Unit 3: IAS 1- Presentation of Financial Statements

Intended Learning Outcomes

After reading this unit, you should be able to:

 describe the objective and scope of IAS 1

 describe the objective of the financial statements
 enumerate the components of the financial statements and their respective uses
 describe the hierarchy in the formulation of accounting policies by the management
 state and apply the general features in the presentation of the financial statements
 explain the limitations of the financial statements
 state the function of the Securities and Exchange Commission
 classify the entities based on applicability of financial reporting frameworks
 identify the different Philippine Financial Reporting Frameworks and their applicability

IAS 1 Presentation of Financial Statements sets out the overall requirements for financial
statements, including how they should be structured, the minimum requirements for their content
and overriding concepts such as going concern, the accrual basis of accounting and the
current/non-current distinction. The standard requires a complete set of financial statements
to comprise a statement of financial position, a statement of profit or loss and other
comprehensive income, a statement of changes in equity and a statement of cash flows.
IAS 1 was reissued in September 2007 and applies to annual periods beginning on or after 1
January 2009.

Objective of IAS 1

The objective of IAS 1 (2007) is to prescribe the basis for presentation of general purpose
financial statements, to ensure comparability both with the entity's financial statements of
previous periods and with the financial statements of other entities. IAS 1 sets out the overall
requirements for the presentation of financial statements, guidelines for their structure and
minimum requirements for their content. [IAS 1.1] Standards for recognising, measuring, and
disclosing specific transactions are addressed in other Standards and Interpretations. [IAS
1.3]

Scope

IAS 1 applies to all general purpose financial statements that are prepared and presented in
accordance with International Financial Reporting Standards (IFRSs). [IAS 1.2]

General purpose financial statements are those intended to serve users who are not in a position
to require financial reports tailored to their particular information needs. [IAS 1.7]

Objective of financial statements

The objective of general purpose financial statements is to provide information about the
financial position, financial performance, and cash flows of an entity that is useful to a
wide range of users in making economic decisions. To meet that objective, financial statements
provide information about an entity's: [IAS 1.9]
 assets
 liabilities
 equity
 income and expenses, including gains and losses
 contributions by and distributions to owners (in their capacity as owners)
 cash flows.

That information, along with other information in the notes, assists users of financial
statements in predicting the entity's future cash flows and, in particular, their timing and
certainty.

Financial statements are the responsibility of the company's management. This means that the
format by which the financial statements are presented, the information presented therein and
the fairness of their presentation depend on the assessment by the enterprise management.
International Accounting Standards (IAS) 1 Presentation of Financial Statements presents the
basis for the presentation of financial statements. The objective of IAS 1 is to present the
basis for the presentation of the financial statements to ensure comparability of an
enterprise's financial statements with financial statements of other enterprises and with
financial statements of the same enterprise (for different reporting periods). Thus, both
intercomparability and intracomparability are addressed by IAS 1.

Components of Financial Statements

A complete set of financial statements includes the following:

 a statement of financial position as at the end of the period;
 a statement of comprehensive income for the period;
 a statement of changes in equity for the period;
 a statement of cash flows for the period; and
 notes, comprising a summary of significant accounting policies and other explanatory
information.

The components Of the financial statements as enumerated present financial information about
an entity as of the end of the reporting period and for the reporting period. Only the statement
of financial position Presents information as of the end of the reporting period. All other
Components present financial information during a reporting period.

The statement of financial position presents information on the balances of assets, liabilities
and equity as at the end of the reporting period. This statement, when evaluated together with
the other components of the financial statements, is useful to various users of accounting
information in assessing the economic resources that an enterprise controls, its financial
structure, its liquidity and solvency and its capacity to adapt to changes in the environment
in which it operates.

