Chapter 12 

Liabilities 

Introduction 
 Liability – is a present obligation arising from past event, the settlement of which
is expected to result in an outflow of resources embodying economic benefits or
service potential. 
 Present obligation means that as of the reporting date, an obligating event must
have already occurred.

 An obligating event is an event that creates either

 (a) a legal obligation or
 (b) a constructive obligation. 

a. Legal Obligation – is an obligation that results from a contract, legislation, or

other operation of law. 
b. Constructive Obligation – is an obligation that results from an entity's actions
(e.g., past practice, published policies) that create a valid expectation from others
that the entity will accept and discharge certain responsibilities. 

Liability Recognition Criteria

 A liability is recognized only when all of the following are met:
a. The item meets the definition of a liability (i.e., present obligation); 
b. It is probable that an outflow of resources embodying economic benefits will be
required to settle the obligation; and 
c. The obligation has a cost or value (e.g., fair value) that can be measured
reliably. 

Scope of this Chapter

The following are discussed in this Chapter: 
a. Financial liabilities; and
b. Provisions, Contingent liabilities and Contingent assets 

Financial Liabilities 
A financial liability is any liability that is: 
a. A contractual obligation to deliver cash or another financial asset to another
entity;
b. A contractual obligation to exchange financial assets or financial liabilities with
another entity under conditions that are potentially unfavorable to the entity; or
c. A contract that will or may be settled in the entity's own equity instruments. 

Examples of financial liabilities: 

a. Accounts Payable. 
b. Notes Payable
c. Interest Payable
d. Loans Payable
 e. Bonds Payable
f.  Rail Bonds Payable. 

Initial Recognition
A financial liability is recognized when an entity becomes a party to the contractual
provisions of the instrument. (PPSAS 29.16) 

Initial Measurement 
Financial liabilities are initially measured at fair value minus transaction costs, except
for financial liabilities at fair value through surplus or deficit (e.g., designated financial
liabilities and derivative liabilities) whose transaction costs are expensed. (PPSAS
29.45) 

 Transaction costs are incremental costs that are directly attributable to the
acquisition, issue, or disposal of a financial instrument. 

Subsequent Measurement 
Financial liabilities are subsequently measured at amortized cost, except for financial
liabilities at fair value through surplus or deficit which are subsequently measured at fair
value. 

Derecognition of A Financial Liability (removal of an asset and liabilities from an entity’s balance
sheet)
Financial Liability is derecognized when it is extinguished, such as when it is
discharged, waived, cancelled, or it expires. 

Provisions, Contingent liabilities and Contingent assets 

Provisions- is a liability of uncertain timing or amount. 

A provision is recognized if all the recognition criteria for liability are met (i.e.,
present obligation, probable outflow, and reliable measurement). If one or more of the
criteria are not met, the item is a contingent liability, not a provision, and therefore
not recognized as liability. 

Contingent Liability is: 

1. A possible obligation 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; or 
2.  A present obligation that arises from past events, but is not recognized
because: 
i. It is not probable that an outflow of resources embodying
economic benefits or service potential will be required to settle the
obligation; or
ii. The amount of the obligation cannot be measured with sufficient
reliability. (PPSAS 19.18) 
 Contingent Asset – is 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. (PPSAS
19.18) 
Summary: 
Contingent Probable Possible Remote

Liability Recognize and Disclose  Disclose only Ignore

Asset Disclose only Ignore Ignore

Measurement 
A provision is measured at the entity's best estimate of the amount needed to
settle the liability at the reporting date. Risks and uncertainties shall be taken into
account in this reaching estimate. 
If the effect of time value of money is material, the provision is measured at the
present value of the settlement amount discounted at a pre-tax rate. 
Gains from the expected disposal of assets shall not be taken into account in
measuring a provision. (PPSAS 19.61). 
Provisions shall be reviewed at each reporting date, and adjusted to reflect the
current best estimate. If it is no longer probable that an outflow of resources embodying
economic benefits or service potential will be required to settle the obligation, the
provision shall be reversed. (PPSAS 19.69) 
A provision shall be used only for expenditures for which the provision was
originally recognized. (PPSAS 19.71) 

Reimbursements
If another party is expected to reimburse the settlement amount of a provision, a
reimbursement asset is recognized and presented in the statement of financial position
separately from the provision. However, in the statement of financial performance, the
expense related to the provision may be presented net of the reimbursement. 
The amount recognized for the reimbursement shall not exceed the amount of
the provision. 

Application of the Recognition and Measurement Rules 

a. Future Operating Net Deficits - No provision shall be recognized for expected
net deficits from future operating activities. Such expectation indicates that
certain assets used in these activities may be impaired. These assets shall be
tested for impairment. 
b. Onerous Contracts - A contract is deemed onerous (i.e., burdensome) if the
unavoidable costs of settling the obligations under the contract exceed the
economic benefits expected to be received from it. 
The obligation under an onerous contract is recognized as a provision.
c. Restructuring – is a program that is planned and controlled by management,
and materially changes either: 
a. The scope of an entity's activities; or
 b. The manner in which those activities are carried out. (PPSAS
19.18) 

A legal obligation to restructure exists if, at the reporting date, the entity has
entered into a binding agreement to sell or transfer an operation. 
A constructive obligation to restructure exists if, at the reporting date, both the
following are present: 
a. Detailed formal plan for the restructuring; and
b. The plan is announced to those affected by it. 

A restructuring provision includes only the direct costs resulting from the
restructuring. It does not include costs associated with the ongoing activities of the
entity, retraining or relocating continuing staff, marketing, or investment in new systems
and distribution networks. 

Chapter 12 Summary: 
 A liability is recognized only when all of the following are met: 
a. The item meets the definition of a liability;
b. It is probable that an outflow of resources embodying economic benefits will be
required to settle the obligations. 
c. The obligation has a cost or value (e.g., fair value) that be measured reliably.
 Financial liabilities are initially measured at fair value minus transaction costs
and subsequently measured at amortized cost, except for financial liabilities at
fair value through surplus or deficit which are initially and subsequently measured
at fair value.
 Provision is a liability of uncertain timing or amount. 
 Contingent liability is one that meets some but not all of the liability recognition
criteria. A contingent liability is not recognized but disclosed only, if its
occurrence or settlement is reasonably possible; otherwise, it is ignored.
 Contingent asset is not recognized but disclosed only, if its occurrence or
realization is probable; otherwise it is ignored. 
 A provision is measured at the entity's best estimate of the amount needed to
settle the liability at the reporting date. If the effect of time value of money is
material, the provision is measured at present value. 

Chapter 13 
Leases 
Introduction
 Lease is an agreement whereby the lessor conveys to the lessee in return for a
payment or series of payments, the right to use an asset for an agreed period of
time. 
Leases include hire purchase contracts (i.e., contracts for the hire of an asset
which contain a provision giving the hirer an option to acquire title to the asset upon the
fulfillment of agreed conditions.) 
Classification of Leases
1. Finance lease – is a lease that transfers substantially all the risks and rewards
incidental to ownership of an asset. 
2. Operating lease - is a lease that does not that transfer substantially all the risks
and rewards incidental to ownership of an asset. 
The classification of a lease depends on the substance of the transaction
rather than the form of the contract. 

Finance lease 
Any of the following would lead to a finance lease classification: 
a. The lease transfers ownership of the asset to the lessee by the end of the lease
term. 
b. The lessee has the option to purchase the asset at a price that is expected to be
sufficiently lower than the fair value at the date the option becomes exercisable
for it to be reasonably certain, at the inception of the lease, that the option will be
exercised ('bargain purchase option'). 
c. The lease term is for the major part of the economic life of the asset even if title is
not transferred. A lease qualifies to be accounted for as finance lease if the
contract is a non-cancellable contract. 
d. At the inception of the lease, the present value of the minimum lease payments
amounts to at least substantially all of the fair value of the leased asset. 
e. The leased assets are of such a specialized nature that only the lessee can use
them without major modifications.
f. The leased assets cannot easily be replaced by another asset. 
g. If the lessee can cancel the lease, the lessor's losses associated with the
cancellation are borne by the lessee. 
h. Gains or losses from the fluctuation in the fair value of the residual (leased asset)
accrue to the lessee (for example in the form of a rent rebate equalling most of
the sales proceeds at the end of the lease). 
i. The lessee has the ability to continue the lease for a secondary period at a rent
that is substantially lower than market rent. 
(GAM for NGAs, Chapter 13, Sec. 5) 

Lease of Land and Building 

When a lease includes both land and buildings elements, each element shall be
classified separately as either operating or finance lease. 
The minimum lease payments are allocated based on the relative fair values of
the leasehold interests in the land and buildings elements at the inception of the lease. 
If the lease payments cannot be allocated reliably, the entire lease is classified
as a finance lease, unless it is clear that both elements are operating leases, in which
case the entire lease is classified as an operating lease. 
If the land element is immaterial, the land and buildings may be treated as a
single unit and classified as finance or operating lease. In such case, the economic life
of the buildings is regarded as the economic life of the entire leased asset. 
as finance or e buildings is 
 
 Inception of the lease - is the earlier of the date of the lease agreement and the
date of commitment by the parties to principal provisions of the lease.
It is on this date that:
a. A lease is classified as either an operating or a finance lease; and 
b. In the case of a finance lease, the amounts to be recognized at the
commencement of the lease term are determined. 
 Commencement of the lease term - is the date from which the lessee is entitled
to exercise its right to use the leased asset. It is on this date that any asset or
liability resulting from the lease is initially recognized. 

