DEFINITION OF ACCOUTING ACCORDING TO:  External – purchase, borrowing,

sales, payments
Committee on Accounting Terminology of the
American Institute of Certified Public  Measuring – technical component
Accountants/AICPA  Assigning of peso amounts to the
accountable economic
 The art of recording, classifying and
transactions
summarizing, in a significant manner,
 Must be expressed in common
and in terms of money, transactions and
financial denominator
events which are in part at least of a
 Measurement Bases:
financial character, and interpreting
Historical Cost
the results thereof
Current Value – fair value
American Accounting Association  Communication – formal component
 The process of preparing and
 The process of identifying, measuring
distributing fs to users
and communicating economic information
 Communication Process:
to permit informed judgement and
- Recording – journal
decision by user of the information
- Classifying – ledger
Accounting Standards Council - Summarizing – FS

 A service activity. Its function is to THE ACCOUNTING PROFESSION

provide quantitative information,
 Republic Act No. 9298 (Philippine
primarily financial in nature, about
Accountancy Act of 2004) – law
economic entities, that is intended to
regulating the practice of accountancy
be useful in making economic decisions
in the PH.
IMPORTANT POINTS  Board of Accountancy (BOA) – body
authorized by law to promulgate the
 Quantitative information
rules and regulations affecting the
 Financial in nature
practice of the accountancy profession
 Useful in decision making
in the PH.
THE MAIN PURPOSE/OBJECTIVE OF ACCOUNTING - They are also responsible for
preparing and grading CPALE
 To provide qualitative information to  Professional Regulation Commission –
be useful in making an economic the PRC upon favorable recommendation
decision of BOA shall issue the Certificate of
COMPONENTS OF ACCOUNTING Registration to practice public
accountancy (valid for 3 yrs, renewable
 Identifying – analytical component every 3 yrs)
 The recognition or - CPAs or firms of CPAs are
nonrecognition of business required to register with the
activities as “accountable” BOA and PRC for the practice
events. of public accountancy
 An event is accountable when it
THREE MAIN AREAS CPAs GENERALLY PRACTICE
has an effect on assets,
THEIR PROFESSION:
liabilities and equity.
 Only economic activities are A. Public Accounting
emphasized and recognized in  Usually offers three kinds of
accounting. (Internal or services – auditing, taxation and
External Transactions) management advisory services
 Internal – production, casualty
A.B.B. NOTES A.B.B. NOTES
 B. Private Accounting
 Employed in business entities to
Financial Reporting Standards Council (FRSC)
assist management in planning and
controlling the entity’s operations  Replaces the Accounting Standards
 The highest accounting officer – Council
controller  Accounting standard setting body
C. Government Accounting created by the PRC upon recommendation
 Focus on the custody and of BOA to assist them in carrying out
administration of public funds its powers and functions provided under
 Many CPAs are employed in many R.A Act No. 9298.
branches of the government such as:  The main function is to stablish and
- Bureau on Internal Revenue improve accounting standards that will
- Commission on Audit be generally accepted in the PH.
- Department of Budget and  The approve statements of FRSC:
Management  Philippine Accounting Standards
- Securities and Exchange (PAS)
Commission  Philippine Financial Reporting
- Bangko Sentral ng Pilipinas Standards (PFRS)

Philippine Interpretations Committee

CONTINUING PROFESSIONAL DEVELOPMENT (CPD)  PIC was formed by FRSC in August 2006.
 Replaced Interpretations Committee
 Republic Act No. 10912 – law mandating
which was formed by ASC in May 2000.
and strengthening the continuing
 Their main role is to prepare
professional development program for
interpretations of PFRS for approval by
all regulated professions, including
the FRSC to provide timely guidance on
the accountancy profession.
financial reporting issues
 CPD refers to the inculcation and
 The counterpart of this in UK is the
acquisition of advanced knowledge,
IFRIC (International Financial
skill, proficiency and ethical and
Reporting Interpretations Committee)
moral values after the initial
registration of the CPA for International Accounting Standards Committee
assimilation into professional practice
and lifelong learning  An independent private sector body,
 CPD Credit Units – CPD credit hours with the objective of achieving
required for the renewal of CPA license uniformity in the accounting principles
(120 units) which are used by businesses and other
 Exempted – 65 yrs old+ organizations for financial reporting
around the world.
ACCOUNTING STANDARDS  Formed in June 1973 – through an
agreement made by professional
 The overall purpose of accounting
accountancy bodies from Australia,
standards is to identify proper
Canada, France, Germany, Japan, Mexico,
accounting practices for the
Netherlands, UK, Ireland and USA.
preparation and presentation of FS
 Headquarter – London, UK
 Creates common understanding
 Harmonization of regulations
 Ensures comparability and uniformity
 Promote worldwide acceptance and
observance

