THEORY OF ACCOUNTS

LECTURE NOTES
PRESENTATION OF FINANCIAL STATEMENTS
(PAS 1 REVISED 2007 INCLUDING AMENDMENTS)
Scope
An entity shall apply this Standard in preparing and
presenting general purpose financial statements in
accordance with Philippine
Financial Reporting
Standards (PFRSs).
DEFINITION AND OBJECTIVE OF FINANCIAL
STATEMENTS
Financial statements are a structured representation of
the financial position and financial performance of an
entity. The objective of financial statements is to provide
information about the financial position, financial
performance and cash flows of an entity that is useful to
a wide range of users in making economic decisions.
Financial statements also show the results of the
managements stewardship of the resources entrusted to
it.
COMPLETE SET OF FINANCIAL STATEMENTS
A complete set of financial statements comprises:
(a) a statement of financial position as at the end of the
period;
(b) a statement of comprehensive income for the
period;
(c) a statement of changes in equity for the period;
(d) a statement of cash flows for the period;
(e) notes, comprising a summary of significant
accounting
policies
and
other
explanatory
information; and
(f) a statement of financial position as at the beginning
of the earliest comparative period when an entity
applies an accounting policy retrospectively or
makes a retrospective restatement of items in its
financial statements, or when it reclassifies items in
its financial statements.
An entity may use titles for the statements other than
those used in this Standard.
An entity shall present with equal prominence all of the
financial statements in a complete set of financial
statements.
GENERAL
FEATURES
CONSIDERATIONS)

(IMPORTANT

1. Fair presentation and compliance with PFRSs

Financial statements shall present fairly the financial
position, financial performance and cash flows of an
entity.
Fair
presentation
requires
the
faithful
representation of the effects of transactions, other
events and conditions in accordance with the definitions
and recognition criteria for assets, liabilities, income and
expenses set out in the Framework. The application of
PFRSs, with additional disclosure when necessary, is
presumed to result in financial statements that achieve a
fair presentation.

An entity whose financial statements comply with PFRSs

shall make an explicit and unreserved statement of such
compliance in the notes. An entity shall not describe
financial statements as complying with PFRSs unless
they comply with all the requirements of PFRSs.

In virtually all circumstances, an entity achieves a fair

presentation by compliance with applicable PFRSs. A fair
presentation also requires an entity:
(a) to select and apply accounting policies in accordance
with PAS 8 Accounting Policies, Changes in
Accounting Estimates and Errors. PAS 8 sets out a
hierarchy
of
authoritative
guidance
that
management considers in the absence of anPFRS
that specifically applies to an item.
(b) to present information, including accounting policies,
in a manner that provides relevant , reliable ,
comparable and understandable information.
(c) to provide additional disclosures when compliance
with the specific requirements in PFRSs is
insufficient to enable users to understand the impact
of particular transactions, other events and
conditions on the entitys financial position and
financial performance.
An entity cannot rectify inappropriate accounting policies
either by disclosure of the accounting policies used or by
notes or explanatory material.
An entity whose financial statements comply with PFRSs
shall make an explicit and unreserved statement of such
compliance in the notes. An entity shall not describe
financial statements as complying with PFRSs unless
they comply with all the requirements of PFRSs.
In the extremely rare circumstances in which
management concludes that compliance with a
requirement in anPFRS would be so misleading that it
would conflict with the objective of financial statements
set out in the Framework
When an entity departs from a requirement ofPFRS, it
shall disclose:
(a) that management has concluded that the financial
statements present fairly the entitys financial
position, financial performance and cash flows;
(b) that it has complied with applicable PFRSs, except
that it has departed from a particular requirement to
achieve a fair presentation;
(c) the title of the PFRS from which the entity has
departed, the nature of the departure, including the
treatment that the PFRS would require, the reason
why that treatment would be so misleading in the
circumstances that it would conflict with the
objective of financial statements set out in the
Framework, and the treatment adopted; and
(d) for each period presented, the financial effect of the
departure on each item in the financial statements
that would have been reported in complying with the
requirement.