Accounting for Finance lease by Lessees 

At the commencement date, a lessee recognizes the asset acquired under a finance
lease and the related lease liability measured at the lower of the: 
a. fair value of the leased property at inception date; and
b. present value of the minimum lease payments at inception date.

Minimum lease payments include the following: 

a. Rentals, excluding contingent rent, costs for services and taxes reimbursable to
the lessor; 
b. Bargain purchase option; and 
c. Guaranteed residual value 

 Contingent rent - is lease payment that is not fixed in amount but rather based
on the future amount of a factor that changes other than with the passage of time
(e.g., percentage of future sales, amount of future use, future price indices, future
market rates of interest). Contingent rent is recognized as expense in the period
incurred. 

The minimum lease payments are discounted using interest rate implicit in the
lease, if this is determinable; if not, the lessee's incremental borrowing rate is used. 

Initial direct costs, such as costs incurred in negotiating and securing leasing
arrangements, are capitalized as part of the asset recognized 

The lease liability is subsequently measured similar to an amortized cost financial

liability. Accordingly, the minimum lease payments are apportioned between interest
expense and a reduction of the outstanding liability. Interest expense in each period
reflects a constant periodic rate of interest on the remaining balance of the liability. 
The leased asset is accounted for similar to an owned asset, e.g., as PPE or
investment property. Accordingly, the leased asset is depreciated using the entity's
existing depreciation policies. If there is no reasonable certainty that the lessee will
obtain ownership by the end of the lease term, the asset shall be depreciated over the
shorter of its useful life and the lease term. 
Accounting for Finance lease by Lessors 
A lessor recognizes the lease payments receivable under a finance lease at an amount
equal to the net investment in the lease. 

Initial direct costs are included in the initial measurement of the finance lease
receivable and reduce the amount of revenue recognized over the lease term. The
interest rate implicit in the lease is defined in such a way that the initial direct costs are
included automatically in the finance lease receivable. Therefore, there is no need to
add the initial direct costs separately. 

 Interest rate implicit in the lease – is the discount rate that, at the inception of
the lease, causes the aggregate present value of: 
1. The minimum lease payments; and 
2. The unguaranteed residual value,
to be equal to the sum of (a) the fair value of the leased asset and (b) any initial direct
costs of the lessor. 
The lease receivable (net investment in the lease) is subsequently measured similar
to an amortized cost financial asset. Accordingly, the lease payments are applied
against gross investment in the lease to reduce both the principal and the unearned
finance revenue. 

Operating lease
A lessee (lessor) under an operating lease recognizes the payments as expense
(income) on a straight-line basis over the lease term, unless another systematic basis
is more representative of the time pattern of the user's benefit. 

Initial direct costs incurred by lessors are added to the carrying amount of the
leased asset and recognized as expense over the lease term on the same basis as the
lease income. Initial direct costs incurred by lessees (such as lease bonus paid to the
lessor) are treated as prepaid rent and recognized as expense on the same basis as the
lease expense. 

Chapter 13 Summary: 
 A lease that transfers substantially all the risks and rewards incidental to
ownership of an asset is a finance lease; a lease that does not is an operating
lease. 
 Any of the following would lead to a financial classification: 
1. Transfer of ownership
2. Bargain purchase option
3. The lease term is for the major part of the economic life of the asset ("75%
criterion').
 4. The PV of the lease payments is at least substantially all of the fair value
of the leased asset ('90% criterion) 
5. The leased asset is specialized nature. 
 Inception of the lease is the earlier of the date of the agreement and the date of
commitment by the parties to the principal provisions of the lease. Classification
measurement are done on this date. 
 Commencement of the lease term is the date from which the lessee is entitled
to exercise its right to use the leased asset. Initial recognition of any asset or
liability is made on this date.
 A lessee recognizes an asset and a liability from a finance lease.
 Lease payments are discounted using the interest rate implicit in the lease, if
this is determinable; if not, the lessee's incremental borrowing rate is used. 
 Initial direct costs are generally capitalized. 
 The lessee depreciates the leased asset under a finance lease over the shorter
of the asset's useful life and the lease term if there is no reasonable certainty that
the lessee will obtain ownership over the asset by the end of the lease term. 
 A lessor recognizes the lease payments receivable under a finance lease at an
amount equal to the net investment in the lease. 
 A lessee (lessor) under an operating lease recognizes the lease payments as
expense (income) on a straight-line basis over the lease term, unless another
systematic basis is more representative of the time pattern of the user's benefit. 

Chapter 14 
Financial Statements 
Introduction 
General Purpose Financial Statements are those intended to meet the needs of users
who are not in a position to demand reports tailored to meet their particular information
needs. (PPSAS 1.3) 

Objectives of General-Purpose Financial Statements 

The objectives of general-purpose financial statements of a public sector entity are:
a. To provide information about the entity's financial position, financial performance, and
cash flows that is useful to a wide range of users in making economic decisions; and
b. To demonstrate the accountability of the entity for the resources entrusted to it. 

Responsibility for Financial Statements 

The responsibility over financial statements rests with the entity's management,
particularly the Head of the Entity jointly with the Head of Finance/Accounting. 
A Statement of Management Responsibility for Financial Statements shall be
attached to the financial statements as letter. 

Components of General Purpose Financial Statements 

A complete set of financial statements consists of: 
a. Statement of Financial Position; 
b. Statement of Financial Performance; 
c. Statement of Changes in Net Assets/Equity; 
d. Statement of Cash Flows; 
e. Statement of Comparison of Budget and Actual Amounts; and 
f. Notes to the Financial Statements, comprising a summary of significant accounting
policies and other explanatory notes. 

General Principles 
Fair Presentation
 Fair presentation means the faithful representation of the effects of transactions
and other events in accordance with the definitions and recognition criteria for
assets, liabilities, revenue, expenses in the PPSAS. The application of PPSAS,
with appropriate disclosures, if necessary, would result in the presentation of the
financial statements. 
Fair presentation also requires the proper selection application of accounting
policies in accordance with the PPSAS. Additional disclosures shall be made whenever
relevant to the understanding of the information contained in the financial statements. 
Compliance with PPSASs 
An entity whose financial statements comply with the PPSASs shall make an explicit
and unreserved statement of such compliance in the notes. Financial statements shall
not be described as complying with the PPSASs unless they comply with all the
requirements of PPSASs. Inappropriate accounting policies are not rectified either by
disclosure of the accounting policies used, or by notes or explanatory material. 

Departure from PPSAS 

In the event that Management strongly believes that compliance with the requirement of
PPSAS would result in misleading presentation that it would contradict the objective of
the financial statements, the entity may depart from that requirement if the relevant
regulatory framework allows, or otherwise does not prohibit, such a departure. 

Going Concern 
The financial statements shall be prepared on a going concern basis unless there is an
intention to discontinue the entity operation or there is no realistic alternative but to do
so. 

Consistency of Presentation 
The presentation and classification of items in the financial statements shall be retained
from one period to the next unless laws, rules and regulations, and PPSAS require a
change in presentation. 

Materiality and Aggregation

Each material class of similar items shall be presented separately in the financial
statements. Items of a dissimilar nature or function shall be presented separately unless
they are immaterial. If a line item is not material, it is aggregated with other items either
on the face of the financial statements or in the Notes. A specific disclosure requirement
in a PPSAS need not be satisfied if information is not material. 
Offsetting 
Assets and liabilities, and revenue and expenses shall not be offset unless
(a) required or permitted by a PPSAS, or 
(b) when offsetting reflects the substance of the transaction or other event. 

Comparative Information 
Comparative information shall be disclosed with respect to the previous period for all
amounts reported in the financial statements. Comparative information shall be included
for narrative and descriptive information when it is relevant to an understanding of the
current period's financial statements. (GAM for NGAs, Chapter 2, Sec. 15-22) 

Identification of the Financial Statements 

The financial statements shall be identified clearly, and distinguished from other
information in the same published document. 

The following information shall be displayed prominently and repeatedly: 

a. Name of the reporting entity;
b. Whether the financial statements cover the individual entity a group of entity; 
c. The reporting date or the period covered by the financial statements, whichever
is appropriate to that component of the financial statements;
d. Name of fund cluster; 
e. The reporting currency; and 
f.  The level of rounding-off of amounts. 
(PPSAS 1.61) 

Reporting Period 
Financial statements shall be presented at least annually. 
When an entity changes its reporting date such that its annual financial
statements are presented for a period longer or shorter than one year, the following
shall be disclosed: 
a. The period covered by the financial statements; 
b. The reason for using a longer or shorter period; and 
c. The fact that comparative amounts are not entirely comparable. 

Statement of Financial Position

The statement of financial position shows the entity's financial condition as at a
certain date. It is presented in comparative, condensed and detailed formats. 

