- Suppliers

CONCEPTUAL FRAMEWORK AND - Potential investors

ACCOUNTING STANDARDS - Taxing authorities
- Regulatory bodies
- Employees
Chapter 1 - The Need for Financial - Employee unions
Reporting - Financial analysts
- Financial advisers
● Stakeholders use the financial - Consultants
information provided by a system - General public
or discipline called accounting
● The general purpose reports
Internal Users and External Users provided to this group are the
financial statements, which are
● The active owners of business the product of a broad branch of
enterprises and the management accounting called financial
use financial information for accounting
internal decision-making
purposes ● External users - have diversified
information needs
● Active owners and managers -
requires the financial information ● Inactive owners - delegate the
in a form with contents fitting their stewardship of the enterprise’s
specific decision-making needs resources to the management
because of their actual
involvement in the business - They use the financial
operations statements to keep track
of the enterprise’s financial
● External users - do not have condition and performance
ready access to financial reports to decide whether they
and rely heavily on negotiations should hold or sell their
and regulations to obtain equity interests
information about a business
enterprise ● Present and potential creditors -
assess the ability of the
External users include: enterprise to pay its loans and
the related interest
- Inactive owners
- Creditors ● Suppliers of goods and services -
- Lenders determine whether they would be
 able to collect the cost of such ● Public - interested in financial
goods and services when due information about the trends and
the range of business entities’
- Dependent upon the economic activities, as the
continuation of the general direction of business
enterprise as a major growth indicates the nation’s
customer economic status

● Employees - evaluate the Direct Users and Indirect Users

enterprise’s financial status to the
asses the latter’s ability to ● Direct users - use financial
provide remuneration, retirement information to protect their
benefits, and employment interests in the enterprise
opportunities
Direct users include:
● Customers - interested in
information about an enterprise’s - Owners
continuance, especially when - Managers
they have a long-term - Creditors
involvement with, or are - Suppliers
dependent on, the enterprise as - Customers
their supplier - Employees
- Taxing authority
● Business entity - subject to
government regulations mainly ● Indirect users - use accounting
made for the interest of public information to advise or protect a
investors and other parties direct user’s interest
dealing with it
Indirect users include:
● Government and its agencies -
rely on financial information to - Regulatory agencies
determine whether business
entities comply with prescribed ➢ Securities and
rules and regulations, collect the exchange
correct amount of taxes, commission -
determine taxation policies, and protect the users of
set the basis for national income the investors and
and similar statistics the public

- Labor unions
 - Financial and legal - It is concerned with the
consultants recognition, measurement,
and communication of
● Monetary unit - generally the economic resources,
measure used in communicating economic obligations, and
accounting information changes in economic
resources and economic
● Quantitative or measurable obligations
information focuses on the - Meets the needs of
entity’s economic resources and external users
economic obligations brought by - Internal users also use
income, expenses, and other financial statements to
transactions evaluate an entity’s
performance and financial
● Reporting entity - often called an condition to perform their
accounting entity, may be a planning and control
business enterprise, a functions better
government unit, a not-for-profit
organization, an individual, a unit ● Management accounting - serves
within an enterprise, a group of the information of internal users
entities, and any other unit that
has a personality different from - Use accounting
that of its owners, members, and information in making
employees routine and significant
economic decisions
● Accounting entity concept or - Because the information
reporting entity concept - required by the
separates the enterprise’s management may vary
personality from that of its owners based on the specific
and other stakeholders; can needs at a particular time,
control economic resources and the information provided is
incur economic obligations not structured
- Does not necessarily
Branches of Accounting conform to accounting
standards
● Financial accounting - broadest
branch of accounting, focusing on ● Cost accounting - concerned with
the needs of external users measuring and recognizing the
cost of services provided or
products manufactured
 - The national government
- More ordinarily associated agencies follow a set of
with manufacturing procedures under the
companies as a tool of Government Accounting
both financial accounting Manual (GAM)
and management - Local government units
accounting and agencies follow the
Local Government
● Tax accounting - concerned with Accounting Manual
the computation of taxes and (LGAM)
preparation of tax returns
submitted to a taxing authority ● Bookkeeping - refers only to the
based on the country’s revenue recording phase of accounting
and tax laws
● Auditing - refers to an
● Government accounting - independent examination of the
encompasses analyzing, financial statements conducted
classifying, summarizing, and by a certified public accountant to
communicating all transactions render an opinion on the fairness
involving the receipt and of the presentation of the
disposition of government funds financial statements
and property and interpreting the
results thereof - Performs an attest function
to lend credibility to the
- System adopted by financial statements; look
government units and for credible evidences
some government
agencies Financial Reporting and the Standard
- Government-owned and Setting Process
controlled corporations
(GOCCs) apply the 1. The accounting profession
Philippine Financial recognized the need to
Reporting standards harmonize the reporting of
- Government Business economic activities across
Enterprises (GBEs) national borders and created the
comply with the International Accounting
requirements of the Standards Committee (IASC) in
International Public Sector 1973
Accounting Standards
(IPSAS)
 - From 1973 to 2001, the
IASC developed and ➢ IFRS include the following:
promoted the use and
application of a set of - Specific International
uniform global accounting Financial Reporting
standards called Standards
International Accounting - Interpretations made by
Standards (IAS) the International Financial
Reporting Interpretations
2. IAS Committee was reconstituted Committee (IFRIC, the
in 2001 as the International body that interprets the
Accounting Standards Board works of the IASB)
(IASB) under the umbrella of the - International Accounting
International Financial Reporting Standards
Standards (IFRS) Foundation - Interpretations made by
the Standing
- IFRS foundation - Interpretations Committee
not-for-profit, public (SIC, the body that
interest organization interpreted the works of
established to develop a the IAS Committee)
single set of high-qiuality,
understandable, ● At the present time, IASB still
enforceable and globally issues new standards and major
accepted accounting amendments to the existing
standards called the IFRS IFRSs
Standards, and to
promote and facilitate ● The overall objective is the very
adoption of the standards objective of financial reporting,
based on the mission statement
● Accounting standards that of the IFRS Foundation; and that
originated from the works of the is, to communicate the financial
IAS Committee, even if improved information that achieves
or revised by the IASB, are transparency, accountability, and
known as International efficiency to financial markets
Accounting Standards around the world

● The standards that originated ● IFRS bring transparency by

from the works of the IASB are enhancing the international
called International Financial comparability and quality of
Reporting Standards (IFRSs financial information, enabling
 investors and market participants standard-setting body, the
to make informed economic International Sustainability
decisions Standards Board (ISSB)

● IFRS strengthen accountability by ● ISSB - intended to deliver a

reducing information gap comprehensive global baseline of
between the investors and the sustainability-related disclosure
people to whom they have standards that provide investors
entrusted their investments (the and capital market participants
management of the entity) with information about
companies’ sustainability-related
● IFRS also contribute to economic risks and opportunities and help
efficiency by helping investors them make informed decisions
identify opportunities and risks,
thus improving capital allocation - Formulates general
sustainability-related
● Financial reporting practices are disclosure standards and
dynamic, being influenced by the sector-specific
complicated transactions that sustainability standards
result from innovative business
practices that evolve from ● More than 140 jurisdictions
changes in economic, political, (countries) require the adoption
and even cultural environment of the IFRS and many more
countries permit their adoption for
- In essence, the financial financial reporting
reporting standards shall
continually be reviewed, ● One of the primary functions of
amended, amd revised, the IFRS Foundation is to govern
when necessary, for the and oversee the activities of its
purpose of faithfully standard-setting bodies, which
communicating in the most are IASB and ISSB
relevant manner the results
of economic transactions of ● IASB follows a due process in the
reporting entities development of financial
reporting standards. The due
Recent Developments process involves interested
individuals and organizations
● In November 2021, the IFRS around the world and comprises
Foundation trustees announced the following stages:
the creation of another
1. Setting the agenda simple majority vote of the IASB
2. Planning the project members
3. Developing and publishing the
discussion paper ● Discussion of all technical issues
4. Developing and publishing the takes place in public sessions
discussion paper
5. Developing and planning the ● Exposure draft - IASB’s main
exposure draft vehicle to consult the interested
6. Developing and publishing the public; proposed standard or
standard amendment to a standard
7. Standard is issued
- The comment period for
● Once an item is added to the major projects is usually
IASB’s project agenda, the IASB for 120 days, and for
decides whether to conduct the IFRIC interpretations is
project alone or jointly with usually 60 days, but may
another standard-setter. A be less in urgent cases
working group is then
established, which may include ● Upon reaching conclusion on the
members of staff from other issues covered in the exposure
accounting standard setters draft, the pre-ballot IFRS is sent
to the selected parties for review;
● The discussion of the working after which a near final draft is
group is contained in a posted on the IASB’s website
discussion paper (although not
mandatory) that includes a ● Balloting - circularizing the near
comprehensive overview of the final reporting standard to the
issue, possible approaches in IASB’s members requires final
addressing the issue; the review and approval of the draft
preliminary views of its authors or
the IASB and an invitation to ● After an issuance of an IFRS, the
comment. The issue being IASB holds regular meetings with
discussed may result from a interested parties to address
research project being carried out some unanticipated issues
by another standard setter or it relating to implementation
may be an active agenda carried
out by the IASB. If the issue ● IFRSs are principle-based rather
originates from another standard than procedure based
setter, the publication of
discussion paper requires a
 ● International Financial Reporting ● The Accounting Standards
Interpretations Committee - Council (ASC) was formed on
organized to interpret specific November 18, 1981 to study the
issues when the standards do not accounting standard-setting
include specific authoritative process in the Philippines
guidance
● The main function of the ASC
● IFRIC - succeeded the Standard was to establish and improve
Interpretations Committee (SIC) generally accepted accounting
and consists of 14 voting standards in the Philippines
members who act independently
and are not representing any ● The accounting standards
organization or association developed by the ASC were
known as the Statements of
The Standard Setting Process in the Financial Accounting Standards
Philippines (SFAS)

