CHAPTER a. CONCEPTUAL FRAMEWORK Presentation and disclosure Concepts of capital WLEDGE TECHNICAL To hnow the guideline in the presentation and disclosure of financial information, To understand presentation and disclosure as an effective communication tool. To define the two concepts of eapital. To determine net income under the financial capital and physical capital concept. 16 PRESENTATION AND DISCLOSURE ‘The presentation and diselonure can bo an effective communication tool about the information in financial statements ‘Areporting entity communicates information about ita assets, ities, equity, income and expenaes by presenting and feslosing information in the financial statement. Effetivecommunication of information in nancial waterenta ‘nals the information more relevant and contributes to 0 [eit repreeition ofan entity as abies, ice and expenses. Effective communication of information in financial statements aloo enhances the understandability and ‘Comparability of information in the financial statements _Bfective communication in financial statamenta is supported ty not duplicating information in different parte of the financial statements Duplication is usually unnecessary and can make financial statements Jess understandable, Classification Classification is the sorting of assets, liabilit income and expenses on the basie of ehared or similar characteristic, Understandabiity and comp faithful epreventation of financial information, For example, it could be appropriate to clissify an asset ora Ubabity int current and noncurrent It may be necessary to classify components of equity cparately if such eompononts are subject to legel, regulatory tnd other requirements, ‘Thus, ordinary share capital, proference share capital, share premiuig and retained earnings should be dislosed Separately. 187ind expenses fied e8 COMPORENES Of proj hensive income. Classification of neo re ds acome and expense a Tesrand cmgoncnt of “The Revised Conceptual Framer atement of financial pee tprotia lose together Comprebensive income: ronan as introduced thet oo refer t0 the stateman atement Presenting other Ta totem! of rl nae erormance ie aera ee. ‘isco and expnser shold be SPP prehensive income are ified €0 profit oF lose or ‘The components of other co fubsequentiy recycled or rel fetained earnings Aggregation “Aggregation ie the adding together of assets, liabilities, sag, income and expenses that have similar or shared ‘characteristics and are included inthe same classifieation, Aggrogation makes information more useful by summarizing flange volume of deta: However, agregstion may conceal ome of the det ence, balance shouldbe made s that relevent information ‘snot obscured either by large amount of insignificent deta or by exeeatve aggregtion, Typically, the statement of financial position and the statement of nancial performance provide # Sttgment of ancl performance provide ummoried or More dts information provided inthe notes to financial 138 CAPITAL MAINTENANCE ‘The foal performance of an entity is determined using to approaches, namely transaction approach ond eoptat smaintenance gpproach ‘The transaction approach is the traditional preparation of ‘The capital maintenance approach means that not income cocura only after the capital used from the beginning ofthe period is maintained, In other words, net income is the amount an entity can. distribute tite owners and be an "well-of" at the end ofthe year ae atthe beginning. ‘The distinction between return of eapital and return on capital is imporant tothe understanding of mot income. ‘Shareholder invest in enlity to earn a return on capital or an fount in exces oftheir orignal investment, Return of capital is an erosion of the capital invested in the nts ‘The Conceptual Framework considered two concepts of capital maintenance or well-ofnees, namely inanciol capital fand physical capital Financial capital Under & fnabcial capital concep, such as invested money or Snwested purchasing power, capital is «ynonymous with net ‘sects or equity of the entity. Financial capital is the monetary amount of the net assots contributed by shareholders andthe amount ofthe inrease in ‘et aacets resulting from earnings retained by the entity. Financial eapital isthe traditional eoncept based on historical cost and adopted by most entities 19srnancial capital cept et S900 OE yy ‘ner teins POC sts a the eno he yet {he aominal amount ofA pee nt assets at te being e.cirthenomnl Nt ting distributions tp of Fhe ped a re Stebations Net income unde Mustration eva union and BEF FBANCEA gy, The following ain ta the current 38% January! Decembersy 1,800,000 250, ree 17000,000 1.200. ‘el westmentedring DE ‘0c. Bees ure = doo. Computation of net income Net asete- Decomber Bt ‘Add Dividend paid Totat Tet: Net aasete- January 1 ‘Asdiconal investments ot income [Note thet the amount of yt ose over the total Lables cssets approach. 0 Physical capital Physical capital isthe quantitative measure ofthe physical productive capacity to prado gods nnd sores. ‘gpl produv capacity may be tna on, fr xr tials of ouipe pr day or pkgs capac of prouciv anes roc pla ander ~ ‘This conept requires that productive ante be measured at ‘current cost, rather than Rstorcal cost Productive assets include inventories anv pres=-ty ole! equipment. ‘The current conte for these productive assets must be rtintined in order that phyecal capital i also maintained. Accordingly, capital is equal to the net assets ofthe entity exprescd interme of curren cost ‘The physical concept of eapital shouldbe adopted ifthe main ‘he operating capability of the entity, teaning, che resource or fund needed to achieve that perating capability or capaci nar een OC a peng re tearm eny s eet re eee Samelacace cron ete ogame pe Ee Mlustration ‘Assume in the previously given illustration, the net assets ‘of P500,000 on January 1 had a current cost of P800,000 by reason of inflationary condition, i Netasets-Desember 31 1,800,000, \Ae:Divdanda paid ‘00,000 Tosa 1,600,000, fast: Netanetestourremtcst, January 1 £00,000 ‘Additonal investments 00,000 1,200,000 Netincme ‘400,000 aanQUESTION ain and none 88 Tc, 1 Bepteuneation to 7 veigensin a sets ils And ea, 2 Esplin Regn ion of neo 3. Explain classifi 4 What is ageresation? 