PRESENTATION OF FINANCIAL STATEMENTS

Financial Statements
Financial statements are the means by which the information accumulated and processed
in financial accounting is periodically communicated to the users.
General purpose financial statements
An entity shall prepare and present general purpose financial statements in accordance with
the International Financial Reporting Standards.
General purpose financial statements or simply referred to financial statements are those
intended to meet the needs of users who are not in a position to require an entity to prepare reports
tailored to their particular information needs.
Components of financial statements
A complete set of financial statements comprises the following components:
• Statement of financial position
• Income Statement
• Statement of comprehensive income
• Statement of changes in equity
• Statement of cash flows
• Notes, comprising a summary of significant accounting policies and other explanatory
notes
Objective of Financial Statements
The objective of financial statements is to provide information about the financial position,
financial performance, and cash flow of an entity that is useful to a wide range of users in making
economic decisions.
Financial statements also show the results of the management’s stewardship of the resource
entrusted to it.
To meet this objective, financial statements provide information about the following:
• Assets
• Liabilities
• Income and expenses including gains and losses
• Contribution by and contribution to owners in their capacity as owners
• Cash flows
Frequency of Reporting
Financial statements shall be presented at least annually.
When an entity’s end of reporting period changes and financial statements are presented
for a period longer or shorter than one year, the entity shall disclose:
a) The period covered by the financial statements
b) The reason for using a longer or shorter period
c) The fact that amounts presented in the financial statements are not entirely comparable
STATEMENT OF FINANCIAL POSITION
A statement of financial position is a formal statement showing the three elements
comprising financial positions, namely assets, liabilities, and equity.
CLASSIFICATION OF ASSETS
Assets are classified only into two, namely current assets and non-current assets.
When an entity supplies goods or services within a clearly identifiable operation cyc;e, the
separate classification of current and non-current assets is a useful information by distinguishing
them between net assets that are continuously circulating as working capital from the net assets
used in long term operations.
The operating cycle of an entity is the time between the acquisition of assets for processing
and their realization in cash or cash equivalents.
When the entity’s normal operating cycle is not clearly identifiable, the duration is assumed
to be twelve months.
Current Assets
PAS 1, paragraph 66, provides that an entity shall classify an asset as current when:
a) The asset is cash or cash equivalent unless the asset is restricted to settle a liability for more
than twelve months after the reporting period.
b) The entity holds the asset primarily for the purpose of trading
c) The entity expects to realize the assets within twelve months after the reporting period
d) The entity expects to realize the asset or intends to sell or consume it within the entity’s
normal operating cycle
Presentation of current assets
Current assets are usually listed in the order of liquidity. PAS 1, paragraph 54, provides
that as a minimum, the line items under current assets are:
a) Cash and cash equivalents
b) Financial assets at fair value such as trading securities
c) Trade and other receivables
d) Inventories
e) Prepaid expenses
Noncurrent Assets
The caption “noncurrent assets” is a residual definition.
PAS 1, paragraph 66, simply states that “an entity shall classify all other assets not
classified as current as noncurrent”
Some non-current assets are the following:
a) Property, plant, and equipment
b) Long-term investments
c) Intangible assets
d) Deferred tax assets
e) Other noncurrent assets
Properties, Plant and Equipment
PAS 16, paragraph 6, defines property, plant, and equipment as “tangible assets which are
held by an entity for use in production of supply of goods and services, for rental to others, or for
administrative purposes, and are expected to be used during more than one period”.
Most property, plant, and equipment, except land, are presented at cost less accumulated
depreciation.
Long Term Investments
The IASC defines investments as “an asset held by an entity for the accretion of wealth
through capital distribution, such as interest, royalties, dividends, and rentals, for capital
appreciation or for other benefits to the investing entity such as those obtained through trading
relationships”.
Intangible Assets
An intangible asset is simply defined as an identifiable nonmonetary asset without physical
substance.
Other noncurrent assets
Other noncurrent assets are those assets that do not fit into the definition of previously
mentioned non-current asset.
DEFINITION OF LIABILITY
A liability is a present obligation of an entity to transfer an economic resource as a result
of past event.
An obligation is a duty or responsibility that an entity has no practical ability to avoid.
An obligation can either be legal or constructive.
A liability is classified as current and noncurrent
Current liabilities
PAS 1, paragraph 69, provides that an entity shall classify a liability as current when:
a) The entity expects to settle a liability within the entity’s normal operating cycle.
b) The entity holds the liability primarily for the purpose of trading.
c) The liability is due to be settled within twelve months after the reporting period.
d) The entity does not have an unconditional right to defer the settlement of liability for at
least twelve months after the reporting period.
Presentation of current liabilities
PAS 1, paragraph 54, provides that as a minimum, the face of the statement of financial
position shall include the following line items of current liabilities:
a) Trade and other payables
b) Current provisions
c) Short-term borrowing
d) Current portion of long term debt
e) Current tax liability
The term “trade and other payables” is a line item for accounts payable, notes payable, accrued
interest on note payable, dividends payable, and accrued expenses.
No objection can be raised if the trade accounts and notes payable are separately presented.
Noncurrent Liabilities
The term “noncurrent liabilities” is also a residual definition.
PAS 1, paragraph 69, provides that all liabilities not classified as current are classified as
noncurrent.
a) Noncurrent portion of long-term debt
b) Finance lease liability
 c) Deferred tax liability
d) Long-term obligations to company officers
e) Long-term deferred revenue
Currently maturing long-term debt
A liability which is due to be settled within twelve months after the reporting period is
classified as current, even if:
a) The original term was for a period longer thatn twelve months
b) An agreement to refinance or to reschedule payment on a long-term basis is completed
after the reporting period and before financial statement are authorized for issue
However, if the refinancing on a long-term basis is completed on or before the end of the
reporting period, the refinancing is an adjusting event and therefore the obligation is classified as
non-current.
Discretion to refinance
If the entity has the discretion to refinance or roll over an obligation for at least twelve
months after the reporting period under an existing loan facility, the obligation is classified as non-
current even if it would be otherwise be due within shorter period.
The reason for this treatment is that such obligation is considered the to form part of the
entity’s long-term refinancing because the entity has an unconditional right under the existing loan
agreement to defer payment for at least twelve months after the end of the reporting period.’
Note that the refinancing or rolling over must be at the discretion of the entity.
Otherwise, if the refinancing or rolling over is not at the discretion of the entity, the
obligation is classified as a current liability.
Covenants
Covenants are often attached to borrowing agreements which the represent undertakings
by the borrower.
Covenants are acu\tually restrictions on the borrower as to undertaking further borrowings,
paying dividends, maintaining specified level of working capital and so forth.
Under these covenants, if these conditions relation to the borrower’s financial situations
are breached, the liability becomes payable on demand.
Effect of breach of Covenants
PAS 1, paragraph 74, provides that the liability is classified as current even if the lender
has agreed, after the reporting period and before the statements are authorized for issue, not to
demand payment as a consequence of breach.
 However, paragraph 75, provides that the liability is classified as non-current if the lender
has agreed on or before the end of reporting period to provide a grace period ending at least twelve
months after the end of reporting period.
DEFINITION OF EQUITY
The term equity is the residual interest in the assets of the entity after deducting al of its
liabilities.
The term used in reporting the equity of an entity depending on the form of the business
organization are:
a) Owner’s equity in a proprietorship
b) Partnership equity in a partnership
c) Stockholders’ equity or shareholders’ equity in a corporation
Under PAS 1, paragraph 7, the holders of instrument classified as equity are simply known as
owners.
Shareholders’ equity
Shareholders’ equity is the residual interest of owners in the net assets of a corporation
measured by the excess of assets over liabilities.
Generally, the elements constituting shareholders’ equity with their prevalent IAS terms
are:
Philippine Term IAS term
Capital stock Share capital
Subscribed capital stock Subscribed share capital
Preferred stock Preference share capital
Common stock Ordinary share capital
Additional paid capital Share Premium
Retained earnings (deficit) Accumulated Profits (losses)
Retained earnings appropriated Appropriation reserve
Revaluation surplus Revaluation reserve
Treasury stock Treasury share

