CHAPTER 8

PRESENTATION OF FINANCIAL STATEMENTS Statement of financial position PAS 1

TECHNICAL KNOWLEDGE ● General purpose financial statements or

simply referred to as financial statements
● To identify the components of financial
are those intended to meet the needs of
statements.
users who are not in a position to require an
● To understand the objective of financial
entity to prepare reports tailored to their
statements.
particular information needs.
● To know the preparation of a statement
of financial position.
● In other words, general purpose financial
● To identify the minimum line items to be
statements are directed to all common
presented in a statement of financial
users and not to specific users.
position as required by IFRS.
● To understand the current and
noncurrent classification of assets and COMPONENTS OF FINANCIAL STATEMENTS
liabilities.
● A complete set of financial statements
● To know the forms of presenting the
comprises the following components:
statement of financial position.

1. Statement of financial position

FINANCIAL STATEMENTS 2. Income statement
3. Statement of comprehensive income
● Financial statements are the means by
4. Statement of changes in equity
which the information accumulated and
5. Statement of cash flows
processed in financial accounting is
6. Notes, comprising a summary of
periodically communicated to the users.
significant accounting policies and other
explanatory notes
● The financial statements are the end
product or main output of the financial OBJECTIVE OF FINANCIAL STATEMENTS
accounting process.
● The objective of financial statements is to
provide information about the financial
● Financial statements are a structured
position, financial performance and cash
financial representation of the financial
flows of an entity that is useful to a wide
position and financial performance of an
range of users in making economic
entity.
decisions.

● Financial statements also show the results

GENERAL PURPOSE FINANCIAL STATEMENTS of the management's stewardship of the
resources entrusted to it.
● An entity shall prepare and present general
purpose financial statements in accordance
with the International Financial Reporting
Standards.
● To meet this objective, financial statements DEFINITION OF ASSET
provide information about the following:
● An asset is an economic resource controlled
by an entity as a result of past event.
a. Assets
b. Liabilities
● An economic resource is a right that has the
c. Equity
potential to produce economic benefits.
d. Income and expenses, including
gains and losses CLASSIFICATION OF ASSETS
e. Contributions by and distributions
to owners in their capacity as ● Assets are classified only into two, namely
owners. current assets and noncurrent assets.
f. Cash flows
● When an entity supplies goods or services
within a clearly identifiable operating cycle,
FREQUENCY OF REPORTING the separate classification of current and
noncurrent assets is a useful information by
● Financial statements shall be presented at
distinguishing between net assets that are
least annually.
continuously circulating as working capital
from the net assets used in long-term
● When an entity's end of reporting period
operations.
changes and financial statements are
presented for a period longer or shorter
● The operating cycle of an entity is the time
than one year, an entity shall disclose:
between the acquisition of assets for
processing and their realization in cash or
a. The period covered by the financial
cash equivalents.
statements.
b. The reason for using a longer or
● When the entity's normal operating cycle is
shorter period.
not clearly identifiable, the duration is
c. The fact that amounts presented in
assumed to be twelve months.
the financial statements are not
entirely comparable. CURRENT ASSETS
STATEMENT OF FINANCIAL POSITION ● PAS 1, paragraph 66, provides that an entity
shall classify an asset as current when:
● A statement of financial position is a formal
statement showing the three elements
a. The asset is cash or cash equivalent
comprising financial position, namely
unless the asset is restricted to
assets, liabilities and equity.
settle a liability for more than
twelve months after the reporting
● Investors, creditors and other statement
period.
users analyze the statement of financial
b. The entity holds the asset primarily
position to evaluate such factors as liquidity,
for the purpose of trading.
solvency and the need of the entity for
c. The entity expects to realize the
additional financing.
asset within twelve months after
the reporting period.
 d. The entity expects to realize the PROPERTY, PLANT AND EQUIPMENT
asset or intends to sell or consume
● PAS 16, paragraph 6, defines property, plant
it within the entity's normal
and equipment as "tangible assets which
operating cycle.
are held by an entity for use in production
PRESENTATION OF CURRENT ASSETS or supply of goods and services, for rental
to others, or for administrative purposes,
● Current assets are usually listed in the order
and are expected to be used during more
of liquidity. PAS 1, paragraph 54, provides
than one period".
that as a minimum, the line items under
current assets are:
● Examples of property, plant and equipment
include land, building, machinery,
a. Cash and cash equivalents
equipment, furniture, fixtures, patterns,
b. Financial assets at fair value such as
molds, dies and tools.
trading securities and other
investments in quoted equity
● Most property, plant and equipment, except
instruments
land, are presented at cost less accumulated
c. Trade and other receivables
depreciation.
d. Inventories
e. Prepaid expenses
LONG-TERM INVESTMENTS
NONCURRENT ASSETS
● The International Accounting Standards
● The caption "noncurrent assets" is a
Committee defines investment as "an asset
residual definition. PAS 1, paragraph 66,
held by an entity for the accretion of wealth
simply states that "an entity shall classify all
through capital distribution, such as
other assets not classified as current as
interest, royalties, dividends and rentals, for
noncurrent".
capital appreciation or for other benefits to
the investing entity such as those obtained
● In other words, what is not included in the
through trading relationships".
definition of current assets is deemed
excluded. All others are classified as INTANGIBLE ASSETS.
noncurrent assets. Accordingly, noncurrent
● An intangible asset is simply defined as an
assets include the following:
identifiable nonmonetary asset without
physical substance.
a. Property, plant and equipment
b. Long-term investments
● The common examples of identifiable
c. Intangible assets
intangible assets include patent, franchise,
d. Deferred tax assets
copyright, lease right, trademark and
e. Other noncurrent assets
computer software.

● An example of an unidentifiable intangible

asset is goodwill.
 OTHER NONCURRENT ASSETS PRESENTATION OF CURRENT LIABILITIES

● Other noncurrent assets are those assets

● PAS 1, paragraph 54, provides that as a
that do not fit into the definition of the
minimum, the face of the statement of
previously mentioned noncurrent assets.
financial position shall include the following
line items for current liabilities:
● Examples of other noncurrent assets
include long-term advances to officers,
a. Trade and other payables
directors, shareholders and employees, or
b. Current provisions
abandoned property and long-term
c. Short-term borrowing
refundable deposit.
d. Current portion of long-term
DEFINITION OF LIABILITY e. Current tax liability

● A liability is a present obligation of an entity ● The term "trade and other payables" is a
to transfer an economic resource as a result line item for accounts payable, notes
of past event. payable, accrued interest on note payable,
dividends payable and accrued expenses.
● An obligation is a duty or responsibility that
an entity has no practical ability to avoid. ● No objection can be raised if the trade
accounts and notes payable are separately
● An obligation can either be legal or presented.
constructive.
NONCURRENT LIABILITIES
● A liability is classified as current and ● The term "noncurrent liabilities" is also a
noncurrent. residual definition.

CURRENT LIABILITIES ● PAS 1, paragraph 69, provides that all

liabilities not classified as current are
● PAS 1, paragraph 69, provides that an entity classified as noncurrent.
shall classify a liability as current when:
a. The entity expects to settle the a. Noncurrent portion of long-term debt
liability within the entity's normal b. Finance lease liability
operating cycle. c. Deferred tax liability
b. The entity holds the liability d. Long-term obligations to company
primarily for the purpose of trading. officers
c. The liability is due to be settled e. Long-term deferred revenue
within twelve months after the
reporting period.
d. The entity does not have an CURRENTLY MATURING LONG-TERM DEBT
unconditional right to defer
● A liability which is due to be settled within
settlement of the liability for at
twelve months after the reporting period is
least twelve months after the
classified as current, even if:
reporting period.
a. The original term was for a period
longer than twelve months.
 b. An agreement to refinance or to borrowings, paying dividends, maintaining
reschedule payment on a specified level of working capital and so
long-term basis is completed after forth.
the reporting period and before
the financial statements are ● Under these covenants, if certain conditions
authorized for issue. relating to the borrower's financial situation
are breached, the liability becomes payable
● However, if the refinancing on a long-term on demand.
basis is completed on or before the end of
the reporting period, the refinancing is an EFFECT OF BREACH OF COVENANTS
adjusting event and therefore the obligation
is classified as noncurrent. ● PAS 1, paragraph 74, provides that the
liability is classified as current even if the
DISCRETION TO REFINANCE
lender has agreed, after the reporting
● If the entity has the discretion to refinance period and before the statements are
or roll over an obligation for at least twelve authorized for issue, not to demand
months after the reporting period under an payment as a consequence of the breach.
existing loan facility, the obligation is
classified as noncurrent even if it would ● This liability is classified as current because
otherwise be due within a shorter period. at reporting date the borrower does not
have an unconditional right to defer
● The reason for this treatment is that such payment for at least twelve months after
obligation is considered to form part of the the reporting period.
entity's long-term refinancing because the
entity has an unconditional right under the ● However, Paragraph 75 provides that the
existing loan agreement to defer payment liability is classified as noncurrent if the
for at least twelve months after the end of lender has agreed on or before the end of
the reporting period. reporting period to provide a grace period
ending at least twelve months after the end
● Note that the refinancing or rolling over of reporting period.
must be at the discretion of the entity.
DEFINITION OF EQUITY

● Otherwise, if the refinancing or rolling over ● The term equity is the residual interest in
is not at the discretion of the entity, the the assets of the entity after deducting all of
obligation is classified as a current liability. its liabilities.

COVENANTS ● Simply stated, equity means "net assets" or

total assets minus liabilities.
● Covenants are often attached to borrowing
agreements which represent undertakings ● The terms used in reporting the equity of an
by the borrower. entity depending on the form of the
business organization are:
● Covenants are actually restrictions on the
borrower as to undertaking further a. Owner's equity in a proprietorship
 b. Partners' equity in a partnership NOTES TO FINANCIAL STATEMENTS
c. Stockholders' equity or
● Notes to financial statements provide
shareholders' equity in a
narrative description or disaggregation
corporation
of items presented in the financial
statements and information about
● However, the term equity may simply be
items that do not qualify for
used for all business entities.
recognition.
● Under PAS 1, paragraph 7, the holders of
● Notes contain information in addition
instruments classified as equity are simply
to that presented in the statement of
known as owners.
financial position, income statement,
SHAREHOLDERS' EQUITY statement of comprehensive income,
statement of changes in equity and
● Shareholders' equity is the residual interest
statement of cash flows.
of owners in the net assets of a corporation
measured by the excess of assets over
● In other words, notes to financial
liabilities.
statements are used to report
information that does not fit into the
● Generally, the elements constituting
body of the financial statements in
shareholders' equity with their equivalent
order to enhance the understandability
IAS term are:
of the financial statements.
PHILIPPINE TERM
● The purpose of the notes to financial
● Capital stock statements is "to provide the
● Subscribed capital stock necessary disclosures required by
● Preferred stock Philippine Financial Reporting
● Common stock Standards."
● Additional paid capital
● Retained earnings (deficit)
● Retained earnings appropriated FORMS OF STATEMENT OF FINANCIAL
● Revaluation surplus POSITION
● Treasury stock
● In practice, there are two customary forms
IAS TERM in presenting the statement of financial
position, namely:
● Share capital a. Report form
● Subscribed share capital o This form sets forth the three
● Preference share capital
major sections in a downward
● Ordinary share capital
sequence of assets, liabilities and
● Share premium
equity.
● Accumulated profits (losses)
b. Account form
● Appropriation reserve
o As the title suggests, the
● Revaluation reserve
presentation follows that of an
● Treasury share
account, meaning, the assets are
shown on the left side and the
 liabilities and equity on the right ● Other formats may be equally appropriate
side of the statement of financial provided the distinction is clear. This is in
position accordance with paragraph 7 of the Preface
to PAS 1.
● The following is an illustration of the two
forms of statement of financial position. ● PAS 1, paragraph 57, provides that the
standard does not prescribe the order or
LINE ITEMS IN STATEMENT OF FINANCIAL
format in which items are to be presented
POSITION
in the statement of financial position.
● PAS 1, paragraph 54, states that as a
minimum, the face of the statement of ● breNote that the format of the statement of
financial position shall include the following financial position as illustrated in the
line items: appendix to IAS 1 presents noncurrent
1. Cash and cash equivalents assets before current assets, equity before
2. Financial assets (other than 1, 3 and liabilities, and noncurrent liabilities before
6) current liabilities. This may be the practice
3. Trade and other receivables in other jurisdiction, like the United
4. Inventories Kingdom
5. Property, plant and equipment
6. Investment in associates accounted
for by the equity method
7. Intangible assets
8. Investment property.
9. Biological assets
10. Total of assets classified as held for
sale and assets included in disposal
group classified as held for sale
11. Trade and other payables
12. Current tax liability
13. Deferred tax asset and deferred tax
liability
14. Provisions
15. Financial liabilities (other than 11
and 14)
16. Liabilities included in disposal group
classified as held for sale
17. Noncontrolling interest
18. Share capital and reserves

● In the Philippines, the common practice is

to present current assets before noncurrent
assets, current liabilities before noncurrent
liabilities, and equity after liabilities.