Definition of Accounting b.

Casualty – an unanticipated loss from disasters or other

similar events.
Accounting is “the process of identifying, measuring, and
communicating economic information to permit informed Measurement
judgement and decision by users of information.” (American Association of
 The several measurement bases used in accounting include,
Accountants)
but not limited to the following:
Three Important Activities 1. Historical cost,
2. Fair value,
1. Identifying – the process of analyzing events and
3. Present value,
transactions to determine whether or not they will be
4. Realizable value,
recognized. Only accountable events are recognized.
5. Current cost, and
2. Measuring – involves assigning numbers, normally in
6. Sometimes inflation-adjusted costs.
monetary terms, to the economic transactions and events.
 The most commonly used is historical cost. This is usually
3. Communicating – the process of transforming economic
combined with the other measurement bases. Accordingly,
data into useful accounting information, such as financial
financial statements are said to be prepared using a mixture
statements and other accounting reports, for dissemination
of costs and values.
to users.
Valuation by Fact or Opinion
Types of Events
 When measurement is affected by estimates, the items
1. External events – events that involve an external party.
measured are said to be valued by opinion.
a. Exchange (reciprocal transfer) – reciprocal giving and
 When measurement is unaffected by estimates, the items
receiving
measured are said to be valued by fact.
b. Non-reciprocal transfer – “one way” transaction
c. External event other than transfer – an event that Basic Purpose of Accounting
involves changes in the economic resources or
The basic purpose of accounting is to provide information about
obligations of an entity caused by an external source
economic activities intended to be useful in making economic
but does not involve transfers of resources or
decisions.
obligations.
2. Internal events – events that do not involve an external Types of Accounting Information Classified as to Users’ Needs
party.
a. Production – the process by which resources are  General purpose accounting information – designed to
transformed into finished goods. meet the common needs of most statement users. This
 information is governed by the Philippine Financial  Concept of Articulation – all of the components of a
Reporting Standards (PFRS). complete set of financial statements are interrelated.
 Special purpose accounting information – designed to meet  Full disclosure principle – financial statements provide
the specific needs of particular statement users. This sufficient detail to disclose matters that make a difference
information is provided by other types of accounting, e.g., to users, yet sufficient condensation to make the
managerial accounting, tax basis accounting, etc. information understandable, keeping in mind the costs of
preparing and using it.
Basic Accounting Concepts
 Consistency concept – financial statements are prepared on
 Double-entry system – each accountable event is recorded the basis of accounting policies which are applied
in two parts – debit and credit. Introduced by Luca Pacioli consistently from one period to the next.
(Father of Accounting)  Matching – costs are recognized as expenses when the
 Going concern – the entity is assumed to carry on its related revenue is recognized.
operations for an indefinite period of time. Its opposite is  Residual equity theory – this theory is applicable where
the Liquidating concern. there are two classes of shares issued, ordinary and
 Separate entity – the entity is treated separately from its preferred. The equation is “Assets – Liabilities – Preferred
owners. Shareholders’ Equity = Ordinary Shareholders’ Equity.
 Stable monetary unit – amounts in the financial statements  Fund theory – the accounting objective is the custody and
are stated in terms of a common unit of measure; changes administration of funds.
in purchasing power are ignored.  Realization – the process of converting non-cash assets into
 Time period – the life of the business is divided into series cash or claims of cash.
of reporting periods.  Prudence (Conservatism) – the inclusion of a degree of
 Materiality concept – information is material if its omission caution in the exercise of the judgements needed in making
or misstatement could influence economic decision. the estimates required under conditions of uncertainty,
 Cost-benefit – the cost of processing and communicating such that assets or income are not overstated and liabilities
information should not exceed the benefits to be derived or expenses are not understated.
from it.
Common Branches of Accounting
 Accrual Basis of accounting – effects of transactions are
recognized when they occur (and not as cash is received or  Financial Accounting – focuses on general purpose financial
paid) and they are recognized in the accounting periods to statements.
which they relate.  Management accounting – focuses on special purpose
 Historical cost concept - the value of an asset is determined financial reports for use by an entity’s management.
on the basis of acquisition cost.
  Cost accounting – the systematic recording and analysis of corporation where decision making requires professional
the costs of materials, labor, and overhead incident to knowledge in the science of accounting, or where civil
production. service eligibility as a CPA is a prerequisite.
 Auditing – the process of evaluating the correspondence of
Accounting Standards in the Philippines
certain assertions with established criteria and expressing
an opinion thereon.  Philippine Financial Reporting Standards (PFRSs) are Standards
 Tax accounting – the preparation of tax returns and and Interpretations adopted by the Financial Reporting
rendering of tax advice, such as the determination of tax Standards Council (FRSC). They comprise:
consequences of certain proposed business endeavors. 1. Philippine Financial Reporting Standards (PFRSs);
 Government accounting – refers to the accounting for the 2. Philippine Accounting Standards (PASs); and
government and its instrumentalities, placing emphasis on 3. Interpretations
the custody of public funds, the purposes for which those
funds are committed, and the responsibility and The Need for Reporting Standards
accountability of the individuals entrusted with those funds.  Entities should follow a uniform set of generally acceptable
Four Sectors in the Practice of Accountancy reporting standards when preparing and presenting financial
statements; otherwise, financial statements would be
1. Practice of Public Accountancy – involves the rendering of misleading.
audit or accounting related services to more than one client  The term “generally acceptable” means that either:
on a fee basis. a. The standard has been established by an authoritative
2. Practice in Commerce and Industry – refers to employment accounting rule-making body; or
in the private sector in a position which involves decision b. The principle has gained general acceptance due to practice
making requiring professional knowledge in the science of over time and has been proven to be most useful.
accounting and such position requires that the holder  The process of establishing financial accounting standards is a
thereof must be a CPA. democratic process in that a majority of practicing accountants
3. Practice in Education/Academe – employment in an must agree with a standard before it becomes implemented.
