Lesson Title: Chapter 1 – The Accountancy Profession

Lesson Objectives:
At the end of the module, the learners will be able to:
1. Define accounting.
2. Describe the practice of the accountancy profession in the Philippines.
3. Identify the standard-setting body in the Philippines.
Lectures and Annotations:
Accounting Standards Council
 Accounting is a service activity. The accounting function is to provide
quantitative information, primarily financial in nature, about economic entities,
that is intended to be useful in making economic decision.

Committee on Accounting Terminology

 Accounting is the art of recording, classifying and summarizing in a significant
manner and in terms of money, transactions and events which are in part at
least of a financial character and interpreting the results thereof.

American Accounting Association

 Accounting is the process of identifying, measuring and communicating
economic information to permit informed judgment and decision by users of
the information.
Important points in the accounting definition:
1. Accounting is about quantitative information.
2. The information is likely to be financial in nature.
3. The information should be useful in decision making.

The definition provided by the AAA states the following accounting components:
a) Identifying as the analytical component.
b) Measuring as the technical component.
c) Communicating as the formal component.
Identifying
• This accounting process is the recognition or nonrecognition of business
activities as accountable events.
• An event is accountable or quantifiable when it has an effect on assets, liabilities
and equity.

External and internal transactions

• External transactions or exchange transactions are those economic events
involving one entity and another entity. Example: purchase of goods from a
supplier.
Measuring
• Is the accounting process of assigning of peso amounts to the accountable
economic transactions and events.
• The measurement bases are historical cost and current value.

Communicating
• Is the process of preparing and distributing accounting reports to potential
users of accounting information.
• The communicating process is the reason why accounting has been called the
“universal language of business”.
• Recording, classifying and summarizing aspects of accounting are implicit in the
communicating process.
Recording or journalizing
• Is the process of systematically maintaining a record of all economic business
transactions after they have been identified and measured.

Classifying
• Is the sorting or grouping of similar and interrelated economic transactions into
their respective classes.

Summarizing
• Is the preparation of financial statements.
Overall objective of accounting
• Is to provide quantitative financial information about a business useful to
statement users particularly owners and creditors in making economic
decisions.

• Accounting is an information system that measures business activities,

processes information into financial reports and communicates the reports to
decision makers.
Standard-Setting Bodies
1. International Accounting Standards Board (IASB)
2. International Financial Reporting Standards Interpretations Committee (IFRSIC)
3. Financial Reporting Standards Council (FRSC)
4. Philippine Interpretations Committee (PIC)

International Accounting Standards Board (IASB)

• The IASB is an independent, private sector body that issues accounting
standards called International Financial Reporting Standards (IFRSs).

International Financial Reporting Standards Interpretations Committee (IFRSIC)

• IFRSIC is the interpretative body of the IASB.
Financial Reporting Standards Council (FRSC)
• The FRSC is the accounting standard-setting body in the Philippines established
by the Professional Regulation Commission (PRC) under the Implementing Rules
and Regulations of the Republic Act No. 9298, to assist the Board of
Accountancy (BOA) in carrying out its power and function in promulgating
accounting standards in the Philippines.

• The FRSC’s main function is to establish generally accepted accounting

principles (GAAP) in the Philippines.

• The accounting standards issued by the FRSC are called Philippine Accounting
Standards (PAS) and Philippine Financial Reporting Standards (PFRS). These
constitute the highest hierarchy of GAAP in the Philippines.
• Its international counterpart is the IASB.
Philippine Interpretations Committee (PIC)
• The Philippine Interpretations Committee (PIC) was established the FRSC in Aug
2006 to develop authoritative interpretations of existing PAS and PFRS and
provide guidance on financial reporting issues not specifically addressed in PAS
and PFRS. A PIC interpretation becomes part of PFRS once they are approved by
the FRSC.

• Its international counterpart is the IFRSIC.

The Accountancy Profession in the Philippines
1. Republic Act No. 9298 (R.A. 9298)
2. Professional Regulatory Board of Accountancy (PRBOA)
3. Philippine Institute of Certified Public Accountants (PICPA)
4. Scope of Practice of Accountancy
5. Continuing Professional Development (CPD)

Republic Act No. 9298 (R.A. 9298)

• The law regulating the practice of accountancy in the Philippines is the R.A.
9298 or the Philippine Accountancy Act of 2004.
Professional Regulatory Board of Accountancy (PRBOA)
• The PRBOA is the body authorized by law to promulgate rules and regulations
affecting the practice of accountancy in the Philippines. PRBOA is under the
supervision of the PRC.

Philippine Institute of Certified Public Accountants (PICPA)

• The PICPA, founded in Nov 1929, is the accredited professional organization of
CPAs by the PRC.
Scope of Practice of Accountancy
 The practice of accountancy shall include, but not limited to, the following:
a) Public Accountancy
 This field of practice involves rendering independent professional
services to the public. These professional services usually fall into one
of the following:
 Auditing financial statements
 Preparing tax returns
 Consultancy services

 CPAs are required to register with the PRBOA and PRC for the practice
of public accountancy.

 A certificate of accreditation shall be issued to CPAs in public practice

only when the registrant has acquired a minimum of three (3) years of
meaningful experience in any of the areas of public practice including
taxation.
  The PRC, upon favorable recommendation of the PRBOA, shall issue the
Certificate of Registration to practice public accountancy which shall be
valid for three (3) years, renewable every three years upon payment of
required fees.

b) Commerce and Industry

 This field of practice, also known as private accountancy, involves
assisting management in planning, controlling, and decision-making
activities.

 CPAs under this scope of practice are employed by a private company.

c) Education or Academe
 This field of practice involves teaching of accounting, auditing,
management advisory services, finance, business law, taxation, and
other technically related subjects.
 d) Government
 CPAs under this field of practice are employed in government and
their agencies such as BIR, BOC, COA.

Continuing Professional Development (CPD)

 CPD is an on-going training requirement to enhance the technical skill
and competence of CPAs.

 All CPAs, regardless of sector of practice, shall accumulate at least 120

CPD units to be accredited to practice the accountancy profession.
However, only 15 CPD units are required for the renewal of the CPA
license.
 CPD units refer to the CPD hours required for the renewal of CPA
license and accreditation of a CPA to practice the accountancy
profession every three years.
  Excess units earned shall not be carried over to the next three-year
period, except units for masteral and doctoral degrees.

 A CPA is permanently exempted from the CPD requirements on the

renewal of the CPA license upon reaching the age of 65.
 Note that this exemption is applicable only to the renewal of the CPA
license and not for the purpose of accreditation to practice the
accountancy profession.
Lesson Title: Chapter 2 – Conceptual Framework
Objective of Financial Reporting

Lesson Objectives:
At the end of the module, the learners will be able to:
1. Know the nature of the revised Conceptual Framework.
2. Describe the purpose of a Conceptual Framework.
3. Understand the objective of financial reporting.
Lectures and Annotations:
Nature of the Conceptual Framework for Financial Reporting
• The Conceptual Framework forms the theoretical foundation of accounting.
• It is the underlying theory for the development and revision of accounting
standards.
• A document that contains:
 The concepts for general purpose financial reporting, and
 Summary of the terms and concepts that underlie the preparation and
presentation of financial statement
Purposes of the Conceptual Framework
• To assist the IASB in the development of existing and future accounting
standards based on consistent concepts.
• To assist financial statement preparers in the development of consistent
accounting policies when no accounting standard applies to a particular
transaction or event, or when an accounting standard allows a choice of
accounting policy or treatment; and
• To assist all parties in understanding and interpreting the accounting standards.
Authoritative Status of the Conceptual Framework
• The applicability of the Conceptual Framework on a particular transaction shall
be considered only when there is no accounting standard or interpretation that
specifically deals with that particular transaction.
• Note that the Conceptual Framework is not an accounting standard.
 In cases where there is a conflict between an accounting standard and the
Conceptual Framework, the requirements of the accounting standard will
prevail over the requirements of the Conceptual Framework.

Users of Financial Information

1. Primary users
2. Other users
Primary users
• The parties to whom general purpose financial reports are primarily directed.
• The primary users are the following:
 Existing and potential investors
 Lenders and other creditors

Other users
• These are the users of financial information other than the primary users.
• These types of users may find the general-purpose financial reports useful but
these are not directed to them primarily.
• Other users include, but not limited to the following:
 Employees
 Customers
 Government and its agencies
 Suppliers
 General public
Scope of Revised Conceptual Framework
1. Objective of financial reporting
2. Qualitative characteristics of useful financial information
3. Financial statements and reporting entity
4. Elements of financial statements
5. Recognition and derecognition
6. Measurement
7. Presentation and disclosure
8. Concepts of capital and capital maintenance
Objectives of Financial Reporting
• This forms the foundation of the Conceptual Framework.

• The “why’ of accounting.

 This serves as the goal or purpose of accounting.

• The overall or general objective is to provide financial information that is useful

for decision-making.
Limitations of Financial Reporting
• General purpose financial reports:
 do not and cannot provide all of the information that existing and potential
investors, lenders and other creditors need.

 are not designed to show the value of an entity but these reports provide
information to help the primary users estimate the value of the entity.

 are intended to provide common information to users and cannot

accommodate every request for information.

 are based on estimates and judgments rather than exact depiction.

Lesson Title: Chapter 3 – Conceptual Framework
Qualitative Characteristics
Lesson Objectives:
At the end of the module, the learners will be able to:
1. Identify the qualitative characteristics of accounting information.
2. Identify the fundamental qualitative characteristics.
3. Identify the enhancing qualitative characteristics.
Lectures and Annotations:
Qualitative Characteristics of Useful Financial Information
 The qualities or attributes that make financial information useful to the users in
making economic decisions.

Fundamental Qualitative Characteristics

 This characteristics relate to the content or substance of financial information.

 For a financial information to be useful, it must be relevant and faithfully

represent what it purports to represent.

 The fundamental qualitative characteristics are:

1. Relevance, and
2. Faithful representation
Relevance
 Refers to the capacity of the information to affect a decision.

 Relevant information is capable of making a difference in decisions if it has

predictive value, confirmatory value, or both.
 Information has predictive value if the information can be used as an input
to predict future outcomes.
 Information has confirmatory value if it provides feedback about previous
evaluations.