5. aplain capital maintensn é;Dintnguish return on capital and eters of expt 1. Explain financial expt 3 Explein the not income ua coneopt vier the financial eapitg ‘9 Explain physical capital to.Esplain the net income under the physical capita concept. ue PROBLEMS: Problem 7-1 Multiple choice (Conceptual Framework) 1. The presentation and disclonure requirement achieves all of the folowing, except ‘a. An effective communication too! tb More relevant and fuithtully represented financiat Underttandebility and comparability of information Financial position, nancial performance and cash ftowe " a 2.Itis the sorting of asvot,lisbiltes, equity, income and coxpenses with similar 2. Classfiation Summerization Interpretation 4 Recognition Al of the following can considered appropriate Classification, except ‘2 Current and noncursent sesets b. Curent and toncurrent lsbilties © Ordinary share capital and preference share capital 4. Offsetting aset and Liability 4. Income and expenses ate classified at Profit or loss and other comprehensive income Profit les and retained earnings ‘etained earnings and cther comprehensive income Ordinary and extreordinary pore 65. What in the new term ta describe the statement of profit or loss together with the statement showing other ‘comprehensive income. ‘a, Income statement 1. Statement of profit or lose © Statement of other comprehensive income 4. Statement of financial performance a3rice Conceptual FFA ; et cd Seng gs T ett om Legal epi and oustanding Sane al maintenance coment FOALS Uh phase capt met bai? 2 Topi of which messes Historia cot © Gatrent cost © Fairvalue Prec value 4. Which concent it 97 Comprehensive inst Finance capital © Papua cata © Lega epi &. Betrowed capital 4. Which statement raring the tm profit is true? ny arian over and above that roquied to Pe coal ete beiang ofthe pcid. 1 Rettisequ wings imi pence 2 FEB sequent fot nome under IFRS. Abul ar stewie to mt the erm pro pplied to net income end other 6. Under the fnancil capital concep, net income occurs when 4 The nominal amount of net assets at year-end increased, ', The physical productive capital at year-end inereased fle xing ey dnbtons to and contributions © The nominal smount of net assets at year-end increased after excluding distributions to and ‘contributions from owners, 4. The physical productive capital at yenr-end increased 144 CHAPTER 8 PRESENTATION OF FINANCIAL STATEMENTS Statement of financial position PAS 1 TECHNICAL KNOWLEDGE To identify the components of financial statements. ‘Torunderstond the objective of financial stotements To know the preparation of statement of financial position. To identify the minimum line items to be presented in o Statement of financial psition as required by TERS. ‘To underetand the current and noncurrent classification of facets and Habilitien. ‘To know the forme of presenting the statement of financial position. 145s FINANCIAL STATEMENT st ancial OCCOURting proce the ues oe voted ama 1 EMT Fe ort eae tne cat PENCE py anil sat Tas fname atest P= mac pa pono nua rats an purpose financial ae = an present oer puoi Ss “t ceernational Faare, sments General ‘Standards nents or simply referred to ‘General pupote Sunil statements o, simply refer sent ao those intended to meet the needy eae te ono rene an en fir particular information In other words, general purpose financial statements are , Propaid taxss Trading securities 4 Cash surrender value of life insurance policy Current assets should never include a. A receivmble not colletble within one year 1D. Current tax arse. Goodwill arising in a business combination 4. Premium paid on bond investment Bguity investments held to finance constevetion of suditional plant should be elaseiod as Current asets 1b Property, plant, and equipment © Intangible assets 4 Noncurrent investments Which ofthe following is not a noncurrent investment? 1. Cash surrender value of lit insurance policy bb Franchise Land held for speelation @. Asinking fund 15spe choice GAA) problem 610 Mettple 1. For intity spate 2 Teena ky og & megetyaaneeenso™ 5 fyut Be ROO quan to pay ensh inthe Futur, a Tove ve so er t cau gman eommitmente when dye & ue St rr tt oy a malate a sea ton aie rom pan event Js the term lability? 2. Wie ‘An exoss of ea suse seroi ae 2 rt nh i Ronse 44 Noneurrent liabilities include Bonds payable 1 Shore term ebligation rfinanced on a long'term basis atthe end of reporting period Deferred tax liability 4. All of these are noncurrent liabilities 1 ih niin he een big? fixed annual salary a » Kaen pneu ia he are frst pon a an Aft lt ts wenn act 16 Problem 8-11 Multiple choice (IAA) 1. The etatement of financial position aweful or analyzing all ofthe following, except a. Liquidity b. Solvency ©. Profitability 4. Financial flexibility 2. The statement of financial position is useful forall of the following, exeept "To compute rate of return ‘To analyze cash inflows and outflows forthe period ‘To evaluate capital structure ‘To ancore future cash Hows ‘8, What is one criticism not normally aimed a of financial postion? statement Failure to reflect current value information "Tho extansive use of separate cassifiations ‘An extensive use of estimate Failure to include itome of nancial value that cannot ‘be recorded objectively 4. The statement of Ginansial postion Omits mang items thet are of nancial value ‘Makes very limited use of judgment and estimate ‘Unes fair vale for moet asnate and Nabilies Al ofthe choices are correct 65. Which i a limitation ofa statement of financial positon? ‘. Many items that aze of financial value are omitted. 1 Judgment and estimate are used ©. Current fair value fe not reported All of these are a limitation of the ‘nancial postion tement of