educational institution which involves teaching of
accounting, auditing, management advisory services, Purpose of the Conceptual Framework
finance, business law, taxation, and other technically The Conceptual Framework prescribes the concepts for general
related subject. purpose financial reporting. Its purpose is to:
4. Practice in the Government – employment or appointment
to a position in an accounting professional group in the
government or in a government-owed and/or controlled
 a. Assist the International Accounting Standards Board (IASB) 7. Presentation and disclosure
in developing Standards that are based on consistent 8. Concepts of capital and capital maintenance
concepts;
Objective of General Purpose Financial Reporting
b. Assist preparers in developing consistent accounting
policies when no Standard applies to a particular  The objective of general purpose financial reporting is to
transaction or when a Standard allows a choice of provide financial information about the reporting entity that is
accounting policy; and useful to primary users in making decisions about providing
c. Assist all parties in understanding and interpreting the resources to the entity.
Standards.  The objective of general purpose financial reporting forms the
foundation of the Conceptual Framework.
Status of the Conceptual Framework
Primary Users
 The Conceptual Framework is not a PFRS. When there is a
conflict between the Conceptual Framework and a PFRS, the  Primary users – are those who cannot demand information
PFRS will prevail. directly from reporting entities. The primary users are:
 In the absence of a standard, management shall consider the a. Existing and potential investors
Conceptual Framework in making its judgement in developing b. Lenders and other creditors
and applying an accounting policy that results in useful  Only the common needs of primary users are met by the
information. financial statements.
Scope of the Conceptual Framework Qualitative Characteristics
The Conceptual Framework is concerned with general purpose I. Fundamental qualitative characteristics
financial reporting. General purpose financial reporting involves the  The fundamental qualitative characteristics are the
preparation of general purpose financial statements. The characteristics that make information useful to users.
Conceptual Framework provides the concepts regarding the 1. Relevance
following:  Information is relevant if it can affect the decision
of users.
1. The objective of financial reporting
 Relevant information has the following:
2. Qualitative characteristics of useful financial information
a. Predictive value – the information can be used
3. Financial statements and the reporting entity
in making predictions.
4. The elements of financial statements
b. Confirmatory value – the information can be
5. Recognition and derecognition
used in confirming past predictions
6. Measurement
  Materiality – is an ‘entity-specific’ aspect of Objective and scope of financial statements
relevance.
 The objective of general purpose financial statements is to
2. Faithful representation
provide financial information about the reporting entity’s
 Faithful representation means the information
assets, liabilities, equity, income, and expense that is useful in
provides a true, correct and complete depiction of
assessing:
what it purports to represent.
a. The entity’s ability to generate future cash inflows; and
 Faithfully represented information has the
b. Management’s stewardship over economic resources.
following:
a. Completeness – all information necessary for Reporting Period
users to understand the phenomenon being
depicted is provided.  Financial statements are prepared for a specific period of time
b. Neutrality – information is selected or (i.e., the reporting period) and include comparative information
presented without bias. for at least one preceding reporting period.
c. Free from error – there are no errors in the Going concern
description and in the process by which the
information is selected and applied.  Financial statements are normally prepared on the assumption
II. Enhancing qualitative characteristics that the reporting entity is a going concern, meaning the entity
 The enhancing qualitative characteristics are the has neither the intention nor the need to end its operations in
characteristics that enhance the usefulness of the foreseeable future.
information. Reporting entity
1. Comparability – the information helps users in
identifying similarities and differences between  A reporting entity is one that is required, or chooses, to prepare
different sets of information. financial statements, and is not necessarily a legal entity. It can
2. Verifiability – different users could reach consensus as be a single entity or a group or combination of two or more
to what the information purports to represent. entities.
3. Timeliness – the information is available to users in
Elements of Financial Statements
time to be able to influence their decisions.
4. Understandability – users are expected to have: The elements of financial statements are:
a. Reasonable knowledge of business activities; and
Related to the entity’s financial position
b. Willingness to analyze the information diligently.
1. Assets
Financial Statements And The Reporting Entity
2. Liabilities
 3. Equity 2. Transfer of an economic resource – the obligation has the
potential to require the transfer of an economic resource to
Related to the entity’s financial performance
another party. Such potential need not be certain or even
4. Income likely – what is important is that the obligation already
5. Expenses exists and that, in at least one circumstance, it would
require the transfer of an economic resource.
Assets – is “a present economic resource controlled by the entity as 3. Present obligation as a result of past events – a present
a result of past events. An economic resource is a right that has the obligation exists as a result of past events if:
potential to produce economic benefits.” a. The entity has already obtained economic benefits or
Three Aspects in the Definition of an Asset taken an action; and
b. As a consequence, the entity will have to transfer an
1. Right – asset refers to right, and not necessarily to a economic resource that it would not otherwise have
physical object, e.g., the right to use, sell, lease or transfer a had to transfer.
building.
2. Potential to produce economic benefits – the right has a Executory Contracts
potential to produce economic benefits for the entity that  An executory contract “is a contract that is equally unperformed
are beyond the benefits available to all others. Such – neither party has fulfilled any of its obligations, or both parties
potential need not e certain or even likely – what is have partially fulfilled their obligations to an equal extent.”
important is that the right already exists and that, in at least  An executory contract establishes a combined right and
one circumstance, it would produce economic benefits for obligation to exchange economic resources.
the entity.  The contract ceases to be executory when one party performs
3. Control – means the entity has the exclusive right over the its obligation.
benefits of an asset and the ability to prevent others from  If the entity performs first, the entity’s combined right and
accessing those benefits. obligation changes to an asset.
Liability – is “a present obligation of the entity to transfer an  If the other party performs first, the entity’s combined right
economic resource as a result of past events.” and obligation changes to a liability.

