CHAPTER 6: Recognition and Measurement

Definition of Recognition

- The revised Conceptual Framework defines recognition as the process of capturing for inclusion in the financial
statements an item that meets the definition of an asset, liability, equity, income, or expense.
- Links the elements to the statement of financial position and statement of financial performance.

Recognition criteria

- Only items that meet the definition of an asset, a liability, or equity are recognized in the statement of financial
position.
- Similarly, only the items that meet the definition of income or expense are recognized in the statement of financial
performance. - Fundamental Qualitative Characteristics (Relevant and Faithfully Represented)

Point of sale income recognition

- The basic principle of income recognition is that income shall be recognized when earned. But the question is when
is income considered to be earned?
- With respect to the sale of goods in the ordinary course of business, the point of sale is unquestionably the point of
income recognition.
- Legal title to the goods passes to the buyer at the point of sale

Expense recognition

- The basic expense recognition means that expenses are recognized when incurred. But the question is when are
expenses incurred?
- The expense recognition principle is the application of the matching principle.
- The generation of revenue is not without any cost. There has got to be some cost in earning a revenue. "There is no
gain if there is no pain

Cause and Effect Association (Strict Matching Concept)

- Under this principle, the expense is recognized when the revenue is already recognized.
- It is commonly referred to as the matching of cost with revenue, involves the simultaneous or combined recognition
of revenue and expenses that result directly and jointly from the same transaction or events.

Systematic and Rational Allocation

- Under this principle, some costs are expensed by simply allocating them over periods benefited.
- When economic benefits are expected to arise over several accounting periods and the association with income can
only be broadly or indirectly determined, expenses are recognized on the basis of systematic and allocation
procedures.

Immediate recognition

- Immediate recognition is the most intuitive way of recording an expense. In this method, you recognize an expense
when you incur it.
- For instance, Recognition is the process of incorporating in the balance sheet or income statement an item that
meets the definition of an element and satisfies the criteria for recognition set out in you can immediately recognize
fixed periodic expenses such as rent payments, utility bill payments, and selling costs.

Derecognition

- Is the removal of a previously recognized financial asset or financial liability from an entity’s statement of financial
position. Most transactions involving derecognition of a financial asset are straightforward. However, financial
assets may be subject to complicated transactions where some of the risks and rewards that attach to an asset are
retained but some are passed on.

Definition of Measurement

- Measurement is defined as quantifying in monetary terms the elements in the financial statements

Measurement Bases

- In selecting a measurement basis for an asset or a liability and for the related income and expense, it is necessary to
consider the nature of the information that the measurement basis will produce.
- In many situations, it is simpler and less costly to measure historical cost than it is also to measure a current value
Historical cost is the measurement basis most commonly adopted in preparing financial statements.
- IASB did not mandate a single measurement basis because the different measurement bases could produce useful
information under different circumstances.
Historical Cost

- Historical cost measures provide monetary information about assets, liabilities and related income and expenses,
using information derived, at least in part, from the price of the transaction or other event that gave rise to them.
- Unlike current value, historical cost does not reflect changes in values, except to the extent that those changes
relate to impairment of an asset or a liability becoming onerous.

Current value

- Current value measures provide monetary information about assets, liabilities and related income and expenses,
using information updated to reflect conditions at the measurement date. Because of the updating, current values
of assets and liabilities reflect changes, since the previous measurement date, in estimates of cash flows and other
factors reflected in those current values
- Unlike historical cost, the current value of an asset or liability is not derived, even in part, from the price of the
transaction or other event that gave rise to the asset or liability.

Fair value

- Fair value is the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction
between market participants at the measurement date.
- Fair value reflects the perspective of market participants-participants in a market to which the entity has access.
The asset or liability is measured using the same assumptions that market participants would use when pricing the
asset or liability if those market participants act in their economic best interest.

Value in use

- Value in use is the present value of the cash flows, or other economic benefits, that an entity expects to derive from
the use of an asset and from its ultimate disposal.

Fulfillment value

- Fulfillment value is the present value of the cash, or other economic resources, that an entity expects to be obliged
to transfer as it fulfils a liability. Those amounts of cash or other economic resources include not only the amounts
to be transferred to the liability counterparty, but also the amounts that the entity expects to be obliged to transfer
to other parties to enable it to fulfil the liability.

