Chap 8 CFAS

CHAPTER 8
PRESENTATION OF FINANCIAL STATEMENTS

An introduction
Statement of Financial Position
PAS 1
Brief Summary:
This chapter tackles the components, objective, and preparation of financial statements,
the classification of current and noncurrent assets and liabilities, and the forms of presenting the
statement of financial position.
Financial Statements
- Financial statements are the means by which the information accumulated and processed
in financial accounting is periodically communicated to the users.
- The financial statements are the end product or main output of the financial accounting
process.
- Financial statements are a structured financial representation of the financial position and
financial performance of an entity
A complete set of financial statements comprises the following components:

1. Statement of financial position
2. Income statement
3. Statement of comprehensive income
4. Statement of changes in equity
5. Statement of cash flows
6. Notes, comprising a summary of significant accounting, 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 flows of an entity that is useful to a wide range
of users in making economic decisions.
- To meet the objective financial statements provide information about the following:
a. Assets
b. Liabilities
c. Equity
d. Income and expenses, including gains and losses
e. Contributions by the distributions to owners in their capacity as owners
f. Cash Flows
The frequency of reporting of financial statements
- 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, an 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 position, namely assets, liabilities and equity.
Classification of Assets
- Assets are classified only into two, namely current assets and noncurrent assets.
- 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 Asset
- 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 unrestricted 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 asset 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.
- 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 and other investments in
quoted equity instruments
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". In other words, what is not included in the definition
of current assets is deemed excluded. All others are classified as noncurrent assets.
- Accordingly, noncurrent assets include the following:
a. Property, 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 or supply of goods
and services, for rental to others, or for administrative purposes, and are
expected to be used during more than one period.
b. Long-term investments
- The IASC defines investment 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 other benefits to the
investing entity such as those obtained through trading relationships.
c. Intangible assets
- An intangible asset is simply defined as an monetary asset without
physical substance.
d. Deferred tax assets
e. Other noncurrent assets
- Other noncurrent assets are those assets that do not fit into the definition
of noncurrent assets.
Classification of Liabilities
- Liabilities are classified into two, namely current and noncurrent liabilities.
- A liability has three essential characteristics:
a. it embodies a present duty or responsibility to one or more other entities that
entails settlement by probable future transfer or use of assets at a specified or
determinable date, on occurrence of a specified event, or on demand;
b. the duty or responsibility obligates a particular entity, leaving it little or no
discretion to avoid the future sacrifice, and;
c. the transaction or other event obligating the entity has already happened.
Current Liabilities
- PAS 1, paragraph 69, provides that an entity shall classify a liability as current when:
a. The entity expects to settle the 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 settlement of the liability
for at least twelve months after the reporting period.
- Current liabilities are often understood as all liabilities of the business that are to be
settled in cash within the fiscal year or the operating cycle of a given firm, whichever
period is longer.
- PAS 1, paragraph 54, provides that as a minimum, the face of the statement of financial
position shall include the following line items for 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
Equity
- The term equity is the residual interest in the assets of the entity after deducting all of its
liabilities.
- It means “net assets” or total assets minus liabilities.
The terms 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. Partners’ Equity in a partnership
c. Stockholders’ or Shareholders’ Equity in a corporation
Treatment of 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 than twelve months.
b. An agreement to refinance or to reschedule payment on a long-term basis is
completed after the reporting period and before the financial statements 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 noncurrent.]
Effect of Breach of Covenants on the Classification of Liability

- 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 the breach. This liability is classified as
current because at reporting date the borrower does not have an unconditional right to
defer payment for at least twelve months after the reporting period.
[However, Paragraph 75 provides that the liability is classified as noncurrent 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.]
Shareholders’ Equity
- The residual interest of owners in the net assets of a corporation measured by the excess
of assets over liabilities.
Philippine Term — IAS Term

1. Capital Stock — Share Capital
2. Subscribed Capital Stock — Subscribed Share Capital
3. Preferred Stock — Preferred Share Capital
4. Common Stock — Ordinary Share Capital
5. Additional Paid Capital — Share Premium
6. Retained Earnings (Deficit) — Accumulated Profits (Losses)
7. Retained Earnings Appropriated — Appropriation Reserve
8. Revaluation Surplus — Revaluation Reserve
9. Treasury Stock — Treasury Share
Elements Comprising the Equity of a Corporation

1. Paid in capital or contributed capital
2. Retained earnings
3. Treasury stock
Notes to Financial Statements

- Notes to financial statements provide narrative description or disaggregation of items
presented in the financial statements 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 statement; statement of comprehensive income, statement of changes in
equity and statement of cash flows.
- In other words, notes to financial statements are used to report information that does not
fit into the body of the financial statements in order to enhance the understandability of
the financial statements.
Forms of Statements of Financial Position

a. Report Form
- The report form sets forth the three major sections in a downward
sequence of assets, liabilities, and equity.
b. Account Form
- As the title suggests, the presentation follows that of an account, meaning,
the assets are shown on the left side and the liabilities and equity are
shown 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 line items:
1. Cash and Cash Equivalents
2. Financial Assets (Other than 1, 3, and 6)
3. Trade and other receivables
4. Inventories
5. Property, plant and equipment
6. Investment in associates accounted for by the equity method
7. Intangible assets
8. Investment property
9. Biological assets
10. Total of assets classified as held for sale and assets included in the disposal group
classified as held for sale
11. Trade and other payables
12. Current tax liability
13. Deferred tax asset and liability
14. Provisions
15. Financial Liabilities (Other than 11 and 14)
16. Liabilities included in the disposal group classified as held for sale
17. Noncontrolling interest
18. Share capital and reserves
- In the Philippines, the common practice is to present current assets before noncurrent
assets, current liabilities before noncurrent liabilities, and equity after liabilities.
- 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.

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Chap 8 CFAS

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CHAPTER 8

PRESENTATION OF FINANCIAL STATEMENTS

A complete set of financial statements comprises the following components:

Objective of financial statements

Statement of Financial Position

Treatment of Currently Maturing Long-term Debt

Effect of Breach of Covenants on the Classification of Liability

Philippine Term — IAS Term

Elements Comprising the Equity of a Corporation

Notes to Financial Statements

Forms of Statements of Financial Position

Line Items in the Statement of Financial Position

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