2. Going Concern
An entity preparing PFRS financial statements is
presumed to be a going concern. If management has
significant concerns about the entity's ability to continue
as a going concern, the uncertainties must be disclosed.
If management concludes that the entity is not a going
concern, the financial statements should not be
prepared on a going concern basis, in which case PAS 1
requires a series of disclosures.
In assessing whether the going concern assumption is
appropriate, management takes into account all
available information about the future, which is at least,

but is not limited to, twelve months from the end

of the reporting period. The degree of
consideration depends on the facts in each case.
3. Accrual Basis of Accounting
PAS 1 requires that an entity prepare its financial
statements, except for cash flow information,
using the accrual basis of accounting.
When the accrual basis of accounting is used, an
entity recognizes items as assets, liabilities,
equity, income and expenses (the elements of
financial statements) when they satisfy the
definitions and recognition criteria for those
elements in the Framework.
4. Materiality and Aggregation
An entity shall present separately each material
class of similar items. An entity shall present
separately items of a dissimilar nature or function
unless they are immaterial.An entity need not
provide a specific disclosure required by PFRS if
the information is not material.
5. Offsetting
An entity shall not offset assets and liabilities or
income and expenses, unless required or
permitted by anPFRS.
An entity reports separately both assets and
liabilities, and income and expenses. Offsetting in
the statements of comprehensive income or
financial position or in the separate income
statement (if presented), except when offsetting
reflects the substance of the transaction or other
event, detracts from the ability of users both to
understand the transactions, other events and
conditions that have occurred and to assess the
entitys future cash flows. Measuring assets net of
valuation allowancesfor example, obsolescence
allowances on inventories and doubtful debts
allowances on receivablesis not offsetting.
In addition, an entity presents on a net basis
gains and losses arising from a group of similar
transactions, for example, foreign exchange gains
and losses or gains and losses arising on financial
instruments held for trading. However, an entity
presents such gains and losses separately if they
are material.
6. Frequency of Reporting
An entity shall present a complete set of financial
statements (including comparative information) at
least annually. When an entity changes the end of
its reporting period and presents financial
statements for a period longer or shorter than one
year, an entity shall disclose, in addition to the
period covered by the financial statements:
(a) the reason for using a longer or shorter
period, and

(b) the fact that amounts presented in the

financial
statements
are
not
entirely
comparable.

7. Comparative Information
Except when PFRSs permit or require otherwise,
an entity shall disclose comparative information in
respect of the previous period for all amounts
reported in the current periods financial
statements. An entity shall include comparative
information
for
narrative
and
descriptive
information
when
it
is
relevant
to
an
understanding of the current periods financial
statements.
8. Consistency of Presentation
An entity shall retain the presentation and
classification of items in the financial statements
from one period to the next unless:
(a) it is apparent, following a significant change in
the nature of the entitys operations or a
review of its financial statements, that
another presentation or classification would be
more appropriate having regard to the criteria
for the selection and application of accounting
policies in PAS 8; or
(b) aPFRS requires a change in presentation.
STRUCTURE AND CONTENTS OF FINANCIAL
STATEMENTS
The entity shall display the following information
prominently and repeat it when necessary for the
information presented to be understandable
(a) the name of the reporting entity or other
means of identification, and any change in
that information from the end of the preceding
reporting period;
(b) whether the financial statements are of an
individual entity or a group of entities;
(c) the date of the end of the reporting period or
the period covered by the set of financial
statements or notes;
(d) the presentation currency, as defined in PAS
21; and
(e) the level of rounding used in presenting
amounts in the financial statements.
Statement of Financial Position
Information to be presented in the statement of
financial position
As a minimum, the statement of financial
position shall include line items that present
the following amounts:
(a) property, plant and equipment;
(b) investment property;
(c) intangible assets;

(d) financial assets (excluding amounts shown

under (e), (h) and (i));
(e) investments accounted for using the equity
method;
(f) biological assets;
(g) inventories;
(h) trade and other receivables;
(i) cash and cash equivalents;
(j) the total of assets classified as held for sale
and assets included in disposal groups
classified as held for sale in accordance with
PFRS 5 Non-current Assets Held for Sale and
Discontinued Operations;
(k) trade and other payables;
(l) provisions;
(m) financial liabilities (excluding amounts shown
under (k) and (l));
(n) liabilities and assets for current tax, as
defined in PAS 12 Income Taxes;
(o) deferred tax liabilities and deferred tax assets,
as defined in PAS 12;
(p) liabilities included in disposal groups classified
as held for sale in accordance with PFRS 5;
(q) non-controlling interests, presented within
equity; and
(r) issued capital and reserves attributable to
owners of the parent.

