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; 
[Link] 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.