The statement of comprehensive income presents the financial performance of an entity during
a reporting period. It is an expanded form of the income statement because it encompasses both
profit or loss and other comprehensive income. The information presented in the statement of
comprehensive income helps users to assess the entity's ability to generate cash and the
potential changes in economic resources that the enterprise is likely to control in the future.
The statement of changes in equity presents the summarized transactions affecting the balances
of equity accounts, such as profit or loss, other comprehensive income, contributions from
owners and distributions to owners.

The statement of cash flows presents information on the inflows and outflows of cash and cash
equivalents during the reporting period. The information presented in the statement of cash
flows assists users in assessing an entity's ability to remain solvent and provide returns
to investors and creditors.

The section "Notes to the Financial Statements" presents relevant financial information
pertaining to the entity's activities that cannot be presented on the face of the financial
statements. The Notes include a description of the basis of the presentation of financial
statements and summary of significant accounting policies, information required by the PFRS
or IFRS that is not presented on the face of the financial statements, and additional information
that will help the users better understand the information presented in any of the financial
statements.

For comparative purposes, the financial statements shall provide the same set of information
for the preceding year.

Requirement for an additional Statement of Financial Position

IAS 1 requires the inclusion of a statement of financial position as at the beginning of the
preceding period whenever an entity restates its comparative prior period financial statements.
In such a case, there shall be six (6) components of a complete set of financial statements.

Restatement of comparative prior period is necessary when there is any of the following:
 retrospective application of a change in accounting policy;
 restatement of financial statements because of prior period errors discovered; and
 reclassification of an element in financial statements.

The requirement for restatement of prior year's financial statements and inclusion of a restated
statement of financial position as at the beginning of the preceding period presented achieves
the objective of comparability.

Accounting Policies

The financial statements are largely affected by the accounting policies adopted by the
company's management. IAS 8 Accounting Policies, Changes in Accounting Policies and Errors,
defines accounting policies as the specific principles, bases, conventions, rules and practices
applied by an entity in preparing and presenting financial statements.

Some examples of an entity's accounting policies are: criteria to determine which financial
instruments qualify as cash equivalents, characteristics of elements comprising Investment
Property, characteristics of elements comprising Property, Plant and Equipment, measurement
model for a class of property, plant and equipment, use of the weighted average method to
determine the cost of inventory, and measuring inventories at the lower of cost and net
realizable value.
The management shall apply the specific requirements of the Philippine Financial Reporting
Standards or Interpretation that specifically applies to a transaction, other event or
condition. In the absence of a Standard or an Interpretation that specifically applies to a
transaction, other event or condition, management shall use its judgment in developing and
applying an accounting policy that results in information that meets the qualitative
characteristics described in the Conceptual Framework (pars. 8-10, IAS 8 Accounting Policies,
Changes in Accounting Estimates and Errors).

In applying its judgment in selecting from different accounting methods to form part of its
accounting policies, the management shall refer to, and consider the applicability of the
following sources in descending order (paragraph 1 1, IAS 8):

 the requirements in PFRS and IFRS dealing with similar and related issues; and
 the definitions, recognition criteria and measurement concepts for assets, liabilities,
income and expenses in the Conceptual Framework.

The management may also consider the most pronouncements of other standard setting bodies that
use a similar conceptual framework to develop accounting standards, other accounting literature
and accepted industry practices to the extent that these do not conflict with the sources
enumerated above (based on paragraph 12, IAS 8).

International Financial Reporting Standards (IFRSs)

These are accounting standards and related Interpretations, which are issued and regulated
by the International Accounting Standards Board (IASB) and these encompasses:

International Financial Reporting Standards (IFRS)

International Accounting Standards (IAS)
Interpretations issued by IFRIC and
Interpretations issued by SIC
Impracticable

It is when the entity is not able to apply the requirement of a particular standard, after
any reasonable effort to do so.