Three Aspects in the Definition of a Liability Equity

1. Obligation – an obligation is “a duty or responsibility that an  Equity is the “residual interest in the assets of the entity after
entity has no practical ability to avoid.” An obligation can be deducting all its liabilities.”
either legal obligation or constructive obligation.  Equity = Assets + Liabilities
Income a. It is uncertain whether an asset or liability exists; or
b. An assets or liability exists, but the probability of an inflow
 Income is “increase in assets, or decreases in liabilities, that
or outflow of economic benefits is low.
result in increases in equity, other hat those relating to
contributions from holders of equity claims.” However, the presence of one or both of the foregoing does not
automatically lead to the non-recognition of an item. Other factors
Expenses
should also be considered.
 Expenses are “decreases in assets, or increases in liabilities, that
Faithful representation
result in decreases in equity, other than those relating to
distributions to holders of equity claims.  The level of measurement uncertainty and other factors can
affect an item’s faithful representation, but not necessarily its
Recognition & Derecognition
relevance.
The recognition process
Measurement uncertainty
 Recognition is the process of including in the statement of
 Measurement uncertainty exists if the asset or liability needs to
financial position or the statement(s) of financial performance
be estimated. A high level of measurement uncertainty does
an item that meets the definition of one of the financial
not necessarily lead to the non-recognition of an asset or
statement elements (i.e., asset, liability, equity, income or
liability if the estimate provides relevant information and is
expense). This involves recording the item in words and in
clearly and accurately describes and explained.
monetary amount and including that amount and including that
 However, measurement uncertainty can lead to the non-
amount in the totals of either of those statements.
recognition of a asset or a liability if making an estimate is
Recognition criteria exceptionally difficult or exceptionally subjective.

