Presentation and Disclosure

• This section talks about how companies communicate financial information to their
stakeholders (like investors).
• They do this by preparing financial statements that show their assets, liabilities, income, and
expenses.
• Clear and concise communication is important to make the information understandable and
useful.
• Duplicate information should be avoided as it can make the statements confusing.
Classification
• This section explains how companies categorize/sort their assets, liabilities, equity, income, and
expenses.
• They group similar items together to make the information easier to understand.
• For example, assets can be classified as current (short-term) or noncurrent (long-term).
• Components of equity (like share capital) should be classified separately if they have different
legal or regulatory requirements.
Classification of Income and Expenses
• This section focuses on how companies classify income and expenses.
• They are generally classified as components of profit or loss, or as components of other
comprehensive income.
• The statement of profit or loss is the main document that shows how much profit or loss a
company has made.
• Some items of income and expenses may be reported separately in other comprehensive
income.
Aggregation
• This section talks about how companies combine similar items to make the information more
concise.
• For example, they might add up all the assets that have similar characteristics.
• Aggregation is useful for summarizing large amounts of data, but it's important to ensure that
important details are not lost.
Capital Maintenance
• This section explains how companies measure their financial performance.
• There are two main approaches: the transaction approach and the capital maintenance
approach.
• The transaction approach focuses on the traditional income statement.
• The capital maintenance approach considers how much capital a company has retained after
paying out dividends and other expenses.
Financial Capital
• This section explains the concept of financial capital.
• Financial capital is the monetary value of a company's net assets.
• It includes the amount invested by shareholders and the retained earnings.
• Financial capital is the most common approach used by companies.
Physical Capital
• This section explains the concept of physical capital.
• Physical capital refers to the productive capacity of a company's assets, such as its machinery
and equipment.
• It is measured in terms of current cost, which reflects the cost of replacing the assets.
• Physical capital is important for companies that focus on their operating capability.
Net Income Under Financial Capital
 • This section explains how net income is calculated under the financial capital concept.
• Net income occurs when the value of a company's net assets at the end of the year exceeds the
value at the beginning, after accounting for dividends and other distributions.
Illustration
• This section provides an example of how to calculate net income under the financial capital
concept.
Physical Capital Illustration
• This section provides an example of how to calculate net income under the physical capital
concept.
Chapter 9
Financial Statements
• Financial statements are like reports that companies create to show their financial performance
and position.
• They are prepared according to specific accounting standards.
• These statements are used by different people, including investors, creditors, and the general
public.
General Purpose Financial Statements
• These are the most common type of financial statements.
• They are designed to be useful to a wide range of users, not just specific groups.
• They provide information about a company's assets, liabilities, equity, income, expenses, and
cash flows.
Objective of Financial Statements
• The main goal of financial statements is to provide useful information to help people make
informed decisions about a company.
• They should be clear, accurate, and relevant.
• They should also show how well the company's management is using its resources.
Components of Financial Statements
• A complete set of financial statements includes several key components:
o Statement of Financial Position: This shows a company's assets, liabilities, and equity at
a specific point in time. It's like a snapshot of the company's financial health.
o Income Statement: This shows a company's revenues and expenses over a period of
time, such as a year. It tells you how much profit or loss the company made.
o Statement of Comprehensive Income: This is similar to the income statement but
includes additional items that affect a company's equity.
o Statement of Changes in Equity: This shows how a company's equity has changed over
a period of time. It includes things like profits, losses, and dividends paid to
shareholders.
o Statement of Cash Flows: This shows how much cash a company has generated and
used during a period of time. It helps you understand how the company is managing its
cash flow.
o Notes: These provide additional information about the financial statements, such as
accounting policies and explanations of specific items.
Frequency of Reporting
• Companies are generally required to prepare financial statements at least once a year.
• If a company changes its reporting period, it needs to explain the change and how it affects the
financial statements
Statement of Financial Position
 • This statement provides a summary of a company's financial position, showing its assets,
liabilities, and equity.
• It helps investors, creditors, and other users assess a company's liquidity (ability to pay short-
term debts), solvency (ability to pay long-term debts), and financing needs.

