MODULE 2

PAS 7, PAS 8 and PAS 10

Learning Objectives:

1. Describe the Statement of Cash Flows

2. Know the classification in presenting Statement of Cash Flows.
3. Define and state examples of Change in accounting Policy, Change in Accounting Estimate and Errors
4. Define Events after the reporting period.
5. State the accounting requirements for events after the reporting period.

Chapter reference:

Conceptual Framework and Accounting Standards by Zeus Vernon B. Millan

Chapter 5 – PAS 7: Statement of Cash Flows

Chapter 6 – PAS 8: Accounting Policies, Changes in Accounting Estimates and Errors
Chapter 7 – PAS 10: Events after the reporting period
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PAS 7: Statement of Cash Flows

Objectives

The objective of PAS 7 is to require the presentation of information about the historical changes in cash and cash
equivalents of an entity by means of a statement of cash flows, which classifies cash flows during the period
according to operating, investing, and financing activities.

Statement of Cash Flows helps users assess the following:

a. the ability of the entity to generate cash and cash equivalents,

b. the timing and certainty of the generation of cash flows, and
c. the needs of the entity to utilize those cash flows.

Classification of Cash Flows

Statement of Cash Flows presents cash flows according to the following classifications:

a. Operating activities
b. Investing activities
c. Financing activities

Operating activities - this affect profit or loss

Investing activities - this affect non-current assets and other investments
Financing activities - this affect barrowings and equity

Note:

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 • interest and dividends received and paid may be classified as operating, investing or financing cash flows,
provided they classified consistently from period to period.
Cash flows Oprtion 1 Option 2
1. Interest income received Operating activity Investing activity
2 Interest expense paid Operating activity Financing activity
3. Dividend income received Operating activity Investing activity
4. Dividend income paid Financing activity Operating activity
• cash flows arising from taxes on income are normally classified as operating, unless they can be specifically
identified with financing or investing activities.
• for operating cash flows, the direct method of presentation is encouraged, but the indirect method is
acceptable.

Presentation of Cash Flows

Cash flows from operating activities may be presented using either:

1. Direct Method – shows each major class of gross cash receipts and gross cash payments.
2. Indirect Method – profit or loss is adjusted for the effects of non-cash items and changes in operating assets
and liabilities.
Direct Method Indirect Method
COMPANY X COMPANY X
STATEMENT OF CASH FLOWS STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2019 AS OF DECEMBER 31, 2019

CASH FLOWS FROM OPERATING ACTIVITIES CASH FLOWS FROM OPERATING ACTIVITIES
Cash receipts from customers XX Income before income tax XX
Cash paid to suppliers Adjustments for:
Cash paid to employees XX Interest expense XX
Cash paid for operating expenses XX Depreciation XX
Cash generared from operations XX Retirement benefit expense XX
Income taxes paid (XX) Interest income XX
Interest received XX Operating income before working capital changes XX
Net cash flows provided by operating activities XX Increase in:
Trade receivables XX
Merchandise inventories XX
Decrease in trade and other payables XX
Net cash generated from operations XX
Income taxes paid (XX)
Interest received XX
Net cash flows provided by operating activities XX

Disclosures:

PAS 7 requires an entity to disclose the components of cash and cash equivalents and to present a reconciliation of
the amounts in its statement of cash flows with the equivalent items reported in the statement of financial position.

PAS 8: Accounting Policies, Changes in Accounting Estimates and Errors

ACCOUNTING POLICIES

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UPLOADING, OR POSTING ONLINE IN ANY FORM OR BY ANY MEANS WITHOUT THE WRITTEN PERMISSION OF THE UNIVERSITY IS
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Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in
preparing and presenting financial statements.

• An entity shall select and apply its accounting policies consistently for similar transactions, other events and
conditions, unless a Standard or an Interpretation specifically requires or permits categorization of items for
which different policies may be appropriate.
• If a Standard or an Interpretation requires or permits such categorization, an appropriate accounting policy shall
be selected and applied consistently to each category.

Change in Accounting Policy – A change from one acceptable accounting policy to another acceptable accounting
policy. If the change is from an unacceptable accounting policy it shall be treated as a correction of an error.

• Cases or circumstances to change accounting policy:

a. Is required by a standard or interpretation; or

b. Results in the financial statements providing reliable and more relevant information about the effects of
transactions, other events or conditions on the entity's financial position, financial performance, or cash flows.
c. Note that changes in accounting policies do not include applying an accounting policy to a kind of transaction or
event that did not exist in the past. Neither is a change from a accounting principle that is not acceptable to one
that is acceptable a change in accounting policy.