 An item is recognized if: Derecognition

a. It meets the definition of an asset, liability, equity, income
 Derecognition is the removal of a previously recognized asset or
or expense; and
liability from the entity’s statement of financial position.
b. Recognizing it would provide useful information, i.e.,
 Derecognition occurs when the item ceases to meet the
relevant and faithfully represented information.
definition of an asset or liability.
Relevance
Unit of Account
 The recognition of an item may not provide relevant
 Unit of account is ”the right or group of rights, the obligation or
information if, for example:
the group of obligations, or the group of rights and obligations,
 to which recognition criteria and measurement concepts are b. A liability is “the consideration that would be received
applied.” for an equivalent liability at the measurement date
minus the transaction costs that would be incurred at
Measurement Bases
that date.”
1. Historical Cost:
Considerations When Selecting a Measurement Basis
a. An asset is the consideration paid to acquire the asset plus
transaction costs.  When selecting a measurement basis, it is important to consider
b. A liability is the consideration received to incur the liability the following:
minus transaction costs. a. The nature of information provided by a particular
 Historical cists is updated over time to depict the following: measurement basis (e.g., measuring an asset at historical
o Depreciation, amortization, or impairment of assets cost may lead to the subsequent recognition of depreciation
o Collections or payments that extinguish part or all of the or impairment, while measuring that asset at fair value
asset or liability would lead to the subsequent recognition of gain or loss
o Unwinding of discount or premium when the asset or from changes in fair value).
liability is measured at amortized cost b. The qualitative characteristics, the cost -constraint, and
2. Current Value other factors (e.g., a particular measurement basis may be
a. Fair value is “the price that would be received to sell an more verifiable or more costly to apply than other
asset, or paid to transfer a liability, in an orderly transaction measurement bases).
between the market participants at the measurement
date.” Measurement of Equity
b. Value in use is “the present value of cash flows, or other
 Total equity is not measured directly. It is simply equal to
economic benefits, that an entity expects to derive from the
difference between the total assets and total liabilities.
use of an asset and from its ultimate disposal.” and
 Because different measurement bases are used for different
fulfillment value is “the present value of the cash, or other
assets and liabilities, total equity cannot be expected to be
economic resources, that an entity expects to be obliged to
equal to the entity’s market value nor the amount that can be
transfer as it fulfills a liability.”
raised from either selling or liquidating the entity.
c. Current cost
 Equity is generally positive, although some of its components
a. An asset is “the cost of an equivalent asset at the
can be negative. In some cases, even total equity can be
measurement, comprising the consideration that would
negative such as when total liabilities exceed total assets.
be paid at the measurement date plus the transaction
costs that would be incurred at that date.” Presentation and Disclosure
 Information is communicated through presentation and Aggregation is “the adding together of assets, liabilities, equity,
disclosure in the financial statements. income or expenses that have shared characteristics and are
 Effective communication makes information more useful. included in the same classification.”
Effective communication requires:
a. Focusing on presentation and disclosure objectives and Concepts of Capital and Capital Maintenance
principles rather than on rules.
b. Classifying information by grouping similar items and  Financial concept of capital – capital is regarded as the invested
separating dissimilar items. money or invested purchasing power. Capital is synonymous
c. Aggregating information in a manner that it is not obscured with equity, net assets, and net worth.
either by excessive detail or by excessive summarization.  Physical concept of capital – capital is regarded as the entity’s
productive capacity, e.g., units of output per day.
Presentation and Disclosure Objectives and Principles
PAS 1: Presentation of Financial Statements
 The objectives are specified in the Standards.
 The principles include: Objective
a. The use of entity-specific information is more useful that
PAS 1 prescribes the basis for presentation of general purpose
standardized descriptions, and
financial statements to improve comparability both with the
b. Duplication of information is usually unnecessary.
entity’s financial statements of previous periods (intra-
Classification comparability) and with the financial statements of other entities
(inter-comparability).
 Classifying means combining similar items and separating
dissimilar items. Types of Comparability
 Offsetting of assets and liabilities is generally not appropriate.
1. Intra-comparability (horizontal or inter-period) – refers to the
Classification of income and expenses comparability of financial statements of the same entity but
from one period to another.
 Income and expenses are classified as recognized either in: 2. Inter-comparability (dimensional) – refers to the comparability
a. Profit of loss; or of financial statements between different entities.
b. Other comprehensive income.
General purpose financial statements are those intended to serve
users who do not have the authority to demand financial reports
tailored for their own needs. General purpose financial statements
cater to most of the common needs of a wide range of external 4. Materiality and Aggregation – each material class of similar
users. General purpose financial statements are the subject matter items must be presented separately in the financial statements.
of the Conceptual Framework and the PFRSs. 5. Offsetting – assets and liabilities, and income and expenses,
shall not be offset unless required or permitted by a PFRS.
Complete Set of Financial Statements Measuring assets net of valuation allowances, for example,
obsolescence allowances on inventories, allowance for doubtful
1. Statement of Financial Position accounts on receivables, and accumulated depreciation on
2. Statement of Profit or Loss and other comprehensive income property, plant, and equipment are not offsetting.
3. Statement of Changes in Equity 6. Frequency of Reporting – an entity shall present a complete set
4. Statement of Cash Flows of financial statements (including comparative information) at
5. Notes least annually.
(5a) comparative information in respect of the preceding Philippines: April 15
period; and When an entity changes the end of its reporting period and
6. Additional Statement of Financial Position (required only when presents financial statements for a period longer or shorter than
certain instances occur) one year; an entity shall disclose the following:
1. The period covered by the financial statements,
General Features of Financial Statements
2. The reason for using a longer or shorter period, and
1. Fair Presentation and Compliance with PFRSs – The application 3. The fact that amounts presented in the financial statements
of PFRSs, with additional disclosure when necessary, is are not entirely comparable.
presumed to result in financial statements that achieve a fair 7. Comparative Information – an entity shall present comparative
presentation. information in respect of the preceding period for all amounts
2. Going Concern – An entity is not a going concern if, as of the reported in the current period’s financial statements, unless
financial reporting date or prior to the date of authorization of other standards permit or require otherwise.
the financial statements for issue, management either: 8. Consistency of Presentation – an entity shall retain the
a. Intends to liquidate the entity or to cease trading, or presentation and classification of items in the financial
b. Has no realistic alternative but to do so. statements from one period to the next unless:
a. It is apparent that another presentation or classification
The assessment of going concern is at least 12 months. would be more appropriate following a significant change in
the nature of the entity’s operations or a review of its
3. Accrual Basis of Accounting – an entity shall prepare its financial statements; or
financial statements, except for cash flow information, using the b. A PFRS requires a change in presentation
accrual basis of accounting.
Additional Statement of Financial Position 4. The asset is cash or a cash equivalent unless the asset is
restricted from being exchanged or used to settle a liability for
An additional statement of financial position is presented as the at least twelve months after the reporting period.
beginning of the preceding period when an entity:
Current Liabilities
1. Applies an accounting policy retrospectively, or
2. Makes a retrospective restatement of items in its financial An entity shall classify a liability as current when:
statements, or
3. Reclassifies items in its financial statements. 1. It expects to settle the liability in its normal operating cycle;
2. It holds the asset primarily for the purpose of trading;
…and the effect of the event of the statement of financial position 3. The liability is due to be settled withing twelve months after the
as the beginning of the preceding period is material. reporting period; or
4. The entity does not have an unconditional right to defer
Statement of Financial Position (Balance Sheet) (extend) settlement of the liability for at least twelve months
after the reporting period.
A statement of financial position may be presented as either
Currently Maturing Long-Term Liabilities
1. Classified – showing distinctions between current and
noncurrent assets and liabilities, or General Rule: Currently maturing long-term liabilities are presented
2. Unclassified (based on liquidity) – showing no distinction as current liabilities.
between current and noncurrent items.
Exceptions:
Current Assets (may specific sense)
1. Refinancing agreement is fully completed on or before the
An entity shall classify an asset as current when: balance sheet date – non-current liability
2. Refinancing agreement after the balance sheet date but before
1. It expects to realize the asset or intends to sell or consume it, in the financial statements are authorized for issue – non-current
its normal operating cycle; liability if the entity expects, and has the discretion, to refinance
2. It holds the asset primarily for the purpose of trading; it on a long-term basis under an existing loan facility.
3. It expects to realize the asset within twelve months after the
reporting period; or Breach of Loan Agreement
General Rule: A liability that is payable on demand is a current o. Deferred tax liabilities and deferred tax assets, as defined in Pas
liability. 12;
p. Liabilities included in disposal groups classified as held for sale
Exception: it is presented as non-current liability if the lender in accordance with PFRS 5;
provides the entity, on or before the balance sheet date, a grace q. Non-controlling interests, presented within equity; and
period ending at least 12 months after the balance sheet date to r. Issued capital and reserves attributable to owners of the parent
rectify a breach of loan covenant.
Order/Format of Presentation
Presentation of Deferred Taxes
PAS 1 does not prescribe the order or format in which an entity
Deferred tax liabilities (assets) are presented as noncurrent items in presents items.
a classified statement of financial position, irrespective of their
expected dates of reversal. Statement of Profit or Loss and other comprehensive income

