INTERMEDIATE

ACCOUNTING III

BY: ROSAIFA H. RADI, CPA

 LESSON 1:

FINANCIAL
STATEMENTS AND
NOTES
Objectives: By the end of this lesson, the students will be able to:
• Identify the components of the financial statements
• Understand the primary responsibility of the
management for the preparation of financial
statements
• Identify the general features of the financial
statements and the representation of each feature
• Discuss the relevance of each of the features to the
users of the financial statements.
• Identify related parties.
• Identify the types of events after reporting period.
 FINANCIAL Financial statements are the means by which the
financial information accumulated and processed in
STATEMENTS financial accounting is periodically communicated to the
users.
• portrays the financial effects of transactions and other
events by grouping them into broad classes according
to their economic characteristics
• refers to the quantitative information reported in
the statement of financial position and income
statement
• usually prepared at least annually
 General General Purpose Financial statements are those
statements intended to meet the needs of users who are

Purpose not in a position to require an entity to prepare reports

tailored to their particular information need.

Financial What is not considered a general purpose financial

statement?
Statements • Reports that are often structured in accordance to the
specific requirements of an entity’s management or
bankers or other financial institutions that may not
necessarily be in the standard format as prescribed
under the PFRS.
• A report prepared at the request of an entity’s
management for the purpose of specifically meeting
the needs of the management
Components of 1. Statement of Financial Position

the Financial 2. Income Statement

3. Statement of Comprehensive Income
Statements 4. Statement of Changes in Equity
5. Statement of cash flows
6. Notes, comprising a summary of significant
accounting policies and other explanatory
information
Objective of • PROVIDE INFORMATION about the
financial position, financial performance and
Financial cash flows of an entity that is useful to a wide
range of users to assist them in making
Statements economic decisions relevant to the continued
of the business (going concern).
• Show the results of the stewardship of management
of the resources entrusted to it.
• Project/forecast the entity’s sustainability in terms of
its cash flow particularly the timing and certainty of
inflows (receipts) and outflows (disbursements).
Do the financial
statements provide
all information
that users may
need to make
economic
decisions?
Do the financial NO.
statements provide
all information
that users may The financial statements
need to make portray the financial effects of
economic
past events and do not
decisions?
necessarily provide
nonfinancial information.
FINANCIAL • Providing financial information about an entity to
external users that is useful to them in making
REPORTING economic decisions and for assessing the effectiveness
of the entity’s management.
• The primary way of providing financial information to
external users is through the annual financial
statements.
• Financial reporting however encompasses not only
the basic (6) financial statements but also other
means of communicating information that relates
directly or indirectly to the financial accounting
process.
FINANCIAL • Financial Highlights
REPORTING • Summary of Important Financial
Figures
• Analysis of Financial Statements and
Significant Ratios
Target Users of Primary users are the parties to whom general purpose
FS are primarily directed because they have the most
Financial critical and immediate need for information in financial
Reporting reports.
• Existing and Prospective/ Potential Investors
• Lenders
• Creditors
Other Users:
• Employees
• Government & Regulatory Agencies
• Public
 Overall • To provide financial information about the reporting
entity that is useful to existing & potential investors,
Objective of lenders and other creditors in making decisions

Financial about providing resources to the entity.

Reporting under 1. The output of financial reporting is the issuance of

the Conceptual financial statements.

Framework of 2. The ultimate objective of financial reporting is to

assist the users by providing financial information
Financial that is useful and relevant in making an economic

Reporting decision.
 Specific a. To provide information useful in making economic
decisions about providing resources to the entity.
Objective of • Investors - Whether to buy, sell or hold investment
Financial • Lenders/Creditors – Whether to provide or settle loans

Reporting under & other forms of credit

b. To provide information useful in assessing the
the Conceptual prospects of future net cash flows for the entity.

Framework of • Investors – Return on investment & distribution of

dividends
Financial • Lenders/Creditors – Receipt of settlement/ payment of
Reporting loans/credit both principal & interest when due
 Specific c. To provide information about the entity’s economic
resources, claims & changes in resources and claims.
Objective of
Financial
Reporting under
the Conceptual
Framework of
Financial
Reporting
 Limitations of Financial Reporting
1. FINANCIAL INFORMATION
Not all information required by users can be provided by general purpose financial
reports in making economic decision.
Economic decisions may consider other factors such as general economic
conditions, political events and industry outlook

2. COMMON INFORMATION
General purpose financial reports are intended to provide common information and
cannot accommodate every request of information

3. ESTIMATE AND JUDGMENT

General purpose financial reports are based on estimate and judgment rather than exact
depiction.
 Who is responsible over the financial statements?