• Treatment of Changes in Accounting Policies

By applying the transitional provision if the change is either required by a standard or interpretation or
Retrospective Application

Retrospective application means adjusting the opening balance of each affected component of equity for the earliest
prior period presented and the other comparative amounts disclosed for each prior period presented as if the new
accounting policy had always been applied.

• However, if it is impracticable to determine either the period, specific effects or the cumulative effect of the
change for one or more prior periods presented, the entity shall apply the new accounting policy to the
carrying amounts of assets and liabilities as at the beginning of the earliest period for which retrospective
application is practicable, which may be the current period, and shall make a corresponding adjustment to
the opening balance of each affected component of equity for that period.
• Also, if it is impracticable to determine the cumulative effect, at the beginning of the current period, of
applying a new accounting policy to all prior periods, the entity shall adjust the comparative information to
apply the new accounting policy prospectively from the earliest date practicable.

CHANGES IN ACCOUNTING ESTIMATES

• A change in accounting estimate is an adjustment of the carrying amount of an asset or liability, or related
expense, resulting from reassessing the expected future benefits and obligations associated with that asset
or liability.

THIS MODULE IS FOR THE EXCLUSIVE USE OF THE UNIVERSITY OF LA SALETTE, INC. ANY FORM OF REPRODUCTION, DISTRIBUTION,
UPLOADING, OR POSTING ONLINE IN ANY FORM OR BY ANY MEANS WITHOUT THE WRITTEN PERMISSION OF THE UNIVERSITY IS
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 • Accounting estimates result from uncertainties inherent in business activities that many items cannot be
measured with accuracy but can only be estimated. Examples of which are bad debts rate, factors used in
computing for depreciation and warranty obligations.
• Changes in accounting estimates are normal and recurring changes that is necessary if changes occur in the
circumstances on which the estimate was based or as a result of new information or more experience.
• The effect of a change in an accounting estimate shall be recognized prospectively by including it in profit
or loss in:

• The period of the change, if the change affects that period only; or
• The period of the change and future periods, if the change affects both.
• However, to the extent that a change in an accounting estimate gives rise to changes in assets and liabilities,
or relates to an item of equity, it is recognized by adjusting the carrying amount of the related asset, liability,
or equity item in the period of the change.
• When it is difficult to distinguish the change is in accounting policy from a change in accounting estimate,
the change is treated as a change in accounting estimate.

ERRORS

• Prior period errors are omissions from, and misstatements in, an entity's financial statements for one or
more prior periods arising from a failure to use, or misuse of, reliable information that was
available and could reasonably be expected to have been obtained and taken into account in
preparing those statements. Such errors result from mathematical mistakes, mistakes in applying
accounting policies, oversights or misinterpretations of facts, and fraud.
• The general principle in PAS 8 is that an entity must correct all material prior period errors retrospectively
in the first set of financial statements authorized for issue after their discovery by:

• Restating the comparative amounts for the prior period(s) presented in which the error
occurred; or

• If the error occurred before the earliest prior period presented, restating the opening
balances of assets, liabilities and equity for the earliest prior period presented.

• However, if it is impracticable to determine the period-specific effects of an error on

comparative information for one or more prior periods presented, the entity must restate the
opening balances of assets, liabilities, and equity for the earliest period for which
retrospective restatement is practicable (which may be the current period).

• Further, if it is impracticable to determine the cumulative effect, at the beginning of the

current period, of an error on all prior periods, the entity must restate the comparative
information to correct the error prospectively from the earliest date practicable.

THIS MODULE IS FOR THE EXCLUSIVE USE OF THE UNIVERSITY OF LA SALETTE, INC. ANY FORM OF REPRODUCTION, DISTRIBUTION,
UPLOADING, OR POSTING ONLINE IN ANY FORM OR BY ANY MEANS WITHOUT THE WRITTEN PERMISSION OF THE UNIVERSITY IS
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 Disclosures Relating to Prior Period Errors

• Disclosures relating to prior period errors include:

• The nature of the prior period error

• For each prior period presented, to the extent practicable, the amount of the correction:
• For each financial statement line item affected
• For basic and diluted earnings per share (only if the entity is applying PAS 33)
• The amount of the correction at the beginning of the earliest prior period presented
• If retrospective restatement is impracticable, an explanation and description of how the error
has been corrected.

• Financial statements of subsequent periods need not repeat these disclosures.