Current cost

- The current cost of an asset is the cost of an equivalent asset at the measurement date, comprising the
consideration that would be paid at the measurement date plus the transaction costs that would be incurred at that
date.
- The current cost of a liability is the consideration that would be received for an equivalent liability at the
measurement date minus the transaction costs that would be incurred at that date

CHAPTER 7: CONCEPTUAL FRAMEWORK Presentation and disclosure Concepts of Capital

Presentation and Disclosure as an Effective Communication Tool

- The presentation and disclosure can be an effective communication tool about the information in financial
statements.
- A reporting entity communicates information about its assets, liabilities, equity, income and expenses by presenting
and disclosing information in the financial statements.
- Effective communication of information in financial statements makes the information more relevant an contributes
to a faithful representation of an entity's assets, liabilities, income and expenses.
- Effective communication of information in financial statements also enhances the understandability and
comparability of information in the financial statements.
- Effective communication in financial statements is supported by not duplicating information in different parts of the
financial statements.
- Duplication is usually unnecessary and can make financial statements less understandable.

Classification

- Classification is the sorting of assets, liabilities, equity, income and expenses on the basis of shared or similar
characteristics.
Classification of Income and Expenses

- Income and expenses are classified as components of profit loss and components of other comprehensive income.
- The revised conceptual framework has introduced the term statement of financial performance to refer to the
statements of profit or loss together with the statement presenting other comprehensive income.
- The statements of profit and loss is the primary source of information about an entity's financial performance for
the reporting period. Classification is the sorting of assets, liabilities, equity, income and expenses on the basis of
shared or similar characteristics.

Aggregation

- Aggregation is the adding together of assets, liabilities, equity, income and expenses that have similar or shared
characteristics and are included in the same classification.

Capital Maintenance

- The transaction approach is the traditional preparation of an income statement. The capital maintenance approach
means that net income occurs only after the capital used from the beginning of the period is maintained.

Financial Capital

- Financial capital is the monetary amount of the net assets contributed by shareholders and the amount of the
increase in net assets resulting from earnings retained by the entity.

Net Income Under Financial Capital

- Under the financial capital concept, net income occurs "when the nominal amount of the net assets at the end of
the year exceeds the nominal amount of the net assets at the beginning of the period, after excluding distributions
to and contributions by owners during the period

Physical Capital

- Physical capital is the quantitative measure of the physical productive capacity to produce goods and services.
- The physical productive capacity may be based on, for example, units of output per day or physical capacity of
productive assets to produce goods and services.
- The physical concept of capital should be adopted if the main concern of users is the operating capability of the
entity, meaning, the resource or fund needed to achieve that operating capability or capacity.

CHAPTER 8: PRESENTATION OF FINANCIAL STATEMENT

Financial Statements are the means by which the information accumulated and processed is periodically communicated by
the users. It is also the end product or the main output of the financial accounting process.

Components of Financial Statement

Statement of Financial Position

- It is a formal statement showing the three elements comprising financial position, namely assets, liabilities and
equity.

Income Statement

- It is a formal statement showing the financial performance of an entity for a given period of time.
- The financial performance is also known as the results of operations of the entity

Statement of Comprehensive Income

- The statement of comprehensive income contains those revenue and expense items that have not yet been
realized. It accompanies an organization's income statement, and is intended to present a more complete picture of
the financial results of a business.

Statement of Changes in Equity

- - It is a formal statement showing the changes in the Capital or Owner’s Equity as a result of additional investment
or withdrawals, net income / loss for the year.

Statement of Cash Flow

- is a formal statement summarizing the operating, investing, and financing activities of an entity.
- In simple language, it provides information about the cash receipts and cash payments of an entity during a period.
Notes to Financial Statements

- Provide narrative description or disaggregation of items presented in the financial statements and information
about items that do not qualify for recognition.

Objectives of Financial Statement

- The objectives of financial statements are 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

Frequency of Reporting

- Financial statements shall be presented at least annually

When an entity's end-of-reporting period changes and financial statements are presented for a period longer or shorter
than one year, an entity shall disclose

1. The period covered by the financial statements.

2. The reason for using a longer or shorter period.

3. The fact that amounts presented in the financial statements are not entirely comparable.

Statement of Financial Position

- A statement of financial position is a formal statement showing the three elements comprising financial position
 Assets - held by an entity for the accretion of wealth through distribution such as interest, royalties, dividends, and
rentals, for capital appreciation or for other benefits to the investing entity such as those obtained through trading
relationships
 Liabilities - An obligation of the entity to transfer an economic resource as a result of past event
 Equity - The term equity is the residual interest in the assets of the entity after deducting all of its liabilities. (Assets
- Liability = Equity)

These are the 3 terms that we used in reporting of the equity of an entity in form of business organization

1. Owner's Equity 2. Partner’s Equity 3. Stockholders' or Shareholders' Equity

Notes to Financial Statement

- Notes to Financial Statements provides narrative description or disaggregation of items presented of financial
statements and information about items that do not qualify for recognition.

Forms of Statement of Financial Position

- Report Form - the report form sets for the three major section in a downward sequence of assets, liabilities, and
equity.
- Account Form – As the title suggest, the presentation follows of an account, meaning the assets are shown on the
left side and the liabilities and equity on the right side of the statement of financial position.

Line Item

1. Cash and Cash Equivalents 7. Intangible Asset 13. Deferred Tax Asset and
Deferred Tax Liability
2. Financial Asset (other than 1, 3, 8. Investment Property
and 6) 14. Provisions
9. Biological Asset
3. Trade and Other Receivable 15. Financial Liabilities (other than
10. Total of Asset Classified as held
11 and 14)
4. Inventories for sale and asset included as
disposal group classified as held for 16. Liabilities included in disposal
5. Property, Plant, and Equipment
sale. group classified as held for sale
6. Investment in associates
11. Trade and Other Payable 17. Non-controlling Interest
accounted for by the equity
method 12. Current Tax Liability 18. Share Capital and Reserve
 CHAPTER 9: INCOME STATEMENT
INCOME STATEMENT

•According to the book of Conceptual Framework and Accounting Standards by Valix of 2022 Edition, income statement is a
formal statement showing the financial performance of an entity for a given period of time.

•Financial performance is also known as the results of operations of the entity.

•It presents the income, expenses, gains, losses and net income or loss recognized during the period.

Sources of Income

a. Sales of merchandise to customers c. Use of entity resources

b. Rendering of services d. Disposal of resources other than products

COMPONENTS OF EXPENSE

a. Cost of goods sold or cost of sales c. Other Expenses

b. Distribution costs or selling expenses d. Income tax expense

CLASSIFICATION OF EXPENSES

Distribution costs constitute cost:

a. Salesmen's salaries c. Traveling and marketing e. Freight out

expenses
b. Salesmen's commissions f. Depreciation of delivery
d. Advertising and publicity equipment and store equipment

Administrative expenses constitute cost:

a. Doubtful accounts e. Office supplies used i. Depreciation of office building

and office equipment
b. Office salaries f. Certain taxes
j. Amortization of intangible assets
c. Expenses of general executives g. Contribution

d. Expenses of general accounting h. Professional fees

and credit department

OTHER EXPENSES:

a. Loss on sale of trading investments c. Loss on sale of non-current investment

b. Loss on disposal of property, plant and equipment d. Casualty loss - flood, earthquake, fire

No more extraordinary items

PAS 1, paragraph 87, specifically mandates that an entity shall not present any items of income and expense as
extraordinary either on the face of the income statement or statement of comprehensive income or in the notes.

LINE ITEMS

PAS 1, paragraph 82, provides that as a minimum, the income statement and statement of comprehensive income shall
include the following line items:

a. Revenue g. Gain or loss from extinguishment of a financial liability

by issuing equity instrument as required by IFRIC 19
b. Gain and loss from the derecognition of financial asset
measured at amortized cost as required by PFRS 9 h. Income tax expense

c. Finance cost i. A single amount comprising discounted operation

d. Share an income or loss of associate and joint venture j. Profit or loss for the period
accounted for using the equity method
k. Total other comprehensive income
e. Gain or loss on the reclassification of financial asset
l. Comprehensive income for the period being the total of
from amortized cost to fair value profit or loss
profit or loss and other comprehensive income
f. Gain or loss on the reclassification of financial asset
from fair value other comprehensive income to fair value
profit or loss
Line items that shall be disclosed on the face of the income statement and statement of comprehensive income:

A. Profit or loss for the period attributable to non-controlling interest and owners of the parent.

B. Total comprehensive income for the period attributable to non-controlling interest and owners of the parent.

Forms of Income Statement

● PAS 1, paragraph 99, provides that an entity shall present ab analysis of expenses using a classification based on
either the function of expenses or their nature within the entity, whichever provides information that is reliable and
more relevant.

Income statement may be presented in two ways:

a. Functional presentation

•The function Presentation classifies expenses according to their function as part of

cost of goods sold, distribution costs, administrative expenses and other expenses.

•The functional presentation is also known as the cost of goods sold method.

•An entity classifying expenses by function shall disclose additional information on

the nature of expenses, including depreciation, amortization and employees
benefit costs.

b. Natural presentation

•The natural presentation is referred to as the nature of the expense method.

•Under the natural presentation, expense are aggregated according to their

nature and not allocated among the various functions within the entity.
•The expenses which are the same nature are grouped or aggregated and
presented as one item.

Which form of income statement?

PAS 1 does not prescribe any format

Paragraph 105 simply states that because each method of presentation has merit for different types of entities,
management is required to select the presentation that is reliable and more relevant.

COMPREHENSIVE INCOME

•It is the change in equity during a period resulting from transactions and other events, other than changes resulting from
transactions with owners in their capacity as owners.

PROFIT OR LOSS

•The term profit or loss is the total of income less expenses, excluding the components of other comprehensive income.

•In other words, this is the bottom line in the traditional income statement.

•An entity may use net income or net loss to describe profit or loss.

OTHER COMPREHENSIVE INCOME

1. Unrealized gain or loss on equity investment measured at fair value through other comprehensive income

2. Unrealized gain or loss on debt investment measured at fair value through other comprehensive income.

3. Gain or loss from translation of the financial statements of a foreign operation

4. Revaluation surplus during the year.

5. Unrealized gain or loss from derivative contracts designated as cash flow hedge

6. Remeasurements of defined benefit plan, including actuarial gain or loss

7. Change in fair value attributable to credit risk of a financial liability designated at fair value through profit or loss

STATEMENT OF COMPREHENSIVE INCOME

● The statement of comprehensive income starts with the net

income or loss as shown in the income statement plus or
minus the components of the other comprehensive.
● The purpose of this statement is to provide a more comprehensive information on financial performance measured
more broadly than the income as traditionally computed.
 Chapter 10: STATEMENT OF CASH FLOWS
Statement of Cash Flows

The statement of cash flows provides information about the sources and utilization (i.e., historical changes) of cash and cash
equivalents during the period. (Millan, 2020)

Cash

It comprises cash on hand and cash in bank. (Millan, 2020)

It refers to money (currency) that is readily available for use (Corporate Finance Institute Team, 2019).

Cash equivalents

Are "short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to
an insignificant risk of changes in value." (PAS 7.6)

• 3-month time deposit

• 90-day money market instrument or commercial paper

Operating Activities

- Cash flows from operating activities are primarily derived from the principal revenue-producing activities of the
entity. (PAS 7.14)
- Include transactions that enter into the determination or profit or loss, i.e., income and expenses. (PAS 7.14)

Direct and Indirect Method

Cash flows from operating activities may be reported using either (a) Direct Method or (b) Indirect Method.

• The direct method shows each major class of gross cash receipts and gross cash payments. (PAS 7)

• The indirect method, profit or loss is adjusted for the effects of non-cash items and changes in operating
assets and liabilities. (PAS 7)

Investing Activities

• Investing activities involve the acquisition and disposal of non-current assets and other investments.
(Millan, 2020)

• Include transactions that affect non-current assets and other non-operating assets. (Millan, 2020)

Financing Activities

• Financing activities are those that affect the entity's equity capital and borrowing structure. (Millan, 2020)

• Include transactions that affect equity and non-operating liabilities. (Millan, 2020)

Non-cash Investing and Financing Activities

• Are investing and financing activities that do not involve cash. (Finance Train, n.d)

• Are not reported in the cash flow statement since there is no cash flow involved. (Finance Train, n.d)