CFAS (CHAPTERS 4 TO 5) Provide information about the assets,

liabilities, equity, income and expenses of

Chapter 4: FINANCIAL STATEMENTS AND
both the parent and its subsidiaries as a
REPORTING ENTITY UNDERLYING ASSUMPTIONS
single reporting entity
General Objective of Financial Statements o Usually, makikita mo ang
transactions of the parent and
Financial Statements provide financial
subsidiaries w/ other parties
information about an entity’s assets, liabilities,
o Eliminating the related party
equity, income and expenses useful to users of
transactions (tinutukoy dito is yung
financial statements in:
subsidiaries nung parent company)
Financial Statements is a way to measure if o Reflects transactions w/ third parties
an investor will invest in a company (suppliers and customers) other than
yung subsidiary ng parent
Assessing future cash flows to the reporting
o Example: Ayala Corporation
entity
(Subsidiaries: BPI, Ayala Land, Globe)
 The life of an entity is dependent on
Consolidated FS are not designed to provide
its present and future cash flows
separate information about the assets,
 If the company is profitable, the
liabilities, equity, income and expenses of a
users will be able to check whether
particular subsidiary. A subsidiary’s own
to invest in a company
financial statements are designed to
Assessing management stewardship of the
provide such information
entity’s economic resources
o Financial Statement of a subsidiary
The financial information is provided in the are being consolidated in the
following: financial statement of the parent
Statement of Financial Position – o Separate financial statement of a
recognizing assets, liability and owner’s subsidiary is not being disclosed in
equity consolidated fs
Income Statement – recognizes income and o It’s being aggregated lang sa FS ng
expenses parent. So if you want to see the
Statement of Cash Flows – reflects the cash information of a subsidiary, you
flows from operating, investing, and should look for its own FS
financing activities Unconsolidated Financial Statements
Statement of Changes in Equity – reflecting
the contributions from equity holders and Are designed to provide information about
the distributions to equity holders the parent’s assets, liabilities, income and
Notes to Financial Statements – recognize expenses and not about those subsidiaries
the appropriate disclosures required by the o Basically, it only relates to the
accounting standards information of the parent alone
Information provided in unconsolidated
Types of Financial Statements financial statements is typically not
1. Consolidated Financial Statements sufficient to meet the requirement needs of
2. Unconsolidated Financial Statements primary users
3. Combined Financial Statements o Because if a potential investor wants
to invest to the parent and its
Consolidated Financial Statements
 subsidiaries, they must look for its Accordingly, the following can be
consolidated fs considered a reporting entity
Accordingly, when consolidated financial
o Individual corporation, partnership
statements are required, unconsolidated
or proprietorship
financial statements cannot serve as
o The parent alone
substitute for consolidated financial
o Parent and its subsidiaries as a single
statements
entity
Combined Financial Statements o Two or more entities without a
This happens when the reporting entity parent and subsidiary relationship as
comprises two or more entities that are not a single reporting entity
linked by a parent and subsidiary o A reportable business segment of an
relationship entity
o For example, a company and the FS Reporting Period
of its employee benefits (meron
kasing FS lang for employee benefits Is a period when financial statements are
solely) that statements are required prepared for general purpose financial reporting
to be reflected sa company’s FS may be prepared on interim basis
financial statement
o Interim FS are not required but
Parent-Subsidiary Relationship optional
If the company bought more than 50% of o For example, 3 months, 6 months, 9
your shares, you are already a subsidiary of that months
company o Kadalasan ang nagrereport on
interim basis are publicly listed
o Meaning, may control na yung entities or multinational corporation
company sayo
FS must be prepared on an annual basis or a
period of 12 months
To help users of FS identify and assess
change in trends, FS also provide comparative
information of the previous reporting period
o One of the purposes in reporting FS
is for the users to be able to have a
comparative info from the prev.
reporting period
Reporting Entity
FS may include information about
A reporting entity is an entity that is transaction and other events that occurred after
required or chooses to prepare financial the end of the reporting period if the information is
statements significant and material
It can be a single entity or a portion of an o Disclosures after the reporting
entity, or compromise more than one entity period
It is not necessarily a legal entity Underlying Assumptions
 Are the basic notions or fundamental condition, obligation, and other expected
premises on which the accounting process is based cash flows within the assessment period
4. Other conditions and events
o Are building blocks in accounting
Examples of adverse conditions and events that
The Conceptual Framework for financial
may raise substantial doubt about an entity’s
reporting mentions only one assumption, Going
ability to continue on going concern:
Concern. However, implicit in accounting are the
basic assumptions of Accounting Entity, Time a. Negative Financial Trends (such as return
Period, and Monetary Unit operating losses, working capital deficiency,
negative cash flows, and other adverse key
Going Concern
financial ratios)
The Going Concern or continuity b. Other indicators of possible financial
assumption means that in the absence of evidence difficulties (such as default of loans, arrears
to the contrary, the accounting entity is viewed as in dividends, denials of usual trade credit
continuing in operation indefinitely from suppliers, need to restructure debt to
avoid default, non-compliance with
o If the company isn’t having liquidity
statutory capital requirements and a need
issues, the it is viewed to be
to seek new resources methods of financing
continuing in operations indefinitely
or the dispose of a substantial assets)
in the future
c. Forecasted debt covenant violations during
It is the very foundation of cost principle the assessment period even if no violation
has yet incurred
If there is evidence that the entity would
d. Internal Matters
experience large and persistent losses or that the
e. External Matters (such as legal proceedings
entity’s operations are to be terminated, the going
– parang yung sa ABS-CBN)
concern assumption is abandoned
Accounting Entity
o Recognizes assets at its disposal cost
Is a specific business organization, which
In this case, the users of the statements will may be a proprietorship, partnership or
have a great interest in the amount of cash that will corporation
be generated from the entity’s assets in the short
term Under this assumption, the entity is
separate from owners, managers, and employees
Things that the management should consider in who constitute the entity
evaluating whether the company will continue to
operate in the future: o Accordingly, the transactions of the
entity shall not be merged with the
1. Entity’s current financial condition including
transactions of the owners
its liquidity sources
2. Entity’s conditional and unconditional However, where parent and subsidiary
obligations, due or anticipated within the relationship exists, consolidated financial
assessment period regardless on whether statements for the affiliates are usually made
they are recognized in the entity’s financial because for practical and economic purpose, the
statements parent and the subsidiary are a single economic
3. Funds necessary to maintain the entity’s entity
operation, considering its current financial
Time Period
 Requires that the indefinite life of an entity The elements of financial statements are
is subdivided into accounting periods which are the building blocks from which financial statements
usually of equal length for the purpose of preparing are constructed
financial reports on Financial Position, Performance
The elements directly related to the
Cash Flows
measurement of financial position are:
By convention, the accounting period or
Asset
fiscal period is 12 months or one year
Liability
The accounting period may be a calendar Equity
year or a natural business year (Fiscal Year)
The elements directly related to the
o Calendar Year – ends on December measurement of financial performance are:
31
Income
o Natural Business Year (Fiscal) –
Expense
ends on any month when the
business is at its slack season Assets