Notes

These are one of the essential component of financial statements and include the information
(financial and non-financial) in addition to the information which is presented in the other
components of financial statements such as statement of profit or loss and other comprehensive
income, statement of changes in equity, statement of financial' position and statement of cash
flows. These are in the form of narrative descriptions

Other comprehensive income

It entails the incomes and expenses which are not permitted to be recognized in profit or loss
as per the requirements of the other standards. It also includes the reclassification,
adjustments

Reclassification Adjustments
It is the reclassification of certain amounts to profit or loss during the current accounting
period, which were previously recognized in statement of other comprehensive income

Total comprehensive income

It is the increase or decrease in the equity in the current accounting period resulting due
to the events and transactions, which are other than the transactions with shareholders in
their capacity as owners.

General Features

1. Fair Presentation

This standard requires that the financial. Performance, financial position and cash flows of
an entity should be fairly presented. Fair presentation of financial statements, the events
and transactions should be reported to financial statements in accordance with the recognition
and measurement principle for the elements of financial statements, given in the IASB ’ s
framework, and financial statements should be prepared in accordance with IFRS with related
disclosure requirements.

To achieve the fair presentation the entity should make sure the following:

 The selection and application of accounting policies as per IAS8

 The information contained in financial statements should have all the qualitative
characteristics of financial statements
 Complete disclosure should be given as per the IFRS

Disagreement with IFRSs

If in very rare situations, the management identifies that compliance with a particular
requirement of a specific standard or Interpretation will result in the information, which
is in conflict with the objectives of financial statements as laid down in the Framework, the
entity will account for such situation as follows:

 If the regulatory frame work permits departure from such requirement, the entity will take
departure from that requirement and will disclose the following:

 The financial statements fairly present the financial performance, financial position and
cash flows of the entity, as per the judgment of management
 The financial statements of the entity are in compliance with all the relevant IFRS’s other
than the departure from the particular requirement
 The title of the standard from which departure is taken, the details of departure and related
reason for the departure
 The financial effect on financial statements due to such departure

 If the regulatory frame work does not permit departure from such requirement, the entity
will reduce the related impact of such compliance by giving following disclosures:
 The title of the standard from which departure is taken, the details of departure and related
reason for the departure
 The adjustment which is required as per the judgment of the management to achieve fair
presentation

2. Going Concern

At the end of each reporting period, when entity will prepare its financial statements, the
management is required to assess of whether the entity has ability to continue its business
as a going concern. If management identifies that it has ability to continue its business as
a going concern then its financial statement will be prepared on a going concern basis.

The entity will be treated as going concern, if it can continue its operations for the
foreseeable future such that neither the management has intention nor the circumstances are
there that the entity will have to curtail its business activities

3. Accrual Basis of Accounting

The entity is required to report all the events and transactions in the financial statements
in the period to which these relate except for the cash flows

4. Consistency of Presentation

The entity should use the same accounting policies in the preparation and presentation of
financial statements for the similar events and transactions, from one period to the next in
order to ensure the comparability of financial statements unless the change is required by
the circumstance laid down in IAS 8

5. Materiality and Aggregation

The entity is required to present each material class of items separately in the financial
statements, unless these are immaterial.

6. Offsetting

The entity should not offset any assets and liabilities or any income and expense, except it
is required by a IFRS

7. 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 longer or shorter than one year an entity shall
disclose, in addition to the period covered by the financial statements
(a) The reason for using a longer or shorter period, and
(b) The fact that amounts presented in the financial statements are not entirely comparable.

8. Comparative Information
This standard requires an entity to disclose the comparative information in respect of the
previous accounting period similar to those amounts which are presented in the financial
statements of the current accounting period

Identification of Financial Statements

The financial statements of the entity should be identified and distinguished from the other
information using the following:

 The title of the entity presenting financial statements

 Whether these are the financial statements of an individual entity or consolidated financial
statements for the group of entities:
 The reporting date for which financial statements are presented
 The presentation currency for the amounts reported in financial statements
 The level of rounding up for the amounts reported in financial statements

Fundamentally Related Financial Statements

The financial statements are fundamentally related because they relate to the effects of the
same sets of transactions completed by the enterprise during the reporting period.