● Before 1981, the Philippines did - These standards were

not have a formal process for the based on existing
development of accounting practices, research and
processes studies undertaken by the
council, available national
● The accounting principles then and international
were patterned from what were accounting literatures,
found in actual business statements by then
practices, mostly based on the International Accounting
accounting principles and Standards Committee, and
principles developed by the the Financial Accounting
United States of America Standards Board (FASB)
of the United States of
● It was only in late 1981 when the America
Philippine Institute of Certified
Public Accountants (PICPA), the ● The ASC was composed of eight
accredited professional members, representing the
organization of certified public following organizations: PICPA
accountants in the Philippines, (one for each of the four sectors),
organized the Accounting Securities and Exchange
Standards Council that Commission, Bangko Sentral ng
formalized the standard-setting Pilipinas, Board of Accountancy,
process in the country
 and Financial Executives of the ● Under the implementing Rules
Philippines and Regulations of the Philippine
Accountancy Act (Republic Act
● In 1997, the ASC made a 9298), the FRSC shall be
decision to move fully to the composed of a chairman and 14
International Accounting members representing the
Standards (IAS), although some following organizations:
statements of financial
accounting standards adopted by - Board of Accountancy
the ASC even before 1997 had - Securities and Exchange
already been based on the IAS Commission
- Bangko Sentral ng Pilipinas
● From 1997 to 2000, the ASC - Bureau of Internal Revenue
developed accounting standards - Financial Executives of the
that were already based on IAS Philippines
- Commission on Audit
● In 2001, it adopted most of the - Accredited professional
standards that had been organizations of CPAs in four
developed by the IASC sectors (2 representatives for
each sector) of the Philippine
● The ASC set the year 2005 for Institute of Certified Public
the full adoption of the Accountants (PICPA) such as:
International Accounting
Standards in the Philippines ➢ Public practice (ACPAPP,
or Association of CPAs in
● Board of Accountancy - body that Public Practice)
regulates the practice of ➢ Commerce and Industry
accountancy in the Philippines (ACPACI, or Association of
CPAs in Commerce and
- In 2006, it established the Industry)
Financial Reporting ➢ Government (GACPA, or
Standards Council (FRSC) Government Association
to replace and take over of CPAs)
the functions of the ASC ➢ Education (NACPAE, or
National Association of
● Since then, the FRSC carries on CPAs in Education
the decision of the ASC to
converge Philippine Accounting ● BOA Chairman - appointed by
Standards with the International the president of the Philippines
Financial Reporting Standards
● The FRSC formed the Philippine interested individuals and
Interpretations Committee (PIC) organizations
in November 2006 to provide the
Council assistance in establishing ● The due process for projects,
and improving financial reporting normally, but not necessarily,
standards in the Philippines involves the following steps:

● PFRS is a crucial responsibility of 1. Consideration of

the FRSC pronouncement of IASB
2. Formation of a task force,
● Similar to IFRS, PFRS consist of: when deemed necessary,
to give advice to FRSC
- Specific Philippine 3. Issued for comment an
Financial Reporting exposure draft approved
Standards (PFRS), which by a majority of the FRSC
are adopted by from the members; comment period
IFRSs will be at least 60 days,
- Philippine Accounting unless a shorter period
Standards (PAS), which (not less than 30 days) is
are adopted from the IASs considered appropriate by
- Philippine Interpretations, the FRSC
which are adopted from 4. Consideration of all
the interpretations of the comments received within
IFRIC and SIC and the the comment period and,
interpretations of PIC when appropriate,
preparing a comment letter
● The PFRS set out the to the IASB
recognition, measurement, 5. Approval of a standard or
presentation, and disclosure an interpretation by a
requirements dealing with majority of the FRSC
transactions and events that are members
important in general purpose
financial transactions ● In September 2022, the
Professional Regulatory board of
● PFRS - developed through a due Accountancy approves the
process that involves members of renaming of Financial Reporting
PICPA, financial executives, Standards Council (FRSC) to
regulatory authorities, members Financial and Sustainability
of the academe, and other Reporting Standard Accountancy
Act of 2004
 and when adopted, the Philippine
● The FRSC created the Philippine Sustainability Reporting
Sustainability Reporting Standards
Committee (PSRC) to provide
technical support to the FRSC in Chapter 2 - The Conceptual
adopting and issuing guidelines Framework for Financial Reporting
and standards of sustainability
reporting in the Philippines
● General-purpose financial reports
● PRSC - composed of at least 17 apply principles that aim to
members representing the Board achieve relevance and faithful
of Accountancy, accounting firms, representation of financial
Financial Executives of the information to the intended users
Philippines, Securities and
Exchange Commission, Bangko ● The Conceptual Framework for
Sentral ng Pilipinas, Insurance Financial Reporting describes the
Commission, Commission on objective and the concepts for
Audit, Management Association general-purpose financial
of the Philippines, Climate reporting
Change Commission, and the
Academe ● The purpose of the Conceptual
Framework is to:
● The FSRSC also monitors the
issuance of IFRIC by the IASB - Assist the IASB in
through its local counterpart, the developing International
Philippine Interpretations Financial Reporting
Committee Standards (IFRS) that are
based on consistent
● The FSRSC, through the PSRC, concepts
likewise monitors the issuance of - Assist preparers in
the International Sustainability developing consistent
Reporting Standards by the ISSB accounting policies when
for adoption in the Philippines no standard applies to a
particular transaction or
● Board of Accountancy - principal other events or when a
regulator of the practice of the standard allows a choice
Philippine accounting profession, of accounting policy
likewise closely monitors the - Assist all parties in
implementation of the Philippine understanding and
Financial Reporting Standards interpreting the standards
 ● The Conceptual Framework is ● General-purpose financial
neither a Philippine Financial reporting aims to provide financial
Reporting Standard nor an information about an entity useful
International Financial Reporting to existing and potential
Standard investors, lenders, and other
creditors in making decisions
● Whenever there is a conflict about providing resources to the
between the Conceptual entity
Framework and an accounting
standard, the requirements of the ● Users make decisions about
accounting standards will prevail buying, selling, or holding equity
and debt instruments, providing
Scope of the Conceptual Framework or settling loans and other forms
of credit or existing rights to vote
● “The Conceptual Framework for on, or influence management’s
Financial Reporting” is divided actions that affect the use of the
into eight chapters, as follows: entity’s economic resources

- Chapter 1 - The Objective ● Financial reports are directed

of General-Purpose toward the common information
Financial Reporting needs of existing and potential
- Chapter 2 - Qualitative investors, lenders, and creditors.
Characteristics of Useful The following also rely on the
Financial Information financial statements to obtain
- Chapter 3 - Financial information about a reporting
Statements and the entity:
Reporting Entity
- Chapter 4 - Elements of - Employees - Employees and
Financial Statements their representative groups
- Chapter 5 - Recognition are interested in information
and Derecognition about the stability and
- Chapter 6 - Measurement profitability of their
- Chapter 7 - Presentation employers
and Disclosure - Government and its
- Chapter 8 - Concepts of agencies - The information
Capital and Capital provided by the
Maintenance general-purpose financial
reports enable the
The Objective of General-Purpose government and its
Financial Reporting agencies to regulate the
 enterprise’s activities and unexpected downturns in the
determine the appropriate economic environment in which it
allocation of resources operates or to take advantage of
through taxation policies profitable investment
being implemented opportunities as they arise
- Public - The
general-purpose financial Information About an Entity’s Economic
reports provide information Resources and Claims
about different enterprises’
trends, recent ● Information about an entity’s
developments, activities, economic resources and claims
and employment data (financial position) is primarily
provided in the statement of
● The users of general-purpose financial position or balance
financial reports have common sheet
information needs: to evaluate
the enterprise’s liquidity, Information on Changes in Economic
solvency, profitability, and Resources and Claims
operating and financial flexibility
● The changes in an entity’s
● Liquidity - refers to the availability economic resources and claims
of cash in the near future, result from its financial
considering the financial performance reflected by accrual
commitments over the next accounting, financial performance
period reflected by past cash flows, and
events or transactions not
● Solvency - availability of cash resulting from financial
over the long term to meet performance
financial obligations as they fall
due ● The information about an entity’s
financial performance reflected
● Profitability - ability of the by accrual accounting is primarily
enterprise to generate cash flows provided in a statement of
from its existing resource base. It comprehensive income
refers to the effectiveness with (expanding the information
which the entity has employed its previously presented in a
resources conventional income statement)