1. Condensed Statement of Financial Position - presents only the 

line items shown below. The breakdowns and other relevant information are disclosed
in the Notes.
a. Cash and cash equivalents; 
b.Receivables from exchange transactions; 
c. Recoverable from non-exchange transactions (taxes and transfers); 
d. Financial assets (excluding amounts shown under (a), (b) and (c)); 
e. Inventories; 
f. Investment Property; 
g. Property, Plant and Equipment; 
h. Intangible assets; 
i. Taxes and Transfers Payable; 
j. Payables under exchange transactions; 
k. Provisions; 
l. Financial liabilities (excluding amounts shown in (i) and (j)); and 
m. Net assets/equity, 
 
Additional line items, headings, and sub-totals shall be presented whenever
relevant to the understanding of the entity’s financial position. 

2. Detailed Statement of Financial Position - presents all the assets liability and
equity accounts in the Revised Chart of Accounts. 

Both the condensed and detailed statement of financial position form part of
the entity's annual financial statements. 
The statement of financial position shall show distinctions between current and
noncurrent assets and liabilities. 

Any of the following would lead to the current classification of an asset or

liability. 

Current Assets Current Liabilities

a. Expected to be realized in, or is held for a. expected to be settled in the

sale or consumption in, the entity's entity's normal operating
normal operating cycle. cycle.

b. held primarily for trading. b.  held primarily for trading.

c. expected to be realized within C.  due to be settled within 12

12months after the reporting date. months after the reporting date.

d. it is cash or a cash equivalent, unless it D.  the entity does not have an
is restricted from being exchanged or unconditional right to defer
used to settle a liability for at least settlement of the liability for at least
twelve months after the reporting date. twelve months after reporting date. 

All other assets and liabilities are classified as noncurrent. 

Statement of Financial Performance

The statement of financial performance shows the revenue, expenses and surplus or
deficit for the period. It is presented in comparative, condensed and detailed formats. 
 Generally, revenue and expenses are recognized surplus or deficit, except for
the following which are recognized directly in equity: 
a.  Correction of prior period errors; 
b. Effect of changes in accounting policies; 
c. Gains or losses on remeasuring available-for-sale financial assets. 

The following are the minimum line items to be presented on the face of the
statement of financial performance:
a. Revenue; 
b. Finance costs; 
c. Share in the surplus or deficit of associates and joint ventures; 
d. Gain or loss attributable to discontinuing operations; and 
e. Surplus or deficit. 

Additional line items, headings, and sub-totals shall be presented whenever

relevant to the understanding of the entity's financial performance. 
The nature and amount of material items of revenue and expense are disclosed
separately. Examples of items to be disclosed separately include the following: 
a. Write-downs of assets (e.g., inventory, PPE) and reversals thereof; 
b. Restructuring provisions and reversals thereof; 
C. Disposals of items of property, plant, and equipment; 
d. Privatizations or other disposals of investments; 
e. Discontinuing operations; 
f. Litigation settlements; and 
g. Other reversals of provisions. 
Expenses may be presented according to their function or nature, whichever is
more relevant. If expenses are classified by function, additional disclosures shall be
made on the nature of expenses, including depreciation, amortization and employee
benefits expenses. 

Statement of Changes in Net Assets/Equity 

The statement of changes in net assets/equity shows the increase or decrease in the
entity's net assets during the period resulting from the following: 
a. Surplus or deficit for the period; 
b. Items of revenue and expense that are recognized directly in equity; 
c. Effects of changes in accounting policies and corrections of errors; and 
d. The balance of accumulated surpluses or deficits at the beginning of the period
and at the reporting date, and the changes during the period. 

Statement of Cash Flows 

The statement of cash flows shows the sources and utilizations of cash and cash
equivalents during the period according following activities: 

a. Operating Activities – cash flows from operating activities are primarily derived from
the principal cash-generating activities of the entity. They normally include cash flows
on items of revenue and expenses. Examples include: 
i. Receipt of NCA and reversion of unused NCA 
ii. Receipt or provision of assistance and subsidy to entities 
iii. Collection of income and receivables 
iv. Payments of expenses, cash advances and payables 
v. Inter or intra-entity transfers of funds 
 
b. Investing Activities – involve the acquisition and disposal of noncurrent assets and
other investments. Examples include: 
i. Acquisition and disposal of PPE, investment property, intangible assets and other
noncurrent assets 
ii. Acquisition and disposal of investment securities and derivatives 
iii. Collection and provision of long-term loans 

c. Financing Activities – are activities that affect the entity's equity capital and
borrowings. Examples include: 
i. Issuing of notes, loans, and bonds payable, and their repayments 
ii. Finance lease payments pertaining to the reduction of the outstanding finance lease
liability 

Cash flow information provides a basis for assessing an entity's ability to

generate cash and cash equivalents and its utilization of funds. 
Cash flows exclude movements between 'cash' and 'cash equivalents' (e.g.,
investment of excess cash in cash equivalents) because these are part of the entity's
cash management rather than operating, investing or financing activities. 

Presentation of Cash flows

Operating activities 
Cash flows from (used in) operating activities are presented using the Direct Method.
Under this method, major classes of gross cash receipts and gross cash payments are
presented. The indirect method, which is available to business entities, is not allowed
for government entities. 
Information about major classes of gross cash receipts and gross cash
payments may be obtained either: 
a. From the accounting records of the entity; or 
b. By adjusting relevant accounts for changes during the period, non-cash items, and
other items whose effects are investing or financing cash flows. This can be done
through T-account analyses. 

A reconciliation of the accrual basis surplus or deficit with the net cash flow
from operating activities shall be provided in the notes to financial statements. 

Investing & Financing activities 

Cash flows from (used in) investing and financing activities are also presented
according to major classes of gross cash receipts and gross cash payments. 
  Cash flows may be reported on a net basis for: 
a. Receipts and payments made on behalf of customers, taxpayers or
beneficiaries that reflect the activities of the other party rather than those of the
entity; and 
b. Receipts and payments for items with quick turnover, large amount, and short
maturities. 
 Cash flows denominated in a foreign currency are translated using the spot
exchange rate at the date of the cash flow. Exchange differences are not cash
flows but a reconciliation of the cash and cash equivalents at the beginning and
end of period. Exchange differences are reported in the statement cash flows
separately from the operating, investing and financing activities. (See illustrative
statement of cash flows below.) 
 Any significant amount of cash and cash equivalents held that is not available for
the entity's use shall be disclosed in the notes. 

Statement of Comparison of Budget and Actual Amounts 

The statement of comparison of budget and actual amounts shows differences
(variances) between budgeted amounts and actual results for a given reporting period.
This enhances the transparency of financial reporting of the government 

The statement of comparison of budget and actual amounts shows the following: 
a. Budget information - consists of, among others, data on appropriations, allotments,
obligations, revenues and other receipts, and disbursements. This is based on the
budget registries and includes the following: 
i. Original Budget – is the initially approved budget for the period, usually the General
Appropriations Act, The original budget may include residual appropriated amounts
automatically carried over from prior years by law such as prior year commitments or
possible future liabilities based on a current contractual agreement (e.g., prior year's not
yet due and demandable obligations). 
ii. Final Budget – is the original budget adjusted for all reserves, carry-over amounts,
realignments, transfers, allocations and other authorized legislative or similar authority
changes applicable to the period.
 (GAM for NGAs, Chapter 3, Sec. 2) 
Explanations regarding changes from original to final budget (i.e., whether they
are a consequence of reallocations within the budget) are disclosed in the notes. 
Moreover, the budgetary basis (cash, accrual or some modification thereof) used
in preparing the budget information vis-à-vis the accounting basis used in preparing the
financial statements shall be disclosed in the notes. 

b. Actual amounts on a comparable basis – These represent the actual

disbursements made during the period. 
Since the 'actual amounts on a comparable basis' to the budgeted amounts are
on a 'cash basis', they may not always be equal to the amounts presented in the other
financial statements, which are on 'accrual basis'. These, therefore, are reconciled in
the notes. The differences are classified as follows: 
i Basis Differences – occur when the approved budget is prepared on a basis other than
the accounting basis; 
ii. Timing Differences - occur when the budget period differs from the reporting period
reflected in the financial statements; and 
iii. Entity Differences – occur when the budget omits program or entities that are part of
the entity for which the financial statements are prepared. 
(GAM for NGAs, Chapter 3, Sec. 20) 

C. Differences between (a) and (b) above – Explanations of material differences shall
be made in the notes. 

Notes to Financial Statements 

The notes to financial statements provides information in addition to those presented
in the other financial statements. It is an integral part of a complete set of financial
statements. All the other Financial statements are intended to be read in conjunction
with the notes. Accordingly, information in the other financial statements shall be cross-
referenced to the notes. 
The notes shall be structured in a systematic and logical manner to show the
following: 
1. General information on the reporting entity. 
2. Statement of compliance with the PPSAS and Basis of preparation of financial
statements. 
3. Summary of significant accounting policies. 
This includes narrative descriptions of the line items in the other financial
statements, measurement bases, transitional provisions, and other relevant information.
4. Disaggregation (breakdowns) and other supporting information for the line items in
the other financial statements. 
5. Other disclosures required by PPSAS, such as: 
a. Explanations for the differences between budgeted and actual amounts; 
b. Events after the reporting date, if material; 
c. Changes in accounting policies and accounting estimates and prior period errors; 
d. Contingent liabilities, contingent assets, and unrecognized contractual commitments;
e. Related party disclosure; and 
f. Non-financial disclosures, e.g., the entity's financial risk management objectives and
policies. 
6. Other disclosures not required by PPSAS but the management deems relevant to the
understanding of the financial statements. 