In completing the accounting process, which culminates in the presentation of the financial
statements, the first financial statements prepared by a reporting entity is generally the
statement of comprehensive income. The profit is the net effect of income and expenses presented
in the profit section of this statement, which is transferred to the appropriate equity account
in the statement of changes in equity. The equity account affected is either the Capital for
a single proprietorship, the partners' Capital accounts for a partnership form of büsiness
organization or Retained Earnings (or Accumulated Profits as termed by the IFRS) for a
corporation. Likewise, the holding (or unrealized) gains and losses or income and expenses
that are expected to reverse over time and other items required by the IFRS to be classified
as other comprehensive income are presented as other comprehensive income and are transferred
to the equity component cumulative other comprehensive income in the statement of changes in
equity.

Other changes in equity not arising from financial performance, such as contributions from
and distributions to the owners of the entity are also presented in the statement of changes
in equity. In effect, the statement of changes in equity, as the term describes, presents the
changes in each major equity component during the reporting period and reconciles the beginning
equity component balances with the ending equity component balances, the latter being presented
as the final figures and are brought forward as equity account balances in the statement of
financial position.

Information on cash flows, which is defined as the inflows and outflows of cash and cash
equivalents, is presented in the statement of cash flows. In the statement of cash flows, cash
flow activities are classified as operating, investing and financing. Operating cash flow
activities are inflows and outflows of cash and cash equivalents that are involved in the
determination of profit. Thus, these activities include (a) inflows during the reporting period
from sale of goods and services and for allowing other entities to use enterprise resources,
and (b) outflows during the reporting period for acquisition of goods and expenses incurred.
Investing cash flow activities are inflows and outflows of cash and cash equivalents during
the reporting period that affect, generally, non current assets. These include cash inflows
from disposal of non-current assets and cash outflows from acquisition, creation, or
enhancement of noncurrent assets.

Financing cash flow activities are those that arise from transactions with nm-trade lenders
as well as owners of the entity. They include inflows from borrowings from lenders, issue of
share capital, reissue of treasury shares, other additional contributions from owners, as well
as outflows for payments to lenders, and distributions to owners.

The net cash inflow or outflow of cash and cash equivalents represents the net change of cash
and cash equivalents during the reporting period. Such net change brings the beginning balance
of cash and cash equivalents to the ending balance, the latter being the final figure in the
statement and the amount that is shown as cash and cash equivalents in the statement of financial
position at the end of the reporting period.

The activities relating to a reporting entity's financial performance, its cash flow activities
and other activities that involve equity accounts affect the elements presented in the statement
of financial position. The balances of assets, liabilities and equity at the end of the reporting
period that result from all the enterprise's activities during the period are comprehensively
presented on an entity's statement of financial position.

Limitations of the Financial Statements

Despite the usefulness of the financial statements, they also several weaknesses and
limitations. The real worth of the business is not reflected in the financial statements because
of the use of different measurement bases.

In addition, the financial statements present values that are a mixture of different levels
of purchasing power. This is true when the non current operating assets such as property, plant
and equipment, intangibles and investment property are measured using the cost model. If such
assets were acquired at different dates, the amounts at which these assets are measured in
the statement of financial position as well as the depreciation reported as expense in the
statement of comprehensive income reflect mixtures of pesos with different levels of purchasing
power.

Furthermore, due to some measurement uncertainties, some financial statement elements are not
recognized because only events and transactions capable Of financial measurement and have met
the recognition criteria identified in the Conceptual Framework can be reflected.

Information such as the moral and efficiency of company personnel' the strategic location of
the company's production facilities and markets, the enterprise's contribution to the
development and deterioration of the environment are reported nowhere in the financial
Statements becaUSe either they do not qualify under the definition of financial statement
elements or they involve high level of measurement uncertainty.