A.B.B. NOTES A.B.B. NOTES

International Accounting Standards Board CONCEPTUAL FRAMEWORK

 Replaces IASC  A complete, comprehensive and single

 IASB published IFRS (International  document promulgated by the IASB
Financial Reporting Standards)  A summary of terms and concepts that
 Has adopted the body standards issued underlie the preparation and
by the IASC presentation of FS for external users
 IASC – IAS (International Accounting  Describes the concepts for general
Standards) purpose financial reporting

International Financial Reporting Standards PURPOSE OF REVISED CONCEPTUAL FRAMEWORK

 The FRSC has adopted in their entirety  To assist the IASB to develop IFRS
all International Accounting Standards Standards based in consisted concepts
and International Financial Reporting  To assist preparers of FS to develop
Standards consistent accounting policy when no
 The move toward IFRS is essential to standard applies
achieve the goal of one uniform and  To assist preparers of FS to develop
globally accepted financial reporting accounting policy when a standard
standards allows a choice of accounting policy
 The PH is fully complaint with IFRS  To assist all parties to understand and
effective January 2005 interpret the IFRS standards

Philippine Financial Reporting Standards In absence of standard, management shall

consider the applicability of the conceptual
 The FRSC issues standards in a series
framework in developing and applying
of pronouncements called PFRS.
accounting policy
 The PFRS collectively include all of
the ff: USERS OF FINANCIAL INFORMATION
- PFRS which corresponds to
A. Primary Users
IFRS
- PAS which corresponds to IAS  The parties to whom general purpose
- Philippine Interpretations financial reports are primarily
which corresponds to IFRIC directed
and the Standing  Existing and potential investors,
Interpretations Committee and lenders and other creditors
PIC
B. Other Users

 Users other than the existing investors

and creditors
 They are the parties that ma find the
general purpose financial reports
useful but the reports are not directed
to them
 Employees, customers, governments and
their agencies and the public

A.B.B. NOTES A.B.B. NOTES

  The descriptions and figures
must match what really existed
or happened
QUALITATIVE CHARACTIRISTICS  The actual effects of the
transactions shall be properly
- the qualities or attributes that make accounted for and reported in
financial accounting information useful the FS
to users  Ingredients of Faithful
- classified into fundamental and Representation:
enhancing qualitative characteristics  Completeness – principle
Fundamental Qualitative Characteristics of disclosure - All
significant and relevant
- relate to the content or substance of information shall be
financial information clearly reported.
1. Relevance (Notes to Financial
 The capacity of the information Statements)
to influence a decision  Neutrality – without bias
 To be relevant, the information in the preparation or
must be capable of making a presentation of financial
difference in the decisions made information (principle of
by users fairness)
 Ingredients of relevance:  Neutrality is
 Predictive Value – supported by the
financial information has exercise of
predictive value if it can prudence
be used as an input to  Prudence – the
processes employed by exercise of care
users to predict future and caution when
outcome (if it can help dealing with the
users accurately predict uncertainties (such
or forecast outcome of as the assets or
events) income is not
 Confirmatory Value – if it overstated and
provides feedback about liabilities and
previous evaluations (if expenses are not
it enables users confirm understated)
or correct earlier  Conservatism –
expectations) synonymous with
2. Materiality prudence, in case
 Also known as doctrine of of doubt record any
convenience loss and do not
 Depends on relative size rather record any
than absolute size gain/lower figure
 An item is material if knowledge is selected
of it would affect or influence  Free from error – no
the decision of the informed errors or omissions
users of the FS
3. Faithful Representation

A.B.B. NOTES A.B.B. NOTES

  Must be available or
communicated early enough when a
decision is to be made

Enhancing Qualitative Characteristics

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
- Relate to the presentation or form of (UNDERLYING ASSUMPTIONS)
the financial information
Underlying assumptions are also known as
- Intended to increase the usefulness if
postulates – the basic notions or fundamental
the information
premises on which the accounting process is
1) Comparability
based
 Enables users to identify and
understand similarities and Conceptual Framework for financial reporting
dissimilarities among items only mentions one assumption – going concern
 Principle of consistency –
GAAP – represent the rules, procedures,
consistency refers to the use of
practice and standards followed in the
the same method for the same
preparation and presentation of financial
item – uniform application of
statements
accounting method
1. Economic Entity/Accounting Entity –
 The business is considered
2) Understandability distinct and separate from the
 Must be comprehensible or owners of the business
intelligible if it is to be most  The personal transactions of
useful owners are not included in the
 Presented in a form and records of the business
expressed in terminology that a 2. Stable Monetary Unit –
user understands  For a business transaction to be
 Clearly and concisely – readily included in the accounting
understandable by users records and financial statements
3) Verifiability of the enterprise, it must be
 The information is verifiable in expressed in terms of a uniform
the sense that it is supported means of measurement
by evidence so that an  In the Philippines, the monetary
accountant that would look into unit is the Philippine peso
the same evidence would arrive 3. Periodicity (Time Period Concept) –
at the same economic decision or  Assumes that the operating life
conclusion of an enterprise may be
 Types of verification: conveniently divided into time
 Direct Verification – periods of equal length (such as
verifying through direct one year), called accounting
observation (counting periods
cash)  Types of Accounting Periods
 Indirect Verification – Fiscal
checking inputs, formula Calendar
or other techniques and 4. Cost Principle –
recalculating  Must record the original cost
4) Timeliness (Market Value – misleading)

A.B.B. NOTES A.B.B. NOTES

  Requires that assets be recorded less net income and/or less
at the cash amount (or its asset amount
equivalent) at the time that an  This leads accountants to
asset is acquired anticipate or disclose losses,
5. Full Disclosure Principle – but it does not allow a similar
 Requires a company to provide action for gains
the necessary information so  you do not use chances, may
that people who are accustomed allowance dapat sa potential
to reading financial information losses or expenses
can make informed decisions
concerning the company
 Notes to the Financial Statement
6. Going Concern Principle –
 The financial statements are
normally prepared on the
assumption that an enterprise is
a going concern and will
continue in operation for the
foreseeable future
7. Matching Principle –
 Requires that expenses be
matched with revenues
8. Accrual Basis –
 Income is recognized when it is
earned, expenses are recognized
when incurred, regardless of
when cash is received or paid
9. Materiality –
 An entity-specific aspect of
relevance based on the nature of
magnitude, or both, of the items
to which the information relates
in the context of an individual
entity’s financial report
 Information is material if
omitting or misstating it could
influence the decisions of users
of financial information about a
specific entity
 kapag may material effect,
irecord/kapag wala hindi na
kailangan irecord
10. Conservatism –
 If a situation arises where
there are two acceptable
alternatives for reporting an
item, conservatism directs the
accountant to choose the
alternative that will result in
A.B.B. NOTES A.B.B. NOTES
 REPORTING PERIOD/FREQUENCY OF REPORTING

- The period when FS are prepared for

general purpose financial reporting
- Interim Basis – 3 months/6 months/9
FINANCIAL STATEMENTS months
- Annual Basis – period of 12 months
 FS provides information about the - Frequency of reporting – FS shall be
economic resources of the reporting presented at least annually
entity, claims against the entity and - When an entity’s end of period changes
the changes in economic resources and and FS are presented for a period
claims. longer or shorter than one year, an
 FS provides Information about the entity shall disclose:
assets, liabilities, equity, income and a. the period cover
expenses useful to users in: b. reason for using shorter or longer
 Assessing future cash flow period
 Assessing management stewardship c. the fact that the amounts presented
 Means by which the information are not entirely comparable
accumulated and processed in financial
accounting is periodically communicated
to the users.
GENERAL PURPOSE FINANCIAL STATEMENT
 End product or the main output of
accounting process  Shall prepare and present FS in
 Structured financial representation accordance with the IFRS (International
 Objective: To provide information that Financial Reporting Standard)
is useful to a wide range of users in  FS are directed to all common users not
making economic decisions. to specific users

TYPES OF FINANCIAL STATEMENTS

1. Consolidated Financial Statements – COMPONENTS OF FINANCIAL STATEMENTS

provide information about the assets,
I. STATEMENT OF FINANCIAL POSITION
liabilities, equity, income and
expenses of both the parent and its  Balance Sheet
subsidiaries as a single reporting  One of the main FS; reports an entity’s
entity. assets, liabilities and equity
2. Unconsolidated Financial Statements -  To evaluate liquidity, solvency and the
provide information about the assets, need for additional financing
liabilities, equity, income and  Elements: Assets, Liability, Equity
expenses of the parent and not those of
the subsidiaries. II. STATEMENT OF COMPREHENSIVE INCOME
3. Combined Financial Statements - provide  Shows the financial performance of an
information about the assets, entity/results of the operations
liabilities, equity, income and  Useful in predicting future performance
expenses of two or more entities not and ability to generate future cash
linked with parent and subsidiary flows
relationship  Elements: Revenue and Expenses
REPORTING ENTITY  Transaction Approach
 Consist of two major sections:
- Entity that is required or chooses to 1. Income Statement (Profit or
prepare FS Loss) – reports the results of
A.B.B. NOTES A.B.B. NOTES
 the operations for one
accounting period
2. Other Comprehensive Income (OCI)
– revenue and expenses not
related to the normal operating
cycle

III. STATEMENT OF CHANGES IN EQUITY

 A reconciliation of the beginning ang

ending balances in a company’s equity
during a reporting period
 Capital account

IV. STATEMENT IF CASH FLOWS

 Explains the net change in cash for the

period
 Consists of three sections:
1. Operating Activities – CA/CL
2. Investing Activities – NCA
3. Financing Activities – NCL/Equity

V. NOTES TO FINANCIAL STATEMENT

 Comprising a summary of significant

accounting policies and other
explanatory notes
 Used to disclose information/provides
necessary disclosure required by the
PFRS

A.B.B. NOTES A.B.B. NOTES

 investments in quoted equity
instruments
c. Trade and other receivables
d. Inventories
e. Prepaid expenses
PAS 1 PRESENTATION OF FINANCIAL STATEMENTS

STATEMENT OF FINANCIAL POSITION (ELEMENTS)

Noncurrent Assets
ASSETS
PAS 1, Paragraph 66, simply states that “an
 An economic resource controlled by an entity shall classify all other assets not
entity as a result of past event. classified as current as noncurrent.”
 Economic Resource – is a right that has
the potential to produce economic NCA include the ff:
benefits
a. PPE (PAS 16, Paragraph 6)
 Essential Characteristics of Assets:
b. Long-term investments
a. present economic resource
c. Intangible assets
b. the economic resource is a right
d. Deferred tax assets
that has the potential to
e. Other NCA
produce economic benefits
c. the economic resource is
controlled by the entity as a
LIABILITY
result of past event
 A present obligation of an entity to
Classification of Assets:
transfer an economic resource as a
Current Assets result of past event
 An obligation is a duty or
PAS 1, Paragraph 66, provides that an entity
responsibility that an entity has no
shall classify an asset as current when:
practical ability to avoid.
a. The asset is cash or cash equivalent  Ang obligation can either be legal or
unless the asset is restricted to constructive
settle a liability for more than twelve  Essential Characteristics of Liability:
months after the reporting period. a. the entity has an obligation
b. The entity holds the asset primarily b. the obligation id to transfer an
for the purpose of trading. economic resource
c. The entity expects to realize the asset c. the obligation is a present
within twelve months after the obligation that exists as a
reporting period. result of past event
d. The entity expects to realize the asset
Classification of Liabilities:
or intends to sell or consume it within
the entity’s normal operating cycle. Current Liabilities

PAS 1, Paragraph 54, provides that as a PAS 1, Paragraph 69, provides that an entity
minimum, the line items under current assets shall classify a liability as current when:
are:
a. The entity expects to settle the
a. Cash and Cash Equivalents liability within the entity’s normal
b. Financial assets at fair value such as operating cycle.
trading securities and other b. The entity holds the liability for the
purpose of trading.