Events After the Reporting Date 

Events after the reporting date are those events, both favorable and  unfavorable,
that occur between the reporting date and the date when the financial statements are
authorized for issue include the following: 
a. Adjusting events – those that provide evidence of condition that existed at the
reporting date; and 
b. Non-adjusting events – those that are indicative of conditions that arose after the
reporting date. (PPSAS 14.5) 
  Reporting date - end of the calendar year (i.e., December 31). 
 Date of authorization of financial statements for issue - date of signing of the
Statement of Management's Responsibility for Financial Statements by the Head
of Agency and Head of Finance Department. 

Adjusting events after the reporting date 

The financial statements are adjusted to reflect adjusting events after the reporting
date. Examples: 
a. Settlement of a court case that evidences a present obligation at the reporting date.
b. Bankruptcy of a debtor that evidences an impairment of a receivable at the reporting
date. 
c. Sale of inventories that evidences the correct NRV of inventories at the reporting
date. 
d. Determination of the amount of revenue pursuant to a revenue sharing agreement
with another entity. 
e. Determination of employee bonuses, if the entity has a present obligation to make
payments as of the reporting date. 
f. Discovery of fraud or errors that show that the financial statements were incorrect. 

Non-adjusting events after the reporting date 

Non-adjusting events are disclosed only, if they are material Examples: 
a. Acquisition or disposal of a major controlled entity. 
b. Announcement of a plan to discontinue an operation or a major program. 
c. Major purchases and disposal of asset. 
d. Destruction of a building by a fire after the reporting date. 
(GAM for NGAs, Chapter 19, Sec. 35) 

Changes in Accounting Policies

Accounting Policies – are the specific principles, bases, conventions, rules and
practices applied by an entity in preparing and presenting financial statements. (PPSAS
3.7) 
An entity shall select accounting policies using the guidance in the PPSAS as
well as the guidance issued by COA and shall apply them consistently to similar
transactions. 
An entity may change an accounting policy if the change: 
a. is required by PPSAS; or 
b. results to a reliable and more relevant information. 

The following are considered changes in accounting policies: 

a. Change from one basis of accounting to another basis of accounting; and 
b. Change in the accounting treatment, recognition or measurement of a transaction,
event or condition within a basis of accounting. (GAM for NGAs, Chapter 19, Sec. 37) 
A change in accounting policy is accounted for as follows: 
a. Using the transitional provision, if any; 
b. In the absence of a transitional provision, by retrospective application; or 
c. If retrospective application is impracticable, by prospective 
application. 

Retrospective application involves adjusting the open balance of each affected

account for the earliest period presented as if the new accounting policy had always
been applied. The net effect of the adjustments is adjusted to the opening balance of
equity for the earliest period presented 
When it is difficult to distinguish a change in accounting policy from a change in
an accounting estimate the change is treated as a change in an accounting estimate.
(PPSAS 3.40) 

Changes in Accounting Estimates 

Changes in accounting estimates result from new information or new developments
and, accordingly, are not correction of errors. (PPSAS 3.7) 
Examples include changes in estimates of: bad debts, provisions, useful life of
an asset, residual value, and the like. 
A change in accounting estimate is accounted for by prospective application.
Prospective application involves recognizing the effect of the change in surplus or
deficit either in the (a) period of change or (b) period of change and future periods, if the
change affects both. 

Errors 
Errors include mathematical mistakes, incorrect application of accounting policies,
oversights or misinterpretations of facts, and fraud. Errors can arise in respect of
recognition, measurement, presentation or disclosure of items in the financial
statements. Financial statements do not comply with the PPSAS if they contain material
errors or immaterial errors made intentionally. 

Errors can be classified as follows: 

a. Current period errors – errors committed, and discovered, in the current year.
These are corrected by correcting entries within the same year. 
b. Prior period errors - errors committed in prior years that are discovered in the
current year. These arise from failure to use information that: 
i. was available when the prior year's financial were authorized for issue; and 
ii. could reasonably be expected to have been obtained and taken into account when
preparing those statements. 

Material prior period errors are corrected by retrospective restatement.

Retrospective restatement involves correcting the prior period errors as if they have
never occurred. The procedures are similar to the retrospective application for a change
in accounting policy. 
Retrospective restatement shall be applied as far back as practicable. If this is
not practicable, prior period errors and corrected prospectively. 
Consolidated and Separate Financial Statements 
A controlling entity is required to present consolidated financial statements, except in
cases where the controlling entity is a controlled entity itself and its securities are not
being traded. 
 Consolidated Financial Statements – are the financial statements of an
economic entity (controlling entity and controlled entities) presented as those of a
single entity. 
 Controlling Entity – is an entity that has one or more controlled entities.
 Controlled Entity – is an entity, including an unincorporated entity such as a
partnership, which is under the control of another entity (known as the
controlling entity). (GAM for NGAs, Chapter 20, Sec. 2) 

All controlled entities shall be consolidated, except for one that is held to be sold
within 12 months from acquisition. A controlled entity is not excluded from
consolidation simply because its activities are dissimilar to those of the other entities in
the group.

Control exists if the entity has both the power to govern the financial and
operating policies of another entity and the ability to benefit from the activities of the
other entity. Examples of indicators of control are shown below: 

Power Condition Benefit Condition

a. Ownership of the majority voting interest a. Ability to dissolve the other entity and
(whether directly or indirectly). obtain significant residual economic benefits
or bear significant obligation.
b. Power to appoint majority of the b Ability to extract distributions of asset from
members of board of directors. the other entity and exposure to certain
c. Power to cast majority votes during obligations of the other entity.
board of directors or general meetings.

Consolidation Procedures
1. Similar items of assets, liabilities, revenue and expenses are added line by line.
2. The carrying amount of the controlling entity's investment in the controlled entity is
eliminated. The resulting goodwill is recognized.
3. The minority interests in the surplus or deficit and net assets of the controlled entity
are recognized and presented separately. 
The minority interest in the net assets is presented within equity but
separately from the equity of the controlling entity. This consists of:
a. the minority interest in the net assets as at the combination date; and
b. the minority's share in the subsequent changes in the controlled entity's equity since
the combination date.
4. The effects of inter-entity transactions are eliminated in full. 
 Separate Financial Statements - are those presented by a controlling entity, an
investor in an associate, or a venturer in a jointly controlled entity, in which the
 investments are accounted for on the basis of the direct net assets/equity interest
rather than on the basis of the reported results and net assets of the investees.
(PPSAS 6.7) 
In the separate financial statements, investments in controlled entities, jointly
controlled entities, and associates are accounted for:
a. Using the equity method; or
b. As a financial instrument (i.e., at fair value). 

Interim Financial Statements

Government entities prepare interim financial statements on a quarterly basis using
the same accounting policies used in annual reports. 

Other Reports
In addition to the financial statements, government entities are also required to prepare
and submit the following reports:
1. Trial balances (Pre-closing and Post-closing)
2. Other schedules: 
a. Regional Breakdown of Income
b. Regional Breakdown of Expenses 

Chapter 14 Summary: 
 The responsibility over financial statements rests the entity's management,
particularly the Head of the Entity jointly with the Head of Finance/Accounting.
 A peculiar financial statement of a government entity is the Statement of
Comparison of Budget and Actual Amounts. This statement shows the
differences between budgeted amounts and actual results for a given reporting
period.
 The statements of financial position and financial performance are presented in
comparative, condensed and detailed formats.
 The statement of financial position of a government entity shows distinctions
between current and noncurrent assets and liabilities.
 The following are recognized directly in equity, rather than through surplus or
deficit: (a) correction of prior period errors; (b) effect of changes in accounting
policies; and (c) gains or losses on remeasuring available-for-sale financial
assets.
 Government entities present cash flows from operating activities using the direct
method.
 Adjusting events are those that provide evidence of conditions that existed at the
reporting date. Those that are indicative of conditions that arose after the
reporting date are non-adjusting events. Adjusting events are recognized. Non-
adjusting events are disclosed only, if material.
 A change in accounting policy is accounted for using the following order of
priority: (1) transitional provision; (2) retrospective application; (3) prospective
application.
 A change in accounting estimate is accounted for by prospective application.
  The correction of a prior period error is accounted for by retrospective
restatement. 

Chapter 15
Miscellaneous Topics
Scope of this chapter
The following are discussed in this Chapter:
a. Service Concession Arrangements by Grantor;
b. Interests in Joint Ventures; and
c. The Effects of Changes in Foreign Exchange Rates.