Minimum Line Items in the Statement of Financial Position An entity shall present all items of income and expense recognized
in a period:
a. Property, plant and equipment;
b. Investment property; 1. In a single statement of profit or loss and other comprehensive
c. Intangible assets; income; or
d. Financial assets (excluding amounts shown under (e), (h), and 2. In two statements: (1) a statement displaying the profit or loss
(i)); section only (separate ‘statement of profit or loss’ or ‘income
e. Investments accounted for using the equity method; statement’) and (2) a second statement beginning with profit or
f. Biological assets; loss and displaying components of other comprehensive
g. Inventories; income.
h. Trade and other receivables;
i. Cash and cash equivalents; Extraordinary Items
j. Assets (or disposal groups) classified as held for sale in
accordance with PFRS 5; PAS 1 prohibits the presentation of any items of income or expense
k. Trade and other payables; as extraordinary items in the statement(s) presenting profit or loss
l. Provisions; and other comprehensive income or in the notes.
m. Financial liabilities (excluding amounts shown under (k) and (l));
Other Comprehensive Income for the Period
n. Liabilities and assets for current tax, as defined in PAS 12
Income Taxes;
a. Changes in revaluation surplus Statement of Changes in Equity
b. Unrealized gains and losses on investments in FVOCI securities
c. Remeasurements of the net defined benefit liability (asset) It shows the following information:
d. Gains and losses arising from translating the financial
statements of a foreign operation a. Effects of change in accounting policy (retrospective application)
e. Effective portion of gains and losses on hedging instruments in a or correction of prior period error (retrospective restatement
cash flow hedge b. Total comprehensive income for the period; and
c. For each component of equity, a reconciliation between the
OCI may be presented either (a) net of tax or (b) gross of tax. carrying amount at the beginning and the end of the period
showing separately changes resulting from:
Reclassification Adjustments a. P/L;
b. OCI; and
Reclassification adjustments are amounts reclassified to profit or c. Transaction with owners (e.g., contributions by and
loss in the current period hat were recognized in other distribution to owners)
comprehensive income in the current or previous periods.
Order of Presentation of Disclosure in the Notes
Total Comprehensive Income
1. Statement of compliance with PFRSs;
Total comprehensive income comprises all components of: 2. Summary of significant accounting policies applied;
3. Supporting information for items presented in the other
1. Profit or loss; and financial statements; and
2. Other comprehensive income. 4. Other disclosures.
“The change in equity during a period resulting from transactions Disclosure of Dividends
and other events, other than those changes resulting from
transactions with owners in their capacity as owners” (PAS 1.7) Dividends declared by an entity are disclosed either in the (a) notes
or (b) statement of changes in equity.
Presentation of Expenses
PAS 2: Inventories
1. Nature of expense method
2. Function of expense method Inventories are assets:

If an entity classifies expense by function, it shall disclose additional a. Held for sale in ordinary course of business (finished Goods);
information on the nature of expenses.
b. In the process of production for such sale (Work in Process); or 3. Administrative overheads that do not contribute to bringing
c. In the form of materials or supplies to be consumed in the inventories to their present location and condition.
production process or in the rendering of services (Raw 4. Storage costs, unless those costs are necessary in the
materials and manufacturing supplies) production process before a further production stage, (e.g., the
storage costs of party finished goods may be capitalized as cost
Financial Statement Presentation of inventory, but the storage costs of completed finished goods
are expensed).
 All items that meet the definition of inventory are presented on
the statement of financial position as one line item under the Cost Formulas
caption “Inventories”. The breakdown of this line item (as
finished goods, WIP and Raw materials) is disclosed in the 1. Specific identification – shall be used for inventories that are
notes. not ordinary interchangeable (i.e., used for inventories that are
 Inventories are normally presented in a classified statement of unique). Cost of sales is the cost of the specific inventory that
financial position as current asset. was sold.
2. FIFO – cost of sales is based on the cost of inventories that were
Measurement purchased first. Consequently, ending inventory represents the
cost of the latest purchases.
 Inventories are measured at the lower of cost and net 3. Weighted Average Cost – cost of sales is based on the average
realizable value (LCNRV) cost of all inventories purchased during the period.
 The cost of inventories comprises all costs of purchase, costs of Weighted Average Costs = Total Good Available for Sale/Total
conversion and other costs incurred in bringing the inventories Goods Available for Sale in units
to their present location and condition.
 Net realizable value (NRV) is the estimated selling price in the Write Down of Inventories
ordinary course of business less the estimated costs of
completion and the estimated costs to sell.  Inventories are usually written down to net realizable value on
an item by item basis.
Costs that are expensed when incurred  If the cost of an inventory exceeds its NRV, the inventory is
written down to NRV, the lower amount. The excess of cost
1. Abnormal amounts of wasted materials, labor or other over NRV represents the amount of write-down.
production costs.
2. Selling costs, for example, advertising and promotion costs and Reversal of Write-Downs
delivery expense or freight out.
 The amount of reversal to be recognized should not exceed the Examples of Cash Flows from Operating Activities
amount of the original write-down previously recognized.
a. Cash receipts from the sale of goods, rendering of services, or
Recognition as an expense other forms of income
b. Cash payments for purchases of goods and services
 The carrying amount of an inventory that is sold is charged as c. Cash payments for operating expenses, such as employee
expense (i.e., cost of sales) in the period in which the related benefits, insurance, and the like, and payments or refunds of
revenue is recognized. Likewise, the write-down of inventories income taxes
to NRV and all losses of inventories are recognized as expense in d. Cash receipts and payments from contracts held for dealing or
the period the write-down or loss occurs. trading purposes.
2. Investing activities – include transactions that affect long-term
PAS 7: Statement of Cash Flows assets and other non-operating assets.
PAS 7 prescribes the requirements in the presentation od statement Examples of Cash Flows from Investing Activities
of cash flows.
a. Cash receipts and cash payments in the acquisition and disposal
The statement of cash flows provides information about the of property, plant and equipment, investment property,
sources and utilization (i.e., historical changes) of cash and cash intangible assets and other noncurrent assets.
equivalents during the period. b. Cash receipts and cash payments in the acquisition and sale of
equity or debt instruments of other entities (other than those
Cash comprises cash on hand and cash in bank.
that are classified as cash equivalents or held for trading)
Cash equivalents are “short-term, highly liquid investments that are c. Cash receipts and cash payments on derivative assets and
readily convertible to known amounts of cash and which are subject liabilities (other than those that are held for trading or classified
to an insignificant risk of change in value.” (PAS 7.6) as financing activities)
d. Loans to other parties and collections thereof (other than loans
Cash flows include inflows (sources) and outflows (uses) of cash and made by a financial institution)
cash equivalents. 3. Financing activities – include transactions that affect equity and
non-operating liabilities.
Classification of Cash Flows
Examples of Cash Flows from Financing Activities
1. Operating activities – include transactions that enter into the
determination of profit or loss. These transactions normally a. Cash receipts from issuing shares or other equity instruments
affect income statements account. and cash payments to redeem them
b. Cash receipts from issuing notes, loans, bonds and mortgage When making the judgement:
payable and other short-term or long-term borrowings, and  Management shall consider the following:
their repayments a. Requirements in other PFRSs dealing with similar
c. Cash payments by a lessee for the reduction of the outstanding transactions
liability relating to a lease b. Conceptual Framework
 Management may consider the following:
Reporting Cash Flows from Operating Activities a. Pronouncements issued by other standard-setting
bodies
1. Direct method – shows each major class of gross cash receipts b. Other accounting literature and industry practices
and gross cash payments.
2. Indirect method – adjusts accrual basis profit or loss for the Scope of PAS 8 Description Accounting Effect of
Treatment Adjustment
effects of changes in operating assets and liabilities and effects 1. Changes in Change in a. Transitional On the beginning
of non-cash items. accounting measurement basis provision balance of retained
policy b. Retrospective earnings, if
application accounted for
PAS 8: Accounting Policies, Changes in Accounting Estimates and c. If (b) is retrospectively.
impracticable,
Errors prospective
application
PAS 8 prescribes the criteria for selecting, applying, and changing 2. Change in Changes in the Prospective In profit or loss of
accounting realization (or application current period or
accounting policies and the accounting and disclosure of changes in estimate incurrence) of current and future
accounting policies, changes in accounting estimates and correction expected inflow (or periods if the
outflow) of change affects
of prior period errors. economic benefits both.
from assets (or
Accounting Policies are “the specific principles, bases, conventions, liabilities)
3. Correction of Intentional and a. Retrospective On the beginning
rules and practices applied by an entity in preparing and presenting prior period unintentional restatement balance of retained
financial statements.” (PAS 8.5) error misapplication of b. If (b) is earnings, if
principles, impracticable, accounted for
misinterpretation prospective retrospectively
Accounting policies are the relevant PFRSs adopted by an entity in of facts and application
mathematical
preparing and presenting its financial statements. mistakes.

