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CA5106 - An “income statement” is different from

a “statement of profit or loss and other
Conceptual Framework and comprehensive income” or a “statement
of comprehensive income”
Conceptual Standards
- Statement of comprehensive income
Quiz 2 presents the financial performance of an
entity for the reporting period. It is an
expanded form of income statement
Chapter 3 - Basis for the Presentation of the because it encompasses profit or loss and
Financial Statements other comprehensive income
- Useful in assessing the:
International Accounting Standard 1 (a) ability to generate cash and the
Presentation of Financial Statements (b) potential changes in economic
- prescribes the basis for presentation of resources
general purpose financial statements to 3. Statement of changes in equity for the
ensure comparability both with the period
entity’s financial statements of previous - Presents the summarized transactions
periods and with the financial statements affecting the balances of equity accounts,
of other entities. such as:
- sets out overall requirements for the (a) profits or loss,
presentation of financial statements, (b) other comprehensive income,
guidelines for structure and minimum (c) contributions from owners,
content requirements and
(d) distributions to owners
★ Components of Financial Statements 4. Statement of cash flows for the period
(5T) - Presents information on the inflows and
1. Statement of financial position as at the end outflows of cash and cash equivalents
of the period during the reporting period
- Presents information on the balances of - Useful in assessing an entity’s:
assets, liabilities, and equity at the end of (a) ability to remain solvent and
the reporting period. (b) provide returns to investor and
- Useful in assessing the: creditors
(a) economic resources that an 5. Notes, comprising material accounting
entity controls, its policy information and other explanatory
(b) financial structure, its information
(c) liquidity and solvency, and its - The section “Notes to Financial
(d) capacity to adapt to changes Statements” presents relevant
2. Statement of profit or loss and other information pertaining to the entity's
comprehensive income for the period
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activities that cannot be presented on the (e) practices applied by an entity in
face of financial statements. preparing and presenting financial
Include a: statements
(a) description of the basis of the - The management shall apply the specific
presentation of financial requirements of the Philippine Financial
statements and a Reporting Standards or Interpretation
(b) summary of significant that specifically applies to a
accounting policies, (a) transaction,
(c) information required by the (b) other events, or
PFRS or IFRS that is not (c) conditions.
presented on the face of financial In the absence of an IFRS:
statements, and (a) management shall use its
(d) additional information that will judgment in developing and
help the users better understand applying an accounting policy
★ Requirements for an additional that results in information that is
Statement of Financial Position (3T) relevant and reliable.
6. Statement of financial position as at the In making the judgement:
beginning of the preceding period when an - management shall refer to and consider the
entity: applicability of the following sources in
- applies an accounting policy descending order:
retrospectively, or (a) requirements in IFRSs dealing
- makes a retrospective restatement of with similar and related issues;
items in its financial statements, or and
- when it reclassifies items in its financial (b) definitions, recognition criteria
statements in accordance with paragraphs and measurement concepts for
40A–40D of IAS 1 assets, liabilities, income and
In such a case, there shall be six components of a expenses in the Conceptual
complete set of financial statements. This Framework for Financial
requirement achieves the objective of Reporting
comparability.
★ General Features for the Presentation
★ Accounting Policies (4T) of Financial Statements (12T)
IAS 8 Accounting Policies, Changes in 1. Fair Presentation and Compliance with
Accounting Estimates and Errors IFRS/PFRS
- Defines accounting policies as the - Financial statements shall present fairly
(a) specific principles, the financial position, financial
(b) bases, performance and cash flows of an entity.
(c) conventions, - Fair presentation requires the faithful
(d) rules, and representation
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- The application of IFRSs, with additional (c) the title of the IFRS from which
disclosure when necessary, is presumed to the entity has departed, the
result in financial statements that achieve a nature of the departure,
fair presentation. including the treatment that the
- An entity who complies with IFRSs must IFRS would require, the reason
include an explicit and unreserved for departure clarifying why that
statement of such compliance in the notes treatment conflicts the
Fair presentation requires an entity to Conceptual Framework, and the
(paragraph 17, IAS 8): treatment adopted
(a) to select accounting policies based on (d) for each period presented, the
PAS/IAS 8 observing the hierarchy of financial effect of the
authoritative guidance that management departure on each item
considers in the absence of an IFRS When an entity is prohibited of
(b) to present information, including departure from IFRS, it shall disclose:
accounting policies, in a manner that (a) the title of the IFRS in question,
provides relevant, reliable, comparable the nature of the requirement,
and understandable information. including the treatment that the
(c) to provide additional disclosures when IFRS would require, the reason
compliance with the specific requirements clarifying why that treatment
in IFRSs is insufficient conflicts the Conceptual
- An entity cannot rectify inappropriate Framework
accounting policies either by disclosure of (b) for each period presented, the
the accounting policies used or by notes or adjustments that management
explanatory material. has concluded would be necessary
- In rare cases that management conclude 2. Going Concern
compliance with a requirement in an IFRS - An entity shall prepare financial statements
would be so misleading, the entity shall on a going concern basis unless
depart from that requirement to achieve a management either intends to liquidate
fair presentation, if otherwise not the entity or to cease trading, or has no
prohibited realistic alternative but to do so.