Service Concession Arrangements by Grantor

● Service Concession Arrangement – is a binding arrangement between a
grantor and an operator in which:
a. The operator uses the service concession asset to provide a public service on
behalf of the grantor for a specified period of time; and
b. The operator is compensated for its services over the period of the service
concession arrangement.
➢ Binding Arrangements – are contracts and other arrangements that confer
similar rights and obligations on the parties to it as if they were in the form of a
contract.
➢ Grantor – is the public sector entity (government entity) that grants the right to
use the service concession asset to the operator.
➢ Operator – is the private entity that uses the service concession asset to provide
public services subject to the grantor's control of the asset.
➢ Service Concession Asset - is an asset used to provide public services in a
service concession arrangement that:
1. Is provided by the operator which:
 i. the operator constructs, develops, or acquires from a third party; or
ii. is an existing asset of the operator; or
2. Is provided by the grantor which:
i. is an existing asset of the grantor; or
ii. is an upgrade to an existing asset of the grantor.
(PPSAS 32.8)

Other terms for service concession arrangement are "build-operate-transfer"

(BOT) arrangements, “rehabilitate operate-transfer," "public-to-private service
concession" and "private-public partnership (PPP).
Examples of concession arrangements under R.A. No.7718 (An Act
Amending Certain Sections Of R.A. No. 6957, Entitled "An Act Authorizing The
Financing, Construction, Operation And Maintenance of Infrastructure Projects By The
Private Sector, And For Other Purposes"):

a. Build-operate-and-transfer (BOT) – the private entity awarded with the contract

undertakes to finance the construction of an infrastructure facility and operate it for a
fixed term not to exceed 50 years. At the end of the term, the facility is transferred to
the government. If the interest of the Government so requires, the transfer of the facility
includes the transfer of process technology and training of Filipino nationals.
b. Build-transfer-and-operate (BTO) – the private entity awarded with the contract
undertakes to complete the construction of a facility, assuming cost overruns, delays,
and specified performance risks. Upon completion, the facility is immediately transferred
to the government. However, the private entity operates the facility on behalf of the
government under an agreement.
c. Rehabilitate-operate-and-transfer (ROT) - the private entity awarded with the
contract undertakes to rehabilitate or refurbish an existing facility of the government
then operate it for a certain period. At the end of that period, the facility is reverted back
to the government.
d. Develop-operate-and-transfer (DOT) - a private entity awarded with an
infrastructure project is also given the right to develop an adjoining property, thereby
enjoying some benefits in the form of higher property or rent values brought about by
the government infrastructure project.
e. Contract-add-and-operate (CAO) – the private entity adds to an existing
infrastructure facility, which it is renting from the government, then operates the added
facility over an agreed period. Ownership over the added facility may or may not be
transferred to the government. If there is a transfer of ownership, the contract is
accounted for as a service concession arrangement

Recognition and Measurement of Asset

The grantor recognizes a service concession asset if:
a. The grantor controls or regulates what services the operator must provide with the
asset, to whom it must provide them, and at what price; and
b. The grantor controls, through ownership, beneficial entitlement or otherwise, any
significant residual interest in the asset at the end of the term of the arrangement.
(PPSAS 32.9)
Complete control of the price is not necessary. It is sufficient that the price is
regulated.
If the operator has freedom to set prices, the grantor controls the price if any
excess profit is returned to the grantor (i.e., the operator's return is capped).
Control shall be distinguished from management. If the grantor retains both the
degree of control described in (a) and (b) above, the operator is only managing the
asset on the granto behalf, even though the operator may have wide managerial
discretion.
A grantor recognizes even a "whole-of-life" asset (i.e., an asset used in a service
concession arrangement for its entire useful life) if the conditions in (a) and (b) above
are met.

Initial measurement
A service concession asset is initially measured at:
a. Fair value, if the asset is provided by the operator in accordance with the recognition
criteria in (a) and (b) above.
b. Cost, in accordance with the measurement principles for PPE or Intangible Assets, as
appropriate, if the asset is reclassified from the existing assets of the grantor, e.g., an
existing asset is transferred to the operator for refurbishing.

Subsequent measurement
A service concession asset is subsequently accounted for as service concession
tangible asset. (a separate class of PPE) or as service concession intangible asset (a
separate class of intangible assets), as appropriate.
Recognition and Measurement of Liability
When the grantor recognizes a service concession asset, the related liability is
measured at the same amount, adjusted for any other consideration (e.g., cash)
received from or paid to the operator.
ating asset of the set, except when
No liability is recognized when an existing asset of the grantor is reclassified as a
service concession asset, except when the operator provides additional consideration.
In exchange for the service concession asset the grantor may compensate the
operator by one or a combination of the following:
1.Making payments to the operator ('financial liability model’)
2. Granting the operator the:
a. Right to collect fees from users of the service concession asset; or
b. Right to access another revenue-generating asset operator's use (e.g., a private wing
of a hospital whe remainder of the hospital is used by the grantort public patients or a
private parking facility adjacent to a public facility). (PPSAS 32.17)
Financial Liability Model
The grantor recognizes a financial liability if it incur unconditional obligation to pay cash
or another financial asset to the operator in exchange for the service concession asset.
The payments shall be allocated as a reduction in the liability, a finance charge,
and charges for services provided by the operator.
Where the asset and service components of a service concession arrangement
are separately identifiable, the payments are allocated based on the relative fair values
of the components. If the components are not separately identifiable, the grantor shall
estimate the service component of the payments.

Grant of Right to the Operator Model

If the operator is compensated by a grant of right to earn revenue from third-party users
or another revenue-generating asset, the grantor recognizes a liability for the unearned
portion of the revenue arising from the exchange of assets between the grantor and the
operator.
The grantor then recognizes revenue for the earned portion over the contract
term according to the economic substance of the service concession arrangement.
Dividing the Arrangement
If the operator is compensated partly by payments and partly by grant of right, the
grantor shall allocate the total liability to these elements and account for them
separately.
The amount initially recognized for the total liability shall be the same amount as
the service concession asset adjusted for any other consideration (e.g., cash) received
from or paid to the operator.

Impairment and Derecognition

The grantor uses the same principles used for PPE and intangible assets to account for
the impairment or derecognition of service concession assets.

Interests in Joint Venture

Introduction
● Joint Venture – is a binding arrangement whereby two one parties are
committed to undertake an activity that is subject joint control.
➢ Joint control – is the agreed sharing of control over an activity by a binding
arrangement. (PPSAS 8.6)

The following are the three forms of joint ventures:

a. Jointly controlled operations
b. Jointly controlled assets
c. Jointly controlled entities

Jointly Controlled Operations

In a jointly controlled operation, each venturer uses and recognizes its own assets,
incurs its own liabilities and expenses, but each will share in the income from sales by
the joint venture. Each venturer records joint venture transactions in its own books of
account

● Venturer – is a party to a joint venture and has joint control over that joint
venture. (PPSAS 8.6)
Jointly Controlled Assets
In a jointly controlled assets, each venturer recognizes its ch. the assets, liabilities,
income and expenses of the joint va classified according to the nature of those items,
rather than through an investment account. Each venturer records venture transactions
in its own books of account.

Jointly Controlled Entities

In a jointly controlled entity, a separate entity (e.g.,a corporation) is established. The
separate entity recognizes its own assets, liabilities, equity, income and expenses in its
own books of accounts, separate from those of the venturers.
Each venturer recognizes its interest in the net assets of the separate entity
through an investment account (i.e., Investment in Joint Venture). The investment in
joint venture is accounted for under the equity method.

Under the equity method, the investment is initially recognized at cost and
subsequently adjusted for the venturer's share in the changes in the equity of the
investee (e.gu, share in surplus or deficit, share in dividends).

An investor that does not have joint control but has significant influence over the
joint venture shall account for its interest as investment in associates. Investment in
associates is also accounted for under the equity method.
➢ Significant influence - is the power to participate in the financial and operating
policy decisions of an activity but is not control or joint control over those policies.
(PPSAS 8.6)
The entity shall discontinue the use of the equity method from the date it ceases
to have joint control or significant influence over a jointly controlled entity.
An interest in a jointly controlled entity that is acquired with the exclusive view of
disposal within 12 months from acquisition shall be accounted for as financial asset
held for trading.
An operator or manager of a joint venture recognizes the management fees it
receives as revenue while the joint venture recognizes those fees as expenses.
The Effects of Changes in Foreign Exchange Rates

Initial Measurement
A foreign currency transaction is initially measured by translating the foreign currency
amount into the functional currency using the spot exchange rate.

● Foreign Currency Transactions - are transactions that are denominated and

require settlement in foreign currency, e.g., buying and selling goods or services
at prices denominated in a foreign currency and settling receivables and
payables denominated in foreign currency.
● Foreign Currency – a currency other than the functional currency of the entity.
(PPSAS 4.10)
● Functional Currency – the currency of the primary economic environment in
which the entity operates. (PPSAS 4.10)
● Spot exchange rate – the exchange rate for immediate delivery. (PPSAS
4.10) ...or simply, the current exchange rate on a given date.
● Exchange Rate – the ratio of exchange for two currencies. (PPSAS 4.10)

Subsequent Measurement
At each reporting date, the following items are translated follows:
Items Translated Using
a. Monetary Items - Closing rate
b. Nonmonetary items measured at - Exchange rate at the date of
historical cost. transaction.
c. Nonmonetary items measured at - Exchange rate at the fair value
fair value. measurement date.

● Closing rate – the spot exchange rate at the reporting date.

