Name : ___________________

Section : ___________________
Subject : AE 417/ Intermediate Accounting 3
Class Schedule : MWF (3:00 pm – 6:00 pm)
Teacher : Cyril Marie S. Ramos, CPA, MBA
Date : April 8, 2020 (Wednesday)

MODULE 10
Learning Activity Sheet # 1

Lesson / Topic: Financial Statements

Learning Targets: • Discuss general principles related to financial
statements
Reference(s) Millan, Z. (2019). Intermediate Accounting 3
Valix, C. (2019). Intermediate Accounting Vol. 3

1. FINANCIAL STATEMENTS DEFINED

These are the means by which the information accumulated and processed
in financial accounting is periodically communicated to the users.

These are the end product or main output of the financial accounting
process.

These are structure financial representations of the financial position and

financial performance of an entity.

2. PAS 1
Objective:
To prescribe the basis for presentation of general-purpose financial
statements, in order to ensure comparability both with the enterprise’s
own financial statements of previous period and with the financial
statements of other enterprises.

PAS 1 sets out

a. The overall consideration for presentation of financial statements
b. Guidelines for their structure
c. The minimum requirements for the content of financial statements

3. SCOPE
PAS 1 should be applied in the presentation of all general-purpose
financial statements prepared and presented in accordance with
International Financial Reporting Standards (IFRS)

Other IFRS set out the recognition, measurement and disclosure

requirements for specific transactions and other events.
a. Applicability: The standard applies equally to all entities and
whether or not they need to prepare consolidated financial statements.
b. The standard uses terminology that is suitable for profit-oriented
entities, including public sector entities

Non-profit, government and other public sector enterprises seeking to

apply this Statement may need to amend descriptions used for certain
line items in the financial statements.

c. Similarly, entities do not have equity as defined in IAS 32, Financial

Instruments Presentation (e.g. some mutual funds) and entities whose
 share capital is not equity (e.g., some cooperative entities) may need
to adapt the financial statement presentation of members’ unit or unit
holders’ interests.

This Standard does not apply to the structure and content of

condensed interim financial statements prepared in accordance with
IAS 34 Interim Financial Reporting. However, the General Features
discussed in this Standard will also apply to interim financial
statements.

4. DEFINTIONS
a. General Purpose Financial Statements (referred to as “financial
statements”) are those intended to meet the needs of users who
are not in a position to require an entity to prepare reports tailored
to their particular information needs.
They include those that are presented separately or within another
public such as an

Exercise

Write “G” before the number if the report given is a general

purpose financial statements, otherwise write “N”.

1. Reports Prepared at the request of an entity’s management or

bankers.
2. Statement of Financial Position
3. Environmental Reports
b. Impracticable – Applying a requirement is impracticable when
the entity cannot apply it after making every reasonable effort to do
so.

c. International Financial Reporting Standards (IFRS) are

Standards and Interpretation adopted by the International
Accounting Standards Board (IASB). They comprise:
i. International Financial Reporting Standards
ii. International Accounting Standards
iii. Interpretations originated by the International Financial
Reporting Interpretations Committee (IFRIC) or the former
Standing Interpretations Committee (SIC)

d. Material Omissions or misstatements of items are material if they

could individually or collectively influence the economic
decisions of users taken on the basis of the financial statements.
Material depends on the size and nature of the omission or
misstatement judged in the surrounding circumstances. The
size or nature of the item, or a combination of both, could be the
determining factor.

Notescontain information in addition to that presented in the

balance sheet, income statement, statement of changes in equity
and cash flow statement.

Notes provide:

i. Narrative descriptions or disaggregation of items disclosed in

those statements and
ii. Information about item that do not qualify for recognition in
those statements.
 e. Other Comprehensive Income – comprises items of income and
expense, (including reclassification adjustments) that are not
recognized in profit or loss as required or permitted by other IFRSs.

The components of other comprehensive income include:

i. Changes in revaluation surplus (see IAS 16and IAS 38)
ii. Actuarial gains and losses on defined benefit plans recognized
in accordance with paragraph 93A of IAS 19 Employee
Benefits.
iii. Gains and losses arising from translating the financial
statements of a foreign operation (see IAS 21)
iv. Gains and losses on remeasuring available for sale financial
assets (see IAS 39 Financial Instruments: recognition and
Measurement)
v. The effective portion of gains and losses om hedging
instruments in cash flow hedge (see IAS 39)

Per amendment of PAS 1 2009, Other comprehensive income

should be classified into two categories: (a) those that will
eventually be recycled to profit and loss and (b) those that will not
be taken to profit and loss.

f. Owners are holders of instruments classified as equity.

g. Profit or loss – is the total of income less expenses, excluding the
components of comprehensive income.
h. Reclassification adjustments are amounts reclassified to profit
or loss in the current period that were recognized in other
comprehensive income in the current or previous periods.
i. Total comprehensive income is the change in equity during a
period resulting from transactions and other events, other than
those changes resulting from transactions with owners in their
capacity as owners.
Total comprehensive income comprises all components of “profit or
loss” and of “other comprehensive income”

Note: An entity may use other terms to describe the totals as

long as the meaning is clear. For example, an entity may use
“net income” to describe profit or loss.