When an entity departs from a requirement of When an entity does not prepare financial
an IFRS, it shall disclose: statements on a going concern basis, it shall
(a) that management has concluded disclose:
that the financial statements (a) the fact that the financial
present fairly statements are not prepared on a
(b) that it has complied with going concern basis
applicable IFRSs, except that it (b) the basis of preparation
has departed
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(c) the reason why the enterprise is - IFRS 15, Revenue from Contracts with
not considered to be a going Customers provides a framework for
concern recognizing revenue
- In assesssment of going concern basis, 4. Materiality and Aggregation
management takes into account - Each material item should be presented
information which is at least, but is not separately
limited to, twelve months from the end - Immaterial amounts of similar nature
of the reporting period. should be aggregated into one line item
- When an entity has a history of - Information is material if its
profitable operations and ready access non-disclosure would influence the
to financial resources, no detailed decision of the user.
analysis is necessary. - Materiality is considered a threshold for
3. Accrual Basis recognition as it depends on the size and
- An entity shall prepare its financial nature.
statements, except for cash flow - Aggregation and classification process
information, using the accrual basis of involves presenting condensed and
accounting. classified information
Three expense recognition principles: 5. Offsetting
(a) associating cost and effect - Offsetting means deducting one item
(b) systematic and rational from another of different nature and
allocation presenting only the net
(c) immediate recognition - An entity shall not offset assets and
Expenses are recognized based on: liabilities or income and expenses unless
(a) direct matching or associating required or permitted by an IFRS.
cause and effect e.g. cost of - Thus, deferred tax assets are set off against
goods sold, salesmen’s the deferred tax liabilities, if they arise from
commission, and warranty deferred taxes imposed by (based on IAS
expense 12 Income Taxes):
(b) systematic and rational (a) only one taxing authority and
allocation e.g. depreciation (b) they are expected to reverse
expense, amortization of simultaneously
intangibles, rent expense, and - Offsetting is allowed and applied when
insurance expense presenting on the net basis reflects the
(c) immediate recognition e.g. substance of the transaction or other
advertising, research, and events, say, netting any income with related
organization costs expense on the same transaction.
- applies revenue recognition principles 6. Frequency of Reporting
- An entity shall present a complete set of
financial statements (including
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comparative information) at least (a) The nature of the reclassification
annually. (b) The amount of each item or class
When an entity changes the end of its of items that is reclassified
reporting period, it shall disclose: (c) The reason for the reclassification
(a) the reason for using a longer or When it is impracticable to reclassify, an entity
shorter period, and shall disclose:
(b) the fact that amounts presented (a) the reason for not reclassifying
in the financial statements are not the amounts, and
entirely comparable. (b) the nature of the adjustments
- Reporting annually does not prevent the that would have been made
enterprise from presenting interim 8. Consistency of Preparation
financial statements, which cover a period Entity shall retain the presentation and
shorter than one year (based on IAS 34 classification of items unless:
Interim Financial Reporting) (a) another presentation or
7. Comparative Information classification would be more
- Comparative information shall be appropriate, or
disclosed in respect of the preceding period (b) an IFRS requires a change in
except when IFRSs permit otherwise presentation
- An entity shall include comparative - If the presentation is changed,
narrative and descriptive information comparative financial statements for the
if it is relevant prior period shall be re-presented unless it
- An entity shall present, as a minimum, is impracticable to do so
two sets of all components of financial
statements. ★ Identification of Financial Statements
- if a retrospective adjustments has a (3T)
material effect on its information, three - Since financial statements are published
statement of financial position shall be together with the entity’s annual reports, it
presented , namely as at shall be identified clearly and
(a) the end of the current period, distinguished from other information
(b) the end of the immediately An entity shall be display the following
prior period, and information prominently and repeatedly:
(c) the beginning of the preceding (a) the name of the reporting entity
period or other means of
Retrospective adjustments: identification, and any change in
(a) change in accounting policy that information