 The relevance of an information is affected by its nature and materiality.

 Information is material if omitting or misstating it could influence or affect
the decisions of primary users.
 Materiality dictates that strict adherence to accounting standards is
not required when the items are not significant enough to affect the
decision of a primary user and the fairness of the financial statements.
In simple terms, materiality is just a quantitative threshold.

 The materiality of an item depends on relative size rather than

absolute size. Meaning, what is material for one may not be material
to another.

 There is no uniform quantitative threshold for materiality as it depends

on the professional judgment of the accountant.
Faithful Representation
 The descriptions and figures presented in the financial reports should match
what really existed or happened.

 Three characteristics:
1. Completeness
 All information that are necessary for a user to understand the
phenomenon being depicted must be included and clearly stated in the
reports.

2. Neutrality
 Being neutral is being fair.
 The information contained in the financial reports should be free from
bias. In other words, the reports should not favor one party to the
detriment of another party.
 The financial reports are directed to the common needs of users and
not to the particular needs of specific users.
 3. Free from error
 This means there are no errors or omissions in the description of
phenomenon or transaction.

 This does not necessarily mean perfectly accurate in all aspects.

Prudence or Conservatism
 The exercise of care and caution when dealing with uncertainties in the
measurement process. The exercise of prudence means that:
 Assets and income are not overstated.
 Liabilities and expenses are not understated.
Substance over Form
 This concept states that information is to represent faithfully the
transactions and other events it purports to represent, it is necessary that
the transactions and other events are accounted for in accordance with their
economic substance and not merely their legal form.
 If there will be a conflict between the economic substance and legal form
of a particular transaction, the economic substance of that transaction
will prevail over its legal form.
Enhancing Qualitative Characteristics
 These characteristics are intended to increase the usefulness of financial
information.
 The enhancing qualitative characteristics are: (VCUT)
1. Verifiability
2. Comparability
3. Understandability
4. Timeliness

Verifiability
 An information is verifiable if it is supported by evidence that an accountant
would look into and arrive at the same conclusion.
 Can either be:
 Direct verification – verifying an information through direct observation
such as counting cash.
 Can either be:
 Indirect verification – checking the inputs to a model, formula or other
technique and recalculating the outputs using the same methodology.
 Example: Verifying the valuation of inventory by checking the inputs
(quantities and costs) and recomputing it.

Comparability
 This characteristic enables users to identify and understand similarities
and differences among items.

 This term is not synonymous to uniformity.

Consistency
 Refers to the use of the same methods for the same items, either from
period to period within a company or in a single period across companies.

 Related to comparability but not synonymous.

 Comparability is the goal and consistency helps to achieve that goal.

Understandability
 Information should be presented in a form that users understand.
 Some transactions and events are complex and difficult to understand.
Excluding information about these might make the information in the
reports easier to understand. However, the reports will result to
incomplete information and therefore might mislead the users.
 This characteristic is very essential because if a relevant and faithfully
represented information is not understood by users, that information is
rendered useless.
Timeliness
 This means having the information available to users in time to be capable of
influencing their decisions.

 Generally, the older the information, the less useful it is.

 The following chart summarizes the qualitative characteristics of useful
financial information: Qualitative Characteristics of Financial Statements
Predictive value

Relevance
Confirmatory
value
Fundamental
Qualitative
Characteristics Completeness

Faithful
Neutrality
representation

Verifiability Free from error

Comparability
Enhancing
Qualitative
Characteristics
Understandability

Timeliness
Cost Constraint
 Cost is a pervasive constraint on the information that can be provided by
financial reporting.

 Reporting financial information imposes costs, and it is important that those

costs are justified by the benefits of reporting that information.
 This concept is known as cost-benefit consideration.

 The benefit derived from the information should exceed the cost in
obtaining the information.
Lesson Title: Chapter 6 – Conceptual Framework
Recognition and Measurement
Lesson Objectives:
At the end of the module, the learners will be able to:
1. Define recognition of the elements of financial statements.
2. Know the recognition criteria for assets, liability, income and expense
3. Define measurement of the elements of financial statements.
Lectures and Annotation:
Recognition
• The process of capturing for inclusion in the financial statements an item
that meets the definition of one of the elements of financial statements.
 Only items that meet the definition of an asset, liability, income or
expense are recognized in the financial statements.

Recognition criteria
• Only items that meet the definition of the elements of financial statements
are recognized in the financial statements.
 The amount at which an asset, a liability or equity is recognized in the
statement of financial position is referred to as its carrying amount.
Point of sale income recognition
• The basic principle of income recognition is that income shall be
recognized when earned.

Expense recognition
• The expense recognition principle means that expenses are recognized
when incurred.

Matching principles
a. Cause and effect association. Under this principle, the expense is
recognized when the revenue is already recognized.

b. Systematic and rational allocation. Costs are expensed by simply

allocating them over the periods benefited.

c. Immediate recognition. The cost incurred is expensed outright because

of uncertainty of future economic benefits or difficulty of reliably
associating certain costs with future revenue.
Derecognition
• The removal of all or part of a recognized asset or liability from the
statement of financial position.

• Normally occurs when an item no longer meets the definition of an

asset or a liability.
 An asset is derecognized when the entity loses control of the
asset.

 A liability is derecognized when the entity no longer has a present

obligation for the liability.
Measurement
• The process of quantifying the elements recognized in the financial
statements.

Measurement bases
a. Historical cost
 The entry price (or value) to acquire an asset or incur a liability.
 The historical cost of an asset is the costs incurred in
acquiring (or creating) the asset, comprising the amount paid
to acquire (or create) the asset plus transaction costs.

 The historical cost of a liability is the amount received to

incur the liability minus transaction costs.

The historical cost of an asset is updated over time to depict, if

applicable:
 The historical cost of an asset is updated over time to depict, if
applicable:
a. Depreciation or amortization
b. Settlement
c. Impairment
d. Accrual of interest to reflect any financing component of the
asset.
e. Amortized cost measurement of financial asset.

 The historical cost of a liability is updated over time to depict, if

applicable:
a. By satisfying an obligation to pay (full or partial) or by
satisfying an obligation to deliver goods.
b. Inflation
c. Accrual of interest to reflect any financing component of the
liability
d. Amortized cost measurement of financial liability.
b) Current value
 This measure provides information about assets, liabilities and
related income and expenses, using information updated to reflect
conditions at the measurement date.

 This include the following:

a. Fair value
 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.

 This can be observed directly using market price of the

asset or liability in an active market.

 In cases where the fair value cannot be directly measured,

an entity can use present value of cash flows.
b. Value in use for asset
 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.

c. Fulfillment value for liability

 The present value of the cash, or other economic resources,
that an entity expects to be obliged to transfer as it fulfils a
liability.

Transaction costs on value in use and fulfillment value. Both value in

use and fulfillment value do not include transaction costs incurred on
acquiring an asset or incurring a liability since they are based on future
cash flows.

However, value in use and fulfillment value include the present value
of any transaction costs an entity expects to incur on the ultimate
disposal of the asset or on fulfilling the liability.
Bonds = P1,000,000
EIR = 10%
Stated interest rate = 8%
Term = 5 years
Annual interest payment = P80,000

Present value of 1 = 0.620

Present value of an ordinary annuity of 1 for 5 periods = 3.790
P1,000,000 x .620 = P620,000
P 80,000 x 3.790 = 303,200
923,200
d. Current cost
 The cost of an equivalent 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.

Selecting a measurement basis

 The IASB did not mandate a single measurement basis
because the different measurement bases could produce
useful information under different circumstances.
 Historical cost is the measurement basis most commonly
adopted in preparing financial statements.
Lesson Title: Chapter 2 – Conceptual Framework
Objective of Financial Reporting

Lesson Objectives:
At the end of the module, the learners will be able to:
1. Know the nature of the revised Conceptual Framework.
2. Describe the purpose of a Conceptual Framework.
3. Understand the objective of financial reporting.
Lectures and Annotations:
Nature of the Conceptual Framework for Financial Reporting
• The Conceptual Framework forms the theoretical foundation of accounting.
• It is the underlying theory for the development and revision of accounting
standards.
• A document that contains:
 The concepts for general purpose financial reporting, and
 Summary of the terms and concepts that underlie the preparation and
presentation of financial statement
Purposes of the Conceptual Framework
• To assist the IASB in the development of existing and future accounting
standards based on consistent concepts.
• To assist financial statement preparers in the development of consistent
accounting policies when no accounting standard applies to a particular
transaction or event, or when an accounting standard allows a choice of
accounting policy or treatment; and
• To assist all parties in understanding and interpreting the accounting standards.
Authoritative Status of the Conceptual Framework
• The applicability of the Conceptual Framework on a particular transaction shall
be considered only when there is no accounting standard or interpretation that
specifically deals with that particular transaction.
• Note that the Conceptual Framework is not an accounting standard.
 In cases where there is a conflict between an accounting standard and the
Conceptual Framework, the requirements of the accounting standard will
prevail over the requirements of the Conceptual Framework.

Users of Financial Information

1. Primary users
2. Other users
Primary users
• The parties to whom general purpose financial reports are primarily directed.
• The primary users are the following:
 Existing and potential investors
 Lenders and other creditors

Other users
• These are the users of financial information other than the primary users.
• These types of users may find the general-purpose financial reports useful but
these are not directed to them primarily.
• Other users include, but not limited to the following:
 Employees
 Customers
 Government and its agencies
 Suppliers
 General public
Scope of Revised Conceptual Framework
1. Objective of financial reporting
2. Qualitative characteristics of useful financial information
3. Financial statements and reporting entity
4. Elements of financial statements
5. Recognition and derecognition
6. Measurement
7. Presentation and disclosure
8. Concepts of capital and capital maintenance
Objectives of Financial Reporting
• This forms the foundation of the Conceptual Framework.

• The “why’ of accounting.

 This serves as the goal or purpose of accounting.