In spite of all the foregoing limitations, users may use the information presented in the
financial statements to estimate the value of the firm.

The Securities and Exchange Commission

The corporate form of business organization allows its owners, called shareholders, to trade
their equity interest in the entity even without the consent of the other shareholders. The
investment risk borne by these inactive owners is mitigated by imposing some reportorial
regulations to corporations.
The Securities and Exchange Commission (SEC) is the national government regulatory agency
charged with supervision of the corporate sector. From its original function of regulating
the sale and registration of securities, the SEC's mandate has been broadened to include
development and regulation of the corporate and capital market toward good corporate governance,
protection of investors, widest participation of ownership and democratization of wealth (SEC
website: sec.gov.ph. Mandate, Mission, Values and Vision).

Republic Act 8799, which is otherwise known as the Securities Regulation Code (SRC), with its
subsequent amendments and implementing rules and regulations (IRR), reemphasizes the
requirement for the submission of an annual report by companies, together with financial
statements, certified by an independent certified public accountant. It also requires for
internal record keeping and internal controls to be complied with by entities.

SRC Rule 68 provides for the general guides to financial statement preparation, responsibility
to financial statements, qualifications and reports of independent auditors and review of their
quality assurance processes.

The Securities and Exchange Commission realizes that enterprises may have transactions ranging
from simple to more complex, depending on the nature and size of the enterprise. The SEC is
cognizant of the fact that financial statement presentation may be modified to suit the varying
decision needs of the users.

Classification of Reporting Entities based on the Applicable Philippine Financial Reporting

Frameworks

Although the discussions in this book are based primarily on the full PFRS or IFRS, it is worthy
to note at this time that there are several reporting frameworks that govern the presentation
of the entities' financial Statements. SRC Rule 68 Section 2 provides general guides to
financial statements preparation.

Under SRC Rule 68, reporting entitles a

 large and/or publicly accountable entities;
 medium-sized entities
 small entities
 micro entities.

Large and/or publicly-accountable entities are those that meet any of the following criteria:
 total assets of more than P350 million or total liabilities of more than P250 million
 are required to file financial statements under Part Il of SRC Rule 68
 are in the process of filing their financial statements for the purpose of issuing any class
of instruments in a public market
 are holders of secondary licenses issued by regulatory agencies.

Medium-sized entities are those that meet all of the following criteria:
 total assets of more than P 100 million to P350 million or liabilities of more than P 100
million to P250 million (for a parent reporting entity, the amounts are based on consolidated
figures)
 are not required to file financial statements under Part Il of Rule 68
 are not in the process of filing their financial statements for the purpose of issuing any
class of instruments in a public market; and
 are not holders of secondary licenses issued by regulatory agencies.

Small entities are those that meet all of the following criteria:
 total assets of between P3 million and P 100 million or liabilities of between P3 million
and P 100 million (for a parent reporting entity, the amounts are based on consolidated
figures)
 are not required to file financial statements under Part Il Of Rule 68
 are not in the process of filing their financial statements for the purpose of issuing any
class of instruments in a public market and
 are not holders of secondary licenses issued by regulat0fl agencies.

Micro entities are those that meet all of the following criteria:
 total assets and total liabilities of less than P3 million
 are not required to file financial statements under Part Il of Rule 68
 are not in the process of filing their financial statements for the purpose of issuing any
class of instruments in a public market and
 are not holders of secondary licenses issued by regulatory agencies.

Applicability of Philippine Financial Reporting Frameworks

Financial reporting frameworks applicable to these foregoing entities fall under the following
classifications:
 Full PFRS/IFRS;
 PFRS for Small and Medium-Sized Entities (PFRS/IFRS for SMEs);
 PFRS for Small Entities
 Income tax Reporting

Large and/or publicly-accountable entities shall prepare their financial statements applying
the Full PFRS/IFRS. Furthermore, banks, insurance companies and other entities which are
holders of secondary licenses issued by regulatory agencies shall also apply the requirements
of their respective regulatory bodies, e.g. Central Bank and Insurance Commission.