Definition of Asset
• An asset is something a company owns that has value and can be used to generate future
economic benefits.
• It's something the company controls, and it's the result of a past event.
Classification of Assets
• Assets are categorized into two main groups: current assets and noncurrent assets.
Current Assets
• These are assets that are expected to be used up or converted into cash within a year.
• Examples include cash, accounts receivable (money owed by customers), and inventory (goods
available for sale).
Noncurrent Assets
• These are assets that are expected to be used for more than a year.
• Examples include property, plant, and equipment (PPE), intangible assets (like patents), and
long-term investments.
Presentation of Current Assets
• Current assets are usually listed in the order of liquidity, meaning how easily they can be
converted into cash.
• This helps investors understand how quickly a company can access cash if needed.
Property, Plant, and Equipment (PPE)
• PPE are tangible assets that are used in a company's operations.
• They are typically recorded at their cost less accumulated depreciation (the decline in value over
time).
• Examples include buildings, machinery, vehicles, and furniture.
Key Takeaways
• Understanding the different types of assets is important for analyzing a company's financial
health.
• Current assets provide information about a company's short-term liquidity, while noncurrent
assets provide information about its long-term investment and operating capacity.
• The way assets are classified and presented in financial statements can provide valuable insights
into a company's financial position and future prospects.
Long-Term Investments
• These are investments that a company holds for a period longer than one year.
• They are typically investments in other companies, such as stocks or bonds.
Intangible Assets
• These are assets that have value but don't have a physical form.
• Examples include patents, copyrights, trademarks, and goodwill (the value of a company's
reputation and customer relationships).
Other Noncurrent Assets
• These are assets that don't fit into the categories of long-term investments or intangible assets.
• Examples include long-term advances to employees, abandoned property, and long-term
refundable deposits.
Definition of Liability
• A liability is an obligation that a company has to pay something to someone else in the future.
 • It's a result of a past event.
Current Liabilities
• These are liabilities that are expected to be paid within one year.
• Examples include accounts payable (money owed to suppliers), salaries payable, and short-term
loans.
Noncurrent Liabilities
• These are liabilities that are expected to be paid after one year.
• Examples include long-term debt, deferred tax liabilities, and long-term deferred revenue.
Key Takeaways
• Understanding the different types of assets and liabilities is important for analyzing a company's
financial health.
• Noncurrent assets and liabilities provide information about a company's long-term investment
and financing strategies.
• Current assets and liabilities provide information about a company's short-term liquidity and
ability to meet its obligations.
Currently Maturing Long-Term Debt
• Short-Term Classification: If a long-term debt is due to be paid within 12 months of the
reporting period, it's classified as a current liability, even if the original term was longer.
• Refinancing: If a company refinances or reschedules a long-term debt payment before the end
of the reporting period, the debt is still considered current.
• Noncurrent Classification: However, if the refinancing happens after the reporting period, the
debt is classified as noncurrent.
Discretion to Refinance
• Conditional Classification: If a company has the option to refinance or roll over a debt within 12
months after the reporting period, the debt is considered noncurrent, even if it would otherwise
be due within a shorter period.
• Reasoning: This treatment is based on the idea that the company has an unconditional right to
refinance under the existing loan agreement.
Covenants
• Restrictions: Covenants are conditions attached to borrowing agreements that restrict the
borrower's actions, such as taking on further debt, paying dividends, or maintaining a certain
level of working capital.
• Demand Payment: If a company breaches a covenant, the lender may demand immediate
payment of the debt.
Effect of Breach of Covenants
• Current Liability: If a covenant is breached, the debt is classified as current, even if the lender
agrees to a grace period.
• Noncurrent Liability: However, if the lender agrees to a grace period that extends beyond the
reporting period, the debt is classified as noncurrent.
Definition of Equity
• Residual Interest: Equity represents the owners' stake in a company after all liabilities are paid
off.
• Net Assets: It's calculated as total assets minus total liabilities.
Types of Equity
• Proprietorship: In a single-owner business, it's the owner's equity.
• Partnership: In a partnership, it's the partners' combined equity.
• Corporation: In a corporation, it's called shareholders' equity.
Shareholders' Equity
 • Residual Interest: It represents the shareholders' claim on the company's assets after liabilities
are paid.
• Excess of Assets over Liabilities: It's calculated by subtracting total liabilities from total assets.
Elements of Shareholders' Equity
• Common Stock: Represents the basic ownership shares in a company.
• Preferred Stock: A type of stock that has priority over common stock in terms of dividends and
asset distribution.
• Retained Earnings: Profits that have been accumulated and not distributed to shareholders.
• Treasury Stock: Shares that a company has repurchased from the market.
Notes to Financial Statements
• Additional Information: Notes provide detailed explanations and disclosures that aren't
included in the main financial statements.
• Enhance Understanding: They help users understand the financial statements better.
Forms of Statement of Financial Position
• Report Form: Presents assets, liabilities, and equity in a downward sequence.
• Account Form: Presents assets on the left side and liabilities and equity on the right side, similar
to an accounting equation.
Key Takeaways
• Equity represents the owners' stake in a company.
• It's a crucial component of financial statements, providing insights into the company's financial
health and ownership structure.
• Notes to financial statements provide additional information that enhances understanding.
• The statement of financial position can be presented in different formats, but the underlying
information remains the same.

Line Items in a Statement of Financial Position

• Assets:
o Cash and cash equivalents
o Financial assets (other than those related to investments in associates)
o Trade and other receivables
o Inventories
o Property, plant, and equipment
o Investments in associates (using the equity method)
o Intangible assets
o Investment property
o Biological assets
o Total of assets classified as held for sale and assets included in disposal groups classified
as held for sale
• Liabilities:
o Trade and other payables
o Current tax liability and deferred tax liability
o Deferred tax asset
o Provisions
o Financial liabilities (other than those related to investments in associates)
o Liabilities included in disposal groups classified as held for sale
o Noncontrolling interest
o Share capital and reserves
Presentation Order
 • In the Philippines, the common practice is to present assets before liabilities and equity after
liabilities.
• However, other formats are equally appropriate as long as the distinction is clear.
• The standard doesn't prescribe a specific order for presenting the items.
International Comparison
• The document notes that the format of the statement of financial position may vary in different
jurisdictions.
• For example, in the United Kingdom, noncurrent assets are presented before current assets,
equity before liabilities, and noncurrent liabilities before current liabilities.
Key Takeaways
• The statement of financial position provides a comprehensive overview of a company's assets,
liabilities, and equity.
• The specific line items included in the statement may vary depending on the industry and the
company's specific circumstances.
• The presentation order of the items can be flexible, but it's important to ensure clarity and
consistency.