Monetary Unit Under the revised conceptual framework,

an asset is defined as a present economic resource
It has two aspects, namely Quantifiability
controlled by the entity as a result of past events
and Stability of Peso
An economic resource is a right that has the
Quantifiability Aspect means that the
potential to produce economic benefits
assets, liabilities, equity, income and expenses
should be stated in terms of a unit of measure Essential characteristics of assets:
which is the peso in the Philippines
The asset is a present economic resource
o Hindi pwedeng ang company ay  The entity has a right and control
local tapos nakapresent in other over that specific asset
currency The economic resource is a right that has
the potential to produce economic benefits
The Stability of Peso means that the
 If you have a right over that
purchasing power of the peso is stable or constant
economic resource, then, that
and that its instability is insignificant and therefore
economic resource has to have a
may be ignored
potential to produce economic
The accounting function is to account for benefits in the future
nominal pesos only and not for constant peso or The economic resource is controlled by the
changes in purchasing power entity as a result of past events
 Example: you cannot consider
CHAPTER 5: ELEMENTS OF FINANCIAL insurance policy as an asset unless
STATEMENTS mamatay yung insurer
Elements of financial statements refer to Rights
the quantitative information reported in the
statement of financial position and income Rights that have the potential to produce
statement economic benefits may take the following forms:

o Basically, we have 5 elements Rights that correspond to an obligation of

another entity
  Receivables: deliver of goods is may potential siya to produce
 Right to receive cash economic benefits
 Right to receive goods or services o May be not certain or likely to occur,
 Right to exchange economic but it has to have a potential to
resources with another party on produce economic benefits
favorable terms (such as Options
A right can meet the definition of an
Contract)
economic resource even if the probability that it
will produce economic benefit is low
An economic resource could produce
economic benefits if an entity is entitled:
To receive contractual cash flows
 Lending, Notes and Bonds
Receivable
To exchange economic resources with
another party on favorable terms
 Related sa options contract
To produce cash inflows or avoid cash
 Right to benefit from an obligation
outflows
of another party if a specified
 PPE (sell or nagpoproduce ng
uncertain future event occurs
inventory), Buildings (pag
(Insurance ang best example dito)
pinarentahan mo)
Rights that do not correspond to an
To receive cash by selling the economic
obligation of another entity
resource
 Correspond to physical objects: PPE,
 Kapag nagbenta ka ng asset
inventories, and right to intellectual
To extinguish a liability by transferring an
property
economic resource
Rights established by contract or
 Example: Cash. It is considered an
legislation such as owning a debt
asset because it has the ability to
instrument or an equity instrument or
extinguish a liability
owning a registered patent
Control of economic resource
Potential to produce economic benefits
An entity controls an asset if it has the
An essential characteristic of an asset to be
present ability to direct the use of the asset and
recognized as an asset
obtain the economic benefits that flow from it
An economic resource is a right that has the
o Example: if yung buildings or PPEs
potential to produce economic benefits
(because you have title on these),
For the potential to exist, it does not need bawal siyang ipalease ng ibang
to be certain or even likely that the right will company (unless you have a
produce economic benefits contract of sub-lease)
o Another example: inventory
o IMPORTANT: According to the
Conceptual Framework, hindi Control also includes the ability to prevent
kailangang certain ka before mo siya others from using the such asset
irecognize sa libro. What’s important
 o Example: if you have a title over the  Obligation to provide services at
goods, or if you have this special some future time (hindi naman
right granted by the government goods, rather, services)
that prevents others from using that  Obligation to exchange economic
specific asset resources with another party on
o If there are no legal rights, control unfavorable terms (kabaligtaran ng
can still exist if an entity has other options contact: POV nung
means of insuring that no other y nagbebenta ng gold)
can benefit from an asset (example:  Obligation to transfer an economic
if an entity has an access to a resource if a specified uncertain
technical know-how, and they know event occurs (POV: insurance
how to keep this a secret) provider)
The obligation is a present obligation that
Control may arise if an entity enforces legal
exists as a result of past event
rights
 An obligation exist as a result of past
Liability event if both criteria are satisfied: a.
an entity has already obtained
A present obligation of an entity to transfer
economic benefits from it ; b. An
an economic resource as a result of past event
entity must transfer economic
The new definition clarifies that a liability is resource
the obligation to transfer an economic resource
Obligation
and not the ultimate outflow of economic benefits
An obligation is a duty or responsibility that
o Parang sa assets lang. In liability,
an entity has no practical ability to avoid
hindi essential na certain ka na
magkakaroon ng outflow ng Obligations can be legal or constructive
economic benefit to be considered Transfer of an economic resource may
as a liability. It is sufficient that an include:
entity has current obligations
Obligation to pay cash
Essential characteristics of liability Obligation to deliver goods or noncash
The entity has an obligation resources
 This obligation can actually be Obligation to provide services at some
constructive (arise from normal future time
business practice) or legally Obligation to exchange economic resources
enforceable (involved ang with another party on unfavorable terms
government/law) Obligation to transfer an economic resource
The obligation to transfer an economic if specified uncertain future event occurs
resource Past event
 Obligation to pay cash
 Obligation to deliver goods and non- An obligation exists as a result of past event
cash resources (example: nag if both of the following conditions are satisfied:
advance payment sayo yung
An entity has already obtained economic
customer)
benefits
 An entity must transfer an economic Expenses encompasses losses as well as
resource those expenses that arise in the course of the
ordinary and regular activities
Income
o Expenses – relate to regular
Is defined as increases in assets or
activities ng business
decreases in liabilities that result in increases in
o Losses – not relating sa ordinary
equity, other than those relating to contributions
course ng business (casualties)
from equity holders
o Excluding to contribution ng equity
holders (example: purchase ng
stocks)
Income encompasses both revenue and
gains
o Revenue – this one arises sa normal
operations ng business (sale of
goods, interest, dividends, royalties
etc.)
o Gain – represent other items that
meet the definition of income but
they don’t arise on the regular
activity of an entity (example:
disposal of noncurrent assets,
unrealized gain on trading
investment
Statement of financial performance
Refers to the income statement and
statement presenting other comprehensive income
o Composed of two statements:
income statement (main activity ng
business) and statement presenting
other comprehensive income (not
related sa main activity or
operations ng business)
Expenses
Expense is defined as decreases in assets or
increases in liabilities that result in decreases in
equity, other than those relating to distributions to
equity holders