Medium-sized entities shall use the PFRS/IFRS for SMEs as their reporting framework.

The following medium-sized entities may choose to prepare the financial statements following
either Full PFRS/IFRS or PFRS/IFRS for SMEs (SEC Memorandum Circular No. 5, Series of 2018):
 a subsidiary of a parent reporting under Full PFRS/IFRS;
 a subsidiary of a foreign parent that will move towards Full PFRS/IFRS;
 a significant joint venture or associate that is part of a group that is reporting under
Full PFRS/IFRS;
 a branch office or regional operating headquarter of a foreign company reporting under Full
PFRS/IFRS;
 a subsidiary that is mandated to report under Full PFRS/IFRS;
 an entity that has a short-term projection that it will breach the quantitative threshold
set in the criteria for a medium sized entity, provided that the event that caused the change
in classification is considered "significant and continuing"
 an entity that has a concrete plan to conduct an initial public offering within the next
two years;
 an entity that has been preparing financial statement under Full PFRS/IFRS and decided to
liquidate
 other entities that the SEC may consider as valid exceptions from mandatory adoption of
PFRS for SMEs.

A medium-sized entity, belonging to any of the above, opting to adopt the Full PFRS/IFRS instead
of the PFRS for SMEs, shall include in its Notes to the Financial Statements the facts supporting
its adoption of the Full PFRS/IFRS.

Reporting entities classified as small entities under the foregoing criteria shall use the
PFRS for Small Entities as adopted by the Securities and Exchange Commission. Small entities
that have operations or investments in another country with different functional currency shall
apply instead the PFRS/IFRS for SMEs or the Full IFRS/PFRS.

Small entities falling under any of the following, may at their option apply the PFRS/IFRS
for SMEs or Full PFRS/IFRS, instead of PFRS for Small Entities (SEC Memorandum Circular No.
5, Series of 2018):
 a subsidiary of a parent reporting under Full PFRS/IFRS or PFRS/IFRS for SMEs;
 a subsidiary of a foreign parent that will move towards Full IFRS or IFRS for SMEs;
 a significant joint venture or associate that is part of a group that is reporting under
Full PFRS/IFRS or PFRS/IFRS for SMEs
 a branch office or regional operating headquarter of a foreign company reporting under Full
PFRS/IFRS or PFRS/IFRS for SMEs
 an entity that has a short-term projection that it will breach the quantitative threshold
set in the criteria for a small entity, provided that the event that caused the change in
classification is "considered significant and continuing
 an entity that has a concrete plan to conduct an initial public offering within the next
two years;
 an entity that has been preparing financial statement under Full PFRS or PFRS for SMEs and
has decided to liquidate;
 and other entities that the SEC may consider as valid exceptions from mandatory adoption
of PFRS for Small Entities

Small entities which opted to apply the PFRS for SMEs or Full PFRS under any of the foregoing
grounds shall include in its financial statements the facts supporting their adoption of the
PFRS for SMEs or Full PFRS.

Micro entities have the option of adopting either the PFRS for Small Entities or the income
tax basis. The following, at a minimum, shall consist the micro entities' financial statements:
 Statement of Management's Responsibility
 Auditor's Report
 Statement of Financial Position
 Statement of Income
 Notes to Financial Statements
All of these components must cover two-year comparative periods.

The management of micro entities using a reporting framework other than PFRS for Small Entities
shall assess the applicability of the basis of accounting considering the nature of the entity,
the objective of the financial statements and the requirements of the law or regulators (par
iv.c, SEC Memorandum Circular No. 5, Series of 2018).

The Securities and Exchange Commission requires the reporting entity to adopt a higher framework
should the prescribed thresholds for total assets or total liabilities fall within different
classification of the reporting entity.