(b) correction of prior period error/s (b) whether the financial statements
(c) reclassification or amendment of are of an individual entity or a
items group of entities;
When an entity reclassifies, it shall disclose:
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(c) the date of the end of the It is transferred to the:
reporting period or the period (a) equity account balances in the
covered statement of financial position
(d) the presentation currency, and 2.2 Statement of Cash Flows
(e) the level of rounding used in - Presents information on cash flows,
presenting amounts which is defined as the inflows and
outflows of cash and cash equivalents
★ Fundamentally Related Financial Are classified as:
Statements (5T) (a) Operating cash flow activities
- The financial statements are that are involved in the
fundamentally related because they determination of profit. These
relate to the effects of the same sets of include (1) inflows from sales
transactions. and (2) outflows for its
1. Statement of Comprehensive Income expenses
- Generally the first financial statement (b) Investing cash flow activities
reported by an entity generally affect non-current
- The profit is the net effect of income and assets. These include (1) inflows
expenses presented from the disposal of
It is transferred to the: non-current assets and (2)
(a) appropriate equity account in outflows from the
the statement of changes in enhancement of non-current
equity assets
- Likewise, the holding or unrealized gains (c) Financing cash flow activities
and losses that are expected to reverse are are those that arise from
presented as other comprehensive income transactions with non-trade
It is transferred to the: lenders as well as owners of the
(a) cumulative other entity. These include (1) inflows
comprehensive income in the from borrowings and
statement of changes in equity additional contributions from
2.1 Statement of Changes in Equity owners and (2) outflows for
- Also presents other changes in equity not payments and distribution to
arising from financial performance, such as owners
contributions and distributions to the - The net change is reflected in the net cash
owners flows of cash and cash equivalents, which
- Presents the changes in each major equity transition the beginning balance to the
component during the reporting period ending balance.
and reconciles the beginning equity It is transferred to the:
component balances with the ending
equity component balances
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(a) final figure of cash and cash (d) contribution to deterioration of
equivalents in the statement of environment
financial position - Nevertheless, financial statements may be
3. Statement of financial position used to estimate the firm’s value
- Presents the activities affecting its
elements in relation to a reporting entity’s ★ Sustainability of Reporting (3T)
financial performance, its cash flow - The sustainability reports provides the
activities, and other activities that involve entity’s stakeholders with an overview of
equity accounts its economic, environmental, and social
- Comprehensively presents the balances of (ESG) impacts.
assets, liabilities, and equity at the end - Due to this requirement, entities may
of the reporting period resulting from all increase their levels of accountability and
the entity’s activities transparency in response to the demands
★ Limitations of Financial Statements of stakeholders.
(4T) Securities and Exhange Commission (SEC)
- The actual worth of the business is not Memorandum Circular (MC) No. 4 Series of
reflected in the financial statements 2019:
because of: (a) mandates publicly listed entities
(a) different measurement bases, to report their sustainability
this is true when non-current practices and measure their
operating assets are measured at outcomes
cost model (b) provided a "comply or explain"
(b) different levels of purchasing template for the first set of
power, if such assets were mandated sustainability reports
acquired at different dates starting in 2019
reflecting mixture of pesos (c) gave entities the option to
- Due to some measurement choose their own sustainability
uncertainties, some elements are not reporting framework to follow
recognized. Only transactions capable of - In November 2021, the IFRS
financial measurement and have met the Foundation created the separate
recognition criteria can be reflected International Sustainability Standards Board
Information reported nowhere in the financial (ISSB):
statements includes: (a) tasked to develop reporting
(a) morale and efficiency of the standards that will result in
employees high-quality, in the public
(b) business’s strategic location interest, comprehensive global
(c) superior quality of products and baseline of sustainability
services disclosures
- In September 8, 2022, the
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Professional Regulatory Board of Accountancy - development and regulation of the
(PRBOA): corporate and capital market toward;
(a) renamed the Financial Reporting (a) good corporate governance,
Standards Council (FRSC) to (b) protection of investors,
