Financial Statements This information would assist users
- are the means by which the of financial statement in predicting
information accumulated and the entity’s cash flows and their
processed in financial accounting is timing and certainty.
periodically communicated to the Financial statements do not provide
users. all the information that users may
- a structured financial representation need to make economic decisions.
of the financial position and financial Financial statements portray the
performance of an entity financial effects of past events and
do not necessarily provide
General Purpose of Financial Statement nonfinancial information.
- to meet the needs of users.
Financial Position
Components of financial statements - Comprises the assets, liabilities, and
1. Statement of financial position equity of an entity at a particular
2. Income Statement time.
3. Statement of Comprehensive - Pertains to the liquidity, solvency,
Income and the need of the entity for
4. Statement of Changes in Equity additional findings.
5. Statement of Cash Flows - Portrayed in statement of financial
6. Notes, comprising a summary of position
significant accounting policies and
other explanatory information. Financial Performance
- also known as results of operations
Objectives of Financial Statement - comprises the revenue, expenses,
- to provide information about the and net income or loss of an entity.
financial position, financial - Performance is the level of income
performance and cash flows of an earned through the efficient and
entity that can be used in making effective use of its resources.
economic decisions. - Portrayed in the income statement
- Show the result of the stewardship and statement of comprehensive
of management of the resources income
entrusted to it.
Cash Flows
Financial statements provide information - Are the cash receipts and cash
about the following: payments arising from the
a. Assets operating, investing and financing
b. Liabilities activities of the entity.
c. Equity - The cash flow information is useful
d. Income and expenses, including in assessing the ability of the entity
gains and losses to generate cash and cash
e. Contribution by and contributions to equivalents.
owners in their capacity as owners - Presented in statement of cash
f. Cash flows flow.
Target users of financial reporting
- Existing and potential investors,
Financial Reporting lender and other creditors, have the
- is the provision of financial most critical and immediate need
information about an entity to for information in financial reports.
external users that useful in making - Management of a reporting entity,
economic decisions and for not rely on general purpose financial
assessing the effectiveness of the reports because it is able to obtain
entity’s management. or access additional financial
- The way of providing financial information directly.
information to external users is
through the annual financial Specific objectives of financial reporting
statements. 1. To provide information useful in
- Encompasses not only financial making investing and credit
statements but also other means of decisions about providing resources
communicating information that to the entity.
relates directly or indirectly to the 2. To provide information useful in
financial accounting process. assessing the cash flow prospects of
- Financial reports include not only the entity.
financial statements but also the: 3. To provide information about entity
o Financial highlights resources, claims and changes in
o Summary of important resources and claims.
financial figures
o Analysis of financial Limitation of financial reporting
statements a. Financial reports do not and cannot
o Significant ratios provide all of the information that
- Financial reports also include the primary users need.
nonfinancial information: b. Financial reports are not designed to
o Description of major show the value of a reporting entity
products but is to help the primary users
o Listing of corporate officers estimate the value of the entity.
and directors. c. Financial reports are intended to
provide common information to
Objective of Financial Reporting users and cannot accommodate
- Under the Conceptual Framework every specific request for
for Financial Reporting, is to provide information.
financial information about the d. Financial reports are based on
reporting entity that is useful to estimate and judgement rather than
existing and potential investors, exact depiction.
lenders, and the creditors in making
decisions about providing resources Responsibility for financial statements
to the entity. Management
- primary responsibility for the a. To select and apply accounting
preparation and presentation of policies in accordance with PFRS.
financial statements b. To present information, including
- Accountable for the safekeeping of accounting policies, in a manner that
the resources and their proper, provides relevant and faithfully
efficient and profitable use. represented financial information.
Board of Directors – reviews and authorizes c. To provide additional disclosures
the financial statements for issue necessary for the users to
Shareholders understand the entity’s financial
- assess how effectively management statements.
has fulfilled this role.
- It is relevant to the decision An entity cannot rectify
concerning their investment and the inappropriate accounting policies
reappointment or replacement of either by disclosure or by notes/
management. explanatory information.
General features of financial statements Department from standard
1. Fair presentation and compliance - The entity shall depart from that
with PFRS requirement provided the relevant
2. Going Concern regulatory Conceptual Framework
3. Accrual Basis requires, or otherwise does not
4. Materiality and aggregation prohibit, such a departure.
5. Offsetting
6. Frequency of reporting Thus an entity is permitted to depart from a
7. Comparative information standard:
8. Consistency of presentation
a. In extremely rare circumstances.
Fair Presentation b. When management concludes that
- The financial statements shall compliance with the standard would
present fairly the financial position, be misleading.
financial performance, and cash c. When the departure from the
flows. Prepared accordance with the standard is necessary to achieve fair
Philippine Financial Reporting presentation.