• The overall or general objective is to provide financial information that is useful

for decision-making.
Limitations of Financial Reporting
• General purpose financial reports:
 do not and cannot provide all of the information that existing and potential
investors, lenders and other creditors need.

 are not designed to show the value of an entity but these reports provide
information to help the primary users estimate the value of the entity.

 are intended to provide common information to users and cannot

accommodate every request for information.

 are based on estimates and judgments rather than exact depiction.

Lesson Title: Chapter 3 – Conceptual Framework
Qualitative Characteristics
Lesson Objectives:
At the end of the module, the learners will be able to:
1. Identify the qualitative characteristics of accounting information.
2. Identify the fundamental qualitative characteristics.
3. Identify the enhancing qualitative characteristics.
Lectures and Annotations:
Qualitative Characteristics of Useful Financial Information
 The qualities or attributes that make financial information useful to the users in
making economic decisions.

Fundamental Qualitative Characteristics

 This characteristics relate to the content or substance of financial information.

 For a financial information to be useful, it must be relevant and faithfully

represent what it purports to represent.

 The fundamental qualitative characteristics are:

1. Relevance, and
2. Faithful representation
Relevance
 Refers to the capacity of the information to affect a decision.

 Relevant information is capable of making a difference in decisions if it has

predictive value, confirmatory value, or both.
 Information has predictive value if the information can be used as an input
to predict future outcomes.
 Information has confirmatory value if it provides feedback about previous
evaluations.

 The relevance of an information is affected by its nature and materiality.

 Information is material if omitting or misstating it could influence or affect
the decisions of primary users.
 Materiality dictates that strict adherence to accounting standards is
not required when the items are not significant enough to affect the
decision of a primary user and the fairness of the financial statements.
In simple terms, materiality is just a quantitative threshold.

 The materiality of an item depends on relative size rather than

absolute size. Meaning, what is material for one may not be material
to another.

 There is no uniform quantitative threshold for materiality as it depends

on the professional judgment of the accountant.
Faithful Representation
 The descriptions and figures presented in the financial reports should match
what really existed or happened.

 Three characteristics:
1. Completeness
 All information that are necessary for a user to understand the
phenomenon being depicted must be included and clearly stated in the
reports.

2. Neutrality
 Being neutral is being fair.
 The information contained in the financial reports should be free from
bias. In other words, the reports should not favor one party to the
detriment of another party.
 The financial reports are directed to the common needs of users and
not to the particular needs of specific users.
 3. Free from error
 This means there are no errors or omissions in the description of
phenomenon or transaction.

 This does not necessarily mean perfectly accurate in all aspects.

Prudence or Conservatism
 The exercise of care and caution when dealing with uncertainties in the
measurement process. The exercise of prudence means that:
 Assets and income are not overstated.
 Liabilities and expenses are not understated.
Substance over Form
 This concept states that information is to represent faithfully the
transactions and other events it purports to represent, it is necessary that
the transactions and other events are accounted for in accordance with their
economic substance and not merely their legal form.
 If there will be a conflict between the economic substance and legal form
of a particular transaction, the economic substance of that transaction
will prevail over its legal form.
Enhancing Qualitative Characteristics
 These characteristics are intended to increase the usefulness of financial
information.
 The enhancing qualitative characteristics are: (VCUT)
1. Verifiability
2. Comparability
3. Understandability
4. Timeliness

Verifiability
 An information is verifiable if it is supported by evidence that an accountant
would look into and arrive at the same conclusion.
 Can either be:
 Direct verification – verifying an information through direct observation
such as counting cash.
 Can either be:
 Indirect verification – checking the inputs to a model, formula or other
technique and recalculating the outputs using the same methodology.
 Example: Verifying the valuation of inventory by checking the inputs
(quantities and costs) and recomputing it.

Comparability
 This characteristic enables users to identify and understand similarities
and differences among items.

 This term is not synonymous to uniformity.

Consistency
 Refers to the use of the same methods for the same items, either from
period to period within a company or in a single period across companies.

 Related to comparability but not synonymous.

 Comparability is the goal and consistency helps to achieve that goal.

Understandability
 Information should be presented in a form that users understand.
 Some transactions and events are complex and difficult to understand.
Excluding information about these might make the information in the
reports easier to understand. However, the reports will result to
incomplete information and therefore might mislead the users.
 This characteristic is very essential because if a relevant and faithfully
represented information is not understood by users, that information is
rendered useless.
Timeliness
 This means having the information available to users in time to be capable of
influencing their decisions.

 Generally, the older the information, the less useful it is.

 The following chart summarizes the qualitative characteristics of useful
financial information: Qualitative Characteristics of Financial Statements
Predictive value

Relevance
Confirmatory
value
Fundamental
Qualitative
Characteristics Completeness

Faithful
Neutrality
representation

Verifiability Free from error

Comparability
Enhancing
Qualitative
Characteristics
Understandability

Timeliness
Cost Constraint
 Cost is a pervasive constraint on the information that can be provided by
financial reporting.

 Reporting financial information imposes costs, and it is important that those

costs are justified by the benefits of reporting that information.
 This concept is known as cost-benefit consideration.

 The benefit derived from the information should exceed the cost in
obtaining the information.
Lesson Title: Chapter 4 - Financial Statements and the
Reporting Entity
Lesson Objectives:
At the end of the module, the learners will be able to:
1. Know the general objective of financial statements.
2. Define a reporting entity.
Lectures and Annotation:
Objective of financial statements
 To provide information about a reporting entity’s assets, liabilities, equity,
income and expenses.
 Assets, liabilities and equity are presented in the statement of financial
position.

 Income and expenses are presented in the statement of financial

performance.

Reporting period
 The period when financial statements are prepared for financial reporting.

 Financial statements are prepared at least annually.

 Optionally, it may be prepared on an interim basis (i.e., three months, six months,
nine months).
 Financial statements also provide comparative information for at least on
preceding period.

Perspective adopted in financial statements

 Financial statements provide information about transactions and other events
viewed from the perspective of the reporting entity as a whole, not from the
perspective of the primary users.

Going concern assumption

 Financial statements are prepared on the assumption that the reporting entity
will continue in operation for the foreseeable future.
 It is assumed that the entity has no intention to liquidate or stop operations.
Reporting entity
 An entity that is required or chooses to prepare financial statements.
 It can be a single entity or a portion of an entity, or can comprise more than
one entity.
 The following can be considered a reporting entity:
 Sole proprietorship, partnership, or corporation

 Parent company

 The parent and its subsidiaries (or group) as single reporting entity;

 Two or more entities without parent and subsidiary relationship as a

single reporting entity (i.e., home office and branch)
Types of financial statements
 Consolidated financial statements
 These are the financial statements prepared when the reporting entity
comprises both the parent and its subsidiaries.
 The parent is the company that exercises control over its subsidiaries.
o The parent obtains control over a subsidiary by way of acquiring a
majority ownership interest (e.g., more than 50%) in the voting
common stocks (ordinary share capital) of the subsidiary.

 Provides information about the assets, liabilities, equity, income and

expenses of both the parent and its subsidiaries as a single reporting entity.
 Unconsolidated financial statements
 These are the financial statements prepared when the reporting entity is
the parent company only.

 Provides information about the parent company’s assets, liabilities, equity

income and expenses and not those of the subsidiaries.

 Combined financial statements

 These are the financial statements prepared when the reporting entity
comprises two or more entities that are not linked by a parent and
subsidiary relationship such as home office and branch.
Underlying Assumptions
 Accounting entity assumption, the entity is separate from the owners,
managers, and employees who constitute the entity.

 Time period assumption, it requires that the indefinite life of an entity is

subdivided into accounting periods which are usually of equal length for the
purpose of preparing financial reports on financial position, performance
and cash flows.

 Monetary unit (has two aspects)

 Quantifiability aspects means that the assets, liabilities, equity, income
and expenses should be stated in terms of a unit of measure which is
the peso in the Philippines.
 Stability of the peso assumption means that the purchasing power of
the peso is stable.
Lesson Title: Chapter 5 – Conceptual Framework
Elements of Financial Statements
Lesson Objectives:
At the end of the module, the learners will be able to:
1. Identify the elements directly related to the measurement of financial position
and financial performance.
2. Understand the concepts of the elements of financial statements.
Lectures and Annotation:
Elements of financial statements
 Refers to the quantitative information reported in the financial statements.
 The following chart summarizes the elements of financial statements:

Asset

Elements of
Liability
Financial Position

Equity
Elements of F/S

Income
Elements of
Financial
Performance
Expense
Asset
 A present economic resources controlled by the entity as a result of past
events.
 An economic resource is a right that has the potential to produce
economic benefits. Rights that have the potential to produce economic
benefits may take the following forms:
 Rights that correspond to an obligation of another entity
 Right to receive cash
 Right to receive goods or services
 Right to exchange economic resources with another party on
favorable term
 Right to benefit from an obligation of another party if a specified
uncertain future event occurs.
  Rights that do not correspond to an obligation of another entity
 Right over physical objects, such as property, plant and
equipment or inventories
 Right to intellectual property

 Right established by contract or legislation

Liability
Present obligation of an entity to transfer an economic resource as a
result of past events.

For a liability to exist, all of the following must be satisfied:

 The entity has an obligation.
 The obligation is to transfer an economic resource.
 The obligation is a present obligation that exists as a result of past
event.
Obligation
 A duty or responsibility that an entity has no practical ability to avoid.

 Can either be legal or constructive.

• Obligation may be legally enforceable as a consequence of a binding
contract or statutory requirement.
• Constructive obligation arises for normal business practice, custom and a
desire to maintain good business relations or act in an equitable manner.

 Obligations to transfer an economic resource as a result of past event

include:
 Obligation to pay cash
 Obligation to deliver goods
 Obligation to provide services at some future time.
 Obligation to exchange economic resources with another party on
unfavorable terms
 Obligation to transfer an economic resource if specified uncertain future
event occurs.
Equity
 The residual interest in the assets of an entity after deducting all of the
liabilities. Assets = Liabilities + Equity
Assets – Liabilities = Equity
Income
 Defined as increases in assets or decreases in liabilities that result in
increases in equity, other than those relating to contributions from
owners.
 Assets = Liabilities + Equity + Income
 Scope of income:
 Revenue
• Income arising from the ordinary course of business.
 Gains
• Represent other items that meet the definition of income and
do not arise in the ordinary course of business.
Expense
 Defined as decreases in assets or increases in liabilities that result in
decreases in equity, other than those relating to distributions to owners.