5. PURPOSE / OBJECTIVE OF FINANCIAL STATEMENTS

Financial statements are structured representation of the
financial position and financial performance of an entity.

The objective of general purpose financial statements is to provide

information about the financial position, performance and cash
flows of an enterprise that is useful to a wide range of users in
making economic decisions.

To meet this objective, financial statements provide information about

an enterprise’s:
a. Assets
b. Liabilities
c. Equity
d. Income and expenses, including gains and losses and
 e. Contributions by and distribution to owners in their capacity as
owners
f. Cash Flows

6. COMPONENTS OF FINANCIAL STATEMENTS

A complete set of financial statements comprises the following
components:

1. Statement of Financial Position (Chapter 2)

2. Statement of Comprehensive Income (Chapter 4)
3. Statement of Changes in Equity (Financial Accounting 1)
4. Statement of Cash flows (Chapter 12)
5. Notes, comprising a summary of significant accounting policies and
explanatory notes. (Chapter 3)
6. Statement of Financial Position as at the beginning of the earliest
comparative period.
When an entity applies an accounting policy retrospectively, or
makes a retrospective restatement of items in its financial
statements or when it reclassifies items in its financial
statements.

An entity may use titles for the statements other than those
used in this Standard.

An entity shall present with equal prominence all of the

financial statements in a complete set of financial statements,

7. GENERAL FEATURES
The general features in the preparation and presentation of financial
statements are:

a. Fair Presentation
b. Going Concern
c. Accrual Basis Accounting
d. Materiality and Aggregation
e. Offsetting
f. Frequency of reporting
g. Comparative Information
h. Consistency of presentation

8. FAIR PRESENTATION AND COMPLIANCE WITH GENERALLY

ACCEPTED ACCOUNTING PRINCIPLES
➢ Financial Statements shouldpresent fairly the financial position,
financial performance and cash flows of an enterprise.

➢ Fair presentation requires the faithful presentation of the effects

of transactions and other events and conditions in accordance with
the definitions and recognition criteria for assets, liabilities, income
and expenses set out in this Framework.

➢ The application of IFRS with additional disclosure when

necessary, is presumed to result in financial statements that achieve
fair presentation.

➢ An entity whose financial statements comply with IFRS shall

make an explicit and reserved statement of such compliance in
 the notes. Financial statements shall not be described as complying
with IFRS unless they comply with all the requirements of IFRS.

➢ Fair Presentations also requires an entity

o To select and apply accounting policies in accordance with IAS 8

Accounting Policies, Changes in Accounting Estimates and Error.
In the absence of Standard or Interpretation that management
could refer to in the treatment of a particular item, IAS 8 sets
out a hierarchy of authoritative guidance.
o To present information, including accounting policies in a manner
that provides information that is relevant, reliable or
representationally faithful, understandable and comparable.
o To provide additional disclosure when compliance with specific
requirements of IFRS is insufficient to enable users to
understand the impact of transactions and events.
➢ Any entity cannot rectify inappropriate accounting policies
either by disclosure of the accounting policies used or by notes or
by explanatory material.

➢ Required disclosures in the extremely

➢ Instances that an entity may depart from the standards

An entity is permitted to depart from a standard:
a. 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 a departure
e.
➢ Disclosure requirements in departing from the standards
When an entity departs from the standards, it is incumbent upon the
entity to disclose the following:
a. The managementhas concluded that the financial
statementspresent fairly the entity’s financial position, financial
performance and cash flows.
b. That it has been complied with applicable Standards and
Interpretation, except that it has been departed from a
particular requirement to achieve a fair presentation.
c. Disclose the
▪ Title of the Standard or Interpretation from which the
enterprise has departed
▪ The nature of the departure, including the treatment
that the Standard or Interpretation would require.
▪ The reason why the treatment would be misleading in
the circumstances and
▪ The treatment adopted
▪ The financial impact of the departure on the
enterprise’s net income or loss, assets, liabilities, equity
and cash flows for each period presented.
➢ When an entity has departed from a Standard or Interpretation in
prior period and the departure affects the FS of the current period, it
shall disclose this fact:
o The title of the standard or Interpretation in question, the
nature of the requirement , and the reason why management
has concluded that complying with the requirement is so
misleading in the circumstances that it conflicts with the
objective of FS set out in this Framework
 o For each period presented, the adjustments to each item in the
FS that management has concluded would be necessary for fair
presentation.

9. GOING CONCERN
➢ When preparing financial statements, management shall make an
assessment of the entity’s ability to continue as a going concern.
➢ Financial statements shall be prepared on a going-concern
basis, unless management either intends to liquidate the
entity, or to cease trading, or has no realistic alternative but to
do so.
➢ Material uncertainties which may cast significant doubt upon the
enterprise’s ability to continue as a going concern should be
properly disclosed.
➢ When the financial statements are not prepared on going
concern basis, the reasons thereof should be disclosed , together
with the basis on which the FS are prepared in reason why
the entity is not regarded as a going-concern.