The management of an entity has the primary responsibility for the preparation and
presentation of the financial statements. Management is accountable as well for the
safekeeping of the resources and their proper, efficient and profitable use.

The board of directors is tasked to review, approve and authorize the issuance of the
financial statement before these are submitted and presented to shareholders of
the entity in a stockholders meeting as well as the submission to regulatory
bodies/agencies.

Shareholders are interested in information that helps them assess how effectively
management has fulfilled this role as this is relevant to the decision concerning their
investment and the reappointment or replacement of management.
 Conceptual What is the conceptual framework of financial reporting?
• Conceptual framework of financial reporting refers to
Framework of the terms and concepts that underlie the preparation
Financial and presentation of financial statements to external
users.
Reporting • This comprises basically the qualitative
characteristics of financial statements.
Why is the conceptual framework important in financial
reporting?
• Because the conceptual framework provides an overall
theoretical foundation for accounting in constructing
and generating the general purpose financial
statements.
 Qualitative 1. Fair presentation

Characteristics of 2. Going concern

Financial 3. Accrual basis

4. Materiality and aggregation
Information 5. Offsetting
6. Frequency of reporting
7. Comparative information (Comparability as a
Qualitative Characteristic of Financial Information)
8. Consistency of presentation
9. Identification of financial statements (Title, Labeling
and Other Relevant Information, Relevant the
Identification of the Financial Statement)
Fair Presentation
When can a financial statement be considered as fairly presented?

When the FS reflect a relevant and faithful representation of the

effects of transactions and other events in accordance with the
definitions and recognition criteria for assets, liabilities, income and
expenses as laid down in the conceptual framework.
How can fair presentation be achieved?

Fair presentation is usually achieved when the FS comply with and are
prepared in accordance to the Philippine financial reporting standards
(PFRS) which represents the GAAP in the Philippines through:
a. Selection and application of the appropriate accounting policies
b. Presentation of information, including accounting policies, in a
manner that provides relevant and faithfully represented financial
information.
c. Provision of additional disclosure necessary for the users to
understand the entity’s FS.
Fair Presentation
When can an entity deviate from complying with the standard?

An entity is permitted to depart from a standard on the following circumstances:

a. In extremely rare circumstances

b. When management concludes that compliance with the standard would be misleading

c. When the departure from the standard is necessary to achieve fair presentation

d. When the regulatory conceptual framework requires or otherwise does not

prohibit such departure.
Fair Presentation
What are the requirements for disclosure requirements when deviating from
the
standard?
A. The management has concluded that the FS present fairly the financial
position, financial performance and cash flows of the entity.

B. That the entity has complied with applicable standards except that it has
departed from a particular requirement to achieve a fair presentation.

C. The title of the standard from which the entity has departed, the nature of the
departure, including the treatment that the standard would require, the reason
why that treatment would be so misleading and the treatment adopted.

D. For each period presented, the financial impact of the department on each
item in the FS that would have been reported in complying with the
requirement.
Going Concern
Also known as the continuity assumption means that the accounting entity is viewed as
continuing in operation indefinitely in the absence of evidence to the contrary.

What is the accounting assumption for going concern?

Financial statements are prepared normally on the assumption that the entity shall
continue with its operation indefinitely for the foreseeable future.

Foundation of the cost principle where:

Assets are normally recorded at cost and as a rule market values are ignored.
*The new PAS/PFRS however may require measurement of certain assets at fair
value.
Going Concern
When does going concern become relevant to a business entity?
This is relevant particularly when management shall make an estimate of the
expected outcome of future events.

When is the going concern assumption set aside or abandoned?

-When business entity is to be terminated hence cash basis is followed.
-When the business intends to liquidate the entity or cease trading or has not realistic
option but to do so.

What is the primary consideration when applying the going concern in the preparation of
financial statements?
Assessment of the applicability of going concern shall consider available information
that may affect the future which should be at least twelve months from the end of
the reporting period.
Accrual Basis
When is this feature applied in financial reporting?
The accrual basis feature of accounting is applied in preparing the financial
statements except for cash flow information.

How does accrual accounting work?

