Chapter 14

Financial Statements

Learning Objectives
1. State the general principles in the presentation of
financial statements.
2. Prepare a complete set of general purpose financial
statements of a government entity, including a partial
notes to the financial statements.
3. Describe the accounting and disclosure requirements
for events after the reporting date, changes in
accounting policies, changes in accounting estimates,
and correction of errors.
4. State the “other reports” prepared by government
entities.

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 General Purpose Financial Statements
• 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)

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Objectives of General Purpose Financial Statements

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.

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 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.

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Components of General Purpose Financial Statements

1. Statement of Financial Position;

2. Statement of Financial Performance;
3. Statement of Changes in Net Assets/Equity;
4. Statement of Cash Flows;
5. Statement of Comparison of Budget and Actual
Amounts; and
6. Notes to the Financial Statements, comprising a
summary of significant accounting policies and
other explanatory notes.

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 General Principles
• Fair Presentation
• Compliance with PPSASs
• Departure from PPSAS
• Going Concern
• Consistency of Presentation
• Materiality and Aggregation
• Offsetting
• Comparative Information

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Identification of the Financial Statements
• The following information shall be displayed
prominently and repeatedly:
a. Name of the reporting entity;
b. Whether the financial statements cover the
individual entity or 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)
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 Reporting Period
• Financial statements shall be presented at least
annually.

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Statement of Financial Position
• The statement of financial position is presented in
comparative, condensed and detailed formats.
1. Condensed Statement of Financial Position –
presents only line items.
2. Detailed Statement of Financial Position –
presents all the asset, liability and equity
accounts in the Revised Chart of Accounts.

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 Current vs. Noncurrent
• The statement of financial position shall show distinctions between
current and noncurrent assets and liabilities.
Current Assets Current Liabilities
a. Expected to be realized in, or is a. Expected to be settled in the
held for sale or consumption in, entity’s normal operating cycle
the entity’s normal operating
cycle.
b. Held primarily for trading. b. Held primarily for trading.
c. Expected to be realized within c. Due to be settled within 12
12 months after the reporting months after the reporting date.
date.
d. It is cash or a cash equivalent, d. The entity does not have an
unless it is restricted from being unconditional right to defer
exchanged or used to settle a settlement of the liability for at
liability for at least 12 months least 12 months after the
after the reporting date. reporting date.

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Statement of Financial Performance
• Generally, revenue and expenses are recognized in
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; and
c. Gains or losses on remeasuring available-for-sale
financial assets.

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 Presentation of Expenses
• 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.

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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.

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 Statement of Cash Flows
• The statement of cash flows shows the sources and
utilizations of cash and cash equivalents during the
period according to the following activities:
1. Operating activities – presented using the Direct
Method only.
2. Investing activities
3. Financing activities

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Examples of Operating Activities
• Receipt of NCA and reversion of unused NCA
• Receipt or provision of assistance and subsidy to
other entities
• Collection of income and receivables
• Payments of expenses, cash advances and payables
• Inter or intra-entity transfers of funds

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Examples of Investing Activities
• Acquisition and disposal of PPE, investment property,
intangible assets and other noncurrent assets
• Acquisition and disposal of investment securities and
derivatives
• Collection and provision of long-term loans

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Examples of Financing Activities
• Issuing of notes, loans, and bonds payable, and their
repayments
• Finance lease payments pertaining to the reduction
of the outstanding finance lease liability

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Effects of Foreign Exchange Rates
• 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 the period. Exchange
differences are reported in the statement of cash
flows separately from the operating, investing and
financing activities.

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Statement of Comparison of Budget and Actual Amounts

• The statement of comparison of budget and actual

amounts shows the differences (variances) between
budgeted amounts and actual results for a given
reporting period.

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 Definitions
• Original Budget – is the initially approved budget for
the period, usually the GAA.
• 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.
• Actual amounts on a comparable basis – 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’.
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 Definitions
• The differences between the ‘actual amounts on
comparable basis’ and amounts presented in the other
components of financial statements are classified as
follows:
1. Basis Differences – occur when the approved budget
is prepared on a basis other than the accounting
basis;
2. Timing Differences – occur when the budget period
differs from the reporting period reflected in the
financial statements; and
3. 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. 28)
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 Notes to Financial Statements
• 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.
4. Disaggregation (breakdowns) and other
supporting information for the line items in the
other financial statements.

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 Notes to Financial Statements
5. Other disclosures required by PPSAS, such as:
– Explanations for the differences between
budgeted and actual amounts;
– Events after the reporting date, if material;
– Changes in accounting policies and accounting
estimates and prior period errors;
– Contingent liabilities, contingent assets, and
unrecognized contractual commitments;
– Related party disclosure; and
– Non-financial disclosures, e.g., the entity’s
financial risk management objectives and policies.

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 Notes to Financial Statements
6. Other disclosures not required by PPSAS but the
management deems relevant to the understanding
of the financial statements.

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Events After the Reporting Date
1. Adjusting events – those that provide evidence of
conditions that existed at the reporting date; and
2. Non-adjusting events – those that are indicative of
conditions that arose after the reporting date.

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 Examples of Adjusting Events
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.

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 Changes in Accounting Policies
• A change in accounting policy is accounted for as
follows:
1. Using the transitional provision, if any;
2. In the absence of a transitional provision, by
retrospective application; or
3. If retrospective application is impracticable, by
prospective application.

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Changes in Accounting Estimates
• A change in accounting estimate is accounted for by
prospective application.

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 Errors
• Material prior period errors are corrected by
retrospective restatement.

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

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 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

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 END

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