Financial Sustainability (c) widest participation of
Reporting Standards Council ownership, and
(FSRSC) (d) democratization of wealth
(b) decided to adopt the IFRS Republic Act 8799 or Securities Regulation
Sustainability Standards that Code (SRC):
may be later implemented by ISSB (a) reemphasizes the requirement
- Currently, this sustainability report for companies to submit an
requirement applies only to publicly annual report, together with
listed entities financial statements, certified by
- However, even non-publicly listed an independent CPA
entities have to apply the - Unlike Conceptual Framework, SRC
triple-bottom-line concept that gives Rule 68 is a law and is anchored to PFRS
equal impiortance to people, the planet, It provides general guides to:
and profit (a) financial statement preparation
(b) responsibility for financial
★ Securities and Exchange Commission statements
(3T) (c) qualifications and reports of
- is a national government regulatory agency independent auditors and
charged with the supervision of the (d) review of the auditor’s quality
corporate sector. assurance processes
- given that shareholders are allowed to trade
equity interest without the consent of ★ Classification of Reporting Entities
others, its main purpose is to protect based on Applicable Philippine
investors by imposing some reportorial Financial Reporting Frameworks (4T)
regulations on corporations - Note that there are several reporting
- realizes enterprises may have transactions frameworks that govern the presentation
ranging from simple to more complex of the entities’ financial statements (not
- is cognizant of the fact that financial just full PFRS or IFRS)
stament presentations may be modified SRC Rule 68, reporting entities are classified:
to suit the varying needs 1. Large and/or publicly accountable
Original function: entities are those that meet ANY of the
- regulating the sale and registration of following criteria:
securities. - Quantitative threshold: total
Broaden function: assets of more than P350
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million or total liabilities of more purpose of issuing any class of
than 250 million instruments in a public market
- are required to file financial - are NOT holders of secondary
statements under Part II of SRC licenses issued by regulatory
Rule 68 agencies
- are in the process of filing their 3. Small entities are those that meet ALL of
financial statements for the the following criteria:
purpose of issuing any class of - Quantitative threshold: total
instruments in a public market assets of between P3 million
- are holders of secondary and 100 million or liabilities of
licenses issued by regulatory more than P3 million and
agencies P100 million
- Such other corporations that the SEC may - are NOT required to file financial
consider in the future as imbued with statements under Part II of SRC
public interest, regardless of the lack of a Rule 68
requirement to obtain a secondary license - are NOT in the process of filing
from the SEC , may fall under the their financial statements for the
following criteria: purpose of issuing any class of
(a) Grantees of legislative franchises; instruments in a public market
(b) Engaged in nationalized or partly - are NOT holders of secondary
nationalized activities; licenses issued by regulatory
(c) Grantees or recipients of public agencies
funds; 4. Micro entities are those that meet ALL of
(d) Regulated by other government the following criteria:
agencies other than BSP or IC. - Quantitative threshold: total
2. Medium-sized entities are those that assets and total liabilities of less
meet ALL of the following criteria: than P3 million
- Quantitative threshold: total - are NOT required to file financial
assets of more than P100 statements under Part II of SRC
million to 350 million or Rule 68
liabilities of more than P100 to - are NOT in the process of filing
P250 million (for a parent their financial statements for the
reporting entity, the amounts are purpose of issuing any class of
based on consolidated figures) instruments in a public market
- are NOT required to file financial - are NOT holders of secondary
statements under Part II of SRC licenses issued by regulatory
Rule 68 agencies
- are NOT in the process of filing - An entity cannot voluntarily choose
their financial statements for the among the different financial reporting
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frameworks. It shall use the framework (a) Full PFRS/IFRS
assigned to it based on its classification. (b) PFRSs for Small and
Medium-Sized Entities (SMEs)
(c) PFRSs for Small-Sized Entities
(SSEs)
(d) Income tax reporting/basis
Holders of secondary licences issued by
regulatory agencies that apply the
requirements of their respective regulatory
bodies:
(a) Bangko Sentral ng Pilipinas (BSP)
Small-sized and medium-sized entities under for banks and other non-bank
PFRSs for SMEs financial institutions
Additionally, PFRSs for SMEs identify (b) Insurance Commission (IC) for
small and medium-sized entities as life and non-life insurance
entities that: companies.