A.B.B. NOTES A.B.B. NOTES

 c. The liability is due to be settled STATEMENT OF COMPREHENSIVE INCOME (ELEMENTS)
within twelve months after the
INCOME
reporting period.
d. The entity does not have an  Increase in assets or decrease in
unconditional right to defer settlement liabilities that result in increase in
of the liability for at least twelve equity, other than those relating to
months after the reporting period. contributions from equity holders
 Encompasses both revenue and gains
 Revenue – arises in the course of
PAS 1, Paragraph 54, provides that as a ordinary regular activities
minimum, the face of the statement of (regularity/recurring)
financial position shall include the  Gain – do not arise in the course of
following line items for current liabilities: ordinary regular activities (non-
recurring)
a. trade and other payables
b. current provisions
c. short-term borrowing
EXPENSE
d. current portion of long-term debt
e. current tax liability  Decrease in assets or increase in
liabilities that result in decrease in
Noncurrent Liabilities
equity, other than those relating to
PAS 1, Paragraph 69, provides that all distributions to equity holders.
liabilities not classified as current are  Encompasses losses
classified as noncurrent.  Expense – arises in the course of
ordinary regular activities (recurring)
a. Noncurrent portion of long-term debt
 Loss – do not arises in the course of
b. Finance lease liability
ordinary regular activities (non-
c. Deferred tax liability
recurring)
d. Long-term obligations to company
officers Components of Expense
e. Long-term deferred revenue
- COGS
- Distribution Cost/Selling Expense –
directly related to selling,
EQUITY
advertising and delivery
 Residual interest in the assets after - Administrative Expense – cost of
deducting all the liabilities administering the business, all
 Net assets or the total assets minus operating expenses not related to
liabilities selling
 Terms used:
- Other Expenses – expenses not related
1. Owner’s Equity (Sole
Proprietorship) to SE or AE
2. Partners’ Equity (Partnership) - Income Tax Expense
3. Stockholders’
Equity/Shareholders’ Equity
(Corporation) COMPREHENSIVE INCOME
PAS 1, Paragraph 7, the holders of - It is the change in equity during a
instruments classified as equity are simply
period resulting from transactions and
known as owners.
other events, other than changes
resulting from transactions with owners
in their capacity as owners.
A.B.B. NOTES A.B.B. NOTES
 - Includes:  OCI that will be reclassified
 Components of Profit or Loss subsequently to profit or loss when
 Components of Other specific conditions are met
Comprehensive Income  OCI will not be reclassified
subsequently to profit or los but to
PROFIT OR LOSS
retained earnings
 The total of income less expenses
OCI that will be reclassified to profit or
excluding the components of OCI
loss
 This is the “bottom line” in the
traditional income statement a. Unrealized gain or loss on debt
 Uses net income or net loss to describe investment measured at fair value
profit or loss through OCI
b. Gain or loss from translation of the
OTHER COMPREHENSIVE INCOME
FS of a foreign operation
 Items of income and expense including c. Unrealized gain or loss from
reclassification adjustments that are derivative contracts designated as
not recognized in profit or loss as cash flow hedge
required or permitted by PFRS.
OCI that will be reclassified to retained
 Includes the fF:
earnings
1. Unrealized gain or loss on
equity investment measured at a. Unrealized gain or loss on equity
fair value through OCI investment measured at fair value
2. Unrealized gain or loss on debt through OCI
investment measured at fair PFRS 9, Paragraph B5.7.1, provides
value through OCI that such unrealized gain or loss
3. Gain or loss from translation of is reclassified to RE upon disposal
the FS of a foreign operation of the investment
4. Revaluation surplus during the
year b. Revaluation surplus during the year
5. Unrealized gain or loss from c. Remeasurements of defined benefit
derivative contracts designated plan, including actuarial gain or
as cash flow hedge loss
6. Remeasurements of defined The remeasurements are not
reclassified but permanently
benefit plan, including
excluded from profit or loss
actuarial gain or loss
However, the remeasurements may be
7. Change in fair value attributed transferred within equity or RE
to credit risk of a financial d. Change in fair value attributed to
liability designated at fair credit risk of a financial liability
value through profit or loss designated at fair value through
profit or loss
PRESENTATION OF OCI may be transferred within equity or
RE
PAS 1, Paragraph 82A, provides that the
statement of comprehensive income shall
present line items for amounts of OCI during PRESENTATION OF THE SCI
the period classified by nature.
1. Two Statements:
The line items shall be grouped as follows:  Income Statement – showing components
of profit or loss

A.B.B. NOTES A.B.B. NOTES

  OCI – beginning with profit or loss as of expenses or their nature within the
shown in the IS plus or minus the entity, whichever provides information that
components of OCI is reliable and more relevant
2. Single Statement of Comprehensive Income PAS 1, Paragraph 105, states that because
 Combined statement showing components each presentation method has merit for
of PL and OCI different types of entities, management is
 CF calls this as Statement of Financial required to select the presentation that is
Performance reliable and more relevant

(PAS 1 does not prescribe any format)