 Scope of expense: Encompasses losses as well as those expenses that

arise in the course of the ordinary regular activities.
 Regular expenses
• Those expenses incurred in the ordinary course of business.

 Loss
• Those expenses do not arise in the ordinary course of business.
Lesson Title: Chapter 7 – Conceptual Framework
Presentation and Disclosure Concepts of Capital

Lesson Objectives:
At the end of the module, the learners will be able to:
1. Know the guideline in the presentation and disclosure of financial information.
2. Define the two concepts of capital.
Lectures and Annotation:
Presentation and Disclosure
 A reporting entity communicates information about its assets, liabilities, equity,
income and expenses by presenting and disclosing information in the financial
statements.

 This can be achieved by classification and aggregation of assets, liabilities,

equity, income and expenses.
 Classification is the sorting of assets, liabilities, equity, income and expenses
on the basis of shared or similar characteristics.
 Offsetting is generally not appropriate.
 Income and expenses are classified either:
a) In the statement of profit or loss; or
b) In other comprehensive income
 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.
 This makes information more useful by summarizing a large volume of
detail.
Concept of Capital Maintenance
a) Financial capital maintenance
 Under this concept, a profit is earned only if the amount of the net assets
at the end of the period exceeds the amount of net assets at the beginning
of the period, after excluding any distributions to, and contributions from
owners during the period.

b) Physical capital maintenance

 Under this concept a profit is earned only if the physical productive
capacity (or operating capability) of the entity at the end of the period
exceeds the physical productive capacity at the beginning of the period,
after excluding any distributions to, and contributions from, owners during
the period.
Required measurement basis to be adopted
 The physical capital maintenance concept requires the adoption of the
current cost basis of measurement.

 The financial capital maintenance concept, however, does not require the
use of a particular basis of measurement.
Concept of Capital Maintenance
 A financial concept of capital is adopted by most entities in preparing their
financial statements.
 Under this concept of capital, capital is synonymous with the net assets
or equity of the entity.

 Under a physical concept of capital, capital is regarded as the productive

capacity of the entity based on, for example, units of output per day.
Lesson Title: Chapter 8 – Presentation of Financial Statements

Lesson Objectives:
At the end of the module, the learners will be able to:
1. Identify the components of financial statements.
2. Know the preparation of a statement of financial position.
3. Understand the current and noncurrent classification of assets and liabilities.
Lectures and Annotation:
Financial Statements
 Financial statements are the means by which the information accumulated and
processed in financial accounting is periodically communicated to the users.

General purpose financial statements

 General purpose financial statements or simply referred to as financial
statements are those intended to meet the needs of users who are not in a
position to require an entity to prepare reports tailored to their particular
information needs.
Components of financial statements
A complete set of financial statements comprises the following components:
1. Statement of financial position
2. Income statement
3. Statement of comprehensive income
4. Statement of changes in equity
5. Statement of cash flows
6. Notes, comprising a summary of significant accounting policies and other
explanatory notes
Objective of financial statements
The objective 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.

Frequency of reporting
Financial statements shall be presented at least annually.

Statement of financial position

A statement of financial position is a formal statement showing the three elements
comprising financial position, namely assets, liabilities and equity (ALE).
Classification of assets
Assets are classified only into two, namely current assets and noncurrent assets.

Current assets
PAS 1, provides that an entity shall classify an asset as current when:
a. The asset is cash or cash equivalent unless the asset is restricted to settle a
liability for more than 12 months after the reporting period.
b. The entity holds the assets primarily for the purpose of trading.
c. The entity expects to realize the asset within 12 months after the reporting
period.
d. The entity expects to realize the assets or intends to sell or consume it within
the entity’s normal operating cycle (is the time between the acquisition of
assets and their realization in cash).
Noncurrent assets (is a residual definition)
PAS 1, simply states that an entity shall classify all other assets not classified as
current as noncurrent. NCA include the following:
a. Property, plant and equipment (PPE)
b. Long-term investments
c. Intangible assets
d. Deferred tax assets
e. Other noncurrent assets

Property, plant and equipment

PAS 16, define PPE as tangible assets which are held by an entity for use in
production or supply of goods and services, for rental to others, or for
administrative purposes, and are expected to be used during more than one
period.
Examples of PPE
• Land
• Building
• Machinery
• Equipment
• Furniture & fixtures
• Patterns, molds, dies and tools

Long-term investments
The IASC defines investment as an asset held by an entity for the accretion of
wealth through capital 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.
Intangible assets
An intangible asset is simply defined as an identifiable nonmonetary asset without
physical substance.
Examples: patent, franchise, copyright, lease right, trademark and computer
software.
An example of an unidentifiable intangible asset is goodwill.

Other noncurrent assets

Other noncurrent assets are those assets that do not fit into the definition of the
previously mentioned noncurrent assets.
Examples: long-term advances to officers, directors, shareholders and employees;
abandoned property and long-term refundable deposit.
Classification of liabilities
Liabilities are classified into two, namely current liabilities and noncurrent
liabilities.

Current liabilities
PAS 1 provides that an entity shall classify a liability as current when:
a. The entity expects to settle the liability within the entity’s normal operating
cycle.
b. The entity holds the liability primarily for the purpose of trading.
c. The liability is due to be settled within 12 months after the reporting period.
d. The entity does not have a right to defer settlement of the liability for at least
12 months after the reporting period.
Noncurrent liabilities (also a residual definition)
PAS 1 provides that all liabilities not classified as current are classified as
noncurrent.
a. Noncurrent portion of long-term debt
b. Finance lease liability
c. Deferred tax liability
d. Long-term obligations to company officers
e. Long-term deferred revenue
Currently maturing long-term debt
A liability which is due to be settled within 12 months after the reporting period is
classified as current, even if:
a. The original term was for a period longer than 12 months.
b. An agreement to refinance or to reschedule payment on a long-term basis is
completed after the reporting period and before the financial statements are
authorized for issue.

However, if the refinancing on a long-term basis is completed on or before the

end of the reporting period, the refinancing is an adjusting event and the
obligation is classified as noncurrent liability.
NCL – long term debt ( 5 yrs) P1,000,000
Date of txn = June 30, 2018
Maturity date = June 30, 2023

Classification : Dec. 31, 2021 (12 mos ------ Dec 31, 2022) = NCL
EOR Dec 31, 2022 ( due June 30, 2023) = CL

Approved: Jan 2, 2023

Covenants
Covenants are restrictions on the borrower as to undertaking further borrowings,
paying dividends, maintaining specified level of working capital and so forth.

PAS 1, provides that the liability is classified as current even if the lender has
agreed, after the reporting period and before the statements are authorized for
issue, not to demand payment as a consequence of the breach.

However, paragraph 75 provides that the liability is classified as noncurrent if the

lender has agreed on or before the end of reporting period to provide a grace
period ending at least 12 months after the end of reporting period.
Definition of equity
The term equity is the residual interest in the assets of the entity after deducting
all of its liabilities.

Terms used in reporting the equity of an entity

• Owner’s equity – proprietorship
• Partners equity – partnership
• Stockholders’ equity or shareholders’ equity - corporation
Shareholders’ equity
Shareholders’ equity is the residual interest of owners in the net assets of a
corporation measured by the excess of assets over liabilities.
Notes to financial statements
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.

Notes to financial statements are used to report information that does not fit into
the body of the financial statements in order to enhance the understandability of
the financial statements.

The purpose of the notes is to provide the necessary disclosures required by

Philippine Financial Reporting Standards.
Forms of statement of financial statements
a. Report form
• The report form sets forth the 3 major sections in a downward sequence of
assets, liabilities and equity.

b. Account form
• The presentation follows that of an account, the assets are shown on the
left side and the liabilities and equity on the right side of the statement of
financial position.
Report form
Line items in statement of financial position
1. Cash and cash equivalents
2. Financial assets (other than 1, 3 & 6)
3. Trade and other receivables
4. Inventories
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
Line items in statement of financial position
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
References:
Cabrera, Ma. E.B., Cabrera, G.A. B, Cabrera, B.A. B. (2022). Conceptual Framework
and Accounting Standards. Manila: GIC Enterprises & Co., Inc.
Millan, ZV. B. (2022). Conceptual Framework & Accounting Standards. Baguio City:
Bandolin Enterprise Publishing
Valix, C. T. , Peralta, J. F., Valix C.A. M., (2022). Conceptual Framework & Accounting
Standards. Manila: GIC Enterprises & Co., Inc.

Villaluz, BC. S., Cruz, MS. M. (2022). Financial Accounting and Reporting. Cainta,
Rizal: BCV Accounting Bookshop
Lesson Title: Chapter 14 - Inventories (PAS 2)
Lesson Objectives:
At the end of the module, the learners will be able to:
1. Understand the meaning of inventories.
2. Identify the items included in inventory cost.
3. Know the measurement of inventory in the statement of financial position.
Lectures and Annotation:
Inventories
Inventories are assets held for sale in the ordinary course of business, in the
process of production for such sale or in the form of materials or supplies to be
consumed in the production process or in the rendering of services.

Cost of inventories
The cost of inventories shall comprise cost of purchase, cost of conversion and
other cost incurred in bringing the inventories to their present location and
condition.
Purchase cost
• Purchase price
• Import duties and irrecoverable taxes
• Freight
• Handling and other cost directly attributable to the acquisition of finish goods
and materials.

Trade discounts, rebates and other similar items are deducted in determining the
cost of purchase.
Excluded from cost of inventories
a. Abnormal amount of wasted material
b. Storage cost, unless necessary in the production process prior to a further
production stage.
c. Administrative overhead
d. Distribution or selling cost

Cost formulas
PAS 2, expressly provides that the cost of inventories shall be determined by using
either:
a. First in, First out (FIFO)
b. Weighted average
The FIFO method assumes that the goods first purchased are first sold and
consequently the goods remaining in the inventory at the end of the period are
those most recently purchased or produced.

Weighted average
The cost of the beginning inventory plus the total cost of purchases during the
period is divided by the total units purchased plus those in the beginning
inventory to get a weighted average unit cost.
Illustration
Illustration
Specific identification
Specific identification means that specific costs are attributed to identified items
of inventory. The cost of inventory is determined by simply multiplying the units
on hand by the actual unit cost.

Measurement of inventory
PAS 2, provides that inventories shall be measured at the lower of cost and net
realizable value (LCNRV).

Net realizable value

Net realizable value (NRV) is the estimated selling price in the ordinary course of
business less the estimated cost of completion and estimated cost of disposal.
Accounting for LCNRV
• If the cost is lower than the NRV, there is no accounting problem because the
inventory is stated at cost and the increase in value is not recognized.

• If the NRV is lower than cost, the inventory is measured at NRV. In this case,
the problem is the proper treatment of the writedown of the inventory to
NRV.

• The writedown of inventory to NRV is accounted for using the allowance

method.

Allowance method
The inventory is recorded at cost and any loss on inventory writedown is
accounted for separately.
Illustration – Inventory data on Dec 31, 2022
Journal entries:
• The inventory on Dec 31, 2022 is recorded at cost.

Inventory, Dec 31 9,000,000

Income summary 9,000,000

• The loss on inventory writedown is accounted for separately.

Loss on inventory writedown 500,000

Allowance for inventory writedown 500,000
• The loss on inventory writedown is included in the computation of cost of
goods sold.

• The allowance for inventory writedown is presented as a deduction from the

inventory.

Inventory, Dec 31, 2022 at cost 9,000,000

Allowance for inventory writedown ( 500,000)
Net realizable value 8,500,000
References:
Cabrera, Ma. E.B., Cabrera, G.A. B, Cabrera, B.A. B. (2022). Conceptual Framework
and Accounting Standards. Manila: GIC Enterprises & Co., Inc.
Millan, ZV. B. (2022). Conceptual Framework & Accounting Standards. Baguio City:
Bandolin Enterprise Publishing
Valix, C. T. , Peralta, J. F., Valix C.A. M., (2022). Conceptual Framework &
Accounting Standards. Manila: GIC Enterprises & Co., Inc.

Villaluz, BC. S., Cruz, MS. M. (2022). Financial Accounting and Reporting. Cainta,
Rizal: BCV Accounting Bookshop
Lesson Title: Chapter 10- Statement of Cash Flows (PAS 7)
Lesson Objectives:
At the end of the module, the learners will be able to:
1. Understand the nature and purpose of a statement of cash flows.
2. Understand the concepts and components of cash and cash equivalents.
3. Know the classifications of cash flows as operating, investing and financing.
Lesson Title: Statement of Cash Flows (PAS 7)
Lectures and Annotation:
Statement of Cash Flows
 A statement of cash flows is a component of financial statements summarizing
the operating, investing and financing activities of an entity.

Purpose of cash flows statement

 to provide relevant information about cash receipts and cash payments of an
entity during a period.
Lesson Title: Statement of Cash Flows (PAS 7)
Cash and cash equivalents
 Cash equivalents are short-term highly liquid investments that are readily
available to known amount of cash and which are subject to an insignificant risk
of change in value.

 PAS 7, provides that an investment normally qualifies as a cash equivalent only

when it has a short maturity of three months or less from date of acquisition.

 Examples of cash equivalents

a. three-month BSP treasury bill
b. three-year BSP treasury bill purchased three months before maturity date
c. three-month time deposit
d.Three-month money market instrument or commercial paper
Lesson Title: Statement of Cash Flows (PAS 7)
Classification of cash flows
• Operating activities
 Operating activities are the cash flows derived primarily from the principal
revenue producing activities of the entity.
a. Cash receipts from sale of goods
b. Cash receipts from royalties, rental, fees, commissions and other
revenue
c. Cash payment to suppliers for goods purchased
d. Cash payment for selling, administrative and other expenses
e. Cash receipts and payments for securities held for trading
f. Cash payment or refund of income taxes unless can be identified
specifically with financing and investing activities
Lesson Title: Statement of Cash Flows (PAS 7)
Investing activities
 Investing activities are the cash flows derived from the acquisition and
disposal of long-term assets and other investments not included in cash
equivalent (nonoperating assets).
a. Cash payment to acquire PPE, intangible asset and other long-term
asset
b. Cash receipt from sale of PPE, intangible asset and other long-term
asset
c. Cash payments to acquire equity or debt instruments of other entities
(current and long-term investments)
d. Cash receipts from sale of equity or debt instruments of other entities
e. Cash advances and loans to other parties other than advances and
loans made by financial institution
f. Cash receipts from repayment of advances and loans made to other
parties
Lesson Title: Statement of Cash Flows (PAS 7)
Financing activities
 Financing activities are the cash flows derived from the equity capital and
borrowings of the entity.
 Between the entity and the owners – equity financing
 Between the entity and the creditors – debt financing

 Financing activities include the cash flows from transactions involving

nontrade liabilities and equity of an entity.
a) Cash receipts from issuance of ordinary and preference shares
b) Cash payments to acquire treasury shares
c) Cash receipts from issuing bonds, loans, notes, mortgages and other short or
long term borrowings
d) Cash payments by a lessee for the reduction of the outstanding principal
lease liability
Lesson Title: Statement of Cash Flows (PAS 7)
Noncash transactions
Noncash investing and financing transactions shall be disclosed only either in
the notes to financial statements or in a separate schedule.

Interest paid and interest received

PAS 7, provides that interest paid and interest received shall be classified as
operating cash flows because such items enter into the determination of net
income or loss.

Dividends received
PAS 7, provides that dividend received shall be classified as operating cash
flow because it enters into the determination of net income.
Lesson Title: Statement of Cash Flows (PAS 7)
Dividends paid
PAS 7, provides that dividend paid shall be classified as financing cash flow
because it is a cost of obtaining financial resources.
References:
Cabrera, Ma. E.B., Cabrera, G.A. B, Cabrera, B.A. B. (2022). Conceptual Framework
and Accounting Standards. Manila: GIC Enterprises & Co., Inc.
Millan, ZV. B. (2022). Conceptual Framework & Accounting Standards. Baguio City:
Bandolin Enterprise Publishing
Valix, C. T. , Peralta, J. F., Valix C.A. M., (2022). Conceptual Framework & Accounting
Standards. Manila: GIC Enterprises & Co., Inc.

Villaluz, BC. S., Cruz, MS. M. (2022). Financial Accounting and Reporting. Cainta,
Rizal: BCV Accounting Bookshop
Lesson Title: Chapter 11-Accounting Policies, Estimate, and Errors
PAS 8

Lesson Objectives:
At the end of the module, the learners will be able to:
1. Understand the concept of a change in accounting policy and accounting
estimate.
2. Understand the concept of prior period errors.
Lectures and Annotation:
Accounting Policies
 Accounting policies are the specific principles, bases, conventions, rules and
practices applied by an entity in preparing and presenting financial statements.

Change in accounting policy

A change in accounting policy shall be made only when:
a) Required by an accounting standard.
b) The change will result in more relevant and faithfully represented information
about the financial position, financial performance and cash flows of the entity.
Examples of change in accounting policy
A change in accounting policy arises when an entity adopts a generally accepted
accounting principles which is different from the one previously used by the entity.
Examples:
a) Change in the method of inventory pricing from the FIFO to weighted average
method.
b) Change from cost model to revaluation model in measuring PPE.
c) Change from cost model to fair value model in measuring investment property.
d) Change to a new policy resulting from the requirement of a new PFRS.
Source: Villaluz and Cruz, 2022

The change shall be

With transitional applied in accordance
provisions with the transitional
provisions
Change required by
accounting standard
No transitional The change shall be
Application of a provisions applied retrospectively
change in Accounting
policy

The change shall be

Voluntary change
applied retrospectively
How to report a change in accounting policy
Retrospective application
 Retrospective application means that any resulting adjustment from the change
in accounting policy shall be reported as an adjustment to the opening balance
of retained earnings.
 If comparative information is presented, the F/S of the prior period presented shall
be restated to conform with the new accounting policy.

FIFO Weighted Ave.

Dec 31, 2021 1,000,000 750,000
Dec 31, 2022 1,500,000 1,200,000

FIFO inventory, Jan 1, 2022 1,000,000

Weighted ave inventory, Jan 1, 2022 750,000
Decrease in inventory 250,000
Adjustment of the decrease in beginning inventory
Retained earnings 250,000
Inventory, Jan 1 250,000
Accounting Estimate
 A change in accounting estimate is a normal recurring correction or adjustment
of an asset or liability which is the natural result of the use of an estimate.

How to report change in accounting estimate

The effect of a change in accounting estimate shall be recognized currently and
prospectively by including it in income or loss of:
a) The period of change if the change affects that period only.
b) The period of change and future periods if the change affects both.

• Prospective recognition of the effect of a change in accounting estimate means

that the change is applied to transactions and other events from the date of
change in estimate.
Prior period errors
 Prior period errors are omissions and misstatements in the financial statements
for one or more periods arising from a failure to use or misuse of reliable
information.

How to treat prior period errors

 Prior period errors shall be corrected retrospectively by adjusting the opening
balances of retained earnings and affected assets and liabilities.

 If comparative statements are presented, a prior period error shall be corrected

through retrospective restatement, which means the prior year statements
must be restated to correct the error.
Q-1: Why is an entity permitted by financial reporting standards to change an
accounting policy?
A. The change would allow the entity to present a better financial results.
B. The change is authorized by the management of the entity.
C. The change is made by a CPA.
D. The change would result in the financial statements providing more
reliable and relevant information about financial position, financial
performance and cash flows.
Q-2: How should the effect of a change in accounting estimate be accounted for?
A. In the period of change and future periods if the change affects both.
B. By restating amounts reported in financial statements of prior periods.
C. As a prior period adjustment to beginning retained earnings.
D. Any of the above.
Q-3: Prior period errors
A. Do not include the effect of a mistake in the application of accounting
policy.
B. Do not affect the presentation of prior period comparative financial
statements.
C. Do not require further disclosure.
D. Are reflected as adjustment of the opening balance of retained earnings
of the earliest period presented.
Lesson Title: Chapter 12- Events After The Reporting Period
PAS 10

Lesson Objectives:
At the end of the module, the learners will be able to:
1. Understand the concept of events after the reporting period.
2. Know the types of events after reporting period.
Lectures and Annotation:
Events after the reporting period
 PAS 10, par 3, defines events after the reporting period as those events,
whether favorable or unfavorable, that occur between the end of reporting
period and the date on which the financial statements are authorized for issue.