NOTES TO FINANCIAL STATEMENTS

Notes to financial statements provide narrative description or disaggregation of items
presented in the financial statements o and information about items that do not qualify for
recognition.
Notes contain information in addition to that presented in the statement of financial
position, income statements, statement of comprehensive income, statement of changes in equity,
and statement of cash flows.
 The purpose of the notes to financial statements is “to provide the necessary disclosures
required by the Philippine Financial Reporting Standards”.
Forms of statement of Financial position
In practice, there are two customary forms in presenting the statement of financial position,
namely;
a) Report form
This form sets forth the three major section in a downward sequence of assets,
liabilities, and equity
b) Account form
As the tile suggest, the presentation follows that of an account, meaning the assets are
shown on the left side, and the liabilities and equity on the right side of the statement of
financial position.
Line items in the statement of financial position
PAS 1, paragraph 54, states that as a minimum, the face of the statement of financial
position shall include the following items:
1. Cash and cash equivalents
2. Financial Assets
3. Trade and Other Receivables
4. Inventories
5. Property plant and equipment
6. Investment in associates accounted for by the equity methods
7. Intangible Assets
8. Investment Property
9. Biological Assets
10. Total assets classified as held for sale and assets included in disposal group classified as
held for sale
11. Trade and other payables
12. Current tax liability
13. Deferred tax asset and deferred tax liability
14. Provisions’
15. Financial Liabilities
16. Liabilities included in the disposal group classified as held for sale
17. Noncontrolling interest
18. Share capital reserves
PAS 1, paragraph 57, provides that the standard does not prescribe the order or format in which
items are to be presented in the statement of financial position.