COLLEGE OF BUSINESS, MANAGEMENT AND ACCOUNTANCY

INTERMEDIATE ACCOUNTING III

3rd Term, S.Y.2022-2023
HANDOUTS

Presentation of Financial Statements (PAS 1)

Objective
⮚ Prescribe the basis for presentation of general-purpose financial statements, to
ensure comparability both with the entity's financial statements of previous periods and
with the financial statements of other entities.
⮚ Overall framework and responsibilities for the presentation of financial statements. ⮚
Guidelines for their structure and minimum requirements for the content of the financial
statements.
⮚ Standards for recognizing, measuring, and disclosing specific transactions are addressed
in other Standards and Interpretations.

Scope
⮚ Applies to all general purpose financial statements that are based on Philippine Financial
Reporting Standards.
⮚ 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.

Purpose of Financial Statements

The objective of general-purpose 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. To meet that objective, financial statements
provide information about an entity's:

∙ Assets.
∙ Liabilities.
∙ Equity.
∙ Income and expenses, including gains and losses.
∙ Other changes in equity.
∙ Cash flows.

That information, along with other information in the notes, assists users of financial statements
in predicting the entity's future cash flows and, in particular, their timing and certainty.

Components of Financial Statements - A complete set of financial statements comprises:

1) A statement of financial position as at the end of the period
2) A statement of comprehensive income for the period
3) A statement of changes in equity for the period
4) A statement of cash flows for the period
5) Notes, comprising a summary of significant accounting policies and other
explanatory information
6) 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

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retrospective restatement of items in its financial statements, or when it reclassifies
items in its financial statements.

Overall Considerations for Statement Presentation

Fair Presentation and Compliance with PFRSs

The financial statements must "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.

PAS 1 requires that an entity whose financial statements comply with PFRSs make an explicit
and unreserved statement of such compliance in the notes. Financial statements shall not
be described as complying with PFRSs unless they comply with all the requirements of PFRSs.

Inappropriate accounting policies are not rectified either by disclosure of the accounting
policies used or by notes or explanatory material.

PAS 1 acknowledges that, in extremely rare circumstances, management may conclude that
compliance with a PFRS requirement would be so misleading that it would conflict with the
objective of financial statements set out in the Framework. In such a case, the entity is required
to depart from the PFRS requirement, with detailed disclosure of the nature, reasons, and
impact of the departure.

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.

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.

Consistency of Presentation

The presentation and classification of items in the financial statements shall be retained from
one period to the next unless a change is justified either by a change in circumstances or a
requirement of a new PFRS.

Materiality and Aggregation

Each material class of similar items must be presented separately in the financial statements.
Dissimilar items may be aggregated only if they are individually immaterial.

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Offsetting

Assets and liabilities, and income and expenses, may not be offset unless required or
permitted by a Standard or an Interpretation.

Comparative Information

PAS 1 requires that comparative information shall be disclosed in respect of the previous period
for all amounts reported in the financial statements, both face of financial statements and notes,
unless another Standard requires otherwise. If comparative amounts are changed or
reclassified, various disclosures are required.

Frequency of Reporting

There is a presumption that financial statements will be prepared at least annually. If the
annual reporting period changes and financial statements are prepared for a different period,
the enterprise must disclose the reason for the change and a warning about problems of
comparability.

Statement of Financial Position

Current/Noncurrent Distinction

An entity must normally present a classified statement of financial position, separating current
and noncurrent assets and liabilities. Only if a presentation based on liquidity provides
information that is reliable and more relevant may the current/noncurrent split be omitted.

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
(c) It expects to realize the asset within twelve months after the reporting period (d) The
asset is cash or a cash equivalent (as defined in IAS 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 classify all other assets as non-current.

Normal Operating Cycle – The time between the acquisition of assets for processing and their
realization cash or cash equivalents. When the entity’s normal operating cycle is not clearly
identifiable, its duration is assumed to be twelve months.
Current liabilities

An entity shall classify a liability as current when:

(a) It expects to settle the liability in its normal operating cycle

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(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 (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.

Issues on Refinancing

∙ An entity classifies its financial liabilities as current when they are due to be settled within
twelve months after the end of the reporting period, even if:

a. The original term was for a period longer than twelve months; and

b. The intention is supported by an agreement to refinance, or reschedule the payments,

on a long-term basis is completed after the end of the reporting period and completed
before the financial statements are authorized for issue.

∙ If the entity has the discretion to refinance, or to roll over the obligation for at least twelve
months after the end of the reporting period under an existing loan facility, it classifies the
obligation as non-current, even if it would be due within a shorter period.