FUNCTIONAL PRESENTATION
NO MORE EXTRAORDINARY ITEMS - This form classifies expenses according
PAS 1, Paragraph 87, mandates that an entity to their function as part of COGS,
shall not present any items of income and Distribution costs, Administrative
expense as extraordinary either on the face expenses and other exp.
of the IS or SCI or in the notes. - AKA as cost of goods sold method
- (grouped)
LINE ITEMS

PAS 1, Paragraph 82, IS and SCI shall include

the following line items: NATURAL PRESENTATION

a. Revenue - Nature of expense method

b. Gain or loss from derecognition of - Expenses are aggregated according to
financial asset measured at amortized their nature
cost as required by PFRS - (specific)
c. Finance cost STATEMENT OF RETAINED EARNINGS
d. Share in income or loss of associate
and joint venture - Shows the changes affecting directly
e. Gain or loss on the reclassification of the retained earnings of an entity and
financial asset from amortized cost to relates IS to the SFP
fair value profit or loss - Important data affecting RE that should
f. Gain or loss on the reclassification of be clearly disclosed:
financial asset from amortized cost to  Profit or loss
fair value OCI to fair value profit or  Prior period errors
loss  Dividends declared and paid to
g. Income tax expense shareholders
h. A single amount comprising discontinued  Effect of change in acc policy
operations  Appropriation of RE
i. Profit or loss for the period - SRE is no longer a required basic
j. Total OCI statement but it is part of Statement
k. Comprehensive income for the period of Changes in Equity
being the total of PL and OCI

FORMS OF INCOME STATEMENT

PAS 1, Paragraph 69, provides that an entity

shall present an analysis of expenses
recognize in profit or loss using a
classification based on either the function
A.B.B. NOTES A.B.B. NOTES
 • Includes current assets (CA) and
current liabilities (CL)

Examples of cash flow transactions under

operating activities:

 Cash received from customers (cash

receipts from sale of goods and
rendering of services)

 Cash received from fees, commissions,

and other income

 Cash payments to suppliers

 Cash payments to employees

 Cash payments for other operating

PAS 7 expenses

STATEMENT OF CASH FLOWS  Interest payments

 Component of FS summarizing the INVESTING ACTIVITIES

operating, investing and financing
• Cash used for acquisition of property,
activities plant and equipment, intangible assets
 Provides information about the cash and other long term assets as well as
receipts and cash payments of an entity cash proceeds from disposals of such
during a period long-term assets

CASH and CASH EQUIVALENTS • This sections hints on the company’s

ability to generate cash in the future
PAS 7, Paragraph 7, provides that an
investment normally qualifies as a cash • Includes non-current assets (NCA)
equivalent only when it has a short maturity Examples of cash flow transactions under
of three months or less from date of investing activities:
acquisition
 Cash payments to acquire property,
(the investment must be acquired three months plant and equipment, intangibles and
or less before the date of maturity) other long-term assets

Examples:  Cash receipts from sale of property,

plant and equipment, intangibles and
- three-month BSP treasury bill other long-term assets
- three-year BSP TB purchased three
 Cash loans made to other parties (long-
months before date of maturity term note receivable)
- three-month time deposit
- three-month money market instrument or  Cash collections on long-term note
commercial paper receivable

FINANCING ACTIVITIES
OPERATING ACTIVITIES
• Cash flows derived from the equity
• Primarily derived from the main revenue
capital and borrowings of the entity
producing activities of the business
• Equity Financing – transaction between
• Reveals the present ability of the
the entity and owners
company to generate cash from its
operations • Debt Financing – transaction between
the entity and creditors
A.B.B. NOTES A.B.B. NOTES
 • Reports cash received and cash paid to Alternatively, interest paid may be
equity owners and long-term creditors classified as financing cash flow because it
is a cost of obtaining financial resources
• Includes non-current liabilities (NCL)
and equity Alternatively, interest received may be
Examples of cash flow transactions under classified as investing cash flow because it
financing activities: is a return on investment

 Cash received from issuing common (for a financial institution, interest paid
shares (or capital contribution from and interest received are usually classified
owners) as operating cash flows)
 Cash received from issuing notes or
getting a long-term loan from a bank
DIVIDENDS
 Cash dividends distributed to
shareholders PAS 7, Paragraph 33, dividend received shall
 Cash payment for principal of long-term be classified as operating cash flow because
loan it enters into the determination of NI