(c) it expects to realize the asset within twelve

months after the reporting period; or
(d) the asset is cash or a cash equivalent (as
defined in PAS 7) unless the asset is restricted
from being exchanged or used to settle a
liability for at least twelve months after the
reporting period.

An entity shall present additional line items,

headings and subtotals in the statement of
financial position when such presentation is
relevant to an understanding of the entitys
financial position.

When an entity presents current and non-current

assets, and current and non-current liabilities, as
separate classifications in its statement of
financial position, it shall not classify deferred tax
assets (liabilities) as current assets (liabilities).

An entity makes the judgment about whether to

present additional items separately on the basis of
an assessment of:
(a) the nature and liquidity of assets;
(b) the function of assets within the entity; and
(c) the amounts, nature and timing of liabilities.

This Standard does not prescribe the order or

format in which an entity presents items.

Current/non-current distinction
An entity shall present current and non-current
assets, and current and non-current liabilities, as
separate classifications in its statement of
financial position except when a presentation
based on liquidity provides information that is
reliable and more relevant. When that exception
applies, an entity shall present all assets and
liabilities in order of liquidity.
Current assets
An entity shall classify an asset as current when:
(a) it expects to realize the asset, or intends to
sell or consume it, in its normal operating
cycle;
(b) it holds the asset primarily for the purpose of
trading;

An entity shall classify all other assets as

non-current.
Current liabilities
An entity shall classify a liability as current when:
(a) it expects to settle the liability in its normal
operating cycle;
(b) it holds the liability primarily for the purpose
of trading;
(c) the liability is due to be settled within twelve
months after the reporting period; or
(d) the entity does not have an unconditional
right to defer settlement of the liability for at
least twelve months after the reporting
period.
An entity shall classify all other liabilities as
non-current.

An entity shall disclose, either in the statement of

financial position or in the notes, further
subclassifications of the line items presented,
classified in a manner appropriate to the entitys
operations.
The detail provided in subclassifications depends
on the requirements of PFRSs and on the size,
nature and function of the amounts involved. The
disclosures vary for each item, for example:
(a) items of property, plant and equipment are
disaggregated into classes in accordance with
PAS 16;
(b) receivables are disaggregated into amounts
receivable from trade customers, receivables
from related parties, prepayments and other
amounts;
(c) inventories are disaggregated, in accordance
with PAS 2 Inventories, into classifications
such as merchandise, production supplies,
materials, work in progress and finished
goods;

(d) provisions are disaggregated into provisions

for employee benefits and other items; and
(e) equity capital and reserves are disaggregated
into various classes, such as paid-in capital,
share premium and reserves.
An entity shall disclose the following, either
in the statement of financial position or the
statement of changes in equity, or in the
notes:
(a) for each class of share capital:
(i) the number of shares authorized;
(ii) the number of shares issued and fully
paid, and issued but not fully paid;
(iii) par value per share, or that the shares
have no par value;
(iv) a reconciliation of the number of shares
outstanding at the beginning and at the
end of the period;
(v) the rights, preferences and restrictions
attaching
to
that
class
including
restrictions on the distribution of dividends
and the repayment of capital;
(vi) shares in the entity held by the entity or
by its subsidiaries or associates; and
(vii) shares reserved for issue under options
and contracts for the sale of shares,
including terms and amounts; and
(b) a description of the nature and purpose of
each reserve within equity.
Statement of Comprehensive Income
An entity shall present all items of income
and expense recognized in a period:
(a) in a single statement of comprehensive
income, or
(b) in two statements: a statement displaying
components of profit or loss (separate income
statement) and a second statement beginning
with profit or loss and displaying components
of other comprehensive income (statement of
comprehensive income).
Information to be presented in the statement of
comprehensive income
As
a
minimum,
the
statement
of
comprehensive income shall include line
items that present the following amounts for
the period:
(a) revenue;
(b) finance costs;
(c) share of the profit or loss of associates and
joint ventures accounted for using the equity
method;
(d) tax expense;
(e) a single amount comprising the total of:
(i) the post-tax profit or loss of discontinued
operations and