● Monetary items – are units of currency held and assets and liabilities to be
received or paid in a fixed or determinable number of units of currency. (PPSAS
4.10)
● Non-Monetary items - items which essential feature is the absence of a right to
receive (or an obligation to deliver) a fixed or determinable number of units of
currency. (PPSAS 4.10)
Exchange Differences
Exchange differences arising from the translation of:
a. Monetary items are recognized in surplus or deficit in the period in which they arise.
b. Nonmonetary items – if the gain or loss is recognized in equity, the exchange
component of the gain or loss is also recognized in equity; if the gain or loss is
recognized in surplus or deficit, the exchange component is also recognized in surplus
and deficit.
● Exchange difference – the difference resulting from translating a given number
of units of one currency into another currency at different exchange rates.
(PPSAS 4.10)

Translation of Financial Statements

An entity is required to present its financial statements using its functional currency (i.e.,
Philippine pesos). However, whenever needed, the entity may translate its financial
statements into any presentation currency (e.g., Japanese yen, US dollars, etc.), as
follows:
Items Translated using
a. Assets and Liabilities - Closing rate at the date of the
(including comparative) statement of financial position.
b. Revenues and Expenses - Exchange rates at the dates of the
(including comparative) transactions.
- All resulting exchange difference are recognized as a separate component
equity.

Chapter 15 Summary:
● Under a service concession arrangement a private entity ('operator') uses the
service concession asset to provide public service on behalf of the government
(‘grantor') in exchange for compensation which is (a) payments in cash or (b)
grant of right to collect fees from users of the asset or right to access another
revenue-generating asset, or (c) a combination of (a) and (b).
● A service concession asset is either an asset that the operator provides to the
grantor or an existing asset of the grantor that the operator undertakes to
refurbish.
● A service concession asset is initially measured at fair value if it is provided by
the operator to the grantor for which the grantor obtains control of. In other
cases, the service concession asset is initially measured at cost.
● A service concession asset is subsequently accounted for as either PPE or
intangible asset.
● If the compensation to the operator is in the form of payments, the grantor
recognizes a financial liability that is subsequently measured at amortized cost. If
the compensation is in the form of grant of right, the grantor recognizes a liability
for unearned revenue that will be recognized as revenue when earned in
accordance with the substance of the service concession arrangement
● The three forms of joint ventures under the GAM for NGAS are (1) Jointly
controlled operations, (2) Joint controlled assets, and (3) Jointly controlled
entities.
● Under jointly controlled operations, the joint venturer recognizes its own costs,
assets, and liabilities but recognizes its share in the sale revenue of the joint
venture.
● Under jointly controlled assets, the joint venturer reco share in the joint
venture's assets, liabilities, inco expenses and include them line-by-line to its own
liabilities, income and expenses.
● Under jointly controlled entities, the joint venturer reco interest in the joint
venture (a separate entity) unde "Investment in Joint Venture" account, which is
accounted using the equity method.
● A foreign currency transaction is initially measured translating the foreign
currency amount into the functional currency using the spot exchange rate.
● At each reporting date, monetary items are translated using the closing rate;
nonmonetary items measured at historical cost are translated using historical
exchange rates; and nonmonetary items measured at fair value are translated
using the exchange rate at the date when the fair value was determined.
● Exchange differences on monetary items are recognized in surplus or deficit
while exchange differences on nonmonetary items are recognized either in equity
or in surplus or deficit.
● An entity is required to present its financial statements using its functional
currency. However, it can translate its financial statements to any presentation
currency whenever needed.
● When translating financial statements, assets and liabilities are translated using
the closing rate at the reporting date. Revenues and expenses are translated at
the exchange rates at the dates of the transactions. All resulting exchange
differences are recognized in equity.
CHAPTER 16
NON-PROFIT ORGANIZATION
Introduction 
Although the IFRSs/PFRSs are designed to apply to business entities, they can also be
applied to non-profit organizations. This is evidenced by the following excerpts from the
IFRSs/PFRSs: 

 IFRSs are designed to apply to the general purpose financial statements and
other financial reporting of profit-oriented entities. Although the IFRSs are not
designed to apply to not for-profit activities, entities with such activities may find
them appropriate." (Preface to IFRSs.9) 
  PAS 1 Presentation of Financial Statements uses terminology that is suitable for
profit-oriented entities. If entities with not-for-profit activities apply PAS 1, they
may need to amend the descriptions used for particular line items in the
financial statements and for the financial statements themselves. (PAS 1.5) 
 IFRSs generally do not have scope limitations for not-for-profit activities.
Although IFRSs are developed for profit oriented entities, a not-for-profit entity
might be required, or choose, to apply IFRSs. (IFRS 3 Business
Combinations. BC63) 

As can be inferred from the foregoing statements PERSs can be applied to all reporting 
to all reporting entities regardless of their form (i.e., sole proprietorship, partnership,
corporation or cooperative) and purpose (i.e., for-profit or not-for-proni Accordingly,
most of the concepts that we will be learning in this Chapter would be very familiar to
you. 
However, just like in the case of accounting for sole proprietorships, partnerships,
corporations and cooperatives, the accounting for non-profit organizations differs in
respect of accounting for equity. 

Current trend in practice 

In practice, the accounting for non-profit organizations is essentially similar to the
accounting for businesses. The notable differences are the terminologies used in the
financial statements, which are modified to suit the non-profit organization's purpose,
and the presentation and disclosure of equity. 
Non-profit organizations in the private sector are normally organized as non-
stock, non-profit corporations. As such, they are required to file audited annual financial
statements to the Securities and Exchange Commission (SEC). In most cases, the
auditors' reports in these financial statements state an opinion on the organization's
compliance with the PFRSs (or IFRSs, for international organizations). 
Since the PFRSs do not provide specific guidance on the accounting for non-
profit organizations, many non-profit organizations resort to the exemptions provided
under PAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
(i.e., 'hierarchy of financial reporting standards'). For example, in cases where the
PFRSs are silent regarding the accounting treatment for or financial statement
presentation of, a transaction peculiar to non-profit organizations, the organization may
refer to the general guidelines set forth under the Conceptual Framework. 
Characteristics of a non-profit organization 
 Non-profit organization (NPO) - (also called not-for-profit entity NEP' or
noncommercial organization 'NCO') is one that carries out some socially
desirable needs of the community or its members and whose activities are not
directed towards making profit. 

The main objective of NPOs may be educational, religious, social, cultural or

charitable. NPOs may be in the form educational institutions, hospitals and other health
care providers, religious institutions, professional bodies, sports, social or literary dubs,
and other forms of charitable institutions. 
NPOs earn revenues sufficient to cover their expenses. A major portion of these
revenues are derived from charitable donations and other fundraising activities. Surplus
revenues do not inure to the benefit of a particular individual or group of individuals but
rather retained in furtherance of the organization's mission. Accordingly, none of the
surplus revenues are distributed as dividends. 
Because NPOs carry out their activities in the interest of the society and without
the intention of making profit, NPOs are usually exempt from income taxation. 

PFRS principles applicable to NPOs 

As stated earlier, the recognition, measurement, derecognition, presentation and
disclosure requirements of the PFRSs can be applied to NPOs. Examples are
provided below: 
 Recognition criteria for assets and liabilities: 
a. Meets the definition of an asset or liability; 
b. Probable inflow or outflow of resources; and
c. Reliable measurement of cost or other value (e.g., fair value). 
 Measurement of Asset or Liability: 
a. Initial measurement at cost except when a relevant PFRS requires measurement
at fair value or some other value. 
b. Subsequent measurement at amortized cost, under the cost model, or some
other measurement model required by a relevant PFRS. 

 Derecognition of Asset or Liability: 

An asset (or liability) is derecognized when it ceases to provide inflow (or require
outflow) of resources embodying economic benefits. The difference between the
carrying amount and net proceeds (or net settlement), if any, is recognized in
change in net assets. 
 Presentation of Financial Statements: 
General features: Fair presentation and compliance with PFRSs, Going concern,
Accrual basis, Materiality and aggregation, Offsetting, Frequency of reporting,
Comparative information and Consistency of presentation. 
Our succeeding discussions on the accounting for NPOs are based in part on the
accounting principles specifically provided under U.S. GAAP Statement of Financial
Accounting Standards (SFAS or FAS) No. 116 Accounting for Contributions Received
and Contributions Made and SFAS No. 117 Financial Statements of Not for-Profit
Organizations. 
Although these principles do not have the same authority as those of the PFRSs,
they may be adopted and used in conjunction with the PFRSs (to the extent that they
not contravene the provisions of the PFRSs) in order to provide more useful financial
information to users of NPO financial statements. Moreover, CPA board exam questions
on accounting for NPOs have traditionally been based on these principles. 
Various illustrative financial statements are provided in the next chapter. I
encourage you to notice later on how the U.S. GAAP principles are incorporated into
PFRS-based financial statements. 
All throughout our discussions in this chapter, we will use the term "non-profit
organization (NPO)" to refer only to non profit organizations in the private sector.
Those belonging to the public sector (e.g., government entities) are outside the scope of
this chapter. They are discussed in the Government Accounting part of this book. 

