss; and
2. Other comprehensive income

Presentation of expenses
1. Nature of expense method
2. Function of expense method

If an entity classifies expenses by function, it shall disclose additional information on the nature of
expenses.

Disclosure of dividends
Dividends declared by an entity is disclosed either in the (a) notes or (b) statement of changes in equity.

Order of presentation of disclosure in the Notes

1. Statement of compliance with PFRSs;
2. Summary of significant accounting policies applied;
3. Supporting information for items presented in the other financial statements; and
4. Other disclosures
 PAS 2 - INVENTORIES

Inventories
Inventories are assets:
a. Held for sale in the ordinary course of business (Finished Goods);
b. In the process of production for such sale (Work in Process); or
c. In the form of materials or supplies to be consumed in the production process or in the rendering of
services (Raw materials and manufacturing supplies)

Financial statement presentation

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

Measurement
- Inventories are measured at the lower of cost and net realizable value (NRV).
- The cost of inventories comprises all cost of purchase, costs of conversion, and other costs
incurred in bringing the inventories to their present location and condition.
- Net realizable value (NRV) (used on damaged or obsolete merchandise) is the estimated selling
price in the ordinary course of business less the estimated costs of completion and the estimated
costs necessary to make the sale.

Costs that are EXPPENSED when incurred

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

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

Write down of inventories

- Inventories are usually written down to net realizable value on an item by item basis
- If the cost of an inventory excess its NRV, the inventory is written down to NRV, the lower amount.
The excess of cost over NRV represents the amount or write-down.

Reversal of write-downs
The amount of reversal to be recognized should not exceed the amount of original write-down previously
recognized.

Recognition as an expense
● The carrying amount of an inventory that is sold is charged as expense (i.e., cost of sales) in the
period in which the related revenue is recognized.
● Likewise, the write-down of inventories to NRV and all losses of inventories are recognized as
expenses in the period the write-down or loss occurs.
 PAS 7 - STATEMENT OF CASH FLOWS

Statement of Cash Flows

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

Operating Activities
- include transactions that enter into the determination of profit or loss. These transactions normally
affect income statement accounts.
- Normal operation of the business such as; purchasing and selling products, salaries to employees,
paying utilities, etc.

Examples of cash flows from Operating Activities

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

Investing activities
- include transactions that affect long-term assets and other non-operating assets.
- Inflow and outflow of cash in relation to investments.

Examples of cash flows from Investing Activities

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

Financing activities
- include transactions that affect equity and non-operating liabilities (i.e., bonds)
- Cash flows derived from the equity capital and borrowings of the entity.

In other words, financing activities are the cash flows that result from transactions:
● Between the entity and the owner- equity financing
● Between the entity and the creditor - debt financing

Examples of cash flows from Financing Activities

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

Remember the following:

1. Operating activities → affect profit or loss

2. Investing activities → affect noncurrent assets and other investments

3. Financing activities → affect borrowings and equity

Core principle
When preparing the statement of cash flows:
➔ Include only the transactions that have affected cash and cash equivalents (e.g., purchase of assets
by paying cash)
 ➔ Exclude transactions that have not affected cash and cash equivalents (e.g., purchase of assets by
issuing note payable or shares of stocks).

Interests and Dividends

Cash Flows from/ for Option 1 (benchmark/priority) Option 2

1. Interest income received Operating activity Investing activity

2. Interest expense paid Operating activity Financing activity

3. Dividend income received Operating activity Investing activity

4. Dividend paid to owners Financing activity Operating activity

Reporting cash flows from operating activities

1. Direct method - shows each major class of gross cash receipts and gross cash payments.
2. Indirect method - adjusts accrual basis profit or loss for the effects of changes in operating assets
and liabilities and effects of non-cash items.