(ii) the post-tax gain or loss recognized on

the measurement to fair value less costs
to sell or on the disposal of the assets or
disposal
group(s)
constituting
the
discontinued operation;
(f) profit or loss;
(g) each component of other comprehensive
income classified by nature (excluding
amounts in (h));
(h) share of the other comprehensive income of
associates and joint ventures accounted for
using the equity method; and
(i) total comprehensive income.
An entity shall disclose the following items in
the statement of comprehensive income as
allocations of profit or loss for the period:
(j) profit or loss for the period attributable to:
(i) non-controlling interests, and
(ii) owners of the parent.
(k) total comprehensive income for the period
attributable to:
(i) non-controlling interests, and
(ii) owners of the parent.
Other comprehensive income comprises
items of incomeand expense (including
reclassification adjustments) that are not
recognized in profit or loss as required or
permitted by other PFRSs.
Components of the Other Comprehensive Income
(OCI)

revaluation surplus (PAS 16 and PAS 38).

actuarial gains and losses on defined benefit

plans recognized in accordance with of PAS 19
revised.

gains and losses arising from translating the

financial statements of a foreign operation
(PAS 21).

gains and losses on remeasuring available-forsale financial assets (PAS 39).

the effective portion of gains and losses on

hedging instruments in a cash flow hedge
(PAS 39).
NOTE:Amendment to PAS 1 Presentation of
Items of Other Comprehensive Income
(Effective on or after July 1, 2012)

Preserve the amendments made to

PAS 1 in 2007 to require profit or loss
and OCI to be presented together, i.e.
either as a single statement of
comprehensive income or a separate
income statement and a statement of
comprehensive income

Require entities to group items

presented in OCI based on whether
they are potentially reclassifiable to
profit or loss subsequently .
Example:

1. Items that might be

reclassified to profit or
loss in subsequent
periods
2. Items that will not be
reclassified to profit or
loss in subsequent
periods

Require tax associated with items

presented before tax to be shown
separately for each of the two groups
of OCI items (without changing the
option to present items of OCI either
before tax or net of tax).

An entity shall present additional line items,

headings and subtotals in the statement of
comprehensive income and the separate income
statement (if presented), when such presentation
is relevant to an understanding of the entitys
financial performance.
Certain items must be disclosed either on the face
of the statement of comprehensive income or in
the notes, if material, including:

write-downs of inventories to net realizable

value or of property, plant and equipment to
recoverable amount, as well as reversals of
such write-downs

restructurings of the activities of an entity and

reversals of any provisions for the costs of
restructuring

disposals of items of property, plant and

equipment

disposals of investments

discontinuing operations

litigation settlements

other reversals of provisions

An entity shall present an analysis of
expenses recognized in profit or loss using a
classification based on either their nature or
their function within the entity, whichever
provides information that is reliable and
more relevant .
The first form of analysis is the nature of
expense method. An entity aggregates expenses
within profit or loss according to their nature (for
example, depreciation, purchases of materials,

transport costs, employee benefits and advertising

costs).
The second form of analysis is the function of
expense or cost of sales method and classifies
expenses according to their function as part of
cost of sales or, for example, the costs of
distribution or administrative activities. At a
minimum, an entity discloses its cost of sales
under this method separately from other
expenses.
If the entity used the function of expense
method, additional disclosure is required
about the nature of expenses, including
depreciation, amortization and employee
benefits expenses.
An entity shall not present any items of
income or expenses as extraordinary items,
in the statement of comprehensive income,
or the separate income statement (if
presented), or in the notes.
Statement of Changes in Equity
An entity shall present a statement of changes in
equity showing in the statement:
(a) total comprehensive income for the period,
showing
separately
the
total
amounts
attributable to owners of the parent and to
non-controlling interests;
(b) for each component of equity, the effects of
retrospective application or retrospective
restatement recognized in accordance with
PAS 8; and
(c) for each component of equity, a reconciliation
between the carrying amount at the beginning
and the end of the period, separately
disclosing changes resulting from:
(i) profit or loss;
(ii) each item of other comprehensive income:
and
(iii) transactions with owners in their capacity
as
owners,
showing
separately
contributions by and distributions to
owners
and changes
in ownership
interests in subsidiaries that do not result
in a loss of control.
The following must be disclosed either on the face
of the statement of changes in equity or in the
notes:

the amount of dividends recognized as

distributions to equity holders during the
period, and

the related amount per share.