Alternatively, DR may be classified as

investing cash flow because it is a return on
TRADING SECURITIES
investment
PAS 7, Paragraph 15, cash flows arising from
PAS 7, Paragraph 34, provides that dividend
the purchase and sale of dealing or trading
paid shall be classified as financing cash
securities are classified as operating
flow since it is a cost of obtaining
activities
financial resources
Cash advances and loans made by a financial
Alternatively, DP may be classified as
institution are usually classified as
operating cash flow in order to assist users
operating activities – since they relate to
to determine the ability of the entity to pay
the main revenue producing activities
dividends out of operating cash flow

NON-CASH TRANSACTIONS
INCOME TAXES
PAS 7, Paragraph 43, provides that investing
PAS 7, Paragraph 35, provides that cash flows
and financing transactions that do not
arising from income taxes shall be separately
require the use of cash or cash equivalents
disclosed as cash flows from operating
shall be excluded from the SCF.
activities unless they can be specifically
Such transactions shall be disclosed identified with investing and financing
elsewhere – either in the notes or in activities.
separate schedule
Tax cash flows are often difficult to match
to the originating underlying transaction, so
most of the time all tax cash flows are
INTEREST
classified as arising from operating
PAS 7, Paragraph 33, provides that interest activities.
paid and interest received shall be
classified as operating cash flows because
they enter into the determination of NI or NL

A.B.B. NOTES A.B.B. NOTES

 a. Cost of Purchase – cost directly
attributable to the acquisition of
goods/services
b. Cost of Conversion (DL+OH) – cost
directly and indirectly related to
production
c. Other Cost – expenses incurred in
bringing the inventories to their
present location and condition

Excluded costs (recognized as expenses):

a. Abnormal amounts of wasted materials,

labor and other production cost
b. Storage costs (SC on WIP –
capitalized; SC on FG – expensed)
c. Administrative overheads
PAS 2 – INVENTORIES
d. Distribution or selling costs
Inventories
Cost Formulas
Inventories are assets held for sale in the
PAS 2, Paragraph 25, cost of inventories
ordinary course of business.
shall be determined by using either:
Encompass:
 FIFO – First in, First Out
a. Finish Goods – ready for sale - inventory is stated at current
a. Goods in Process – production process replacement cost
(WIP) - goods sold are stated at older
b. Raw Materials - materials and supplies prices resulting in
awaiting use in the production process understatement of COGS
- there is improper matching of
cost against revenue
Classified into two: - Inflation = highest NI
- Deflation = lowest NI
1. Inventories of a trading concern –  Weighted Average
merchandise inventory, buys and sells - relatively easy to apply
goods in the same form - produces inventory valuation
2. Inventories of manufacturing concern – that approximates current value
buys goods which are altered into - simple average (periodic)
another form before they are made - moving average (perpetual)
available for sale
Inventories of manufacturing: LIFO – Last in, First out
 Finish goods - LIFO favors IS because there is
 Goods in process matching of current cost against
 Raw materials current revenue – COGS expressed in
 Factory supplies terms of current cost
- Inflation = lowest NI
- Deflation = highest NI
Cost of Inventories:
Specific Identification

A.B.B. NOTES A.B.B. NOTES

 - Specific costs are attributed to
identified items of inventory
- PAS 2, Paragraph 23, this method is
appropriate for inventories that are
segregated for a specific project and
inventories that are not ordinarily
interchangeable

Measurement of Inventory

PAS 2, Paragraph 9, provides that inventory

shall be measured at the ower of cost and net
realizable value (LCNRV)

Net Realizable Value (NRV) – the estimated

selling price in the ordinary course of
business less the estimated cost of
completion and the estimated cost of
disposal.

*Inventories are usually written down to NRV

on an item by item or individual basis

Allowance Method

- The inventory is recorded at cost and

any loss on inventory writedown is
accounted for separately
- Also known as the loss method
- Debit loss on inventory writedown,
Credit allowance for inventory
writedown (Cost > LCNRV)
- PAS 2, Paragraph 36, required
disclosure of the amount of any
inventory writedown and the amount of
any reversal of inventory writedown

Inventory Estimation Method

a. Gross Profit Method – if the rate of GP

is consistent every period
b. Cost to Retail Method

A.B.B. NOTES A.B.B. NOTES

 Bioassets IR = BSP

Fair value less cost to sale (disposal)

- A gain or loss arising on initial

recognition of a bioasset at fair value
less cost to sale and any subsequent
changes shall be included in profit or
loss

Bearer Plants

- IASB decided that bearer plants should

be accounted for in the same way as PPE
because the operation of bearer plants
is similar to that of manufacturing
- A bearer plant is a living plant that:
 Used in the production or supply
of agricultural produce
 Expected to bear produce for
more than one period
PAS 41 – AGRICULTURE
 Has a remote likelihood of being
 Biological Assets – living animals and sold as agricultural produce,
living plants except for incidental scrap
 Agricultural Produce at the point of sales
harvest – harvested product of an
Plant with dual use = biological assets
entity’s biological assets
 Harvest – the detachment of produce - The plant is cultivated for bearing
from biological asset agricultural produce
- The plant itself is being sold either
Agricultural Activity
as a living plant or an agricultural
The management by an entity of the biological produce
transformation and harvest of biological
Bearer Animals
assets for sale or for conversion into
agricultural produce or into additional - Like bearer plants, may be held solely
biological assets for the produce that they bear
- However, they are excluded from the
Biological Transformation
IASB amendment and will continue to be
Comprises the process of growth, accounted for under IAS 41
degeneration, production and procreation that - Bearer animals continue to be reported
cause qualitative or quantitative changes in as biological assets
a biological asset

Asset changes through:

 Growth
 Degeneration
 Procreation

Measurement

A.B.B. NOTES A.B.B. NOTES

 - Shall be recognized as income on a
systematic basis over the periods in
which an entity recognizes expense

Government Grant

1. Unconditional – records income when

received
2. Conditional – recognize income when
conditions are met
 Deferred income
 Systematic Allocation

PAS 20 – GOVERNMENT GRANT

PAS 20, Paragraph 3, defines that government

grant as assistance by the government in the
form of transfer of resources to an entity in
return for part or future compliance with
certain conditions relating to the operating
activities of the entity

Recognition and Measurement

Government Grant shall be recognized when

there is reasonable assurance that:

a. The entity will comply with the

conditions attaching to the grant
b. The grant will be received

Government grant shall not be recognized on a

cash basis as this is not consistent with
GAAP

Classification of Government Grant

a. Grant related to asset

b. Grant related to income

Accounting for Government Grant

A.B.B. NOTES A.B.B. NOTES

 The measurement may be to realize fair value
changes and to collect contractual cash flows

FA at FVTPL

- FA held got trading

- All other investment in quoted equity
instruments
- Debt investments that are irrevocably
designated on initial recognition as
FVTPL
- All debt instruments that do not
satisfy the requirements for
measurement at AC and at FVTOCI

FA at FVTOCI

- Investment in equity that is not held

for trading (nontrading equity
investment)
*Shall be recorded as FV plus
transaction cost

(insert business model for FA)

PFRS 9 – FINANCIAL INSTRUMENTS

PFRS 9, Paragraph 5.1.1, provides that at the

initial recognition, an entity shall measure
a financial asset at fair value plus
transaction cost that are attributable to the
acquisition of the financial asset (except in
the case of financial asset measured at
FVTPL)

As a rule, transaction costs that are

directly attributable shall be capitalized as
cost of the FA

However, if the financial asset is held for

trading or is measured at FVTPL, transaction
costs are expensed outright.

PFRS 9, Paragraph 5.2.1, provides that after

initial recognition, an entity shall measure
a financial asset at:

 FVTPL
 FVTOCI
 Amortized Cost
A.B.B. NOTES A.B.B. NOTES
 5. The investor has a significant
influence over the investee
6. The IIA accounted for using the equity
method shall be reported as NCA

Excess of cost over carrying amount

If the investor pays more than the carrying

amount of the net assets acquired, the
difference is commonly known as “excess cost
over carrying amount” and may be attributed
to the ff:

- Undervaluation of the investee’s asset

such as building, land and inventory
- Goodwill

PAS 28 – INVESTMENT IN ASSOCIATES

Associate

- An entity over which the investor has

significant influence
- Significant influence is the power to
participate in the financial and
operating policy decisions of the
associate
- Holds directly or indirectly 20%-50%
- Equity Method

Accounting Procedures

1. The investment is initially recognized

at cost
2. The carrying amount is increased by
share of profit and decreased by share
of loss (recognized as investment
income)
3. Dividends reduce the carrying amount
4. Investment must be in ordinary shares
A.B.B. NOTES A.B.B. NOTES
A.B.B. NOTES A.B.B. NOTES