In assessing whether the going concern assumption is

appropriate, management takes into account all available
information for the foreseeable future, which should at least, but is
not limited to, twelve months from the balance sheet date.

➢ When an enterprise has a history of profitable operations and ready

access to financial resource, a conclusion that the going concern basis
of accounting is appropriate may be reached without detailed analysis.
➢ In assessing whether the going concern basis is appropriate,
management may consider a wide range of factors surrounding
current and expected profitability, debt repayment schedules,
and potential sources of replacement financing.

10. ACCRUAL BASIS OF ACCOUNTING

➢ An entity shall prepare its financial statements, except for cash flow
information, using accrual basis of accounting.

11. MATERIALITY AND AGGREGATION

➢ Each material class of similar item shall be presented
separately in the financial statements.
➢ Items of dissimilar nature or function shall be presented separately
unless they are immaterial.
➢ If a line item is not individually material, it is aggregated with other
items either on the face of those statements or in the notes.
➢ A specific disclosure requirement in a Standard or Interpretation need
not be satisfied if the information is not material.

Materiality depends on the size and nature of the item judged

in the particular circumstances of its omission. The nature and
size of the item should be evaluated together.

12. OFFSETTING
➢ Assets and liabilities, and income and expenses, shall not be
offset unless required or permitted by the Standard or
Interpretation.
➢ Offsetting is allowed only when the presentation reflects the substance
of the transaction or other events.
 ➢ Examples:
o Gains and losses on disposal of non-current assets, including
investments and operating assets are reported by deducting
from the proceeds on disposal the carrying amount of the
asset and related selling expenses.
o Expenditure that is reimbursed under a contractual
arrangement with a third party (IAS 37)
o Gains and losses arising from a group of similar transactions are
reported on a net basis.

13. FREQUENCY OF REPORTING

➢ An entity shall present a complete set of financial statements
(including comparative information) at least annually.
➢ When an entity changes the end of its reporting period and
presents financial statements for a period of longer or
shorter than one year, an entity shall disclose, in addition to
the period covered by the financial statements:
o The reason for using a longer or shorter period, and
o The fact that amounts presented in the financial statements are
not entirely comparable.

14. COMPARATIVE INFORMATION

➢ Comparative information shall be disclosed in respect of the
previous period for all amounts reported in the current
period’s financial statements, except when a Standard or
Interpretation permits or requires otherwise.
➢ Comparative information should be included in narrative and
descriptive information when it isrelevant to an understanding
of the current period’s financial statements.
➢ When the entity changes the presentation or classification of items in
the financial statements the entity shall reclassify comparative
amounts unless reclassification is impracticable.
➢ When comparative amounts are reclassified, an entity shall
disclose:
o The nature of each reclassification
o The amount of each item or class of items reclassified; and
o The reason for the reclassification
➢ When it is impracticable to reclassify comparative amounts, an
entity shall disclose:
o The reason for not reclassifying the amounts, and
o The nature of the adjustments that would have been made if
amounts were reclassified.
➢ An entity disclosing comparative information shall present, as a
minimum two statements of financial position, two of the other
statements, and related notes.

➢ When an entity applies an accounting policy retrospectively

ormakes a retrospective restatement of items in its financial
statements, or when it reclassifies itemsin its financial
statements, it shall represent, as a minimumthree statements
of financial positon, two of each of other statements and
related notes. An entity presents statements of financial
position at:
o The end of the current period
o The end of the previous period (which is the same as the
beginning of the current period)
o The beginning of the earliest comparative period.

➢ IAS 8 sets out the adjustments to comparative information required

when an entity changes an accounting policy or corrects an error.
15. CONSISTENCYOF PRESENTATION
➢ The presentation and classification od items in the Financial
Statements should be retained from one period to the next
unless:
o It is apparent that, following a significant change in the nature of
the entity’s operations or a review of its financial statements,
another presentation or classification would be more
appropriate, or
o A standard or an Interpretation requires a change in
presentation.

16. STRUCTURE AND CONTENT

➢ Requires particular disclosure in the statement of financial position or
of comprehensive income, in the separate income statement (if
presented), or in the statement of changes in equity and
➢ Requires disclosure of other line items either in those statements or
in the notes
a. Identification of financial statements
b. Reporting period
c. Statement of financial position
i. Current and non-current assets and liabilities
ii. Owner’s equity
d. Income statements
e. Statement of changes in equity
f. Cash flow statement
g. Notes to financial statements

17. IDENTIFICATION OF FINANCIAL STATEMENTS

Financial statements (and each component) should be clearly identified and
distinguished from other information in the same published document. The
following information should be prominently displayed and repeated
when necessary for a proper understandability.
a. The name of the reporting enterprise or other means pf
identification
b. Whether the financial statements cover the individual
enterprise or a group of enterprises.
c. The balance sheet date or the period covered by the
financial statements, whichever is appropriate to the related
component of the financial statements.
d. The reporting currency
e. The level of precision used in the presentation of the figures
in financial statements.

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