Standards (PFRS), the GAAP in the d. When the regulatory Conceptual
Philippines. Framework requires or otherwise
- Is a faithful representation of the does not prohibit such a departure.
effects of transactions and other
events in accordance with the In such circumstances, it is incumbent upon
definitions and recognition criteria the entity to disclose the following:
for assets, liabilities, income, and 1. The management has concluded
expenses laid down in the that the financial statements
Conceptual Framework present fairly the financial position,
financial performance and cash
Fair presentation requires an entity: flows of the entity.
2. That the entity has complied with - If the financial statements are not
applicable standards except that it prepared on a going concern basis,
has departed from a particular such fact shall be disclosed together
requirement to achieve a fair with the measurement basis and the
presentation. reason therefor.
3. The title of the standard from which
the entity has departed the nature Accrual Basis
of the departure, including the is the assets are recognized when
treatment that the standard would receivable rather than when physically
require, the reason why that received, and liabilities are recognized
treatment would be so misleading, payable rather than when actually paid.
and the treatment adopted.
4. For each period presented, the - Shall prepare the financial
financial impact of the departure on statements, using the accrual basis
each item in the financial of accounting except for cash flow
statements that would have been information.
reported in complying with the
requirement. Accrual Accounting is the income is
recognized when earned and expense is
recognized when paid.
Going Concern
- Also known as Continuity Main Essence of Accrual Accounting
Assumptions - is to recognize the accounts
- The accounting entity is viewed as receivable, accounts payable,
continuing in operation indefinitely prepaid expenses, accrued
in the absence of evidence to the expenses, deferred income, and
contrary. accrued income.
- It is relevant when management
shall make an estimate of the Materiality and aggregation
expected outcome of future events. - present separately each material
- The financial statements shall be class of similar items
prepared on ang going concern - present separately items of
basis. dissimilar nature or function unless
- There are material uncertainties they are immaterial.
regarding the ability of the entity to - Financial statements aggregated
continue as a going concern, those into classes according to their nature
uncertainties shall be fully or function. The final stage in the
disclosed. process of aggregation and
- In making the assessment about the classification is the presentation of
going concern assumption, condensed and classified data by
management shall take at least 12 line items in the FS.
months from the end of reporting - If a line item is not individually
period. material, it is aggregarted with
other items either in those longer or shorter than one year, the
statements or in the notes. entity shall disclose:
o The period covered by the FS
When is an item material? o The reason for using a longer
- This is dependent on good or shorter period
judgement, professional expertise o Amounts presented in the FS
and common sense. are not entirely comparable
- General Guide: item is material if Comparable Information
knowledge of it would affect the - If permitted by the PFRS, an entity
decision of the informed users of shall disclose comparative
the financial statements. information in respect of the
Ex. previous period.
- Large entities of rounding amounts - Shall presented with comparative
to the nearest thousand pesos in information (narrative and
their FS descriptive information)/ figures of
- Small Entities may round off to the the FS.
nearest peso.
Third Statement of Financial Position
Materiality is a relativity - It is required when an entity:
- Materiality of an item depends on o Applies an accounting policy
relative size rather than absolute retrospectively
size. o Makes retrospective
- What is material for one entity may restatement of items in the
be immaterial for another. financial statement
o Reclassifies items in the
Factors of materiality financial statements.
1. Relative size of the item – relation to - Shall present three statements of
the total of the group financial position
2. Nature of the item – some item may 1. End of the current period
be inherently material because of its 2. End of the previous period
nature 3. Beginning of the earliest
comparative period
Offsetting
- Assets and Liabilities, Income and Consistency of presentation
Expenses, material shall not be - The principle of consistency requires
offset against each other. that the accounting methods and
- Offsetting – if it is required or practices shall be applied on a
permitted by another PFRS uniform basis from period to period.
- Consistency is desirable and
Frequency of reporting essential to achieve comparability of
- At least annually financial statements. But does not
- When an entity changes the end of mean that no change in accounting
the reporting period and present method can be made. If the change
financial statements for a period
will result to information that is
faithfully represented and more
relevant to the users, change should
be made.
- Change in the presentation and
classification of items in the financial
statement is allowed:
o When it is required by
another PFRS.
o When a significant change in
the nature of the operations
of the entity will
demonstrate a more
appropriate revised
presentation and
classification.
Identification of financial statements
- FS shall be clearly identified and
distinguished from other
information in the same published
document.
- The following information shall be
prominently displayed:
a. Name of the reporting entity.
b. The FS cover the individual entity
or a group of entities.
c. The end of the reporting period
or the period covered by the FS
or notes.
d. Presentation currency
e. Level of rounding used in the
amounts in the financial
statements
- More understandable by presenting
information in thousands or millions
of units of the presentation
currency.