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PAS 10: Events after the reporting period

Events after the reporting period: An event, which could be favorable or unfavorable, that occurs between the
reporting period and the date that the financial statements are authorized for issue.

Adjusting event: An event after the reporting period that provides further evidence of conditions that existed at
the end of the reporting period, including an event that indicates that the going concern assumption in relation to
the whole or part of the enterprise is not appropriate.

Non-adjusting event: An event after the reporting period that is indicative of a condition that arose after the
reporting period.
Adjusting event Non-adjusting event
Examples: Examples:
-Events that indicate that the going concern assumption in relation
to the whole or part of the entity is not appropriate -Major business combinations or disposal of a subsidiary
-Settlement after reporting date of court cases that confirm the -Major purchase or disposal of assets, classification of assets as
entity had a present obligation at reporting date held for sale or expropriation of major assets by government
-Bankruptcy of a customer that occurs after reporting date that -Destruction of a major production plant by fire after reporting
confirms a loss existed at reporting date on trade receivables date
-Sales of inventories after reporting date that give evidence about
their net realisable value at reporting date -Announcing a plan to discontinue operations
-Determination after reporting date of cost of assets purchased or
proceeds from assets sold, before reporting date -Announcing a major restructuring after reporting date
-Discovery of fraud or errors that show the financial statements are
incorrect. -Major ordinary share transactions
-Abnormal large changes after the reporting period in assets prices
or foreign exchange rates
-changes in tax rates or tax law
-Entering into major commitments such as guarantees -
Commencing major litigation arising solely out of events that
occurred after the reporting period.

THIS MODULE IS FOR THE EXCLUSIVE USE OF THE UNIVERSITY OF LA SALETTE, INC. ANY FORM OF REPRODUCTION, DISTRIBUTION,
UPLOADING, OR POSTING ONLINE IN ANY FORM OR BY ANY MEANS WITHOUT THE WRITTEN PERMISSION OF THE UNIVERSITY IS
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Accounting

• Adjust financial statements for adjusting events – events after the reporting period that provide further
evidence of conditions that existed at the end of the reporting period, including events that indicate that
the going concern assumption in relation to the whole or part of the enterprise is not appropriate.
• Do not adjust for non-adjusting events – events or conditions that arose after the reporting period.
• If an entity declares dividends after the reporting period, the entity shall not recognize those dividends as
a liability at the reporting period. That is a non-adjusting event.

Going Concern Issues Arising After Reporting period

An entity shall not prepare its financial statements on a going concern basis if management determines after the
reporting period either that it intends to liquidate the entity or to cease trading, or that it has no realistic
alternative but to do so.

Disclosure

• Non-adjusting events should be disclosed if they are of such importance that non-disclosure would affect
the ability of users to make proper evaluations and decisions. The required disclosure is (a) the nature of
the event and (b) an estimate of its financial effect or a statement that a reasonable estimate of the effect
cannot be made.
• A company should update disclosures that relate to conditions that existed at the reporting period to
reflect any new information that it receives after the reporting period about those conditions.
• Companies must disclose the date when the financial statements were authorized for issue and who gave
that authorization. If the enterprise's owners or others have the power to amend the financial statements
after issuance, the enterprise must disclose that fact.

-END-

THIS MODULE IS FOR THE EXCLUSIVE USE OF THE UNIVERSITY OF LA SALETTE, INC. ANY FORM OF REPRODUCTION, DISTRIBUTION,
UPLOADING, OR POSTING ONLINE IN ANY FORM OR BY ANY MEANS WITHOUT THE WRITTEN PERMISSION OF THE UNIVERSITY IS
STRICTLY PROHIBITED.
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THIS MODULE IS FOR THE EXCLUSIVE USE OF THE UNIVERSITY OF LA SALETTE, INC. ANY FORM OF REPRODUCTION, DISTRIBUTION,
UPLOADING, OR POSTING ONLINE IN ANY FORM OR BY ANY MEANS WITHOUT THE WRITTEN PERMISSION OF THE UNIVERSITY IS
STRICTLY PROHIBITED.
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THIS MODULE IS FOR THE EXCLUSIVE USE OF THE UNIVERSITY OF LA SALETTE, INC. ANY FORM OF REPRODUCTION, DISTRIBUTION,
UPLOADING, OR POSTING ONLINE IN ANY FORM OR BY ANY MEANS WITHOUT THE WRITTEN PERMISSION OF THE UNIVERSITY IS
STRICTLY PROHIBITED.
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