(a) do not have public accountability; - If a small-sized entity has foreign
and operations, it is not allowed to use the
(b) publish general purpose financial PFRSs for SSEs.
statements for external users. - Full PFRSs and PFRSs for SMEs have
An entity has public accountability if: international counterparts
(a) its debt or equity instruments are Classes of entities:
traded in a public market or it Large and/or publicly-accountable entities
is in the process of issuing such - shall prepare their financial statements
instruments for trading in a public applying the Full PFRS/IFRS
market; or Medium-sized entities
(b) it holds assets in a fiduciary - may use the full PFRS/IFRS or
capacity for a broad group of PFRS/IFRS for SMEs in any of the
outsiders as one of its primary following circumstances (SEC MC No. 5,
businesses (most banks, credit 2018):
unions, insurance companies, (a) The MSE is a subsidiary of a
securities brokers/dealers, mutual parent company reporting under
funds, and investment banks Full IFRS/PFRS
would meet this second criterion). (b) The MSE is a subsidiary of a
foreign parent company which
★ Applicability of Philippine Financial will be moving towards Full
Reporting Frameworks (4T) PFRS/ IFRS
Different financial reporting frameworks in (c) The MSE is a significant joint
the Philippines: venture or associate of a group
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that is reporting under Full (b) The SSE is a subsidiary of a
IFRS/PFRS foreign parent company which
(d) The MSE is a branch office or will be moving towards full
regional operating headquarter PFRS/IFRS or PFRS/IFRS for
of a foreign company reporting SMEs
under the full IFRSs; (c) The SSE is a significant joint
(e) The MSE has a subsidiary that venture or associate of a group
is mandated to report under that is reporting underfull
Full IFRS/PFRS PFRS/IFRS or PFRS/IFRS for
(f ) The MSE has a short-term SMEs;
projection that shows that it will (d) The SSE is a branch office or
breach the quantitative thresholds regional operating headquarter
set in the criteria for an MSE. The of a foreign company reporting
breach shall be considered as full PFRS/IFRS or PFRS/IFRS
"significant and continuing", for SMEs;
which is assumed to be 20% or (e) The SSE has a short-term
more of the consolidated total projection that shows that it will
assets or total liabilities; breach the quantitative thresholds
(g) The MSE has a concrete plan to set in the criteria for an SSE. The
conduct an initial public offering breach shall be considered as
within the next two years; "significant and continuing",
(h) The MSE has been preparing which is assumed to be 20% or
financial statements using full more of the consolidated total
PFRSs and has decided to assets or total liabilities;
liquidate. (f ) The SSE has a concrete plan to
(i) And other entities that the SEC conduct an initial public offering
may consider valid exceptions within the next two years;
from mandatory adoption of (g) The SSE has been preparing
PFRS for SMEs. financial statements using full
Small-sized entities PFRSs or PFRSs for SMEs and
- may use either the full PFRSs or PFRSs for has decided to liquidate.
SMEs, PFRSs for SSEs, in any of the (h) And other entities that the SEC
following circumstances (SEC MC No. 5, may consider valid exceptions
2018): from mandatory adoption of
(a) The SSE is a subsidiary of a PFRS for SSEs.
parent company reporting under Micro entities
full PFRS/IFRS or PFRS/IFRS - have the only option to use either the
for SMEs income tax basis or PFRSs for SSEs as
their financial reporting framework.
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- However, its financial statements shall Large/PAE Medium- Small - Micro -
cover two-year comparative periods and sized sized entities
consist of the following, at the minimum: (MSE) (SSE)
(a) Statement of Management
Full PFRS/ PFRSs for PFRSs PFRSs for
Responsibility (SMR) IFRS SMEs for SEs SEs or
(b) Auditor's Report Income
(c) Statement of financial position tax basis

(d) Statement of Income

(e) Notes to Financial Statements
Exceptions to the applicable financial
reporting framework:
- The SEC allows an entity may use a more
complex financial reporting framework
but not a less complex framework in
preparation of its financial statements, for
instance:
(a) A medium-sized entity may use
either (1) PFRSs for SMEs or (2)
full PFRS but not PFRSs for
SEs or the income tax basis.
(b) A small-sized entity may use
either the (1) PFRSs for SSEs,
(2) PFRSs for SMEs, or (3) full
PFRSs but not the income tax
basis.
(c) A large entity/PAE shall use only
the full PFRSs. It is not allowed
to use the other reporting
frameworks since full PFRSs is
already the most complex
framework.
- The entities that apply the allowed
exception shall include a discussion in its
notes to financial statements of the facts
supporting its adoption of the other
allowed financial reporting framework.
Assigning Financial Reporting Frameworks to
each class of entity: