Conceptual Framework

The Conceptual Framework for Financial Reporting is a complete, comprehensive and single document
promulgated by the International Accounting Standards Board.

Purpose of Conceptual Framework

The conceptual frameworks purpose is to serve as a guide in developing, understanding, and interpreting the
standards. The conceptual framework is not a standard. In case of a conflict between these two, the standard
prevails.

Scope of the Conceptual Framework

The conceptual framework is concerned with general purpose financial reporting. General purpose financial
reporting involves the preparation of general purpose financial statements.

Objective of Financial Reporting

The objective of general purpose financial reporting is to provide information that is useful to primary users in
making decisions about providing resources to the entity.

Primary Users
1. Existing and potential investors
2. Lenders and other creditors

Financial reports do not and cannot provide all the information needs of the primary users. Only their common
needs.

Qualitative characteristics
Fundamental Qualitative Characteristics - These are the useful characteristics that make information
useful to users.
1. Relevance - capable of making a difference in the decisions made by users.
a. Predictive value - information help users in making decisions about future outcomes.
b. Confirmatory value - the information help users in confirming previous predictions.

Materiality is an entity-specific aspect of relevance. It is a matter of judgment. The overriding

consideration when making materiality judgment is whether information could reasonably be
expected to influence the decision of users. Materiality process involves following steps:
1. Identify 3. Organize
2. Assess 4. Review
2. Faithful representation – information provides a true, correct, and complete depiction of what it
purports.
a. Completeness - all information necessary for users to understand the phenomenon being
depicted is provided.
b. Neutrality - information is presented without bias.
c. Free from error - means there are no errors in the description and in the process by which the
information is selected and applied.

Enhancing Qualitative Characteristics – These are the characteristics that enhance the usefulness of
information.
1. Comparability - information is comparable if it helps users identify similarities and differences
between sets of information.
2. Verifiability - information is verifiable if different users could reach a general agreement as to the
information presented.
3. Timeliness - information is timely if it is available to users in time.
4. Understandability - information is understandable if it is presented in a clear and concise manner.

The Cost Constraint

Cost is a pervasive constraint; it affects virtually all aspects of financial reporting.
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Financial Statements and the Reporting Entity
The objective of general purpose financial statements is to provide financial information about reporting
entity’s assets, liabilities, equity, income and expenses that is useful in assessing:
 a. The entity’s ability to generate future net cash inflows
b. Management’s stewardship over economic resources
A reporting entity is one that is required, or chooses, to prepare financial statements.

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The Elements of Financial Statements
The elements of financial statements refer to the quantitative information reported in the statements of financial
position and income statement.

The elements directly related to the measurement of financial position are:

1. Assets - is a present economic resource controlled by the entity as a result of past events. An economic
resource is a right that has the potential to produce economic benefits.
2. Liabilities - is a present obligation of the entity to transfer an economic resource as a result of past events.
3. Equity - is assets less liabilities.

These relate to the entity’s financial performance:

4. Income
5. Expenses

Income and expenses are changes in assets and liabilities excluding owner contributions/distributions and
capital maintenance adjustments.

Recognition and Derecognition

An item is recognized if it:
a. Meets the definition of an element
b. Recognizing it would provide useful information (relevant and faithfully represented)

An item is derecognized of it ceases to meet the definition of an asset or a liability.

Measurement Basis
1. Historical cost - value that becomes the asset’s (liability’s) deemed cost for subsequent measurement at
historical cost. Historical cost does not reflect changes in value.
2. Current value - measures reflect changes in values at the measurement date.
a. Fair value
b. Value in use and fulfillment value
c. Current cost

Presentation and Disclosure

Financial information is communicated to users through presentation and disclosure in the financial statements.
Presentation and disclosure objectives are specified in standards.

Concepts of capital
The conceptual framework mentions two concepts of capital namely:
a. Financial concept of capital – capital is regarded as the invested money or invested purchasing
power
b. Physical concept of capital - capital is regarded as the entity’s productive capacity

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 PAS 1 - Presentation of Financial Statements
PAS 1 prescribes the basis for presentation of general purpose financial statements to ensure comparability both
with the entity’s financial statements of previous periods (intra-comparability) and with the financial statements
of other entities (inter-comparability).

Financial Statements are the “structured representation of an entity’s financial position and results of its
operations.”

General purpose financial statements are those statements that cater to the common needs of a wide range of
primary (external) users.

The purpose 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.

Complete set of financial statements

1. Statement of financial position
2. Statement of profit or loss and other comprehensive income
3. Statement of changes in equity
4. Statement of cash flows
5. Notes
a. Comparative information
6. Additional statement of financial position (required only when certain instances occur)

General Features of financial statements

1. Fair Presentation and Compliance with PFRSs
The application of PFRSs, with additional disclosure, is presumed to result fair presentation of financial
statements.
2. Going Concern
It assumes that the entity continue operating indefinitely. An entity is not a going concern if it intends to
liquidate the entity or has no realistic alternative to do so. Assessment of going concern is at least 12
months.
3. Accrual Basis of Accounting
Entity should prepare its financial statements, except for cash flow, using the accrual basis.
4. Materiality and Aggregation
Each material class or similar items must be presented separately in the financial statements.
5. Offsetting
Assets and liabilities, income and expense, should not be offset unless permitted by a PFRS.
6. Frequency of reporting
An entity shall present a complete set of financial statements (including comparative information) as least
annually.
7. Comparative Information
An entity shall present comparative information in respect of the preceding period for all amounts reported
in the current period’s financial statements.
8. Consistency of presentation
An entity shall retain presentation and classification of items in the financial statements from one period to
another.

Additional Statement of financial position

An additional statement of financial position may be presented as at the beginning of the preceding period when
an entity:
a. Applies an accounting policy retrospectively
b. Makes a retrospective restatement of items
c. Reclassifies items in its financial statements

Presentation of statement of financial position

1. Classified presentation shows distinctions1 between0 current and noncurrent assets and current and
noncurrent liabilities.
2. Unclassified presentation shows no distinction between current and noncurrent assets.
Deferred tax assets and deferred tax liabilities are presented as noncurrent items in a classified statement of
financial position, irrespective of their expected dates of reversal.
PAS 1 does not prescribe the order or format in which an entity presents items.

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Statement of profit or loss and other comprehensive income
Income and expenses may be presented by:
a. Single statement of profit or loss and other comprehensive income
b. Two statements with an income statement and a statement presenting comprehensive income

Other comprehensive income (OCI) compromises items of income and expense (including reclassification
adjustments) that are recognized in profit or loss as required or permitted by other PFRSs.

OCI include:
a. Changes in revaluation surplus
b. Remeasurements of the net defined benefit liability (asset)
c. Unrealized gains and losses on FVOCI investments
d. Translation gains and losses on foreign operation
e. Effective portion of gains and losses on hedging instrument in a cash flow hedge

Reclassification adjustments are amounts reclassified from other comprehensive income (OCI) to profit or
loss.

OCI may be presented net or gross of related taxes

Total comprehensive income includes all non-owner changes in equity. It compromises profit or loss and other
comprehensive income.

Presentation of Expenses
1. Nature of expense method – under this method, expenses are aggregated regarding to their nature (e.g.,
depreciation, purchase of materials, transport cost, advertising cost).
2. Function of expense method – under this method, an entity classifies expenses according to their function
(e.g., cost of sales, distribution costs and other functional classifications).

If and entity classifies expenses by function, it shall disclose additional information on the nature of expenses.

Disclosure of Dividends
Dividends are disclosed either in the statement of changes in equity or in the notes.

Notes
The notes is an integral part of the financial statements. It presents:
a. Information regarding the basis of preparation of financial statements
b. Information required by the PFRSs
c. Other information not required by PFRSs but is relevant to users of financial statements

Other disclosures:
Judgments and key assumptions
 when substantially all the significant risks and rewards of ownership of financial assets and lease assets
are transferred to other entities
 whether, in substance, particular sales of goods are financing arrangements and therefore do not give
rise to revenue

Dividends
 the amount of dividends proposed or declared before the financial statements were authorised for issue
but which were not recognised as a distribution to owners during the period
 the related amount per share the amount of any cumulative preference dividends not recognized

Capital disclosures
 qualitative information about the entity's objectives, policies and processes for managing capital,
including
 description of capital it manages nature of external capital requirements, if any how it is meeting its
objectives
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 quantitative data about what the entity regards as capital
 changes from one period to another
 whether the entity has complied with any external capital requirements and
 if it has not complied, the consequences of such non-compliance

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 PAS 7 - Statement of Cash Flows
PAS 7 prescribes the requirements in the presentation of statement of cash flows and it indicates information
about the cash flows of an entity.

The statement of cash flows shows historical changes in cash and cash equivalents during the period. Cash
flows are classified into:
a. Operating activities
b. Investing activities
c. Financial activities

Operating activities include transactions that enter into the determination of profit or loss, i.e., income and
expenses. Cash flows from operating activities may be reported using either:
a. Direct method – shows each major class of gross cash receipts and gross cash payments.
b. Indirect method – profit or loss is adjusted for the effects of non-cash items and changes in operating
assets and liabilities.

Investing activities include transactions that affect non-current assets and other non-operating assets.

Financial activities include transactions that affect equity and non-operating liabilities.

Only transactions that have affected cash and cash equivalents are included in the statement of cash flows.
Non-cash transactions are excluded and disclosed only.
Remember the following:
1. Operating activities
Affect profit or loss
2. Investing activities
Affect noncurrent assets and other investments
3. Financing activities
Affect borrowings and equity

Core Principle
When preparing statement of cash flows:
 Include only the transactions that have affected the cash and cash equivalents.
 Exclude transactions that have not affected the cash and cash equivalents.

Interest and Dividends

Cash flow from/for Option 1 Option 2
1. Interest Income Received Operating Activity Investing activity
2. Interest Expense Paid Operating Activity Financing activity
3. Dividends Income Received Operating Activity Investing activity
4. Dividends Paid to Owners Financing activity Operating Activity

Disclosures
 an entity's financing activities
 the liquidity of any entity, including restrictions that affect an entity's decisions on how it uses cash and
cash equivalent balances
 changes in liabilities arising from financing activities, including both changes arising from cash flows
and non-cash changes

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 PAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
PAS 8 prescribes the criteria for selecting and changing accounting policies, together with the accounting
treatments and disclosure of changes in accounting policy, changes in accounting estimates and correction of
prior period errors. It is intended to enhance the relevance, reliability and comparability of the entity’s financial
statements.

Accounting policies are “the specific principles, bases, conventions, rules and practices applied by an entity in
preparing and presenting financial statements”

Hierarchy of reporting standards

1. PFRSs
2. Judgment

When making judgment:

 Management shall consider the following:
a. Requirements in other PFRSs dealing with similar transactions
b. Conceptual Framework
 Management may consider the following:
a. Pronouncements issued by other standard-setting bodies
b. Other accounting literature and industry practices

Two types of accounting changes

1. Changes in Accounting Policies are change in accounting policy usually results from a change in
measurement basis. The accounting treatment for these changes following in order of priority are transitional
provision, retrospective application, and if impracticable, prospective application. Examples of changes in
accounting policies:
a. Change from FIFO to Weighted Average cost formula for inventories
b. Change from cost model to fair value model of measuring investment property and or to revaluation
model of measuring property, plant, and equipment and intangible assets
c. Change in business model for classifying financial assets
d. Change in method of recognizing revenue from long term construction contracts
e. Change to new policy results from the requirement of new PFRS
f. Change in financial reporting framework, such as from PFRS for SMEs to full PFRSs

Application of an accounting policy for transactions, other events that differ in substance from those previously
occurring and application of new accounting policy for transactions, other events that did not occur previously
or were immaterial are not changes in accounting policies.

2. Changes in Accounting Estimate normally results from changes on how the expected inflows or outflows of
economic benefits are realized from assets or incurred on liabilities. The accounting treatment for changes in
accounting estimate is prospective application. Examples of changes in accounting estimate:
a. Change in depreciation method
b. Change in estimated useful life or residual value of depreciable asset
c. Change in the required balance of allowance for uncollectible accounts or impairment loss.

If a change is difficult to distinguish between these two, the change is treated as a change in accounting
estimate.

Errors
Errors include misapplication of accounting policies, mathematical mistakes, misinterpretation of facts and
fraud. Material errors are those errors that cause the financial statements to be misstated while Intentional
errors are fraud. This error in financial statements does not comply with PFRSs.

Errors include the effects of:

1. Mathematical mistakes
2. Mistakes in applying accounting policies 1 0
3. Oversights or misinterpretations of facts
4. Fraud
Errors can be errors of commission or errors of omission. The types of errors according to period are:
1. Current period errors – these are the errors that are discovered either during the current period or after the
current period. These are corrected by correcting entries.

2. Prior period errors – are errors in one or more prior period that only discovered either during current period
or after the current period. These are corrected by retrospective application.

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Disclosures
Accounting Policy
 the title of the standard or interpretation causing the change
 the nature of the change in accounting policy
 a description of the transitional provisions, including those that might have an effect on future periods
 or the current period and each prior period presented, to the extent practicable, the amount of the
adjustment
 the amount of the adjustment relating to periods before those presented, to the extent practicable
 if retrospective application is impracticable, an explanation and description of how the change in
accounting policy was applied

Accounting Estimates
 the nature and amount of a change in an accounting estimate that has an effect in the current period or is
expected to have an effect in future periods
 if the amount of the effect in future periods is not disclosed because estimating it is impracticable, an
entity shall disclose that fact

Errors
 the nature of the prior period error
 for each prior period presented, to the extent practicable, the amount of the correction
 the amount of the correction at the beginning of the earliest prior period presented
 if retrospective restatement is impracticable, an explanation and description of how the error has been
corrected

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 PAS 10 Events after the Reporting Period
PAS 10 prescribes adjustments of the entity to its financial statements for events after the balance sheet date and
the disclosures that an entity should give in the date when the financial statements were authorized for issue and
about events after the balance sheet date.

Events after the Reporting Period

These are the events, favorable or unfavorable, that occur between the end of the reporting period and the date
when the financial statements are authorized for issue.

Date of authorization of the financial statements is the date where the management authorizes financial
statement for issue regardless whether the authorization is final or subject in further approval.

Types of events after the reporting period

1. Adjusting events after the reporting period – these are the events that existed at the end of the reporting
period. It requires adjustments of amounts in the financial statements. Examples of adjusting events:
a. Settlement (entity obligations) after the reporting period
b. Receipt of information (impaired assets) after the reporting period
c. Determination of certain amount (cost and proceeds of an asset, bonus payments) after the reporting
period
d. Discovery of fraud or errors

2. Non-adjusting events after the reporting period – are indicative in conditions events that arose after the
reporting period. These events don’t require adjustments of amounts in the financial statements but they are
disclosed if they are material.
a. Changes in fair values (interest rates, market prices) after the reporting period
b. Casualty losses (e.g., fire, storm, or earthquake) that occur after the reporting period but before the
financial statements were authorized for issue
c. Implementation of a major restructuring after the reporting period
d. Announcing plan to discontinue an operation after the reporting period
e. Change in tax rate enacted after reporting period
f. Declaration of dividends after reporting period

Dividends that are declared after the reporting period are not recognized as liability at the end of reporting
period because there is no present obligation existed.

Going Concern
PAS 10 prohibits the preparation of financial statements on a going concern basis if the management either
intends to liquidate the entity or to cease trading, or no alternative but to do so after the reporting period.

Disclosure
• Date of authorization for issue
• Adjusting events
• Material Non-adjusting events

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 PAS 24 Related Party Disclosures
PAS 24 ensures that an entity's financial statements contain the disclosures necessary to draw attention to the
possibility that its financial position and profit or loss may have been affected by the existence of related parties
and by transactions and outstanding balances with such parties.

Core Principle
The financial position and profit or loss of an entity may be affected by a related party relationship even if
related party transactions do not occur. The mere existence of the relationship may be sufficient to affect the
transactions of the entity with other parties.

Necessary disclosures, therefore, should be provided to draw users’ attention to the possible effects of such
relationships and transactions on the financial statements presented.

Related parties are two or more parties that has the ability to affect the financial and operating decision of
other party through control, significant influence or joint control. Examples of these are:
a. Investor and investee relationship where control, joint control or significant influence exists.
b. Key management personnel
c. Close family member
d. Post-employment benefit plan

The following are not related parties:

a. Two entities simply because they have a director in common.
b. Two venturers simply because they share joint control over a joint venture.
c. Providers of finance, trade unions, public utilities, and departments and agencies of a government that does
not control, jointly control or significantly influence the reporting entity, simply by virtue of their normal
dealings with an entity.
d. A customer, supplier, franchisor, distributor or general agent with whom an entity transacts a significant
volume of business, simply by virtue of the resulting economic dependence.

Disclosure
 Parent-subsidiary relationship - regardless of whether there have been transactions between them.
 Key management personnel compensation - broken down into the following categories SPOTS and
loans to key management personnel.
 Related party transactions – nature of transaction and outstanding balances

Disclosures that related party transactions were made on terms equivalent to those that prevail in arm’s length
transactions are made only if such terms can be substantiated.

Government-related Entities
A government-related entity is an “entity that is controlled, jointly controlled or significantly influenced by a
government”. The following are disclosed by a government-related entity if there have been related party
transactions with the government:
a. Name of the government and the nature of relationship
b. Nature and amount of each individually significant transaction
c. Other transactions that are collectively significant but are individually significant

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 PAS 34 Interim Financial Reporting
PAS 34 prescribes the minimum content of an interim financial report and to prescribe the principles for
recognition and measurement in complete or condensed financial statements for an interim period. Timely and
reliable interim financial reporting improves the ability of investors, creditors and others to understand an
entity’s capacity to generate earnings and cash flows and its financial condition and liquidity.

PAS 34 does not require entities to provide interim financial reports. PAS 34 applies if an entity is (a) required
by government, securities regulators, stock exchanges, and accountancy bodies or (b) the entity elects or
chooses to publish an interim financial report in accordance with PFRSs.

PAS 34 encourages publicly traded entities to provide at least semi-annual interim financial report and publish
them not later than 60 days after the end of the interim period.

Interim Financial Report is a financial report prepared for an interim period and contains either:
a. A complete set of financial statements as describe in PAS 1
b. A set of condensed financial statements as described in PAS 34

Complete set of financial statements under PAS 1

1. Statement of financial position
2. Statement of profit or loss and other comprehensive income
3. Statement of changes in equity
4. Statement of cash flows
5. Notes, comprising a summary of significant accounting policies and other explanatory information
a. comparative information in respect of the preceding period
6. A statement of financial position as at the beginning of the preceding period (i.e., in cases of retrospective
application, retrospective restatement or reclassification adjustment).

Minimum content of an interim financial report under PAS 34

1. Condensed statement of financial position
2. Condensed statement of profit or loss and other comprehensive income, presented as either
a. a condensed single statement
b. a condensed separate income statement and a condensed statement of comprehensive income
3. Condensed statement of changes in equity
4. Condensed statement of cash flows
5. Selected explanatory notes.

Periods for which interim financial statements are presented

• Semi-annual interim financial reporting

Current Comparative
Statement of Financial As of June 30, 20x1 December 31, 20x0
Position
Statement of Profit or Loss For the 6 June 30, 20x1 June 30, 20x0
& Other Comprehensive months ending
Income
Statement of Changes in For the 6 June 30, 20x1 June 30, 20x0
Equity months ending
Statement of Cash Flows For the 6 June 30, 20x1 June 30, 20x0
months ending

• Quarterly interim financial reporting (3rd quarter)

Current Comparative
Statement of Financial As of September 30, 20x1 December 31, 20x0
Position
Statement of Profit or Loss For the 9 September 30, 20x1 September 30, 20x0
& Other Comprehensive months ending
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For the 3 September 30, 20x1 September 30, 20x0
months ending
Statement of Changes in For the 9 September 30, 20x1 September 30, 20x0
Equity months ending
Statement of Cash Flows For the 9 September 30, 20x1 September 30, 20x0
months ending

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Other Disclosures
• Entity-wide disclosures apply to all entities subject to PFRS 8 including those entities that have a sin
reportable segment
• Revenues from external customers attributed to the entity’s country of domicile and attributed to all fore
countries in total from which the entity derives revenues

• Non-current assets other than financial instruments, deferred tax assets, post-employment benefit assets,
rights arising under insurance contracts located in the entity’s country of domicile and located in all fore
countries in total in which the entity holds assets

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 PAS 23 Borrowing Costs
Under PAS 23, Borrowing costs are defined as interest and other costs that an entity incurs in connection
borrowing of funds.

Borrowing costs include:

a. Interest expense\
b. Finance charge
c. Exchange

Qualifying Asset
An asset that necessarily takes a substantial period of time to get ready for the intended use or sale.

Examples:
a. Manufacturing plant
b. Power generation facility
c. Intangible asset
d. Investment property

Excluded from capitalization:

a. Asset measured at fair value
b. Inventory that is manufactured in large quantity on a repetitive basis
c. Asset that is ready for the intended use or sale when acquired

Accounting for Borrowing Costs (Capitalization of BC)

a. Effective interest rate
b. Construction period
c. Capitalizable borrowing cost should not exceed the actual borrowing cost
Capitalized
Capitalize BC > Actual BC Actual BC
Actual BC > Capitalize BC Capitalize BC

Specific Borrowing
- Exist because of qualifying asset
- Capitalized at Actual Borrowing Cost
Entire Proceeds x Effective Interest Rate x Construction Period x
Income from temporary investment x Construction Period (x)
Net Actual Borrowing Cost x

General Borrowing
- Exist with or without qualifying asset 1 0
- No specific guidance is provided for general borrowing
 Cost x No. of Months Outstanding / 12 x
Effective Interest Rate x x
x

Mixed (Both Specific and General Borrowing)

- Not automatically specific and general will be used

Commencement of capitalization
a. When the entity incurs expenditures for the asset
b. When the entity incurs borrowing costs
c. When the entity undertakes activities that are necessary to prepare the asset for the intended use or sale

Suspension of capitalization
Capitalization of borrowing costs shall be suspended during extended periods in which active developme
interrupted.

Cessation of capitalization
Capitalization of borrowing costs shall cease when substantially all the activities necessary to prepare
qualifying asset for the intended use or sale are complete.

Disclosures
a. The amount of borrowing costs capitalized during the period
b. The capitalization rate used to determine the amount of borrowing costs eligible for capitalization

PAS 20 - Accounting for Government

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Grants
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and Disclosure of Government Assistance
Prescribes the accounting and disclosure of government grants and the disclosure of other forms of governm
assistance.

PAS 20 does NOT apply to:

a. Under hyperinflationary economies
b. Tax benefits
c. Ownership of the entity
d. Government grants covered by PAS 41 Agriculture

Government Grants - assistance received from government in the form of transfers:

a. Receipt of cash, land, or other non-cash assets.
b. Receipt of financial aid in case of loss from a calamity.
c. Forgiveness of an existing loan from the government.
d. Government Loan with below-market rate of interest.
NOT Government Grants:
a. Tax Benefits
b. Free technical or marketing advice
c. Provision of Guarantees
d. Government procurement policy

Recognition
Government grants are recognized if there is reasonable assurance that:
a.) the attached conditions will be complied;
b.) the grants will be received.

Types of government grants according to attached condition:

1. Grants related to assets
2. Grants related to income

Measurement
Monetary Grants Non-Monetary Grants
a. Amount of cash received; a. fair value of the non-monetary asset
b. fair value of amount receivable received; or
b. alternatively, at nominal amount

Accounting for Government Grants

Uses a "matching" concept such that, if related expense is not yet recognized, income is also not yet recogni

Repayment of Grants
Treated as a change in accounting estimate and accounted for prospectively.

Disclosure
a. Accounting policy and method of representation
b. Nature and extent of government grants and other forms of government assistance from which the entity
directly benefited.
c. Unfulfilled conditions and contingencies attached to the government grants.

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 PAS 12 - Income Taxes
Prescribes the accounting for income taxes. It refers to the taxes that are based on taxable profits.

The income tax expense reported in the statement of comprehensive income may be different from the am
of income tax required to be paid to the Bureau of Internal Revenue (BIR).

Some items are appropriately recognized as income (expense) under financial reporting but are either:
a.) non-taxable (non-deductible) or;
b.) taxable (deductible) only at some other periods.

May result to permanent and temporary differences.

Accounting Profit and Taxable Profit

 Accounting Profit is "profit or loss for a period before deducting tax expense."
 Taxable Profit (tax loss) is "profit (loss) for a period, determined in accordance with the r
established by the taxation authorities, upon which income taxes are payable (recoverable)."
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Income Tax Expense and Current Tax Expense
 Tax Expense or Income Tax Expense (Tax Income) is the total amount included in the determinatio
 profit or loss for the period.
 Current Tax or Current Tax Expense is "the amount of income taxes payable (recoverable) in respe
the taxable profit (tax loss) for a period."
 Deferred Tax Expense (income or benefit) is the sum of the net changes in deferred tax assets
deferred tax liabilities during the period.

Permanent Differences
 Permanent differences arise when income and expenses enter the computation of either accounting p
or taxable profit but not both. These are items excluded from the income tax return.

Temporary Differences
Are "differences between the carrying amount of an asset or liability in the statement of financial position
its tax base." may be either:
a. Taxable Temporary Differences
b. Deductible Temporary Differences

Taxable Temporary Differences

Arise when:
● Financial Income is greater than the taxable income.
● Carrying Amount is greater than tax base.
● Carrying Amount of a liability is less than its tax base.
Taxable temporary difference multiplied by tax rate results to Deferred Tax Liability.

Deductible Temporary Differences

Arise when:
● Financial Income is less than the taxable income.
● Carrying Amount is less than the tax base.
● Carrying Amount of a liability is greater than its tax base.
Deductible temporary difference multiplied by tax rate results to Deferred Tax Assets.

Accounting for Deferred Taxes

PAS 12 requires the use of asset-liability method (balance sheet liability method) in accounting for defe
taxes. This method is a comprehensive approach in accounting for deferred taxes in that it accounts both:
a.) Timing Differences;
b.) Differences between carrying amounts and tax bases of assets and liabilities.

Recognition
“An entity shall, with certain limited exceptions, recognize a deferred tax liability (asset) whenever recovery
settlement of the carrying amount of an asset or liability would make futuretax payments larger (smaller)
they would be if such recovery or settlement were to have no tax consequences.” (PAS 12.39)

Measurement
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period of
reversal. PAS 12 prohibits the discounting of deferred tax assets and liabilities.

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Presentation in the Statement of Financial Position
Deferred tax assets and liabilities are presented separately as noncurrent assets and noncurrent liabi
respectively.

PAS 12 permits offsetting only if:

1. The entity has a legally enforceable right
2. Relate to income taxes levied by the same taxation authority.

Accounting for Current Taxes

Unpaid current taxes are recognized as current tax liability, e.g., income tax payable. Excess cu
taxes are recognized as current tax asset, e.g., prepaid income tax
PAS 12 permits offsetting only if entity has:
1. legally enforceable right
2. an intention to settle/realize

Presentation in Comprehensive Income

Tax consequences are accounted for in the same way as the related transactions or events. Current and defe
taxes are usually recognized in profit or loss.
1. Taxes recognized in other comprehensive income:
● Revaluation of property, plant and equipment
● exchange differences
2. Taxes recognized directly in equity:
● adjustment to the opening balance of retained earnings.
● amounts arising on initial recognition

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 PAS 26 - Accounting and Reporting by Retirement Benefit Plans
PAS 26 applies to the preparation of financial statements of retirement benefit plans. The retirement be
plan may have its own financial statement since it is separated from employers.

Defined Contribution Plan

Shall contain the following:
 a statement of net assets available for benefits.
 a statement of changes in net assets available for benefits.
 accompanying notes to the financial statements.

Defined Benefit Plans

The financial statements of this contains either:
 a statement that shows:
a. the net assets available for benefits;
b. the actuarial present value of promised retirement benefits and non-vested benefits;
c. the resulting excess or deficit
or
 a statement of net assets available for benefits including either:
a. a note disclosing the actuarial present value of promised retirement benefits, distinguis
between vested benefits and non-vested benefits;
b. a reference to this information in an accompanying actuarial report.

Actuarial Present Value of Promised Retirement Benefits

This is “the present value of the expected payments by a retirement benefit plan to existing and past employ
attributable to the service already rendered.”

Valuation of Plan Assets

Plan assets are measured at fair value or market value. Securities with fixed redemption values that have
acquired to match the obligations of the plan may be measured at their final redemption values.

Disclosure
Aside from a statement of net assets available for benefits and a statement of changes in net assets availabl
benefits, the financial statements shall also provide information on the following:
a. significant accounting policies
b. description and effect of any changes in the plan during the period
c. any single investment exceeding 5% of net assets or 5% of any category of investment
d. any investment in the employer
e. contributions of employee and employer, if applicable
f. analysis of benefits paid or payable
g. funding policies and, for defined contribution plans, investment policies
h. investment income on the plan assets
i. administrative, tax, and other expenses
j. transfers from or to other plans
k. for defined benefit plans, the actuarial present value of promised retirement benefits, signif
actuarial assumptions, methods used, number of plan participants, promised benefits, and the name
employers and employees

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 PFRS 1 - First-Time Adoption of Philippine Financial Reporting Standards
PFRS 1 sets out the procedures that an entity must follow when it adopts IFRSs for the first time as the basis
preparing its general purpose financial statements. The IFRS grants limited exemptions from the gen
requirement to comply with each IFRS effective at the end of its first IFRS reporting period.

A restructured version of IFRS 1 was issued in November 2008 and applies if an entity's first IFRS finan
statements are for a period beginning on or after 1 July 2009.

Objective
To ensure that an entity’s first PFRS financial
1 statements
0 are containing high quality information t
transparent to users, comparable, makes way for accounting, and can be prepared with cost efficiency.
First PFRS Financial Statements
Are “the first annual financial statements in which an entity adopts PFRSs, by an explicit and unreser
statement of compliance with PFRSs.”

First-Time Adopter - is called in an entity presenting their first PFRS financial statement.

Recognition and Measurement

PFRS 1 requires an entity to prepare and present an opening PFRS statement of financial position of the da
transition to PFRSs.

Accounting Policies
The entity selects its accounting policies based on the latest versions of PFRSs as at the current reporting d
PFRS 1 prohibits the application of non-uniform accounting policies or earlier versions of PFRSs to
comparative periods as these undermine comparability.

Retrospective Application
PFRS 1 requires retrospective application of the accounting policies selected by the first-time adop
Retrospective Application means as if PFRSs have been used all along. It requires restating assets and liabil
in the opening statement of financial position.

Exceptions to the Requirements of PFRS 1

PFRS 1 grants certain exceptions from compliance with the “retrospective application” requirement when
cost of compliance exceeds the expected benefits.

Other Exceptions:
1. Derecognition of Financial Instruments - May not recognize financial instruments that it has alr
derecognized under its previous GAAP prior to the date of transition.
2. Hedge Accounting - Required to do the ff:
I. measure all derivatives at fair value.
II. eliminate all deferred losses and gains on derivatives
3. Business Combinations - First-time adopter is exempted from applying PFRS 3 Business Combinati
retrospectively to business combinations that occurred prior to the date of transition to PFRSs. It s
also restate all subsequent business combinations if it elects to restate any that complies to PFRS 3.
4. Fair Value or Revaluation Amount as deemed cost - An entity adopting the cost model for its
property, plant and equipment, (b) investment property, or (c) intangible assets is permitted to mea
those assets at that date of transition to PFRSs at fair value.
5. Cumulative Translation Differences - First-time adopter is permitted to zero out any cumula
translation differences recognized in equity
6. Compound Financial Instruments - First-time adopter need not to separate the two components
compound financial instrument, if the liability is no longer outstanding at the date of transitio
PFRSs.

Presentation and Disclosure

1. Shall include at least one-year comparative information
2. The entity presents non-PFRS comparative information and historical summaries for periods before
date of transition, it need not restate those summaries to PFRS.
3. The entity shall explain how the transition from previous GAAP to PFRSs affected its financial posi
financial performance and cash flows.
● Reconciliations of Equity
● Reconciliation of Total Comprehensive Income
● Disclosure of impairment losses and reversals of impairment losses
● Disclosures of errors
● Material adjustments
● Appropriate explanations
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 Subsequent
Standards Description Recognition Initial measurement Derecogn
measurement

PAS 2 Inventories Recognized Cost Lower of Cost and Subsequen

initially as an Net Realizable recognize
ASSET Value (LCNRV) EXPENSE
when:
Definition
Inventories are assets: Cost includes:
a. Held for sale in the 1. Purchase Cost = 1. Sold
ordinary course of Purchase Price (Net of derecogniz
business (finished Trade discounts and inventory
goods) other rebates) + Import recognized
b. In the process of duties + Non-refundable expense (C
production for such sale taxes + Transportation Goods Sol
(work in process) costs + Other cost 2. Inv
c. In the form of directly attributable to write-dow
materials and supplies the acquisition of the
to be consumed in the inventory
production process or 2. Conversion costs =
rendering of services Direct Labor +
(raw materials and Overhead
manufacturing 3. Other cost
supplies)
Cost Formulas: Cost excluded;
1. Specific a. Abnormal amounts of
Identification wasted materials, labor
2. First-In, First-Out or production costs
(FIFO) b. Storage Costs
3.Weighted average unless those costs are
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necessary in the
production before a
further production stage
 c. Administrative
Overheads
d. Selling Cost

Disclosures:
1. Accounting policies
in measuring
inventories including
the cost formula
2. Total carrying
amount of inventories
3. Carrying amount of
inventories carried at
Fair Value less Cost to
Sell (FVCS)
4. Amount of
inventories recognized
as an expense during
the period
5. Amount of any
write- down of
inventories recognized
as an expense during
the preiod

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