● Operating and financial flexibility - ● Statement of Comprehensive

the company’s ability to adjust to Income - includes revenues,
 expenses, gains, and losses that financial information most useful
have yet to be realized and are to the users
excluded from net income on an
income statement (hindi kasama ● These attributes, called
sa income statement) qualitative characteristics, apply
to financial information contained
● Information presented in the in the financial statements and
statement of comprehensive financial information provided in
income helps users asses other ways
potential changes in the
economic resources the ● The qualitative characteristics are
enterprise will likely control divided into two groups:

● Accrual accounting - recognizes - The fundamental qualitative

the effects of the transactions characteristics
during the reporting period when - The enhancing qualitative
the changes in economic characteristics
resources and claims occur
rather than only when cash is Fundamental Qualitative Characteristics
received or paid
● The fundamental qualitative
● Information on an entity’s characteristics are relevance and
financial performance reflected faithful representation
by past cash flows is presented in
a statement of cash flows 1. Relevance - information is
considered relevant if knowledge
- This information indicates of such information would affect
how the entity obtains and the judgment or evaluation of the
spends cash that may user
affect its liquidity or
solvency and helps users ➢ A relevant financial
understand its operations information has
and evaluate its financing confirmatory value
and investing activities or predictive value,
or both
Qualitative Characteristics of Useful ➢ Confirmatory value
Financial Information - information
provides feedback
● The financial statements must on past events or
meet some attributes to make the
 previous ● Financial reporting is concerned
evaluations with information that is significant
➢ Predictive value - enough to influence the economic
financial information decisions of the users
about the
enterprise’s - Materiality - largely a
financial position matter of professional
and past judgment based on
performance helps identifiable circumstances.
users formulate It depends on:
more intelligible
predictions about ➢ The nature of the
the future; input to item
processes used to ➢ The magnitude of
predict future the items to which
outcomes the information
relates
- This means that the information ➢ Error judged in
can be used to assist in the particular
process of making predictions circumstances of
about future events, such as omission or
potential investment returns, misstatement of
credit defaults, and other information
decisions that financial statement
users need to make - An item is material if its
- The historical information is used inclusion or disclosure
as a basis for forecasts of would make a difference
performance and other matters in the evaluation or
which users may need in decision of the user of
analyzing price movements of financial statements
securities, dividend and wage - Materiality is an
payments, and the ability to meet entity-specific asset, and
obligations as they come due the IASB has a set no of
quantitative threshold to
➢ Note that although determine when an item
the information may is material
assist in these
decisions, it is not a 2. Faithful Representation - requires
prediction or forecast that the amounts and
descriptions of information
presented on the financial certain level of uncertainty. If
statements reflect the actual information is so relevant, but
results of the transactions its measurement involves a
completed by the enterprise. To high level of uncertainty that
be representationally faithful, the faithful representation may not
information must be: be fully achieved, the most
useful information may be an
➢ Complete uncertain estimate
➢ Neutral accompanied by a description
➢ Free from error of uncertainties affecting it.
- In some cases, information
- The financial information is considered most useful may
not neutral if, by the selection include an estimate of another
or presentation of information, type slightly less relevant and
it includes the making of a subject to lower measurement
decision or judgment in order uncertainty
to achieve a predetermined
result or outcome Enhancing Qualitative Characteristics
- Prudence - exercise of
caution when making ● The IASB’s Conceptual
judgments under conditions of Framework also identifies other
uncertainty, results in a attributes that add to the
neutral depiction of usefulness of financial
information information. The enhancing
- An information is free from qualitative characteristics of
error if there are no errors or financial information are as
omissions in its description follows:
and that there is no error
committed in the process of - Comparability
producing information. If - Verifiability
certain limitations exist, such - Timeliness
limitations must be clearly - Understandability
explained
- In some cases, there may be 1. Comparability - quality of
a trade-off between relevance information that enables users of
and faithful representation, as identify similarities and
in cases of measuring and differences between at least two
reporting financial statement economic circumstances
elements through the process
of elimination that involves a
 - Achieving comparability is the - Direct verification - applying
very objective of IAS 1 techniques and methods to
Presentation of Financial achieve the same result, as
Statements counting cash and obtaining
- IAS 1 - prescribes the basis bank statement to validate
for the presentation of cash on hand and cash in
financial statements to ensure bank
comparability with the entity’s - Indirect verification -
financial statements of recalculation using verified
previous periods and other information, as in
entities’ financial statements recalculating the cost of
- Comparability within the inventory
reporting entity for at least two - An information is considered
reporting periods (sometimes verifiable if it is supported by
called intra-comparability) is underlying documents, such
achieved by adhering to the as invoices, official receipts,
principle of consistency checks issued promissory
- Consistency - application of notes, credit memoranda, and
the same accounting policies others
from period to period to - The extent to which
identify actual similarities and information is reproducible
differences in financial given the same data and
performance and financial assumptions
position - For example, if a company
- Comparability between and owns equipment worth $1,000
among enterprises (called and told an accountant the
inter-comparability) is more purchase cost, salvage value,
challenging to achieve than depreciation method, and
intra-comparability useful life, the accountant
should be able to reproduce
2. Verifiability - information that can the same result.
be replicated using the same
measurement methods and 3. Timeliness - availability of
applying the same process information to users early enough
exhibits the characteristic of to be used for the economic
verifiability decisions the information might
influence
- Verification may be made
directly or indirectly
 - Providing timely information - The entity’s financial
may require trading off position with recognized
faithful representation assets, liabilities and equity
- In striking a balance - The entity’s financial
between relevance and performance with
faithful representation, the recognized income and
overriding consideration is expenses
the best satisfaction of the - Recognized assets,
decision-making need of the liabilities, and income and
users expenses including nature
and risks arising from those
4. Understandability - linkage recognized assets and
between the information and the liabilities
economic decision to be made by - Assets and liabilities that
the user have not been recognized
(including information about
- Users - also responsible for their nature and risks
understanding the contents arising therefrom)
of financial statements - Cash flows
- Contributions from and
The Cost Constraint on Useful Financial distributions to enterprise
Reporting owners
- The methods, assumptions
● Constraint - a practical exception and judgments in
to the application if sound estimating amounts
accounting theory presented or disclosed, and
changes in those methods
- As such, it is an exception and judgments
not to apply rigidly what is
required by current ● Financial statements are
accounting standards prepared for a specified period of
time, called reporting period, with
Financial Statements and the Reporting comparative information for at
Entity least one preceding reporting
period
● The information presented in the
financial statements pertains to: ● The financial statements also
contain information on
transactions and other events
that have occurred after the
 reporting period if such - A portion of an entity
information may affect the - More than one entity
decision or evaluation of the
users ● Financial statements of a reporting
entity comprising both the parent
Going concern assumption and its subsidiaries are called
“consolidated financial
● A reporting entity is presumed to statements”
continue operation in the
foreseeable future unless ● A parent is an entity that
circumstances indicate the entity exercises control over another
needs or intends to liquidate entity, called the subsidiary

● The going concern assumption ● Unconsolidated financial

provides a useful reference for statements - provide useful
accounting measurements where information to the parent
assets are carried at going company’s existing and potential
concern values instead of investors, lenders, and other
liquidation values creditors

● If the reporting entity has an ● The financial statements of a

intention or needs to liquidate, it reporting entity comprising two or
must disclose this intention or more entities that are not linked
need and prepare the financial by a parent-subsidiary
statements differently. The relationship are called “combined
appropriate basis must likewise financial statements”
be disclosed
The Elements of Financial Statements
The Reporting Entity
● The financial statements present
● A reporting entity is an entity that the financial effects of the
is required or chooses to prepare transactions and other events
financial statements affecting the enterprise based on
certain groups or classes of
● Not necessarily a legal entity characteristics. Such classes are
called elements of the financial
● A reporting entity can be one of statements
these:

- A single entity
 ● The elements relating to financial ● For a liability to exist, it is not
position: assets, liability, and necessarily to know the identity of
equity the person or entity to whom the
obligation is owed
● The elements relating to
performance: income and ● Equity - the residual interest in
expenses the assets of the entity after
deducting all its liabilities
Elements Relating to Financial Position
● For single proprietorships and
● Asset - present economic partnerships, equity is generally
resource controlled by the entity called capital
as result of past events
Elements Relating to Financial
● Economic resource - a right that Performance
has the potential to produce
economic benefits ● Income - increases in assets or
decreases in liabilities that result
● Three aspects in the definition of in increases in equity other than
assets: those relating to contributions
from holders of equity claims
- Right
- Potential to receive ● Expenses - decreases in assets,
economic benefits or increases in liabilities, that
- Control result in decreases in equity other
than those relating to distributions
● Liability - present obligation of to holders of equity claims
an entity to transfer an economic
resource as a result of past ● Income accounts may be
events presented using different names
that reflect the nature of
● These criteria must be satisfied transaction that generate them
for a liability to exist:
● Income that arises from the
- An obligation of an entity principal operations of an entity
- The obligation is to are called “revenues”
transfer an economic
resource ● Those that arise from incidental
- The present obligation or peripheral transactions are
arises from a past event called “gains”
● Expenses resulting from an to users justify the
entity’s principal operations are costs of obtaining,
called “expenses” providing, and using
the information
● Those resulting from incidental or ➢ It is measurable
peripheral transactions are called
“losses” ● Some items of information at the
reporting date cannot yet be
Recognition and Derecognition measured with certainty, and
reasonable estimates may be
● Recognition - process of necessary to provide useful
including in the face of the information; information must be
financial statement an item that provided describing the estimate
meets the definition of a financial and explaining the uncertainties
statement that affect it

- It involves giving a name ● In some limited cases, the high

to the financial statement uncertainty involved in the
element and assigning it a measurement of a financial
monetary amount, referred statement element cannot
to as the “carrying amount” provide useful information even if
the information is accompanied
- Its process is governed by by a description of the
the qualitative uncertainties affecting the
characteristics of estimate. In such a circumstance,
relevance and faithful the item would not be recognized
representation. An item is
recognized in the financial ● Derecognition - removal of all or
statements if: part of a recognized asset or
liabiility from an entity’s statement
➢ Meets the definition of of financial position
an asset, liability,
equity, income, or - Derecognition normally
expense occurs when that item is
➢ It provides useful no longer meets the
information that is definition of an asset or a
relevant and faithfully liability
represented - An entity derecognizes an
➢ The benefits of the asset (or a part of it) when
information provided
 it loses control over that ● Historical cost - based on the
asset (or part of it) price of the transaction or event
that gave rise to the financial
- An entity derecognizes statement element
a liability (or a portion
of a liability) when the - Does not reflect changes in
entity has no more values, except changes
present obligation for relating to impairment of an
all (or part) of that asset or a liability becoming
liability onerous
- An entity derecognizing - Value of the costs incurred in
a part of an asset or acquiring or creating the
liability and retaining a asset, comprising the
part of it shall not consideration paid to acquire
recognize in profit or or create the asset plus
loss an income or transaction costs, whereas
expense relating to the the historical cost of a liability
portion retained unless is the value of the
the portion retained is consideration received to
remeasured or incur or take on the liability
reclassified. In such a minus transaction costs
case, the income or - Current value at that date
expense results from
the remeasurement or ● The historical cost of an asset is
reclassification of the updated over time to depict, if
retained portion applicable:

Measurement - The consumption of a part or

all of the economic resource
● The choice of measurement - Payments received that
basis is determined by extinguish part or all of the
considering both initial asset
measurement (at the date of - Impairment (reflecting the
creation) and subsequent date effect of events that cause
(date of reporting) the carrying amount to be no
longer recoverable)
● Two general measurement - accrual of interest to reflect
bases: historical cost and current any financing component
value
● The historical cost of a liability is be applied to the
updated over time to depict, if accumulated amount of
applicable: depletion of a natural
resource that has been
- Fulfillment of part or all of the charged to expense.
liability - The amortized cost of a
- The effect of events that financial asset or financial
increase its value, to the liability reflects estimates of
extent that the liability future cash flows, discounted
becomes onerous (which at a rate determined at initial
means that the historical cost recognition
is no longer sufficient to
depict the obligation) ● As the asset or part of the asset
- Accrual of interest to reflect is consumed, sold, or impaired,
any financing component the asset (or portion of it) used,
- The measurement of impaired, or disposed of is
financial assets and financial recognized as expense in profit
liabilities initially at historical or loss
cost and subsequently
considering subsequent - A portion of its cost is
changes due to interest, transferred to profit or loss in
receipts or payments and the form of depreciation
impairment, is in effect (PPE)
applying and arriving at the - The cost of a portion of the
amortized cost of the inventory is transferred to
financial asset or financial expense in the period that
liability the goods are sold
- Amortized cost -
accumulated portion of the ● Historical cost is a measurement
recorded cost of a fixed asset basis that may be readily verified;
that has been charged to however, it may not support
expense through either comparability of information
depreciation or amortization. across enterprises as the
Depreciation is used to carrying amounts of assets with
ratably reduce the cost of a identical economic benefits may
tangible fixed asset, and be measured at amounts based
amortization is used to on prices at different acquisition
ratably reduce the cost of an dates
intangible fixed asset. The
amortized cost term can also
● Current Value - measurement techniques, that reflect the
basis that uses information following factors:
updated to reflect conditions at
the measurement date. - Estimates of future cash
flows
- It is not derived, even in part, - Possible variations in
from the price of the amounts or timing
transaction or other event - The time value of money
that gave rise to the asset or - Risk premium or risk
liability discount (which is the price
for bearing the uncertainty in
● Current value measurement the cash flows)
includes the following bases: - Other factors, such as
enterprise liquidity
- Fair value
- Value in use (for assets) and ● Fair value is not increased or
fulfillment value (for liabilities) decreased by transaction costs,
- Current cost and it does not consider the
transaction costs on the disposal
● Fair value - price that would be of asset or settlement of liability
received to sell an asset, or or
paid to transfer a liability, in an ● Value in use (for an asset) - is the
orderly transaction between present value of the cash flows or
market participants to which the other economic benefits an entity
entity has access at the expects to derive from using and
measurement date eventually disposing of an asset

● Fair market value - may ● Fulfillment value (for liability) - is

involvement si buyer and seller the present value of the cash, or
other economic resources, that
- May be observed directly for an entity expects to be obliged to
assets and liabilities with transfer to the counterparty and
active market, or indirectly if other parties as it fulfills a liability
the asset or liability does not
have active market - Value in use and fulfillment
value include the present
● In the latter case, some value of transaction costs
measurement techniques will relating to the ultimate
have to be applied, such as disposal of an asset or
cash-flow measurement fulfilling the liability
 on market rentals, are
● Current cost - cost of an preferably measured at
equivalent asset at the current value
measurement date plus the
transaction costs that would be ● The use of fair value involves low
incurred at that date cost as the fair value can be
directly observed and can
- Cost kapag nag report enhance both comparability from
period to period for a reporting
● The current cost of a liability is entity and comparability for a
the consideration that would be single period across entities. On
received minus the transaction the other hand, value in use and
costs that would be incurred for fulfillment value could provide
an equivalent liability at the different measures for identical
measurement date assets and liabilities of different
entities because such measures
Use of current value are entity-specific rather than
market-based. Thus the
● When the value of the asset is information may not be
sensitive to market factors or comparable. In addition, valuation
other risks, the most relevant techniques may be costly and
information is provided under more complex, using inputs that
measuring the asset or liability at may be subjective and arbitrary,
fair value if such can be directly thus reducing verifiability
observable, or value in use or
current cost if the value cannot Entry Values and Exit Values
be directly observed
● Entry values are measurement
- This type of measurement bases on the date of acquisition,
basis is applicable for assets creation, or incurrence.
and liabilities that produce
cash flows indirectly (those ● Exit values are measurements
that can be sold bases on the date of
independently) measurement (after acquisition or
- Thus, financial assets that incurrence), disposal or
are held for trading, financial settlement
assets that are held for sale,
and assets that are held for ● Historical cost and current cost -
capital appreciation or for entry values
leasing out to others based
 ● Fair value, value in use, and ● The measurement basis
fulfillment value - exit values subsequent to initial recognition
is normally the same
Initial Measurement and Subsequent measurement basis at initial
Measurement recognition. Using a uniform
basis at initial recognition and
● At initial recognition, the cost of subsequent measurement avoids
an asset acquired, or a liability recognizing income or expense at
incurred is normally similar to fair the time of the first subsequent
value at that date unless measurement solely because of a
transaction costs are significant change in measurement basis

● When an asset or liability is - For example, most PPE

measured at cost, no income or are measured initially at
expenses arise at initial historical cost and
recognition, unless income and subsequently at historical
expenses arise from the cost minus accumulated
derecognition of the transferred depreciation. The
asset or liability (through depreciation recognized as
exchange), or unless the asset is expense arises from the
impaired asset or the liability is use or lapse of time and
onerous not from the change in
measurement basis
● In some instances, an asset or - In some cases, there may
liability does not have a “cost” be differences in
because they are acquired or measurement bases used
incurred as a result of in presenting information
condonation, donation, legislation in the statement of
or regulation, or penalty. In such financial position and in
cases, the fair value or its the recognized income
equivalent, determined through and expenses in profit or
measurement techniques, is its loss
“deemed cost”. Any difference - For example, financial
between this deemed cost and assets held in the
any consideration given or business model of
received (which is probably collecting contractual cash
nominal or zero), is recognized flows and for sale are
as income or expense measured at fair value in
the statement of financial
position because fair value
 is the most relevant - Aggregating information to
measurement basis. The make it not obscured by
total income relating to the unnecessary details or
asset during the reporting excessive aggregation
period is separated and
classified into profit or loss 1. Focusing on Presentation and
(for the interest income Disclosure Objectives
component) on the basis
of amortized cost and the ● An entity must communicate the
other comprehensive information in financial
income for the remaining statements effectively to its
component of income due intended users
to adjustment to fair value
● A balance is needed between:
● Amortized cost - historical basis
- Giving entities the flexibility
● Fair market value hierarchy: to provide relevant and
kapag wala sa market ang asset, faithfully represented
kumuha/gawing source and financial statement
identical or similar asset elements
- Achieving comparability
Presentation and Disclosure across enterprises for a
single reporting period
● An entity reports its financial
position, performance, and other 2. Classifying Information
financial information in its
financial statements. Such ● To maximize the
information must both be relevant understandability of information, it
and faithfully represented and is necessary to classify the
requires: financial statement elements
based on shared characteristics,
- Focusing on presentation such as the nature of the item, its
and disclosure objectives function within the business
and principles rather than activities, and how it is measured
on rules
- Classifying information in a - For example, assets and
manner that groups similar liabilities can be classified
items and separates into current and
dissimilar items non-current, revenues can
be grouped and separated
 from gains, and expenses classifies dissimilar items
can be separated from together
losses
● It may be necessary to present
● Income and expenses are different equity components in the
classified and presented in profit financial statements to provide
or loss or other comprehensive useful information about the
income. The statement of profit or sources of equity components
loss is a primary source of and legal and regulatory
information about an entity’s requirements affecting such
financial performance components

● However, changes in the current - The presentation of equity

value of recognized assets or components based on
liabilities are also relevant. They sources is particularly true
are presented as part of other for corporations for easy
comprehensive income until such distinction between
changes in value are realized contributed, earned, and
and, therefore, transferred to other sources of equity
profit or loss
3. Aggregation
- There are certain
exceemptions, however, ● Aggregation is the adding
that the IASB considers it together of similar financial
best not to recycle other statement elements that have
comprehensive income shared characteristics and are
elements to profit or loss included in the same
subsequently classification (par. 7.20)

● Offsetting is deducting an item ● Summarizes a large volume of

from another item of a different details. hence , information is not
kind to arrive at a net amount obscured by so many details,
which when considered
- It occurs when, say, necessary, are presented in the
presenting a net amount Notes
for both an asset and a
liability - For example, claims
- Offsetting is generally not against parties other than
appropriate because it customers arising from
different transactions may
 be aggregated in a single in preparing their financial
line item as “Other statements
Receivables” on the face of
the statement of financial ● Physical concept of capital -
position. The details may concerned with the operating
be shown in the Notes to capability of the enterprise
the Financial Statements
- Requires using the current
Concepts of Capital cost as a measurement
basis
● Capital may be viewed based on
the financial concept of capital or Concept of Capital Measurement
the physical concept of capital
● The capital maintenance views
● Financial concept of capital - profit as the excess of the capital
when the users of an entity’s at the end of the period over the
financial statements are primarily capital at the beginning, after
concerned with the maintenance excluding the effects of
of nominal invested capital or the contributions from and
purchasing power of invested distributions to the owners during
capital the reporting period

- Capital is synonymous with - The net worth method of

the net assets or equity of measuring profit
the enterprise
- Can be measured in either ● Under the capital maintenance
nominal monetary units or concept, the focus is on return on
units of constant capital, where only inflows of net
purchasing power assets in excess of amounts
- The enterprise does not needed to maintain capital may
require the adoption of a be regarded as profit (or loss, if
specific measurement expenses needed income)
basis, and the
measurement basis used ● Financial capital maintenance
depends on the type of concept - profit is measured as
financial capital the entity the excess of the financial (or
seeks to maintain money) amount of the net assets
- Most entities adopt the at the end of the period over the
financial concept of capital financial (or money) amount of
the net assets at the beginning of
 the period, after excluding the assets and liabilities are
effects of the contributions from treated as capital
and distributions to the owners of maintenance adjustments
the enterprise that are not part of profit,
but are part of equity
- Under this concept,
increases in the prices of Chapter 3 - Basis for the Presentation
assets held over the period of the Financial Statements
(also called holding gains)
are conceptually profits.
However, they may not be ● Financial Statements also
recognized as such until the provide a comprehensive and
assets are disposed of. quantitative economic history and
When the capital is defined can be used to gauge an entity’s
in terms of purchasing performance
power units, only that part of
the increase in the prices of - Are indispensable for
assets exceeds the increase developing an accurate
in the general price level of profile of an entity’s
prices is regarded as profit, ongoing performance and
and the rest of the increase prospects
is treated as capital - Structured financial
adjustment, and hence, representation of an
taken to equity enterprise’s financial
position, performance, and
● Physical capital maintenance transactions
concept - there is profit if the - Also show the results of
physical productive capacity (or the management’s
operating capacity) of the entity stewardship of the
(or the resources of funds resources entrusted to it
needed to achieve that capacity)
at the end of the period exceeds ● To meet this objective, financial
the physical productive capacity statements provide information
at the beginning of the same about an entity’s (paragraph 9,
period, after excluding the effects IAS 1 Presentation of Financial
of transactions with owners Statements):
- Assets
- Under this concept of - Liabilities
capital maintenance, all - Equity
price changes affecting
 - Income and expenses, ● A complete set of financial
including gains and losses statements includes the following:
- Contributions by and
distributions to owners 1. Statement of financial
- Cash flows position as of the end of the
period
● Financial statements are the 2. Statement of comprehensive
responsibility of the company’s income for the period
management. This means that 3. Statement of changes in
the format by which the financial equity for the period
statements are presented, the 4. Statement of cash flows for
information presented therein, the period
and the fairness of their 5. Notes, comprising a
presentation depend on the summary of significant
assessment by the enterprise accounting policies and
management other explanatory
information
● International Accounting
Standards (IAS) 1 Presentation of ● Statement of comprehensive
Financial Statements presents income - presents the financial
the basis for presenting financial performance of an entity during a
statements. reporting period. It is an
expanded form of the income
- The objective of IAS 1 is to statement because it
present the basis for the encompasses profit or loss and
presentation of the other comprehensive income
financial statements to
ensure comparability of an ● Statement of cash flows -
enterprise’s financial presents information on the
statements with those of inflows and outflows of cash and
other enterprises and with cash equivalents during the
financial statements of the reporting period
same enterprise (for
different reporting periods) - The information presented in
- Both inter-comparability the statement of cash flows
and intra-comparability are assists users in assessing an
addressed by IAS 1 entity’s ability to remain
solvent and provide returns
Components of Financial Statements to investors and creditors
● The section “Notes to the ● Restatement of the comparative
Financial Statements” presents prior period is necessary when
relevant financial information there is any of the following:
pertaining to the entity’s activity
that cannot be presented on the - Retrospective application
face of the financial statements of a change in accounting
policy
- It include a description of the - Restatement of financial
basis of the presentation of statements because of
financial statements and a prior period errors
summary of significant discovered
accounting policies, - Reclassification of an
information required by the element in financial
PFRS or IFRS that is not statement
presented on the face of the ● Retrospective - ginamit mula sa
financial statements, and simula
additional information that will
help the users better ● Change in accounting estimates
understand the information do not require retrospective
presented in any of the application (ex: bad debts,
financial statements depreciation)

● For comparative purposes, the ● The requirement for a

financial statements shall provide restatement of the prior year’s
the same set of information for financial statements and the
the preceding year inclusion of a restated statement
of financial position as at the
Requirement for an additional beginning of the preceding period
statement of financial position presented achieves the objective
of comparability
● IAS 1 requires the inclusion of a
statement of financial position at Accounting Policies
the beginning of the preceding
period whenever an entity ● The accounting policies adopted
restates its comparative prior by the company’s management
period financial statements. In largely affect the financial
such a case, there shall be six (6) statements
components of a complete set of ● IAS 8, Accounting Policies,
financial statements Changes in Accounting Estimates
and Errors defines accounting
 policies as the specific principles, expenses in the conceptual
bases, conventions, rules, and framework
practices applied by an entity in
preparing and presenting ● The management may also
financial statements consider the most recent
pronouncements of other
● Some examples of an entity’s standard-setting bodies that use
accounting policies are criteria to a similar conceptual framework to
determine which financial develop accounting standards,
instruments qualify as cash other accounting literature, and
equivalent, characteristics of accepted industry practices to the
elements comprising Investment extent that these do not conflict
property, the characteristics of with the sources enumerated
elements comprising Property, above (based on paragraph 12,
Plant, and Equipment, the IAS 8)
measurement model for a class
of property, plant, amd General Features
equipment, the use of weighted
average method to determine the ● IAS 1 enumerates the following
cost of inventory, and measuring general features for the
inventories at the lower cost and presentation of financial
net realizable value statements:

● Kapag from IAS to IFRS si 1. Fair Presentation and

company, need gumawa ng Compliance with IFRS/PFRS
panibagong SFP 2. Going Concern
3. Accrual Basis of Accounting
● The management shall refer to 4. Materiality and Aggregation
and consider the applicability of 5. Offsetting
the following sources in 6. Frequency of Reporting
descending order (paragraph 11, 7. Comparative Information
IAS 8): 8. Consistency of Presentation

- The requirements in PFRS

and IFRS dealing with
similar and related issues Fair Presentation and Compliance with
- The definitions, recognition, IFRS
criteria, and measurement
concepts for assets, ● Financial statements shall
liabilities, income, and present fairly the financial
 position, financial performance, impact of a particular
and cash flows of an enterprise transaction, other event, or
condition on the entity’s
● Fair presentation requires the financial position and
faithful representation of the performance
effects of transactions, other
events, and conditions in ● Philippine Financial Reporting
accordance with the definitions Standards (PFRS), as used in
and recognition criteria for PAS 1 and this chapter, are
assets, liabilities, income and Standards and Interpretations
expenses set out in the adopted by the Financial and
Conceptual Framework Sustainability Reporting
Standards Council. They
● The application of IFRS with comprise:
additional disclosures, when
necessary, is presumed to result - Philippine Financial
in financial statements that Reporting Standards (based
achieve a fair presentation on IFRS AND originally
(paragraph 15, IAS 1) promulgated by the IASB)
- Philippine Accounting
● Fair presentation requires an Standards (based on
entity to (paragraph 17, IAS 8): International Accounting
Standards and originally
- Select accounting policies promulgated by the
based on PAS/IAS 8, International Accounting
observing the hierarchy in Standards Committee,
formulating accounting subsequently reviewed,
policies improved, amended, or
- Present information, redrafted by the IAS Board)
including accounting - Interpretations originated by
policies, in a manner that the International Financial
provides relevant, reliable, Reporting Interpretations
comparable, and Committee (IFRIC, which is
understandable information the body that interprets the
- Provide additional work of the IASB), and the
disclosures when Philippine Interpretations
compliance with the specific Committee (PIC)
requirements of the IFRS is
insufficient to enable the ● In extremely rare circumstances,
users to understand the the management of the
enterprise shall depart from the Conceptual Framework,
specific requirements of the IFRS and the treatment adopted
when it concludes that - For each period presented,
compliance with that requirement the financial impact of the
would make the financial departure on each item in
information misleading, provided the financial statements that
further that the regulatory would have been reported in
framework requires, or otherwise complying with the
does not prohibit, such a requirement
departure. In such
circumstances, the entity shall ● In rare instances when
make the following disclosures, management believes that
as enumerated in paragraph 20, departure from IFRS is necessary
IAS 1: to achieve the objective the
financial statements, but the
- That management has relevant regulatory framework
concluded that the prohibits departure from the
financial statements requirement, the enterprise shall
present fairly the entity’s reduce the perceived misleading
financial position, financial aspects of compliance by
performance and cash disclosing (paragraph 23, IAS 1):
flows
- That it has complied with - The title of the Standard or
applicable IFRS, except Interpretation in question,
that it has departed from a the nature of the
particular requirement to requirement, and the reason
achieve a fair presentation why management has
- The title of the IFRS from concluded that complying
which the entity has with that management is so
departed, the nature of the misleading in the
departure, including the circumstances that it
treatment that the IFRS conflicts with the objective of
would require, the reason the financial statements
why the treatment would - For each period presented,
be misleading in the the adjustments in each item
circumstances that it in the financial statements
would conflict with the that management has
objective of financial concluded would be
statements set out in the necessary to achieve a fair
presentation
 the capacity of the enterprise to
Going Concern continue operations in the future

● Financial statements should be ● When management is aware of

prepared on a going-concern significant uncertainties that may
basis unless management cast doubt upon the entity’s ability
intends to liquidate the enterprise to continue as a going concern,
or cease trading or has no the management may consider
realistic alternative but to do so reviewing the basis for the
measurement of assets and
● When the financial statements liabilities. Under such a
are not prepared on a circumstance, the financial
going-concern basis, the statements shall disclose these
following shall be disclosed in the uncertainties, the basis for the
notes to the financial statements: presentation of financial
statements, and the reasons why
- The fact that the financial the entity is not viewed as a
statements are not prepared going concern
on a going-concern basis
- The basis on which the Accrual Basis
financial statements are
prepared ● An enterprise should prepare its
- The reason why the financial statements, except for
enterprise is not considered cash flow information, under the
to be a going concern accrual basis of accounting.
Under the accrual basis of
● In assessing whether the accounting, transactions and
enterprise is a going concern events are recognized when they
entity, the management should occur (not necessarily when the
assess the ability of the cash is received or paid)
enterprise to continue operations
for a period of at least, but not ● The transactions are recorded
limited to, twelve months and reported in the financial
statements of the periods which
● However, when the enterprise they relate. Under the accrual
has a history of profitable basis, there are three expense
operations and ready access to recognition principles:
financial resources, no detailed
analysis is necessary to evaluate - Associating cause and effect
 - Systematic and rational Materiality and Aggregation
allocation
- Immediate recognition ● Each material item should be
presented separately in the
● Expenses are recognized based financial statements. Immaterial
on a direct association between amounts of similar nature or
the costs incurred and the function should be aggregated
earning of specific items of and presented as a one-line item
income (direct matching or on the face of the financial items.
associating cause and effect) or The details compromising the
by systematically allocating the amount, if relevant to the decision
cost of an asset required to needs of the users, will be
periods and benefit (systematic presented in the notes to the
and rational allocation) financial statements

● The accrual basis of accounting ● Information is material if its

and the expense for costs that non-disclosure would influence
are not expected to provide the decision or evaluation of the
probable future economic user. Materiality depends on the
benefits to the enterprise size and nature of the item
(immediate recognition) judged in the particular
circumstances of its omission
● Examples of expenses
recognized using associating ● The aggregation and
cause and effect are the cost of classification process involves
goods sold, salesmen’s presenting condensed and
commission, and warranty classified information. If an item
expense taken individually will call the
attention of the user, then the
● Depreciation expense, item is presented as a single line
amortization of intangibles, rent item on the face of the financial
expense, and insurance expense statements. However, it the item,
- recognized using systematic taken individually, is not
and rational allocation considered significant, it is
aggregated with other items
● Advertising, research, and either on the face or in the notes.
organization osts are recorded as
expenses when incurred because ● Materiality is considered a
of the uncertainty of probable threshold for recognition. A
future economic benefits specific disclosure requirement in
 an accounting standard need not related expenses arising on the
apply if the item is not material. same transaction. Thus, only the
excess net proceeds from the
● Exception ang fraud sa sale of property, plant, and
immateriality equipment over the carrying
amount are presented as a gain
Offsetting on the statement of
comprehensive income
● Offsetting means deducting one
item from one another of different ● Other examples of offsetting
nature and presenting only the involves presenting only the net
net on the face of the financial unrealized gain or loss on
statements financial assets at fair value
through profit or loss and the net
● Presenting receivables net of the foreign exchange transaction
related allowance for estimated gain or loss
credit losses, property, plant, and
equipment net of accumulated Frequency of Reporting
depreciation on the face of the
statement of financial position is ● Financial statements should be
NOT offsetting presented at least annually

● Generally, offsetting is not ● When in exceptional cases, an

allowed unless required or enterprise’s statement of fiancial
permitted by a Standard or an position date changes and
Interpretation. Thus, deferred tax financial statements are prepared
assets are set off against the for a period longer or shorter than
deferred tax liabilities, if they one year, that fact should be
arise from deferred taxes disclosed
imposed by only one taxing
authority and they are expected ● The reason for using a period
to reverse simultaneously. This shorter or longer than one year
applies the requirements of IAS and the fact that comparative
12 Income Taxes amounts are not entirely
comparable should likewise be
● Offsetting is also allowed and disclosed
applied when presenting on the
net basic reflects the substance ● Reporting annually does not
of the transaction or other event, prevent the enterprise from
say, netting any income with presenting interim financial
 statements, which cover a period the end of the immediate
shorter than one year. PAS/IAS prior year)
34 Interim Financial Reporting - Statement of
presents the guidelines for these Comprehensive Income (for
interim financial statements the current year, ended and
the immediate prior year)
Comparative Information - Statement of Changes in
Equity (for the current year
● Comparative information should ended and the immediate
be disclosed in respect of the period year)
preceding period for all financial - Statements of Cash Flows
information in the financial (for the current year ended
statements, except when IFRS and the immediate prior
permit or require otherwise year)
- Notes (for the current year
● Comparative narrative and and immediate prior year)
descriptive information shall
likewise be included when it is ● When an enterprise makes
relevant to understanding the retrospective adjustment for any
current period’s financial one or combination of the
statements (paragraph 38, IAS 1) following:

● Thus, when presenting financial - Change in accounting

statements for 2023, the policy
comparative information for 2022, - Correction of prior period
as a minimum, should be error/s
presented. Likewise, comparative - Reclassification of
information for narrative amendment of items in the
disclosures relating to the prior financial statements
period should be presented
unless otherwise required. This ● Three statements of financial
means that in presenting position shall be presented,
information for the current year, namely as at:
two sets of all components of
financial statements are - The end of the current
presented as follows: period
- The end of the immediately
- Statement of Financial prior period
Postion (as at the end of - The beginning of the
the current year and as at preceding period
 another presentation or
● This is done to ensure classification would be more
comparability of prior year appropriate
information with the current ● This means that the manner of
period presentation of financial
statements shall be retained from
● When an entity reclassifies period to period unless the
comparative amounts, it shall changed presentation is more
disclose: useful to the users and enhances
the relevance of information. If
- The nature of reclassification the presentation is changed,
- The amount of each item or comparative financial statements
class of items that is for the period period shall be
reclassified re-presented unless it is
- The reason for the impracticable to do so
reclassification (paragraph 41,
IAS 1) Identification of the Financial
Statements
● When it is impractiable to
reclassify comparative amounts, ● The financial statements shall be
an entity shall disclose the identified clearly and
reason for not reclassifying the distinguished from other
amount and the nature if the information in the same published
adjustments that would have content (paragraph 49, IAS 1):
been made if the amount had
been reclassified (paragraph 42, ● Each component of the financial
IAS 1) statements shall be identified
clearly. In addition, the following
Consistency of Presentation information shall be displayed
prominently and repeated, when
● The presentation and necessary, for proper
classification of items in the understanding of the information
financial statements should be presented (paragraph 51, IAS 1):
the same from period to period
unless (paragraph 45, IAS 1): - The name of the reporting entity
and other means of identification,
- It is apparent, following a and any change in that
significant change in the nature of information from the preceding
the entity’s operations or a review financial statement date
of its financial statements, that
- Whether the financial statements in the statement of changes
cover the individual entity or a in equity
group of entities
- The statement of financial ● The equity account affected is
position date or the period either the Capital for a single
covered by the financial proprietorship, the partners’
statements, whichever is Capital accounts for a partnership
appropriate to that component of form of business organization or
the financial statements Retained Earnings (or
- The presentation currency Accumulated Profits as termed by
- The level of rounding used in the IFRS) for a corporation
presenting amounts in the
financial statements ● Likewise, holding (or unrealized)
gains or losses or income and
Funadamentally Related Financial expenses that are expected to
Statements reverse over time and other items
required by the IFRS to be
● The financial statements are classified as other
fundamentally related because comprehensive income are
they relate to the effects of the presented as other
same sets of transactions comprehensive income
completed by the enterprise
during the reporting period ● They are transferred to the equity
component called cumulative
● In completing the accounting other comprehensive income in
process, which culminates in the the statement of changes in
presentation of the financial equity
statements, the first financial
statement prepared by a ● Other changes in equity not
reporting entity is generally the arising from financial
statement of comprehensive performance, such as
income contributions from and
distributions to the owners of the
- The profit is the net effect of entity, are also presented in the
income and expenses statement of changes in equity. In
presented in the profit effect, the statement of changes
section of this statement, in equity, as the term describes,
which is transferred to the presents the changes in each
appropriate equity account major equity component during
the reporting period and
 reconciles the beginning equity disposal of non-current assets
component balances with the and cash outflows from
ending equity component acquisition, creation, or
balances, the latter being enhancement of non-current
presented as the final figures that assets
are brought forward as equity
account balances in statement of ● Financing cash flow activities are
financial position those that arise from transactions
with non-trade lenders as well as
● Information on cash flows , which owners of the entity. They include
is defined as the inflows and cash inflows from borrowings
outflows of cash and cash from lenders, issue of share
equivalents, is presented in the capital, reissue of treasury
statement of cash flows shares, other additional
contributions from owners,
- In the statement of cash outflows for payments to lenders,
flows, cash flow activities and distributions to owners
are classified as operating,
investing, and financing ● The net cash inflow or outflow of
cash and cash equivalents
● Operating cash flow activities are represents the net change of
inflows and outflows of cash and cash and cash equivalents during
cash equivalents that are the reporting period
involved in the determination of
profit. Thus, these activities - Such net change brings the
include (a) inflows during the beginning balance of cash
reporting period from sale of and cash equivalents to the
goods and services and for ending balance, the latter
allowing other entities to use being the final figure in the
enterprise resources, and (b) statement and the amount
outflows during the reporting of cash abd cash
period for acquisition of goods equivalents in the
and expenses incurred statement of financial
position at the end of the
● Investing cash flow activities are reporting period
inflows and outflows of cash and
cash equivalents during the ● The activities relating to a
reporting period that generally reporting entity’s financial
affect non-current assets. These performance, its cash flow
include cash inflows from the activities, and other activities that
 involve equity accounts affect the statement of financial
elements presented in the positon, as well as the
statement of financial positon depreciation reported as an
expense in the statement of
- The balances of assets, comprehensive income,
liabilities, and equity at the reflect mixtures of pesos
end of the reporting period with different levels of
resulting from all the purchasing power
enterprise’s activities are
comprehensively presented ● Furthermore, due to some
on an entity’s statement of measurement uncertainties,
financial positon some financial statement
elements are not recognized
Limitations of the Financial because only events and
Statements transactions capable of financial
measurement and have met the
● Despite the usefulness of recognition criteria identified in
financial statements, they also the Conceptual Framework can
have several weaknesses and be reflected
limitations
● Information such as the morale
● The actual worth of the business and efficiency of company
is not reflected in the financial personnel, the strategic location
statements because of the use of of the company’s production
different measurement bases facilities and markets, and the
superior quality of the enterprise’s
● In addition, the financial products and services, and the
statements present values that enterprise’s contribution to the
are a mixture of different levels of development and deterioration of
purchasing power. This is true the environment are reported
when the non-current operating nowhere in the financial
assets such as property, plant, statements because either they
and equipment, intangibles, and do not qualify under the definition
investment property are of financial statements elements,
measured using the cost model or they involve a high level of
measurement uncertainty
- If such assets were acquired
at different dates, the ● Despite all the preceding
amounts at which these limitations, users may use the
assets are measured in the information presented in the
 financial statements to estimate option to present their reports in
the firm’s value accordance with their chosen
sustainability reporting framework
Sustainability Reporting
● The “comply or explain approach”
● In recent developments, publicly is being reviewed by the SEC,
listed entities are also required to which is expected to release a
issue their sustainability reports new set of guidelines for the
for the disclosure of their presentation of sustainability
respective environmental, social, reports
and governance (ESG) goals
● In November 2021, the IFRS
● The sustainability report provides Foundation embraced the need
the entity’s stakeholders with an for global reporting standards for
overview of its economic, the sustainability practices of
environmental, and social business entities by creating the
impacts. By requiring these separate International
entities to issue sustainability Sustainability Standards Board
reports, entities may increase (ISSB)
their levels of accountability and
transparency in response to the - The ISSB is tasked to
demands of their stakeholders develop, in the public
interest, reporting standards
● The Securities and Exchange that will result in a
Comission (SEC) moved to issue high-quality, comprehensive
Memorandum Circluar (MC) No. global baseline of
4 Series of 2019, which sustainability disclosures
mandates publicly listed entities focused on the needs of
to report their sustainability investors and the financial
practices and measure their markets
outcomes
● In response to this series of
● The SEC provided a “comply or events, our own Professional
explain” template for the first set Regulatory Board of Accountancy
of mandated sustainability reports (PRBOA), in its Resolution No.
starting in 2019 44, dated September 8, 2022,
renamed the then Financial
● However, entities who consider Reporting Standards Council to
their advocacy the sustainability Financial and Sustainability
practices have been given the
 Reporting Standards Council ● The Securities and Exchange
(FSRSC) Comission (SEC) is the national
government regulatory charged
● The PRBOA decided to adopt the with the supervision of the
IFRS Sustainability Standards corporate sector. From its original
that may be developed and later function of regulating the sale
implemented by the ISSB and registration of securities, the
SEC’s mandate has been
● Currently, the sustainability report broadened to include the
requirement applies only to development and regulation of
publicly listed entities. However, the corporate and capital market
even non-pubicly listed entities toward good corporate
will have to revisit their practices governance, protection of
and apply the triple-bottom-line investors, widest participation of
concept that gives equal ownership, and democratization
importance to people, the planet, of wealth
and the profit
● Republic Act 8799, which is
● Entities are encouraged to otherwise known as the
measure their social Securities Regulation Code
responsibility, economic value, (SRC), with its subsequent
and environmental impact to amendments and implementing
sustain operations and gain rules and regulations (IRR),
competitive advantage reemphasizes the requirement for
the submission of an annual
The Securities and Exchange report by companies, together
Comission with financial statements, certified
by an independent certified public
● The corporate form of business accountant
organization allows its owners,
called shareholders, to trade their - The SEC also requires
equity interest in the entity even these reports for internal
without the consent of the other record keeping and internal
shareholders controls to be complied with
by entities
● The investment risk these
inactive owners bear is ● SRC Rule 68 provides for the
mitigated by imposing some general guides to financial
reportial regulations on statements preparation,
corporations responsibility to financial
 statements, qualifications and - SRC Rule 68 Section 2
reports of independent auditors provides general guides to
and review of their quality financial statement
assurance processes preparation

● SRC Rule 68 provides for the ● Under SRC Rule 68, reporting
general guides to financial entities are classified as:
statement preparation,
responsibility to financial - Large and/or publicly
statements, qualifications and accountable entities
reports of independent auditors - Medium-sized entities
and review of their quality - Small entities
assurance processes - Micro entities

● The Securities and Exchange ● Large and/or

Comission realizes that publicly-accountable entities are
enterprises may have those that meet any of the
transactions ranging from simple following criteria:
to more complex depending on
the nature and size of the - Total assets of more than
enterprise 350 million or total liabilities
of more than P250 million
- The SEC is cognizant of - Are required to file financial
the fact that financial statements under Part II of
statement presentations SRC Rule 68
may be modified to suit the - Are in the process of filing
varying decision needs of their financial statements for
the users the purpose of issuing any
class of instruments in a
Classification of Reporting Entities public market
Based on the Applicable Philippine - Are holders of secondary
Financial Reporting Frameworks licenses issued by
regulatory agencies
● Although the discussions in this
book are based primarily on the ● Medium-sized entities are those
full PFRS or IFRS, it is worth that meet all of the following
noting now that several reporting criteria:
frameworks govern the
presentation of the entities’s - Total assets of more than
financial statements P100 million to P350 million
 or liabilities of more than ● Micro entities are those that meet
P100 million to P250 million all of the following criteria:
(for a parent reporting entity,
the amounts are based on - Total assets and total
consolidated figures) liabilities of less than P3
- Are not required to file million
financial statements under - Are not required to file
Part II of Rule 68 financial statements under
- Are not in the process of Part II of Rule 68
filing their financial - Are not in the process of
statements for the purpose filing their financial
of issuing any class of statements for the purpose
instruments in a public of issuing any class of
market instruments in a public
- Are not holders of market
secondary licesnes issued - Are not holders of
by regulatory agencies secondary licenses issued
by regulatory agencies
● Small entities are those that meet
all of the following criteria: Applicabiklity of Philippine Financial
Reporting Frameworks
● Total assets of between P3
million and P100 million or ● Financial reporting frameworks
liabilities of between P3 applicable to these foregoing
million and P100 million (for entities fall under the following
a parent reporting entity, the classifications:
amounts are based on
consolidated figures) - Full PFRS/IFRS
● Are not required to file - PFRS for Small and
financial statements under Medium-Sized Entities
Part II of Rule 68 (PFRS/IFRS for SMEs)
● Are not in the process of - PFRS for Small Entities
filing their financial - Income tax Reporting
statements for the purpose
of issuing any class of ● Large and/or
instruments in a public publicly-accountable entities shall
market prepare their financial statements
● Are not holders of applying the Full PFRS/IFRS
secondary licenses issued
by regulatory agencies
 - Furthermore, banks, threshold set in the criteria
insurance companies, and for a medium-sized entity
other entities shall also provided that the event that
apply the requirements of caused the change in
their respective regulatory classification is considered
bodies, say, Central Bank “significant and continuing”
and Insurance Comission - An entity that has a concrete
plan to conduct an initial
● Medium-sized entities shall use public offering within the
the PFRS/IFRS for SMEs as their next two years
reporting framework - An entity that has been
preparing financial
● The following medium-sized statements under Full
entities may choose to prepare PFRS/IFRS and decided to
the financial statements following liquidate
either Full PFRS/IFRS or - Other entities that the SEC
PFRS/IFRS for SMEs (SEC may consider valid
Memorandum Circular No. 5, exceptions from mandatory
Series of 2018): adoption of PFRS for SMEs

- A subsidiary of a parent ● A medium-sized entity belonging

reporting under Full to any of the above, opting to
PFRS/IFRS adopt the Full PFRS/IFRS
- A subsidiary of a foreign instead of the PFRS for SMEs,
parent that will move shall include in its Notes to the
towards Full PFRS/IFRS Financial Statements the facts
- A significant joint venture or supporting its adoption of the Full
associate that is part of a PFRS/IFRS
group that is reporting under ● Reporting entities classified as
Full PFRS/IFRS small under the preceding criteria
- A branch office or regional shall use the PFRS for Small
operating headquarters of a Entities adopted by the Securities
foreign company reporting and Exchange Comission
under Full PFRS/IFRS
- A subsidiary that is - Small entities with
mandated to report under operations or investments
Full PFRS/IFRS in another country with
- An entity that has a different functional
short-term projection that it currencies shall apply
will breach the quantitative insead the PFRS/IFRS for
 SMEs or the Full an initial public offering
PFRS/IFRS within the next two years
- An entity that has been
● Small entities falling under any of preparing financial
the following may, at their option, statement under Full
apply the PFRS/IFRS for SMEs PFRS or PFRS for SMEs
or Full PFRS/IFRS instead of and has decided to
PFRS for Small Entities (SEC liquidate
Memorandum Circular No. 5, - Other entities that the SEC
Series of 2018): may consider as valid
exceptions from
- A subsidiary of a parent mandatory adoption of
reporting under Full PFRS for Small Entities
PFRS/IFRS or PFRS/IFRS
for SMEs ● Small entities which opted to
- A subsidiary of a foreign apply the PFRS for SMEs or Full
parent that will move PFRS under any of the foregoing
towards Full PFRS/IFRS grounds shall include in their
or IFRS for SMEs financial statements the facts
- Significant joint venture or supporting their adoption of the
associate that is part of a PFRS for SMEs or Full PFRS
group that is reporting
under Full PFRS/IFRS or ● Micro entities can adopt either
PFRS/IFRS for SMEs the PFRS for Small Entities or the
- A branch office or regional income tax basis. The following,
operating headquarter of a at a minimum, shall consist of the
foreign company reporting micro entities’ financial
under Full PFRS/IFRS or statements:
PFRS/IFRS for SMEs
- An entity that has been a - Statement of
short-term projection that it Management’s
will breach the quantitative Responsibility
threshold set in the criteria - Auditor’s report
for a small entity provided - Statement of Financil
that the event that caused Position
the change in classification - Statement of Income
is “considered significant - Notes to Financial
and continuing” Statements
- An entity that has a
concrete plan to conduct
● All of these components must
cover two-year comparative
periods

● The management of micro

entities using a reporting
framework other than PFRS for
Small Entities shall assess the
applicability of the basis of
accounting considering the
nature of the entity, the objective
of the financial statements, and
the requirements of the law or
regulators (par iv, SEC
Memorandum Circular No. 5,
Series of 2018)

● The Securities and Exchange

Comission requires the reporting
entity to adopt a higher
framework should the prescribed
thresholds for total assets, or
total liabilities fall withi the
different classification of the
reporting entity

● A diagram showing the

classification of reporting entities
based on the applicable
Philippine Financial Reporting
Framewoks is presented overleaf