Accounting for non-profit organizations 

Fund theory vs. Fund accounting 

The financial statements of most NPOs are based on the fund theory. The fund
theory stresses great importance on the custody and administration of funds.
Accordingly, the source, nature and purpose of the funds held by the NPO are disclosed
in order to give information necessary for users to assess the organization's
štewardship over those funds. 
Although fund accounting is an off-shoot of the fund theory, SFAS 117 and the
PFRSs do not require the use of fund accounting. However, entities are not prohibited
from using it. 
Under fund accounting, the main accounting unit is the fund. Accordingly,
transactions are accounted for in the books and presented in the financial statements
strictly based on their fund classifications as either 
(1) Unrestricted, 
(2) Temporarily restricted, or 
(3) Permanently restricted. 

Fund theory-based financial statements Fund accounting-based financial accounting

 Focuses on the reporting entity  Views the entity as being made up of

concept;  thus,  the accounting component parts;thus,  the
unit is the organization as a accounting units are the various
whole funds held

 Adheres to the accounting point of  Adheres to the bookkeeping point-of-

view or providing useful information to view of providing useful informations
external users. to managers
 The term ‘funds’  is more commonly  The term ‘funds’  is used to refer to
used to refer to the net assets specific funds  consisting of cash and
other non-cash assets.

 Provides disclosures on the types of  Focuses and classifying assets, net

restrictions on net assets and revenues assets, and changes in them strictly
(i.e.,Unrestricted, temporarily restricted, in accordance with their fund
or permanently restricted) classification (i.e.,  unrestricted,
temporarily restricted, or permanently
restricted)

 Current trend  Traditional 

Contributions 
A majority of the revenues of NPOs come from charitable contributions or donations. 
 Contributions refer to resources received in non-reciprocal transactions.
Contributions exclude those that result from exchange transactions (i.e.,
resources received in exchange for other resources or obligations). 

SFAS 116 classifies contributions based on donor's restrictions as follows: 

1. Unrestricted - available for immediate use and for any purpose. 
2. Temporarily restricted – restricted by the donor in such a way that the
availability of the contribution for the NPO's use is dependent upon: 
a. the performance of a specific task; 
b. the happening of a future event; or 
c. the passage of time 
The temporarily restricted contribution is available to the organization when the task
is performed, the event occurred, or the time restraint passes. At that time, the support
is reclassified from temporarily restricted to unrestricted. 
3. Permanently restricted – restricted by the donor in such a way that the
organization will never be able to use the contribution itself; however, the organization
may be able to use the income therefrom. 

Recognition and measurement 

Cash and other Non-cash assets 
Cash and other non-cash assets received as contributions are recognized as revenues
in the period received and as assets, decreases of liabilities, or expenses depending
on the form of the benefits received 
Contributions are measured at fair value at the date of contribution, and are
reported as either: 
a. Unrestricted support - revenue from unrestricted contributions; or 
b. Restricted support – revenue from temporarily restricted or permanently
restricted contributions. 
 Temporarily restricted contributions whose restrictions are met in the same
reporting period may be reported as unrestricted support provided that the NPO
discloses this accounting policy and applies it consistently from period to period. 
Unrestricted support increases unrestricted net assets while restricted support
increases either (a) temporarily restricted net assets or (b) permanently restricted net
assets. 

Unconditional promises 
Unconditional promise to give cash or other non-cash assets in a future period is
recognized when the unconditional promise to give is received from the donor.
Generally, such unconditional promise is classified as a temporarily restricted
contribution because of the time restriction (i.e., to be received in the future). In the
event that the promised contribution becomes doubtful of collection, an allowance for
uncollectibility is recognized. 

Conditional promises 
Conditional promises to give, which depend on the occurrence of a specified future and
uncertain event to bind the promisor, are recognized only when the attached conditions
are substantially met (i.e., when the conditional promise becomes unconditional). A
conditional promise to give is considered unconditional if the possibility that the
condition will not be met is remote (that is, the possibility that the conditions will be met
is reasonably certain). 
A transfer of assets with a conditional promise to contribute them shall be
accounted for as a refundable advance (i.e., liability) until the conditions have been
substantially met. (SFAS No. 116.22) 

Services 
Contributions of services are recognized if the services received 
a. create or enhance nonfinancial assets; or 
b. require specialized skills, are provided by individuals possessing those skills, and
would typically need to be purchased if not provided by donation. 

Services requiring specialized skills are provided by accountants, architects,

carpenters, doctors, electricians, lawyers, nurses, plumbers, teachers, and other
professionals and craftsmen. 
Contributed services and promises to give services that do not meet the above
criteria are not recognized. (SFAS No. 116.9) 

Works of art and similar items 

An entity need not recognize contributions of works of art, historical treasures, and
similar assets if the donated items are added to collections that meet all of the following
conditions: 
a. Held for public exhibition, education, or research in furtherance of public service
rather than financial gain; 
b. Protected, kept unencumbered, cared for, and preserved; and 
 c. Proceeds from sales of collection items are to be used to acquire other items for
collections. (SFAS No. 116.11) 

The reason for the non-recognition as an asset or revenue is that, when all of the
conditions above are met, the work of art (or similar item) does not meet the PFRS
asset recognition criterion of "probable economic benefits.” Moreover, the financial
value of some works of art may be difficult to measure reliably. 
In cases, however, where a work of art (or similar item) meets all of the
recognition criteria for an asset, the work of art is recognized as asset and revenue
measured at fair value. 

Other funds held by NPOS 

 Endowment fund - classified into the following: 
a. Term endowment fund - under the donor's restrictions, the NPO can use
a portion of the principal each period. This is classified as temporarily
restricted. 
b. Regular endowment fund - under the donor's restrictions, the NPO
cannot spend any of the principal. This is classified as permanently
restricted. 
Income from either term or regular endowment fund is used according to the donor's
instruction. 
 Agency fund – funds held by the NPO acting as a custodian. Agency funds are
recognized as liabilities. For example, an educational institution may receive
funds from the Commission on Higher Education (CHED) to be disbursed as
student loans. 
 Plant fund - consists of the following: 
a. unexpended funds for the acquisition of plant assets; 
b. funds for the renewal and replacement of plant assets; 
c. funds for the retirement of indebtedness; and 
d. investment in plant assets. 
 Board-designated fund ('quasi-endowment') - funds which are restricted at the
sole discretion of the NPO's governing board (i.e., Board of Trustees). Funds that
are internally restricted are classified as unrestricted. Only contributions with
donor-imposed restrictions are classified as restricted. 

Treating the various funds held by an NPO ass accounting units can make accounting
cumbersome. Thus, SFAS No. 117 and the PFRSs do not require fund accounting.
NPOs normally use fund accounting as a managerial tool rather than a system for
providing general-purpose financial statements. 

Deferral method of recognizing contributions 

In its publication titled "A Guide to Financial Statements of Not-For Profit Organizations
- Questions For Directors to Ask," the Chartered Accountants of Canada suggest a
“Deferral Method" in accounting for restricted contributions received by NPOs. 
 The "deferral method" is similar to the provisions of PAS 20 Accounting for
Government Grants and Disclosure of Government Assistance, in such a way that
income from donations is recognized based on the "matching concept." 
Under the "deferral method," restricted contributions are initially recognized as
liability (i.e., as deferred revenue) and recognized as revenue in the same period where
the related expenditures, for which the contributions were intended to reimburse, are
incurred. 
The "deferral method" parallels more the principles under the PFRSs. However, we
will be using the principles of SFAS 116 and 117, unless otherwise indicated, because
Philippine CPA board exam questions on NPOs have traditionally been based on these
principles. 

Financial statements 
A complete set of general-purpose financial statements of an NPO consists of the
following: 
PFRSs  SFAS NO. 7
(based on IASCF’s published audited financial
statements

 Statement of financial position  Fitment of financial

position

 Statement of activities  Statement of activities

 Statement of cash flows  statement of cash flows

 Notes  Notes 

Statement of financial position 

The statement of financial position shows information on assets. liabilities, and net
assets. 

Classification of Net assets 

SFAS No. 117 requires reporting of net assets in the statement of financial position
according to the following classifications: 
1. Unrestricted net assets 
2. Temporarily restricted net assets 
3. Permanently restricted net assets 

PFRS-based financial statements may present net assets using the

classifications above either on the statement of financial position or in the notes. 

Statement of activities 
The statement of activities shows information on revenues, expenses, and changes in
net assets for a period. This statement takes the place of the income statement and
statement of changes in equity for a business entity. However, NPOs may opt to
present a separate statement of changes in net assets (or statement of changes in
reserves). This separate statement takes the place of a statement of changes in equity. 
SFAS No.117 requires that the statement of activities report the changes in net
assets for each of the three categories of support separately (i.e., unrestricted,
temporarily restricted and permanently restricted). 
PFRS-based financial statements may present changes in net assets using the
classifications above either on the statement of activities or in the notes. 
In a statement of activities, the term “profit" or "net income" is replaced by the
term "change in net assets." 
NPOs adopting the PFRSs shall apply PFRS 15 Revenue from Contracts with
Customers for revenues arising from transactions other than charitable contributions. 

Expenses 
A statement of activities shall report expenses as decreases in unrestricted net
assets. 
SFAS No. 117 requires expenses to be presented in the statement of activities or
in the notes according to their function.
The functional classifications are as follows: 
1. Program services – are the activities that result in goods and services being
distributed to beneficiaries, customers, or members that fulfill the purposes or
mission for which the organization exists. Those services are the major purpose
for and the major output of the organization and often relate to several major
programs. 
2. Supporting activities - are all activities other than program services. Generally,
these include management and general, fund-raising, and membership-
development activities. (SFAS No. 117, 26 to 28) 

Statement of cash flows 

The statement of cash flows of an NPO is similar to that of a business entity and can
also be prepared using the direct or indirect method. 
Restricted assets acquired during the period that are used for long-term
purposes because of donor restrictions are classified as financing activities. 