Under the accrual basis, the effects of transactions and other events are recognized
when they occur and not as cash or cash equivalent is received or paid, and they are
recorded and reported in the financial statements of the periods to which they relate.

What is the advantage of adopting the accrual basis of accounting to decision making?
Financial performance when measured in accordance with accrual basis of
accounting provides a better basis for assessing past and future performance than
information solely about cash receipts and payments during a period.
Accrual Basis
How is accrual basis of accounting applied in accountable transactions?

You recognize Income when earned regardless of when received.

Expense is recognized when incurred regardless of when paid.
Assets are recognized when receivable rather than when physically received.
Liabilities are recognized payable rather than when actually paid.

What is the effect of accrual accounting to accountable transactions?

Applying the accrual accounting basis recognizes the accounts receivable, accounts
payable, prepaid expenses, accrued expenses, deferred income and accrued income.
Materiality and Aggregation
What does materiality and aggregation refer to?

Refer to the process by which large number of transactions or other events that have
been combined and accumulated are classified and presented in the financial statements
into classes according to their nature or function.

How is this process of aggregation applied in accounting?

1. The entity shall determine separately each material class of similar items in the
financial statements.
2. The entity shall present as well separately items of dissimilar nature or
function unless they are immaterial.
3. The final stage in the process is the presentation of the condensed and classified data
which form line items in the financial statements.
Materiality and Aggregation
How is concept materiality applied in accounting?

Materiality is applied when the nature and/or size in terms of amount involving a
transaction become a major consideration e.g. omission or misstatement, etc. that
will influence the outcome of an economic decision of informed users of financial
statements.
Ex. small expenditures for tools are often expensed immediately rather than recognized
as asset and depreciated over their useful life

Factors of materiality as a guide for good judgment, professional expertise and

common sense:
A. RELATIVE SIZE OF THE ITEM IN RELATION TO THE TOTAL GROUP to which the
item belongs.
B. NATURE OF THE ITEM – an item maybe be inherently material because by its very
nature is affects economic decision
Materiality and Aggregation
Materiality of an item depends on the relative size rather than absolute size.

• “What is material for one entity may be immaterial for another.”

• For example, an error of P100,000 in the financial statement of an airline
company with billion pesos worth of assets may not be important but may be so
for a sari-sari store or small trading business entity.

Materiality dictates that “an entity need not provide a specific disclosure required by
PFRS if the information is not material”.
Offsetting
General Rule: Assets & liabilities and income & expenses, when material, shall not be
offset against each other.

Exception: Only when it is required or permitted by another PFRS.

What are examples of offsetting transactions?

A. Gains and losses on disposal of noncurrent assets
B. Expenditures related to a provision and reimbursed under a contractual arrangement
with a third party may be netted against the related reimbursement.
D. Gains and losses arising from group of similar transactions are reported on a net
basis.
E. If material, gains and losses are reported separated.
F. The measurement of assets net of valuation allowance is permitted because
technically this is not offsetting.
G. Accounts receivable may be shown net of allowance for doubtful accounts.
Frequency of Reporting
When is an entity required to present a financial statement?
An entity shall present a complete set of financial statements at least annually. But it
does not limit the entity from preparing financial statements on a periodic basis.

What should be the basis for the periodic preparation of financial statements?
The periodicity or time period must be applied by the business entity to identify and
determine the timely preparation of financial statements.

What happens if the business entity changes its reporting period?

If there is a change in the end of the accounting period and presents the FS for a period
longer or shorter than one year, the entity shall be required to disclose:
A. The period covered by the financial statements
B. The reason for using a longer or shorter period
C. The fact that the amounts presented in the financial statements are not entirely
comparable
Comparative information (Comparability as a Qualitative
Characteristic)
What are the general rules in presenting the financial statement under the comparative
information?
1. An entity shall disclose comparative information in respect of the previous period for
all amounts reported in the current period’s financial statements.
• The financial statements must show comparative figures between the current and
previous periods (current period versus prior period).
• For management purposes, the variances between accounts are
shown for financial analysis.

2. Comparative information shall be included for narrative and descriptive information

when it is relevant to an understanding of the current period’s financial statements.
• For example, details of a legal dispute, the outcome of which was uncertain at the
end of the preceding reporting period, are disclosed in the current period.
• Users shall benefit from information that an uncertainty existed at the end of the
immediately preceding reporting period.
Comparative information (Comparability as a Qualitative
Characteristic)
When is the Third Statement of Financial Position required to be presented?