Types of events after the reporting period

a) Adjusting events after the reporting period are those that provide evidence of
conditions that exist at the end of reporting period.
b) Non-adjusting events after reporting period are those that are indicative of
conditions that arise after the end of reporting period.
Examples of adjusting events
1. Settlement after the reporting period of a court case because it confirms that
the entity already had a present obligation at the end of reporting period.
2. The receipt of information after the reporting period which indicates the
asset’s NRV or its recoverable amount. Example: a) bankruptcy of a customer
which occurs after the reporting period. b) the sale of inventories after the
reporting period may give evidence about their NRV at the end of the
reporting period.
3. The determination after the reporting period of the cost of asset purchased or
the proceeds from assets sold before the end of reporting period.
4. The determination after the reporting period of the profit sharing or bonus
payment if the entity has the present legal or constructive obligation at the
end of reporting period to make such payment.
5. The discovery of fraud or errors that show the financial statements were
incorrect.
6. Going concern issues arising after the reporting date, but before the financial
statements are authorized for issue
Examples of non-adjusting events
1. Business combination after the reporting period.
2. Plan to discontinue an operation.
3. Major purchase and disposal of asset or expropriation of major asset by govt.
4. Destruction of a major production plant by a fire after the reporting period.
5. Major ordinary share transactions and potential ordinary share transactions after the
reporting period.
6. Announcing or commencing the implementation of a major restructuring.
7. Entering into significant commitments or contingent liabilities, for examples, by issuing
guarantees.
8. Commencing major litigation arising solely from events that occurred after the reporting
period.
9. Dividends declaration after the reporting period.
10. Abnormally large changes after the reporting period in asset prices or foreign exchange rates.
11. Changes in FV of assets based on the events and circumstances after the reporting period.
12. Changes in tax rates or tax laws enacted or announced after the reporting period that have
significant effect on current and deferred tax assets and liabilities.
F/S authorized for issue
 Financial statements are authorized for issue when the board of directors
reviews the F/S and authorizes them issue.
Illustration:
Jan 1 to Dec 31, 2023 – period covered by the F/S
• Dec 31, 2023 to April 5, 2024 – period when the F/S are prepared, reviewed, authorized and
filed.
• An entity’s reporting period ended on Dec. 31, 2023.
• The 2023 F/S were authorized on Mar 15, 2024 and were filed on Apr 5, 2024.
In this case, events happening after Dec. 31, 2023 until March 15, 2024 are
covered by PAS 10. The events happening after the date of authorization
(March 15, 2024) are excluded.
Classifications of events after the reporting period
Adjusting events Non-adjusting events
Description Provide evidence of conditions Indicative of conditions that
that existed at the end of the arose after the reporting period.
reporting period.

Accounting treatment Adjusted the recorded amounts Do not adjust the recorded amounts
as of the reporting date. as of the reporting date. These are
usually limited to disclosures in the
notes.
Illustration 1 – Court Case:
During 2023, the entity became involved in a litigation involving the health hazards of its products.
Consequently, the entity recognized a provision for litigation amounting to P1.0M for probable
damages that it will pay after the final decision of the court. On Jan 15, 2024, the court made its
final judgement requiring the entity to pay damages of P1.2M. The F/S were authorized for issue
on Mar 31, 2024.
In this case, the final decision of the court confirmed the existence and amount of entity’s liability.
Consequently, as of Dec 31, 2023, the provision shall be recognized and measured at P1.2M or
equal to the actual damages required by the court.
Illustration 2 – Bankruptcy of Customer:
An entity estimates its allowance for bad debts as 5% of it’s A/R balance. As of Dec 31, 2023,
initial balance in the allowance for bad debts account is P250,000, based on P5.0M A/R balance.
On Jan 10, 2024, one of the entity’s major customers, from which the entity has A/R of P1.0M,
filed for bankruptcy. It is estimated that 60% of the receivable balance will be collected from the
bankruptcy proceedings (i.e., 40% will not be collected). In this case, the balance of allowance for
bad debts as of Dec 31, 2023 shall be revised as follows:
From bankrupt customer (P1.0M x 40%) 400,000
From other customers ( P5.0M – 1.0M) x 5% 200,000
Allowance for bad debts 600,000

The increase in allowance for bad debts will result to a decrease in the NRV and carrying amount
of A/R of P4.4M (P5.0M – 600K) as of Dec 31, 2023, and increase in bad debts expense for 2023.
Illustration 3 – Inventories:
On Jan 12, 2024, an entity sold some of its merchandise for P1.5M net proceeds. Upon looking at
the detailed accounting records, these goods had carrying amount of P2.0M as of Dec 31, 2023.
In this case, the entity shall write-down its inventory to P1.5M as of Dec 31, 2023 and recognize
loss on inventory write-down amounting to P500,000 for the year 2023.
Illustration 4 – Cost of Asset Purchased:
On Dec 26,2023, an entity acquired specialized equipment to be used in its manufacturing
operations. However, the transaction was not recorded as of Dec 31, 2023 since the related
invoice from the supplier was misplaced. It was found only on Jan 18, 2024 and indicated that cost
of equipment is P4.0M
In this case, since the equipment was already acquired before 2023 year end, the entity shall
include this equipment at P4.0M in the balance of its PPE as of Dec 31, 2023
Q-1: PAS 10 covers adjusting and non-adjusting events after the reporting period
up to
a. date of financial statements publication.
b. date of authorization to issue the financial statements.
c. date when financial statements are filed with the regulator.
d. date when financial statements are approved by shareholders.
Q-2: Which event after reporting period requires adjustment?
a. Sale of bond planned before year-end
b. Decline in value of inventory as a result of fire
c. Purchase of existing business
d. Loss on trade receivable resulting from customer’s bankruptcy after
reporting period
Q-3: Nobita Corp. has a fiscal year-end of Dec 31, 2021. On that date, Nobita
reported total assets of P600,000. On Feb 1, 2022, before the 2021 financial
statements were issued, Nobita lost P250,000 of inventory due to a fire. The
inventory was a total loss and was uninsured. How should Nobita present
this information in its Dec. 31, 2021 financial statements?
a. Nobita should disclose the loss in a footnote to its 2021 financial
statements.
b. Nobita should report an extraordinary loss in its 2021 income statement.
c. Nobita should report an allowance for lost inventory in its 2021 balance
sheet.
d. Nobita should not report the loss.
Lesson Title: Earnings Per Share (PAS 33)
Lesson Objectives:
At the end of the module, the learners will be able to:
• Explain how basic EPS is computed.
• Explain how diluted EPS is computed.
Lectures and annotations:
Nature of Earnings Per Share (EPS) Information
 EPS is the amount attributable to each ordinary share outstanding during the period.
 The EPS information only applies to ordinary shares.
o Its objective is to provide a measure of the interest of each ordinary share in the
performance of the entity during a particular period.
 Not required for preference shares because such shares have a definite rate of return.

Entities Required to Present EPS

 Entities whose ordinary shares or potential ordinary shares are traded in a public
market (publicly listed entities).
 Entities that file, or in the process of filing, their financial statements with a securities
commission or other regulatory organization for the purpose of issuing ordinary shares
in a public market.
Types of EPS
1. Basic earnings per share
2. Diluted earnings per share

Financial Statement Presentation

 An entity shall present in the statement of comprehensive income basic and diluted
earnings per share for profit or loss from continuing operations attributable to the
ordinary equity holders of the entity and for profit or loss attributable to the ordinary
equity holders of the entity for the period.
 An entity shall present basic and diluted earnings per share, even if the amounts are
negative (i.e., loss per share).
Computation of Basic Earnings Per Share
Net income (Loss) - Dividends on Preference shares
Basic EPS = ------------------------------------------------------------------
Weighted Ave. No. of Ordinary Shares Outstanding

Numerator
 The numerator is equal to after-tax net income (loss) attributable to ordinary
shareholders.
 If the preference share is cumulative, only the current year’s dividends on preference
shares are deducted from net income, regardless of whether the dividend is declared or
not.
 If the preference share is non-cumulative, the current year dividends on preference
shares are deducted from net income only when declared.
Denominator
 Shares are usually included in the weighted average number of shares from the date
consideration is receivable (which is generally the date of issue), for example:
 Ordinary shares issued in exchange for cash are included when cash is receivable.
 Ordinary shares issued on the voluntary reinvestment of dividends on ordinary or
preference shares are included when dividends are reinvested.
 Ordinary shares issued as a result of the conversion of a debt instrument to ordinary
shares are included from the date of conversion.
 Ordinary shares issued in place of interest or principal on other financial instruments
are included from the date that interest ceases to accrue.
 Ordinary shares issued in exchange for the settlement of liability of the entity are
included from the settlement date.
 Ordinary shares issued as consideration for the acquisition of an asset other than cash
are included as of the date on which acquisition is recognized.
 Ordinary shares issued for the rendering of services to the entity are included as the
services are rendered.
 Ordinary shares issued as part of the consideration transferred in a business
combination are included in the weighted average number of shares from the
acquisition date.
 Subscribed ordinary shares or partially paid shares are included in EPS under IFRS to the
extent that they are entitled to dividends.
o Subscribed shares are entitled to a full share of dividends under Phil jurisdiction.

 The weighted average number of ordinary shares outstanding during the period and
for all periods presented shall be adjusted for events other than the conversion of
potential ordinary shares that have changed the number of ordinary shares
outstanding without a corresponding change in resources.
o Examples:
• Bonus issue
• Share split
• Rights issue
Note:
 In a bonus issue or share split, ordinary shares are issued to existing shareholders for no
additional consideration. Therefore, the number of ordinary shares outstanding has increased
without an increase in resources.
o The number of ordinary shares outstanding before the event is adjusted for the
proportionate change in the number of ordinary shares outstanding as if the event had
occurred at the beginning of the earliest period presented.
• For example, on a two-for-one bonus issue, the number of ordinary shares outstanding
before the issue is multiplied by three to obtain the new total number of ordinary
shares, or by two to obtain the number of additional ordinary shares.
 If the number of ordinary or potential ordinary shares outstanding changes as a result of a
bonus issue or share split, the calculation of basic and diluted earnings per share for all periods
presented shall be adjusted retrospectively.
o If these changes occur after the reporting period but before the F/S are authorized for issue,
the earnings per share computations for those and any prior period F/S presented shall be
based on the new number of shares.
Illustration:
The following information is available for the current year:
12% preference share capital, P100 par, 12,000 shares - P1,200,000
Ordinary share capital, P100 par, 60,000 shares - 6,000,000
Reported net income of the entity for the current year - 2,400,000

Q. Compute the basic earnings per share under each of the following independent assumptions:
a) The preference shares are cumulative.
b) The preference shares are non-cumulative. No dividends were declared during the year.
c) The preference shares are non-cumulative. Dividends on preference shares were declared
during the year.
Ans: a) 37.60; b) 40.00; c) 37.60
2,400,000 - (1,200,000 x.12)
a) Basi c EPS = ----------------------------------
60,000

2,400,000 - 144,000
----------------------------------
60,000

37.60

2,400,000 - 0
b) Basi c EPS = ----------------------------------
60,000

40.00

2,400,000 - (1,200,000 x.12)

c) Basi c EPS = ----------------------------------
60,000

2,400,000 - 144,000
----------------------------------
60,000

37.60
Diluted Earnings Per Share
Nature of Diluted Earnings Per Share
 Diluted earnings per share is computed when the entity’s capital structure includes
potential ordinary shares.
 A potential ordinary share is a financial instrument or another contract in which the
holder may be entitled to ordinary shares. In other words, it is a financial instrument
that represents future issuance of ordinary shares.
• Examples: convertible preference shares, convertible bonds, share options and warrants

Dilution and Anti-dilution

 When the inclusion of potential ordinary shares decreases the basic earnings pe share
or raises the basic loss per share, dilution occurs.
• The potential ordinary shares are dilutive securities in this case.

 When the inclusion of potential ordinary shares increases the basic earnings per share
or decreases basic loss per share, anti-dilution occurs.
• The potential ordinary shares are anti-dilutive securities in this case.
Note:
 Only dilutive securities are considered in computing diluted earnings per share.
 Anti-dilutive securities are ignored in the computation of diluted earnings per share.

Computation of Diluted Earnings Per Share

 The computation of the diluted earnings per share follows the “as if” approach.
• As if the convertible preference shares are converted to ordinary shares.
• As if the convertible bonds are converted to ordinary shares.
• As if the options and warrants are exercised by the holders.

 Securities are assumed to be converted or exercised at the beginning of the current

year or at the date issued/granted, if later, during the current year,
• Case 1: The current year is 2023 and the convertible securities are issued on or before
Jan. 1, 2023.
o For purposes of computing the diluted EPS, the convertible securities are assumed to
be converted at the beginning of 2023.
• Case 2: The current year is 2023 and the convertible securities are issued on Apr. 1, 2023.
o For purposes of computing the diluted EPS, the convertible securities are assumed to
be converted on Apr. 1, 2023.
Convertible preference share
 The computation of the diluted earnings per share assumes that the preference shares
are converted to ordinary shares.
• As a result, the amount of preference dividend is added back to the net income
(adjustment to the numerator).
• The weighted average number of outstanding ordinary shares is increased by the weighted
average number of ordinary shares that would have been issued if the preference shares
had been converted (adjustment to the denominator).
Illustration:
On Dec. 31, 2023, Santiago Co. had 200,000 shares of P20 par ordinary shares and 20,000 shares of
P100 par, 6% cumulative convertible preference shares outstanding. Each preference share can be
converted into 5 ordinary shares. During the year, the company reported net income of P840,000.

Q: Compute the basic and diluted EPS under each of the following independent assumptions;
1) The preference shares were issued on Jan. 1, 2023.
2) The preference shares were issued on July 1, 2023.
3) The preference shares were issued on sept. 1, 2023.
Ans -1: Basic EPS = P3.60; diluted EPS = P2.80
Net income attributable to ordinary shareholders
Basic EPS=
Weighted Ave. Number of Ordinary Shares Outstanding

840,000 - (2,000,000 x 6%)

200,000

720,000
200,000

Basic EPS= P3.60

Net income attributable to ordinary shareholders + Adjustment

Diluted EPS=
Weighted Ave. Number of Ordinary Shares Outstanding + Adjustment

720,000 + (2,000,000 x 6%)

200,000 + (20,000 x 5)

720,000 + 120,000
200000 + 100,000

840,000
300,000

Diluted EPS= P2.80 (since the diluted EPSis lower than the basic EPS,
the convertible preference shares are dilutive).
Ans -2: Basic EPS = P3.60; Diluted EPS = P3.36
Net income attributable to ordinary shareholders
Basic EPS=
Weighted Ave. Number of Ordinary Shares Outstanding

840,000 - (2,000,000 x 6%)

200,000

720,000
200,000
Basic EPS= P3.60

Net income attributable to ordinary shareholders + Adjustment

Diluted EPS=
Weighted Ave. Number of Ordinary Shares Outstanding + Adjustment

720,000 + (2,000,000 x 6%)

200,000 + (20,000 x 5) x 6/12

720,000 + 120,000
200,000 + 50,000

840,000
250,000

Diluted EPS= P3.36 (since the diluted EPSis lower than the basic EPS,
the convertible preference shares are dilutive).
Ans -3: Basic EPS = P3.60; Diluted EPS = P3.60
Net income attributable to ordinary shareholders
Basic EPS=
Weighted Ave. Number of Ordinary Shares Outstanding

840,000 - (2,000,000 x 6%)

200,000

720,000
200,000
Basic EPS= P3.60

Net income attributable to ordinary shareholders + Adjustment

Diluted EPS=
Weighted Ave. Number of Ordinary Shares Outstanding + Adjustment

720,000 + (2,000,000 x 6%)

200,000 + (20,000 x 5) x 3/ 12

720,000 + 120,000
200,000 + 25,000

840,000
225,000

Diluted EPS= P3.73 (since the computed diluted EPSis higher than the basic EPS,
the computed diluted EPSof P3.73 shall not be used since the
effect of the convertible preference shares is antidilutive.
Consequently, both the basic and diluted EPSshall be reported
at P3.60.
Convertible Bonds
 The computation of diluted earnings per share assumes that the bonds are converted
into ordinary shares.
• As a result, adjustments to the numerator and denominator will be made.
o The interest expense on the bonds payable, net of tax, is added back to the net income
(adjustment to the numerator).
o The weighted average number of outstanding ordinary shares is increased by the
weighted average number of ordinary shares that would have been issued if the bond
payable had been converted (adjustment to the denominator).
Illustration:
Ned Company had 5,000,000 ordinary shares outstanding on Jan 1, 2023. 1,000,000
ordinary shares were issued on Apr 1, 2023, and another 500,000 ordinary shares were
issued on July 1, 2023.

On Jan 1, 2023, the entity issued 10,000, P1,000 face amount, 7% convertible bonds. Each
bond is convertible into 80 ordinary shares.

The company realized after-tax profit of P4,000,000 during 2023. The income tax rate is
30%.

Q: Compute the basic and diluted EPS under each of the following independent
assumptions:
a) No bonds were converted into ordinary shares in 2023.
b) All bonds were converted on Sept 30, 2023.
Ans: a) Basic EPS = P0.67; Diluted EPS = P0.66
5,000,000 x 12/12 = 5,000,000
1,000,000 x 9/12 = 750,000
500,000 x 6/12 = 250,000
6,000,000 (weighted ave. no. of ordinary shares outstanding)

Net income attributable to ordinary shareholders

Basic EPS=
Weighted Ave. Number of Ordinary Shares Outstanding

4,000,000 - 0
6,000,000
Basic EPS= P.67

Net income attributable to ordinary shareholders + Adjustment

Diluted EPS=
Weighted Ave. Number of Ordinary Shares Outstanding + Adjustment

4,000,000 + [(10,000,000 x 7%) x (1 - 0.30)]

6,000,000 + [(10,000 x 80) x 12/ 12]

4,000,000 + 490,000
6,000,000 + 800,000

4,490,000
6,800,000
Diluted EPS= P0.66
Ans: b) Basic EPS = P0.65; Diluted EPS = P0.64
5,000,000 x 12/12 = 5,000,000
1,000,000 x 9/12 = 750,000
500,000 x 6/12 = 250,000
6,000,000 (weighted ave. number of ordinary shares outstanding)
Net income attributable to ordinary shareholders
Basic EPS=
Weighted Ave. Number of Ordinary Shares Outstanding

4,000,000
6000000 + [(10,000 x 80) x 3/12] * * (9/31/23 - 12/31/23)

4,000,000
6000000 + 200,000

4,000,000
6,200,000
Basic EPS= P0.65

Net income attributable to ordinary shareholders + Adjustment

Diluted EPS=
Weighted Ave. Number of Ordinary Shares Outstanding + Adjustment

4,000,000 + [(10,000,000 x 7% 0.70) x 9/12]

6,200,000 + [(10,000 x 80) x 9/12]

4,000,000 + 367,500
6,200,000 + 600,000

4,367,500
6,800,000
Diluted EPS= P0.64 (Diluted EPS must always be lower than the basic EPS).
Options and Warrants
 Options and warrants entitle the holders to purchase ordinary shares of the issuer
entity at a specified price during a specified period of time.
 Options and warrants have no cash yield, but their value is derived from the right to
purchase ordinary shares at a specified price, which is usually lower than the current
market price.
 Options and warrants are dilutive when the exercise price is lower than the average
market price.
 The computation of diluted EPS assumes that the options and warrants are exercised.
Consequently, ordinary shares are issued at the exercise price of the options and
warrants.
• No adjustments shall be made to the numerator since options and warrants have no effect
on the net income.
• The weighted average number of outstanding ordinary shares (WANOOS) is increased by the
weighted average number of the assumed number of ordinary shares that would have been
issued for no consideration if the options and warrants had been exercised (adjustment to
the denominator).
Options and Warrants
• This is computed by using the Treasury Share method:
Number of ordinary shares (OS) covered by the options and warrants xx
Less: Assumed treasury shares acquired xx
Assumed number of OS that would have been issued for no consideration xx

 The assumed treasury shares acquired shall be computed as:

Number of ordinary shares covered by the options & warrants x exercise price
Average market price

 The exercise price (or option price) for share options shall include the fair value of any future
services to be provided to the entity under the share option plan.
Illustration:
Ned Company had 1,000,000 ordinary shares outstanding on Jan 1, 2023. No ordinary shares were
issued during 2023.

On Dec 31, 2023, the entity had outstanding share options that entitle the holders to purchase
100,000 shares at an exercise price of P22.50 per share.

The company realized after-tax profit of P3,900,000 during 2023. The income tax rate is 30%.

Q: Compute the basic and diluted EPS under each of the following independent assumptions:
1) The share options were issued on Jan 1, 2023, and the average market price of the ordinary
shares for 2023 is P30 per share.
2) The share options were issued on Apr 1, 2023, and the average market price of the ordinary
shares for 2023 is P30 per share.
3) The share options were issued on Jan 1, 2023, and the average market price of the ordinary
shares for 2023 is P20 per share.
4) The share options were issued on Apr 1, 2023, and the average market price of the ordinary
shares for 2023 is P20 per share.
Illustration:
Ans. 1) Basic EPS = P3.90; Diluted EPS = P3.80
Net income attributable to ordinary shareholders
Basic EPS =
Weighted Ave. Number of Ordinary Shares Outstanding

3,900,000
1,000,000

Basic EPS = P3.90

Net income attributable to ordinary shareholders

Diluted EPS =
Weighted Ave. Number of Ordinary Shares Outstanding + Adjustment

3,900,000
1,000,000 + (25,000 x 12/12)

3,900,000
1,000,000 + 25,000

3,900,000
1,025,000
Diluted EPS = P3.80

Number of ordinary shares covered by options and warrants 100,000

Less: Assumed T/Sacquired [(100,000 x P22.50)/P30] -75,000
Assumed number of Ordinary shares that would have been issued for
no consideration (adjustment to the denominator) 25,000
Ans. 2) Basic EPS = P3.90; Diluted EPS = P3.83

Net income attributable to ordinary shareholders

Diluted EPS=
Weighted Ave. Number of Ordinary Shares Outstanding + Adjustment

3,900,000
1,000,000 + (25,000 x 9/12)

3,900,000
1,000,000 + 18,750

3,900,000
1,018,750
Diluted EPS= P3.83

Number of ordinary shares covered by options and warrants 100,000

Less: Assumed T/Sacquired [(100,000 x P22.50)/P30] -75,000
Assumed number of Ordinary shares that would have been issued for
no consideration (adjustment to the denominator) 25,000
Ans. 3) & 4) Basic EPS = P3.90; Diluted EPS = P3.90

Since the exercise price is higher than the average market price of the ordinary shares, the share
options are anti-dilutive, thus, not considered in the computation of the diluted EPS. Consequently,
both the basic and diluted EPS shall be reported at P3.90.
Multiple Potential Ordinary Shares
 If an entity has more than one potential ordinary shares in its capital structure, each of these
potential ordinary shares shall be considered separately in computing the diluted EPS.
• To maximize the dilution of the EPS, each potential share shall be ranked from the most
dilutive to the least dilutive. In other words, the potential ordinary shares shall be ranked in
terms of incremental EPS.
o The potential ordinary share with the lowest incremental EPS is ranked first.
o In determining whether potential ordinary shares are dilutive, the income figure to be
used as the control number is the income from continuing operations.

Test for dilution

Convertible Preference Shares (PS)
Dividends on convertible preference shares
Incremental EPS=
Number of Ordinary Shares that would have been issued if the PShad been converted

Note:
 If incremental EPS < basic EPS, the convertible preference share is probably dilutive.
 If incremental EPS > basic EPS, the convertible preference share is anti-dilutuve.
Test for dilution
Convertible Bonds
Interest on convertible bonds, net of tax
Incremental EPS=
Number of Ordinary Shares that would have been issued if the bond payabe had been converted

Note:
 If incremental EPS < basic EPS, the convertible bond is probably dilutive.
 If incremental EPS > basic EPS, the convertible bond is anti-dilutuve.
Test for dilution
Options and Warrants
Zero
Incremental EPS=
Number of the assumed number Ordinary Shares that would have been issued for
no consideration if the options and warrants had been exercised

Note:
 The options and warrants are dilutive if the exercise price is lower than the average market
price.
 These are the most dilutive securities because they have no impact on net income.
 Therefore, the options and warrants are always ranked first.
Illustration:
ABC Co. provided the following information for the year 2023:
Income from continuing operations 12,500,000
Income from discontinued operations 2,500,000
Ordinary share capital, P10 par (500,000 shares) 5,000,000
5% cumulative preference share capital, P100 par
(convertible into 25,000 ordinary shares) 12,500,000
10% bonds payable (convertible into 40,000 ordinary shares) 12,500,000

In addition, the company also has outstanding share options that entitle the
holders to purchase 50,000 shares at an exercise price of P60 per share. The
average market price of the ordinary shares during 2023 is P75. The income
tax rate is 30%.

Q-1: Compute the basic earnings per share.

Q-2: Compute the diluted earnings per share.
Illustration:
ABC Co. provided the following information for the year 2023:
Income from continuing operations 12,500,000
Income from discontinued operations 2,500,000
Ordinary share capital, P10 par (500,000 shares) 5,000,000
5% cumulative preference share capital, P100 par
(convertible into 25,000 ordinary shares) 12,500,000
10% bonds payable (convertible into 40,000 ordinary shares) 12,500,000

In addition, the company also has outstanding share options that entitle the
holders to purchase 50,000 shares at an exercise price of P60 per share. The
average market price of the ordinary shares during 2023 is P75. The income
tax rate is 30%.

Q-: Compute the basic earnings per share.

Ans-: Basic EPS = P28.75

Basic EPS, income from continuing operations [(12,500,000 – {12,500,000 x 5%}) /500,000] 23.75
Basic EPS, income from discontinued operations (2,500,000 /500,000) 5.00
Basic EPS 28.75
Q-: Compute the diluted earnings per share.
Ans.: P27.73
1st step: Perform dilution test for each potential ordinary share. In determining whether potential
ordinary shares are dilutive, the income figure to be used as the control number is the
income from continuing operations.
• ConvertibleIncremental
preference shares
EPS= (12,500,000 x 5%)/25,000
Incremental EPS= P25
Assessment: Antidilutive (Incremental EPS> Control number
Rank: -

• Convertible bonds
Incremental EPS= [(12,500,000 x 10%) x (1 - 0.30)] /40,000
Incremental EPS= P21.88
Assessment: Dilutive (Incremental EPS < Control number
Rank: - 2nd

• Share options
Incremental EPS= 0/10,000
Incremental EPS= zero
Assessment: Dilutive (Incremental EPS < Control number
Rank: - 1st
No. of option shares 50,000
Less: Assumed T/S[(50,000 x P60) /P75] -40,000
Incremental ordinary shares 10,000
2nd step: Compute the diluted EPS by integrating each potential ordinary share based on their
ranking as determined in step 1.
Numerator Denominator EPS
Control number 11,875,000 500,000 23.75
Options - 10,000
Diluted EPS- 1 11,875,000 510,000 23.28
Convertible bond 875,000 40,000
Diluted EPS- 2 12,750,000 550,000 23.18
Convertible preference share 625,000 25,000
Diluted EPS 13,375,000 575,000 23.26

The final diluted EPS is computed as follows:

Diluted EPS- Income from continuing operations (12,750,000/550,000) 23.18

Diluted EPS- Income from discontinued operations (2,500,000/550,000) 4.55
Diluted EPS 27.73
Exercises:
1. The disclosure of earnings per share (EPS) is required for:
a) All entities.
b) Entities whose ordinary shares and potential ordinary shares are publicly traded.
c) Entities that are in the process of issuing ordinary shares in the public market.
d) Entities whose ordinary shares and potential ordinary shares are publicly traded and entities
that are in the process of issuing ordinary shares in the public market.

2. How should a company calculate basic earnings per share?

a) by dividing the profit or loss attributable to ordinary shareholders by the number of ordinary
shares issued as of the end of the reporting period.
b) by dividing the profit or loss attributable to ordinary shareholders by the number of ordinary
shares outstanding as of the end of the reporting period.
c) by dividing the profit or loss attributable to ordinary shareholders by the weighted average
number of ordinary shares issued during the period.
d) by dividing the profit or loss attributable to ordinary shareholders by the weighted average
number of ordinary shares outstanding during the period.
Exercises:
3. Dilution of EPS is defined as:
a) decrease in EPS when any financial instrument is converted to any form of share capital.
b) decrease in EPS when convertible instruments are converted to ordinary shares.
c) increase in EPS when any financial instrument is converted to any form of share capital.
d) increase in EPS when convertible instruments are converted to ordinary shares.

4. Dilutive potential ordinary shares are deemed to have been converted into ordinary shares if
and only if the following conditions are met:
a) The date of the issue of potential ordinary shares.
b) At the start of the period.
c) At end of the period.
d) At the start of the period or, if later, the date of the issue of potential ordinary shares.
Source: https://ph.images.search.yahoo.com
References:

Millan, ZV. B. (2022). Conceptual Framework & Accounting Standards. Baguio City: Bandolin
Enterprise Publishing

Valix, C. T. , Peralta, J. F., Valix C.A. M., (2022). Conceptual Framework & Accounting Standards.
Manila: GIC Enterprises & Co., Inc.

Villaluz, BC. S., Cruz, MS. M. (2022). Financial Accounting and Reporting. Cainta, Rizal: BCV
Accounting Bookshop.