Hierarchy of reporting standards When it is difficult to distinguidh a change in accounting policy from a
change in accounting estimate, the change is treated as a change in an
1. PFRSs accounting estimate.
2. Judgement
An entity shall change an accounting policy only if the change: The varying treatments of economic activities between the PFRSs and the
tax laws result to permanent and temporary differences.
1. Is required by a PFRS; or
2. Results to a more relevant and reliable information about an entity’s Permanent Difference
financial position, performance, and cash flows.
Permanent differences are those that do not have further tax
PAS 10: Events after the Reporting Period consequences.

Events after the reporting period are “those events, favorable or Examples:
unfavorable, that occur between the end of the reporting period and the
date that the financial statements are authorized for issue.” (PAS 10) a. Interest income on government bonds and treasury bills
b. Interest income on bank deposits
Two Types of Events after the Reporting Period c. Dividend income
d. Fines, surcharges, and penalties arising from violation of law
1. Adjusting events after the reporting period – are events that provide e. Life insurance premium on employees where the entity is the
evidence of conditions that existed at the end of the reporting period. irrevocable beneficiary
2. Non-adjusting events after the reporting period – are events that are
indicative of conditions that arose after the reporting period. Temporary Differences

Date of Authorization of Financial Statements Temporary differences are those that have future tax consequences.
Temporary differences are either:
This date is the date when management authorizes the financial
statements for issue regardless of whether such authorization for issue is a. Taxable temporary differences – arise, for example, when financial
for further approval or for final issuance to users. income is greater than taxable income or the carrying amount of an
asset is greater than its tax base.
PAS 12: Income Taxes b. Deductible temporary differences – arise in case of the opposites of
the foregoing.
Accounting profit or loss Taxable profit (Tax loss)
Computed using PFRSs Computed using tax laws
Taxable temporary differences result to deferred tax liabilities while
Total income less total expenses, Taxable income less tax-deductible
deductible temporary differences result to deferred tax assets.
excluding tax expense (EBIT/ expenses
earnings before income taxes)
Deferred Taxes
Other terms: pretax income, Other term: taxable income
financial income and accounting
If the increase in deferred tax liability exceeds the increase in deferred tax
income.
asset, the difference is deferred tax expense. If it is the opposite, the
difference is deferred tax income or benefit.
A declared tax asset is recognized only to the extent that it is realizable. Elements of Cost

Deferred taxes are measured using enacted or substantially enacted 1. Purchase price, including non-refundable purchase taxes, after
tax rates that are applicable to the periods of their expected deducting trade discounts and rebates.
reversals. 2. Costs directly attributable to bringing the asset to the location
and condition necessary for it to be capable of operating in the
Deferred tax assets and liabilities are not discounted. manner intended by the management.
3. Present value of decommissioning and restoration costs to the
Deferred tax asset and liabilities are presented as non-current. extent that they are recognized as obligation.
PAS 16: Property, Plant and Equipment Cessation of Capitalizing Costs to PPE
Characteristics of Property, Plant and Equipment Recognition of costs in the carrying amount of an item of PPE ceases
when the item is in the location and condition necessary for it to be
a. Tangible assets – items of PPE have physical substance
capable of operating in the manner intended by management.
b. Used in normal operations – items of PPE are used in the
production or supply of goods and services, for rental, or for Measurement of Cost
administrative purposes
c. Long-term in nature – items of PPE are expected to be used The cost of an item of PPE is the cash price equivalent at the
from more than a year. recognition date. If payment is deferred beyond normal credit
terms, the difference between the cash price equivalent and the
Recognition total payment is recognized as interest over the period of credit
unless such interest is capitalized in accordance with PAS 23
The cost of an item of property, plant and equipment shall be
Borrowing Costs.
recognized as an asset only if:
Acquisition Through Exchange
a. It is probable that future economic benefits associated with the
item will flow to the entity; and If the exchange has commercial substance, the asset received from
b. The cost of the item can be measured reliably. the exchange is measured using the following order of priority:
Initial Measurement a. Fair value of asset Given up
b. Fair value of asset Received
An item of PPE is initially measured at its cost.
c. Carrying amount of asset Given up
If the exchange lacks commercial substance, the asset received from Selection of Depreciation Method
the exchange is measured at (c) above.
There are various methods of depreciation. The entity shall select
Subsequent Measurement the method that most closely reflects the expected pattern of
consumption of the future economic benefits embodied in the
Subsequent to initial recognition, an entity shall choose either: asset.