Accounting procedures peculiar to specific types of NPOs 

The principles that we have discussed so far apply to all types of NPOs. In this section,
we will discuss accounting procedures unique to specific types of NPOs. For this
purpose, we will subdivide NPOs into the following: 
1. Health Care Organizations 
2. Private, non-profit, Colleges and Universities 
3. Voluntary Health and Welfare Organizations 
4. Other non-profit organizations 

Health Care Organizations 

Health Care Organizations include hospitals, clinics, medical group practices, individual
practice associations, individual practitioners, emergency care facilities, laboratories,
suro centers, other ambulatory care organizations, continuing care retirement
communities, health maintenance organizations, home health agencies, nursing homes,
and rehabilitation centers. 
In accordance with the "AICPA Audit and Account Guide, Health Care
Organizations," the following are the accounting requirements unique to healthcare
organizations: 
1. Components of a complete set of financial statements 
2. Presentation of revenues in the statement of operations 
3. Presentation of contributions in the statement of operations 
4. Disclosure of performance indicator 

Financial statements of a health care organization 

According to the "AICPA Audit and Accounting Guide, Health Care Organizations,”
health care organizations shall prepare the following statements: 
a. Statement of financial position 
b. Statement of operations (in lieu of a statement of activities) 
c. Statement of changes in net assets 
d. Statement of cash flows, and 
e. Notes to the financial statements. 

Presentation of revenues in the statement of operations 

Revenues in the statement of operations are classified into the following: 
a. Net patient revenue - gross patient service revenue less contractual
adjustments, employee discounts and billed charity care. 
b. Premium revenue – results from capitation agreements 
c. Other revenues – all other revenues not classifiable as net patient revenue or
premium revenue. 

Contractual adjustments
A portion of a hospital's revenues is collectible from third-party payors, such as the
Philippine Health Insurance Corporation (PhilHealth) and other health insurance
providers. In this regard, a contractual adjustment may arise from the reimbursement 
agreement. 
A contractual adjustment is the difference between what the hospital considers
a fair price for a service rendered versus an agreed upon amount for the service with
the insurance company. 

Employee discounts 
These are special discounts available only to the NPO's employees (and their
immediate family members) in the form of reduction in the price of patient services.
Employee discounts are accounted for as direct reduction to patient service
revenue. 

Charity care 
Charity care pertains to free services rendered to patients. Charity care is not
recognized but rather disclosed only in the notes. 
Capitation agreements
Capitation agreements are agreements with third parties based on the number of
employees instead of services rendered. SFAS No. 117 requires revenues from
capitation agreements to be shown separately on the statement of operations under the
caption "Premium revenue," which is a line item below net patient revenue. 

Other revenues 
Other revenues consist of revenues other than patient service revenues and premium
revenues. Examples are the revenues from the hospital's pharmacy, parking deck,
flower and gift shop, educational programs, donated materials and services. 

Presentation of contributions in the statement of operations 

Unlike for other NPOs, health care organizations do not present restricted
contributions on the statement of operations as part of revenues. The revenues
discussed above (i.e., net patient service revenues, premium revenues, and other
revenues) pertain only to unrestricted revenues and may include revenues from
unrestricted contributions. Revenues from unrestricted contributions may be separately
indicated as such or included in the other revenues classification. 
Revenues from restricted contributions are presented separately at the bottom
part of the statement of operations, after unrestricted revenues and expenses. 

Disclosure of performance indicator 

According to the AICPA Guide, the statement of operations shall provide a
performance indicator, such as operating income, revenue over expenses, etc. The
policy used in determining the performance indicator shall be disclosed in the notes. 
Unrealized gains and losses on investments in securities are not a part of the
performance indicator, but shall be reported on the statement of operations after the
performance indicator. 

Private, non-profit, Colleges and Universities 

The accounting procedure that is unique to private, non-profit, colleges and universities
is the accounting for scholarships and fellowships. The concepts are provided
below:  
a. Scholarships and fellowships granted freely are treated as direct reduction of
revenues from tuition and fees, e.g., academic scholarship. 
b. Scholarships and fellowships granted as compensation for services rendered by
the grantee are treated as expenses, e.g., scholarships provided to student
assistants and faculty members or their dependents. 
c. Refunds of tuition fees from class cancellations and other withdrawal of
enrolment are treated as direct reduction of revenues from tuition and fees. 

Voluntary Health and Welfare Organizations 

Voluntary Health and Welfare Organizations (VHWO) are non-profit entities that derive
their revenues primarily from donations from the general public to be used for purposes
connected with health, welfare, or community services. Examples include: women and
children's health and welfare societies, human rights advocates, environmental
protection organizations, religious organizations, museums and other cultural and arts
societies libraries, research and scientific foundations, professional associations, private
elementary schools, social clubs, and fraternal organizations. 
What distinguishes a VHWO providing health care services from a Health Care
Organization is the source of revenue rather than the type of services provided. A
VHWO derives its revenues from donations from the general public while a Health Care
Organization derives its revenues from patients. 
The accounting requirement unique to VHWOs is the provision of a statement of
functional expenses that reports expenses by both functional (i.e., program and
supporting) and natural classifications (salaries expense, depreciation expense, etc.).
According to SFAS No. 117, the statement of functional expenses is useful in
associating expenses with service efforts and accomplishments of the organization. 

Other non-profit organizations

The general accounting requirements for NPOs apply to other non-profit organizations.
Thus, there are actually no accounting requirements peculiar to these organizations. 

Accounting for other assets held by NPOs 

As mentioned earlier, the general principles of PFRSs apply to NPOs. Accordingly, an
NPO shall: 
 Use the accrual basis of accounting, in addition to the other ‘general features'
provided under PAS 1. 
 Apply PFRS 9 Financial Instruments (or PFRS for SMEs, as appropriate) for
financial assets and financial liabilities. Usually, NPOs account for marketable
securities at fair value with changes in fair values recognized in the statement of
activities – similar to FVPL securities (the FVOCI classification is not applicable
to NPOs adopting the PFRS for SMEs). - 
Under SFAS 124 Accounting for Certain Investments Held by Not-for-Profit
Organizations, the marketable securities of an NPO, consisting of either equity or debt
instruments, are measured at fair value. Changes in fair values are recognized in the
statement of activities. Also, marketable securities can be classified as either current or
non-current assets. SFAS 124 does not apply to investments which result to significant
influence or control. Accounting Principles Board (APB) Opinion No. 18, also a U.S.
GAAP, requires the use of the equity method for investments held by NPOs that result
to significant influence. 
 Depreciate its depreciable assets in accordance with PAS 16, Property, Plant
and Equipment. 
 Recognize impairment loss in accordance with PAS 36 Impairment of Assets
when an asset's carrying amount exceeds its recoverable amount. 
 Account for leases (other than those qualifying as contributions) in accordance
with PFRS 16 Leases. 

Chapter 16 Summary: 
 Although the PFRSs are designed to apply to business entities they can also be
applied to non-profit organizations. 
 Non-profit organizations carry out socially desirable needs of the community or
its members without the intention of making profit. NPOs can be classified into
the following: (1) Health Care Organizations, (2) Private, non-profit, colleges and
universities, (3) Voluntary Health and Welfare Organizations, and (4) Other non-
profit organizations.
  Accounting principles under U.S. GAAP: 
-Contributions are classified based on donor's restrictions as: (1) unrestricted, (2)
temporarily restricted, and (3) permanently restricted. These classifications are
also applied to the net assets. Internally-restricted funds are unrestricted. 
-Unconditional promises to give contributions are recognized when the promise is
received from the donor. Conditional promises are recognized only when the
performance of the attached condition is reasonably certain. 
-Cash and other non-cash assets received as contributions are recognized as
assets and revenue measured at fair value. 
-Services in-kind that enhance a non-financial asset or require specialized skills
are recognized as revenue and expense. Other services are not recognized. 
-Works of art and similar items received as donation are generally not
recognized, unless they meet the asset recognition criteria. 
-Contributions received by an NPO acting as an agent are recognized as
liabilities. 
-Net assets released from restrictions are presented as a decrease in temporarily
restricted net assets and an increase in unrestricted net assets. 
-NPOs shall prepare the following financial statements: (1) of financial position,
(2) Statement of activities, (3) Statement of cash flows, and (4) Notes. 
-Expenses are presented using the following functional classifications: (1)
Program services and (2) Supporting activities. 
-For a health care organization: 
a. Net patient revenue = Gross patient service revenue less contractual
adjustments, employee discounts and billed charity care. 
b. Premium revenue = revenues from capitation agreements. 
c. Other revenues = all other unrestricted revenues. 
› Restricted contributions are presented separately from the revenues section of
the statement of operations.
-For a private, non-profit, college or university: Net revenue from tuition and fees
= Total assessments less refunds and scholarship grants that are not granted as
compensation for services rendered by the grantee. All other types of
scholarships are expensed.