Required when an entity:

a. Applies an accounting policy retrospectively
b. Makes retrospective statement of items in the financial statements
c. Reclassifies items in the financial statements

When should an entity present three (3) statements of financial position?

a. The end of the current period

b. End of the previous period
c. The beginning of the earliest comparative period
Consistency of Presentation

While separately discussed but consistency as a qualitative characteristic of financial

information is implicit to comparability.

What is the general principle of consistency?

The Principle of Consistency requires that the accounting methods and practices e.g.
presentation and classification of accounts, shall be applied on a uniform basis from
period to period.

Consistency is desirable and essential to achieve comparability of financial statements.

Consistency does not prevent nor limit the entity from changing accounting policy
especially if such change will result to information that is faithfully represented and more
relevant to users.
Consistency of Presentation

When can an entity be allowed to adopt a change in the presentation and classification of
items in the financial statements?

A. When it is required by another PFRS.

B. When a significant change in the nature of the operations of the entity will
demonstrate a more appropriate revised presentation and classification.

What are the requirements when a change in accounting policy is adopted?

There should be a full disclosure of the change and the peso effect of the change.
Identification of Financial Statements

Financial statements shall be:

A. Clearly identified and distinguished from other information in the same published
document.
B. Must be clearly identified/labelled.
C. The following information shall be prominently displayed/indicated:
i. The name of the reporting entity.
ii. Whether the financial statements cover the individual or a group of entities
iii. The end of the reporting period or period covered by the financial statements
or notes
iv. The presentation currency
v. The level of rounding used in the amounts of the financial statements.
Ex. FS are often made more understandable by presenting information in thousands
or millions of units of the presentation currency. This is acceptable as long as the level of
rounding in presentation is disclosed and relevant and material information is not
omitted.
 Statement of Financial Position
Comprises the assets, liabilities and equity of an entity
as at a particular moment in time.

It pertains to the liquidity, solvency and the need of the

entity for additional financing.
 CURRENT • An entity must normally present a classified
vs. NONCURRENT statement of financial position, separating
current and non-current assets and liabilities,
DISTINCTION unless presentation based on liquidity provides
information that is reliable.
CURRENT •Expected to be realized in the entity's
ASSETS normal operating cycle 
•Held primarily for the purpose of
trading 
•Expected to be realized within 12
months after the reporting period 
•Cash and cash equivalents (unless
restricted).

•All other assets are non-current.

 CURRENT
LIABILITIES • Expected to be settled within the
entity's normal operating cycle
•  Held for purpose of trading
•  Due to be settled within 12 months
•  For which the entity does not have the
right at the end of the reporting period
to defer settlement beyond 12 months.
• Other liabilities are non-current.
 NON-CURRENT

• When a long-term debt is expected to be refinanced

under an existing loan facility, and the entity has the
discretion to do so, the debt is classified as non-
current, even if the liability would otherwise be due
within 12 months.
 NON-CURRENT
• 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 reporting date, the
liability is current, even if the lender has agreed, after the reporting date 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 reporting
date 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.
 PAS 37
• Contingent liability:
a possible obligation depending on whether some uncertain future event occurs, or
a present obligation but payment is not probable or the amount cannot be measured reliably
• Contingent asset:
a possible asset that arises from past events, and
whose existence will be confirmed only by the occurrence or non-occurrence of one or more
uncertain future events not wholly within the control of the entity.
• Recognition of a provision
An entity must recognise a provision if, and only if: [IAS 37.14]
A present obligation (legal or constructive) has arisen as a result of a past event (the
obligating event),
 Payment is probable ('more likely than not'), and
 The amount can be estimated reliably.
 Contingent Liability
• DISCLOSED ONLY
• IF REMOTE – NO DISCLOSURE REQUIRED
 Contingent Asset
• PROBABLE - DISCLOSED ONLY
• POSSIBLE OR REMOTE– NO DISCLOSURE REQUIRED
 Statement of Financial Performance
Comprises the revenue, expenses and net income or loss of an
entity for a period of time.

Performance is the level of income earned/generated by the

entity through the efficient and effective use of its resources.

It is also known as the results of operations and is portrayed in

the Income Statement and Statement of Comprehensive Income.
 Statement of Cash Flows
Refer to the cash receipts and cash payments arising from
the operating , investing and financing activities of the
entity.

The cash flows are presented in the statement of cash

flows.