(a) The cost model or However, a depreciation method that is based in revenue that is
(b) The revaluation model generated by an activity that includes the use of an asset is not
appropriate.
As its accounting policy and shall apply that policy to an entire class
to PPE. The Straight-Line Method of Depreciation

Cost Model Straight-line method – depreciation is recognized evenly over the

life of the asset by dividing the depreciable amount by the
After recognition, an item of PPE is measured at its cost less any estimated useful life,
accumulated depreciation and any accumulated impairment
losses. Depreciation = (historical cost – residual value) / estimated useful
life
Depreciation
Changes in Depreciation Method, Useful Life, and Residual Value
Depreciation is the systematic allocation of the depreciable amount
of an asset over its estimated useful life. A change in depreciation method, useful life, or residual value is a
change in accounting estimates accounted for prospectively.
When computing for depreciation, each part of an item of PPE with
a cost that is significant in relation to the total cost of the item shall Prospective accounting means the change affects only the current
be depreciated separately. period and/or future periods. The change does not affect past
periods.
Depreciation begins when the asset is available for use, i.e., when it
is in the location and condition necessary for it to be capable of Revaluation Model
operating in the manner intended by management.
After recognition as an asset, an item of PPE whose fair value can be
Depreciation ceases when the asset is derecognized or when it is measured reliably shall be carried at a revalued amount, being its
classified as “held for sale” under PFRS 5, whichever comes earlier. fair value at the date of the revaluation less any subsequent
accumulated depreciation and subsequent accumulated impairment 1. If the revalued asset is non-depreciable, the revaluation surplus
losses.
accumulated in equity is transferred directly to retained
Frequency of Revaluation earnings when the asset is derecognized.
2. If the revalued asset is depreciable, a portion of the revaluation
For items with significant and volatile changes in fair value, annual
surplus may be transferred periodically to retained earnings as
revaluation is necessary. For items with insignificant changes in fair
the asset is being used.
value, revaluation may be made every 3 or 5 years.

Derecognition
Revaluation Applied to All Assets in a Class

The carrying amount of an item or PPE shall be derecognized:

If an item of PPE is revalued, the entire class of PPE to which that
asset belongs shall be revalued. a. On disposal; or
b. When no future economic benefits are expected from its
The items within a class of PPE are revalued simultaneously to
use or disposal
avoid selective revaluation of assets and the reporting of amounts in
the financial statements that are a mixture of costs and values as at PAS 19: Employee Benefits
different values.
Employee Benefits are “all forms of consideration given by an entity
Subsequent Accounting for Revaluation Surplus in exchange for service rendered by employees.” (PAS 19.8)

Revaluation is initially recognized in other comprehensive income Four Categories of Employee Benefits Under PAS 19
unless the revaluation represents impairment loss or reversal of
impairment loss, in which case it is recognized in profit or loss. 1. Short-term employee benefits – are employee benefits (other
than termination benefits) that are due to be settled within 12
Subsequently, the revaluation surplus is accounted for as follows: months after the end of the period in which the employees
render the related service.
 1. Salaries, wages, and SSS, PhilHealth and Pag-IBIG Accumulating compensated absences are those that are carried
contributions forward and can be used in future periods if the current period’s
2. Paid vacation leaves and sick leaves entitlement is not used in full. Accumulating compensated absences
3. Profit-sharing and bonuses may either be:
4. Non-monetary benefits (e.g., free goods and services)
1. Vesting – wherein employees are entitled to a cash payment

Recognition and Measurement for unused entitlement on leaving the entity; or

2. Non-vesting – wherein employees are not entitled to a cash

When an employee has rendered service to an entity during an
payment for unused entitlement on leaving the entity.
accounting period, the entity shall recognize the undiscounted
amount of short-term employee benefits expected to be paid in Non-accumulating compensated absences are those that are not
exchange for that service: carried forward. NO liability or expense us recognized until the
absences occur, because employee service does not increase the
1. as a liability (accrued expense), after deducting any amount
amount of the benefit.
already paid.
2. Post-employment benefits – are employee benefits (other than
2. as an asset (prepaid expense, if the amount paid is in excess
termination benefits) that are payable after the completion of
of the undiscounted amount of the benefits incurred; provided,
employment. Post-employee benefit plans are classified either:
the prepayment will lead to a reduction in future payments or a
1. Defined contribution plans – the employer commits to
cash refund; and
contribute to a fund which will be used to pay for the
3. as an expense, unless the employee benefits forms part of retirement benefit of the employees. Risk that the
the of an asset, e.g., as part of the cost of inventories or retirement benefit may be insufficient rests with the
property, plant and equipment. employee.

Short-term Compensated Absences

 2. Defined benefit plans – the employer commits to pay obligation or the expense and there is no possibility of any actuarial
retiring employees a definite amount. Risk that retirement gain or loss.
benefit may be insufficient rests with the employer.
Accounting for Defined Benefit Plan
Other Relevant Terms
The accounting for defined benefit plans is complex because
Contributory – both the employee and employer contributes actuarial assumptions are required to measure the obligation and
for the retirement benefits of the employee. the expense and there is a possibility of actuarial gains and losses.