Notes to the Financialstatements/ Notes

Structure
The notes shall:
(a) present information about the basis of
preparation of the financial statements and
the specific accounting policies used;
(b) disclose the information required by PFRSs
that is not presented elsewhere in the
financial statements; and
(c) provide information that is not presented
elsewhere in the financial statements, but is
relevant to an understanding of any of them.
An entity shall, as far as practicable, present
notes in a systematic manner. An entity shall
cross-reference each item in the statements of
financial position and of comprehensive income, in
the separate income statement (if presented), and
in the statements of changes in equity and of cash
flows to any related information in the notes.
An entity normally presents notes in the following
order, to assist users to understand the financial
statements and to compare them with financial
statements of other entities:
(a) statement of compliance with PFRSs
(b) summary of significant accounting policies
applied ;
(c) supporting information for items presented in
the statements of financial position and of
comprehensive income, in the separate
income statement (if presented), and in the
statements of changes in equity and of cash
flows, in the order in which each statement
and each line item is presented; and
(d) other disclosures, including:
(i) contingent liabilities (see PAS 37) and
unrecognized contractual commitments,
and
(ii) non-financial disclosures, eg the entitys
financial risk management objectives and
policies (see PFRS 7).
Financial statements and specific accounting
policies as a separate section of the financial
statements.
Disclosure of accounting policies
An entity shall disclose in the summary of
significant accounting policies:
(a) the measurement basis (or bases) used in
preparing the financial statements, and
(b) the other accounting policies used that are
relevant to an understanding of the financial
statements.

Disclosure of judgments. New in the 2003 revision

to PAS 1, an entity must disclose, in the summary
of significant accounting policies or other notes,
the judgments, apart from those involving
estimations, that management has made in the
process of applying the entity's accounting policies
that have the most significant effect on the
amounts recognized in the financial statements.
Examples include management's judgments in
determining:

whether financial assets are held-to-maturity

investments

when substantially all the significant risks and

rewards of ownership of financial assets and
lease assets are transferred to other entities

whether, in substance, particular sales of

goods are financing arrangements and
therefore do not give rise to revenue; and

whether the substance of the relationship

between the entity and a special purpose
entity indicates that the special purpose entity
is controlled by the entity
Disclosure
of
key
sources
of
estimation
uncertainty. Also new in the 2003 revision to PAS
1, an entity must disclose, in the notes,
information about the key assumptions concerning
the future, and other key sources of estimation
uncertainty at the balance sheet date, that have a
significant risk of causing a material adjustment to
the carrying amounts of assets and liabilities
within the next financial year. These disclosures
do not involve disclosing budgets or forecasts.
The following other note disclosures are required
if not disclosed elsewhere in information published
with the financial statements:

domicile of the enterprise

country of incorporation

address of registered office or principal place

of business

description of the enterprise's operations and

principal activities

name of its parent and the ultimate parent if it

is part of a group
Other Disclosures
Disclosures about Dividends
The following must be disclosed either on the face
of the statement of changes in equity or in the
notes:

the amount of dividends recognized as

distributions to equity holders during the
period, and

the related amount per share.

The following must be disclosed in the notes:

the amount of dividends proposed or declared

before
the
financial
statements
were
authorized for issue but not recognized as a
distribution to equity holders during the
period, and the related amount per share; and
the amount of any cumulative preference
dividends not recognized.

Capital Disclosures
In August 2005, as part of its project to develop
PFRS 7Financial Instruments: Disclosures, the
IASB also amended PAS 1 to add requirements for
disclosures of:

the entity's objectives, policies and

processes for managing capital;

quantitative data about what the entity

regards as capital;

whether the entity has complied with any

capital requirements; and
if it has not complied, the consequences of
such non-compliance.

Disclosures about Puttable Shares and Obligations

Arising Only on Liquidation

summary quantitative data about the amount

classified as equity;

the entity's objectives, policies and processes

for managing its obligation to repurchase or
redeem the instruments;

the expected cash outflow on redemption or

repurchase
of
that class
of financial
instruments; and

information about how the expected cash

outflow on redemption or repurchase was
determined.

- DONE-