Cash flow information is useful in assessing the ability of

the entity to generate cash and cash equivalents.
 Notes to Financial Statements
The notes must:
• Present information about the basis of preparation of the financial
statements and the specific accounting policies used
• Disclose any information required by IFRSs that is not presented elsewhere
in the financial statements and
• Provide additional information that is not presented elsewhere in the
financial statements but is relevant to an understanding of any of them

Notes are presented in a systematic manner and cross-referenced from the face
of the financial statements to the relevant note.
 Notes to Financial Statements
The notes must:
• Present information about the basis of preparation of the financial
statements and the specific accounting policies used
• Disclose any information required by IFRSs that is not presented elsewhere
in the financial statements and
• Provide additional information that is not presented elsewhere in the
financial statements but is relevant to an understanding of any of them

Notes are presented in a systematic manner and cross-referenced from the face
of the financial statements to the relevant note.
RELATED • Requires disclosures about transactions and
outstanding balances with an entity's related parties.

PARTIES The standard defines various classes of entities and

people as related parties and sets out the disclosures

(PAS 24) required in respect of those parties, including the

compensation of key management personnel.
• The objective of PAS 24 is to ensure that an entity's
financial statements contain the disclosures necessary to
draw attention to the possibility that its financial
position and profit or loss may have been affected by the
existence of related parties and by transactions and
outstanding balances with such parties.
RELATED • (a) A person or a close member of that person's family
is related to a reporting entity if that person:

PARTIES (i) has control or joint control over the reporting

entity;
(PAS 24) or
 (ii) has significant influence over the reporting entity;

 (iii) is a member of the key management personnel of

the reporting entity or of a parent of the reporting entity.
RELATED • (b) An entity is related to a reporting entity if any of the
following conditions applies:

PARTIES – (i) The entity and the reporting entity are members of the
same group (which means that each parent, subsidiary

(PAS 24) and fellow subsidiary is related to the others).

–  (ii) One entity is an associate or joint venture of the other
entity (or an associate or joint venture of a member of a
group of which the other entity is a member).
–  (iii) Both entities are joint ventures of the same third
party.
–  (iv) One entity is a joint venture of a third entity and the
other entity is an associate of the third entity.
RELATED (v) The entity is a post-employment defined benefit plan for
the benefit of employees of either the reporting entity or an
entity related to the reporting entity. If the reporting entity
PARTIES is itself such a plan, the sponsoring employers are also
related to the reporting entity. 
(PAS 24) (vi) The entity is controlled or jointly controlled by a
person identified in (a). 

(vii) A person identified in (a)(i) has significant influence

over the entity or is a member of the key management
personnel of the entity (or of a parent of the entity). 

(viii) The entity, or any member of a group of which it is a

part, provides key management personnel services to the
reporting entity or to the parent of the reporting entity*.
RELATED PARTY If there have been transactions between related parties,
disclose the nature of the related party relationship as well
TRANSACTION as information about the transactions and outstanding
balances necessary for an understanding of the potential
effect of the relationship on the financial statements. These
disclosure would be made separately for each category of
related parties and would include:
• the amount of the transactions
•  the amount of outstanding balances, including terms
and conditions and guarantees
•  provisions for doubtful debts related to the amount of
outstanding balances
•  expense recognized during the period in respect of bad
or doubtful debts due from related parties
 EVENTS • An event, which could be favorable
AFTER or unfavorable, that occurs between
the end of the reporting period and
REPORTING the date that the financial statements
PERIOD are authorized for issue.
(PAS 10)
Adjusting • An event after the reporting period
Events 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.
Examples • The resolution of a court case, as the result of
which a provision has to be recognized instead
of the disclosure by note of a contingent
liability;
• Evidence of impairment of assets;
• Bankruptcy of a major customer;
• Sale of inventories at prices suggesting the
need to reduce the figure in the Statement of
Financial Position to the net value actually
realized;
• Discovery of fraud or errors that show the
financial statements were incorrec
Non- Adjusting • An event after the reporting period
Event that is indicative of a condition that
arose after the end of the reporting
period.
• Disclosed only if important.
• 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.
EXAMPLES • Decline in market value of
investments;
• Announcement of a plan to
discontinue part of the enterprise;
• Major purchases and sales of assets;
• Destruction of a major asset by fire
etc;
• Sale of a major subsidiary;
• Major dealings in the company's
ordinary shares;
END OF
PRESENTATION

BY: ROSAIFA H. RADI, CPA