Non-contributory – only the employer contributes for the Obligations are measured on a discounted basis.
retirement benefits of the employee.
Steps in the accounting for defined benefit plans:
Funded – a fund is transferred to a trustee who will manage the
1. Determine the deficit or surplus
fund. The trustee assumes obligation of paying retirement
o If FVPA < PV of DBO (defined benefit obligation),
benefits out from the fund and directly to retiring employees.
difference is deficit
Unfunded – no fund is transferred to a trustee. The employer o If FVPA > PV of DBO, difference is surplus
retains the obligation of paying retirement benefits to 2. Determine the net defined benefit liability (asset)
employees. o Net defined benefit liability = deficit
o Net defined benefit asset = lower of surplus and ‘asset
Accounting for Defined Contribution Plan
ceiling’ (the present value of any economic benefits
The accounting for defined contribution plans is straightforward available in the form of refunds from the plan or
because the reporting entity’s obligation for each period is reductions in future contributions to the plan.
determined by the amounts to be contributed for that period. 3. Determine the components of the defined benefit cost to
Consequently, no actual assumptions are required to measure the be recognized in P/L and OCI.
Definition of Terms Actuarial assumptions are an entity’s best estimates of the
variables that will determine the ultimate cost of providing
1. Current service cost – is the increase in the present value of
post-employment benefits.
a defined benefit obligation resulting from employee service
in the current period. 1. Demographic assumptions about the future characteristics
2. Past service cost – id the change in the present value of the of employees who are eligible for benefits. Demographic
defined benefit obligation resulting from a plan amendment assumptions deal with matters such as:
or curtailment. a. Mortality, both during and after employment
3. Gain or loss on settlement – the difference between the b. Rates of employee turnover, disability and early
present value of the defined benefit obligation and the retirement
settlement price. c. The proportion of plan members with dependents who
4. Interest cost on the defined benefit obligation – is the will be eligible for benefits
increase during a period in the present value of a defined d. Claim rates under medical plans
benefit obligation which arises because the benefits are one 2. Financial assumptions, dealing with items such as:
period closer to settlement. a. The discount rate
5. Actuarial gains and losses – are changes in the present b. Future salary and benefit levels
value of the defined benefit obligation resulting from c. Future medical costs, if any, including cost of
experience adjustments and the effects of changes in administering claims and payments
actuarial assumptions. d. The expected rate of return on plan assets

Actuarial Assumptions Actuarial Assumption – Discount Rate

The rate used to discount post-employment benefit obligations shall 5. Deferred compensation payable beyond 12 months after
be determined by refence to market yields at the end of the the end of the period in which it is earned.
reporting period on high quality corporate bonds.
4. Termination benefits – are employee benefits provided in
In countries where there is no deep market in such bonds, the
exchange for the termination of an employee’s employment as
market yields at the end of the reporting period on government
a result of either:
bonds shall be used.
1. An entity’s decision to terminate an employee’s

3. Other long-term employee benefits – are employee benefits employment before the normal retirement date; or

(other than post-employment benefits and termination 2. An employee’s decision to accept an entity’s offer of

benefits) that are due to be settled beyond 12 months after the benefits in exchange for the termination of employment.

end of the period in which the employees render the related

Measurement
service.
Other long-term employee benefits are accounted for using the Termination benefits are initially and subsequently recognized in
procedures applicable for a defined benefit plan. However, all accordance with the nature of the employee benefit.
of the components of the net benefit cost are recognized in
a. If the termination benefits are payable within 12 months, the
profit or loss.
entity shall account for the termination benefits similarly with
1. Long term compensated absences, e.g., sabbatical leave
short-term employee benefits.
2. Jubilee or other long-service benefits
b. If the termination benefits are payable beyond 12 months, the
3. Long term – disability benefits
entity shall account for the termination benefits similarly with
4. Profit-sharing and bonuses payable beyond 12 months after
long-term employee benefits.
the end of the period in which the employees have
rendered the related service
c. If the termination benefits are, in substance to post- a. Tax benefits,
employment benefits, the entity shall account for the benefits b. Free technical or marketing advice,
as post-employee benefits. c. Provision of guarantees,
d. Government procurement policy that is responsible for a potion
PAS 20: Accounting for Government Grants and Disclosure of
of the entity’s sales, and
Government Assistance
e. Public improvements that benefit the entire community.

Government Grants are assistance received from the government

Recognition
in the form of transfers of resources in exchange for compliance
with certain conditions. Government grants are recognized if there is reasonable assurance
that:
Government grants exclude government assistance whose value
cannot be reasonably measured or cannot be distinguished from a. The attached conditions will be complied with; and
the entity’s normal trading transactions. b. The grants will be received

Examples of Government Grants Classification of Government Grants according to Attached

Condition
a. Receipt of cash, land, or other non-cash assets from the
government subject to compliance with certain conditions a. Grants related to assets – grants whose primary condition is
b. Receipt of financial aid in case of loss from a calamity that an entity qualifying for them should purchase, construct or
c. Forgiveness of an existing loan from the government otherwise acquire long-term assets.
d. Benefit of a government loan with below-market rate of b. Grants related to income – grants other than those related to
interest assets.

The following are not government grants: Initial Measurement

1. Monetary grants are measured at the: Government grants related to assets are presented in the statement
a. Amount of cash received; or of financial position either by:
b. The fair value of amount receivable; or
a. Gross presentation – the grant is presented as deferred income
c. Carrying amount of loan payable to government for which
(liability) or
repayment is forgiven; or
b. Net presentation – the grant is deducted when computing for
d. Discount on loan payable to government at a below-market
the carrying amount of the asset
rate of interest.
2. Non-monetary grants (e.g., land and other resources) are Presentation of Government Grants Related to Income
measured at the:
a. Fair value of non-monetary asset received. Government grants related to income are sometimes presented in

b. Alternatively, at nominal amount pr zero, plus direct costs the income statement either by:

incurred in preparing the asset for its intended use.

c. Gross presentation – the grant is presented separately or under

Accounting for Government Grants a general heading such as “Other income”, or

d. Net presentation – the grant is deducted when reporting the
The main concept in accounting for government grants is the related expense
Matching Concept.
Repayment of Government Grants
This means that the government grant is recognized as income as
the entity recognizes as expense the related cost for which the A government grant that becomes repayable is accounted for as a

grant is intended to compensate. change in accounting estimate that is treated prospectively under
PAS 8.
Presentation of Government Grants Related to Assets