Breach of a Loan Covenant

∙ If a liability has become payable on demand because an entity has breached an undertaking
under a long-term loan agreement on or before the end of the reporting period, the
liability is current, even if the lender has agreed, after the end of the reporting
period and before the authorization of the financial statements for issue,
not to demand payment as a consequence of the breach. However, the liability is
classified as non-current if the lender agreed by the end of the reporting period to
provide a period of grace ending at least 12 months after the end of the reporting period,
within which the entity can rectify the breach and during which the lender cannot demand
immediate repayment.

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). Components of
Comprehensive Income

1. Profit and Loss - Income minus Expenses including Tax expense and any Income or
Loss from Discontinued Operations.

2. Other Comprehensive income – Items of income and expenses including reclassification

adjustments (RA) that are not included in Profit and Loss as required by a standard or
interpretation. There are two types of OCI items, those that are reclassified to profit or

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loss (RA), and those that are reclassified to Retained Earnings (RE). OCI includes the
following

∙ Unrealized gain or loss on equity investments measured at FVOCI (RE) ∙

Unrealized gain or loss on debt investments measured at FVOCI (RA) ∙ Unrealized
gain or loss from derivative contracts designated as cash flow hedge (RA)
∙ Revaluation Surplus (RE)
∙ Remeasurement Gains and losses for defined benefit plans (RE)
∙ Change in fair value arising from credit risk for financial liabilities measured at FVPL
(RE)
∙ Translation gains and losses of foreign operations

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
(h) Share of the other comprehensive income of associates and joint ventures accounted for
using the equity method
(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:
 (a) Profit or loss for the period attributable to:
(i) Minority interest, and
(ii) Owners of the parent.

(b) Total comprehensive income for the period attributable to:

(i) Minority interest, and
(ii) Owners of the parent.

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∙ An entity shall present either an analysis of expenses using a classification based on either
the nature of expenses or their function within the entity, whichever provides
information that is reliable and more relevant.

a. Nature of expense method – Expenses are aggregated in the income statement

according to their nature and are not reallocated among various functions within the
entity.

Revenue X Other income X Changes in inventories of finished goods and

work in
progress X
Raw materials and consumables used X
Employee benefit costs X
Depreciation and amortization X
Other expense X
Total expense (X) Profit X

b. Function of expense or cost of sales method – Classifies expenses according to

their function as part of cost of sales or, for example, the cost of distribution or
administrative activities.

Revenue X Cost of sales (X) Gross profit X Other income X Distribution costs (X)
Administrative expenses (X) Other expenses (X) Income before tax X Income tax
expense (X) Net income X

∙ An entity shall not present any items of income and expense as extraordinary items,
either on the face of the income statement 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 minority interest
(b) For each component of equity, the effects of retrospective application or retrospective
restatement recognized in accordance with PAS 8
(c) The amounts of transactions with owners in their capacity as owners, showing
 separately contributions by and distributions to owners

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(d) For each component of equity, reconciliation between the carrying amount at the
beginning and the end of the period, separately disclosing each change.

An entity shall present, either in the statement of changes in equity or in the notes, the amount
of dividends recognized as distributions to owners during the period, and the related amount per
share.

Statement of Cash Flows

Cash flow information provides users of financial statements with a basis to assess the ability of
the entity to generate cash and cash equivalents and the needs of the entity to utilize those
cash flows.

Notes to the Financial Statements

The notes must:

a. Present information about the basis of preparation of the financial statements and the
specific accounting policies used;
b. Disclose any information required by PFRSs that is not presented on the face of the
statement of financial position, income statement, statement of changes in equity, or
statement of cash flows
c. Provide additional information that is not presented on the face of the statement of
financial position, income statement, statement of changes in equity, or statement of
cash flows that is deemed relevant to an understanding of any of them.

Notes should be cross-referenced from the face of the financial statements to the relevant note.
The notes should normally be presented in the following order:

a. A statement of compliance with PFRSs

b. A summary of significant accounting policies applied, including:

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.

c. Supporting information for items presented on the face of the statement of financial
position, income statement, statement of changes in equity, and statement of ash flows,
in the order in which each statement and each line item is presented.

d. Other disclosures, including:

a. Contingent liabilities and unrecognized contractual commitments

b. Non-financial disclosures, such as the entity's financial risk management objectives
 and policies.

Disclosure of judgments - an entity must disclose, in the summary of significant accounting

policies or other notes, the judgments, apart from those involving estimations, that management

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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.
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