PAS 1

PAS 1 Presentation of Financial Statements

- Prescribes the basis for the presentation of general purpose financial statements, the
guidelines for their structure, and the minimum requirements for their content to ensure
comparability.
Types of Comparability
Intra-comparability- the comparability of FS of the same entity but from one period to another.
Inter-comparability- comparability of FS between different entities.
Comparability
- Requires consistency in the adoption and application of accounting policies and in the
presentation of financial statements, either within a single entity from one period to
another or across different entities.
PAS 1
- Applies to the preparation and presentation of general purpose financial statements. The
recognition, measurement and disclosure requirements for specific transactions and other
events are set out in other PFRS.
- The terminology PAS 1 is suitable for profit-oriented entities.
- If non-profit organizations apply PAS 1, they may need to amend the line-item and
financial statement description.
Financial Statement
- Structures representation of an entity’s financial position and results of its operations.
- The end product of the financial reporting process and the means by which the
information gathered and processed is periodically communicated to users.
- The FS of an entity pertain only to that entity and not the industry where the entity
belongs or economy as a whole.
General Purpose Financial Statements
- 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.
- Cater most of the common needs of a wide range of external users.
- The subject matter of the Conceptual Framework and the PFRS.
Purpose of Financial Statements
1. Primary objective- to provide information about he financial position, financial performance,
and cash flows of an entity that is useful to a wide range of users in making economic decisions.
2. Secondary objective- to show the results of management’s stewardship over the entity’s
resources.
Financial statements provide information about an entity’s:
1. Assets 6. Expense
2. Liabilities 7. Contributions by, and distributions to owners
3. Equity 8. Cash flow
4. Income
Complete set of FS consists of:
 Statement of financial position
 Statement of profit or loss and other comprehensive income
 Statement of changes in equity
 Statement of cash flows
 Notes
- Comparative information
 Additional statement of financial position
Reports that are presented outside of the FS, such as reviews by management, environmental
reports and values added statements, are outside the scope of PFRS.
General Features of Financial Statements
1. Fair Presentation and Compliance with PFRS
- Compliance with the PFRS is presumed to result in fairly presented financial statements.
- Also requires the proper selection and application of accounting policies, proper
presentation of information, and provision of additional disclosures whenever relevant to
the understanding of the financial statements.
- Inappropriate accounting policies cannot be rectified by mere disclosure.
- PAS 1 requires an entity whose financial statements comply with the PFRSs to make an
explicit and unreserved statement of such compliance in the notes.
Statement of Compliance with Philippine Financial Reporting Standards
The financial statements of the bank have been prepared in accordance with PFRS, which
are adopted by the FRSC from the pronouncement issued by the IASB.
When an entity’s management concludes that compliance with a PFRS requirement is
misleading, in such cases, PAS 1 permits a departure from a PFRS requirement if the relevant
regulatory framework requires or allows such a departure.
Relevant regulatory framework
- Refers to the accounting principles and other financial reporting requirements prescribed
by a government regulatory body.
- Accounting principles prescribed by a regulatory body are sometimes referred to as
Regulatory Accounting Principles (RAP)
2. Going Concern
- FS are normally prepared on a going concern basis unless the entity has an intention to
liquidate or has no other alternative but to do so.
- When preparing FS, management shall assess the entity’s ability to continue as a going
concern, taking into account all available information about the future, which is at least,
but not limited to 12 months from the reporting date.
- If there are material uncertainties on the entity’s ability to continue as a going concern,
those uncertainties shall be disclosed
- If the entity is not a going concern, its financial statement shall be presented using other
basis.
3. Accrual Basis of Accounting
- All FS shall be prepared using the accrual basis of accounting except for the statement of
cash flows, which is prepared using cash basis.
4. Materiality and Aggregation
- Each material class of similar items are presented separately.
- A class of similar is called a “line item”.
- Dissimilar items are resented separately unless they are immaterial.
- Individually immaterial items are aggregated with other items.
5. Offsetting
- Assets and liabilities or income and expense are presented separately and are not offset,
unless offsetting is required or permitted by a PFRS.
- Measuring assets net of valuation allowances is not offsetting.
Examples of offsetting:
1. Presenting gains or losses from sales of assets net of the related selling expense.
2. Presenting at net amount the unrealized gains and losses arising from trading securities and
from translation of foreign currency denominated assets and liabilities, except if they are
material.
3. Presenting a loss from a provision net of a reimbursement form a third party.
6. Frequency of reporting
- Financial statements are prepared at least annually. If an entity changes its reporting
period to a period longer or shorter than one year, it shall disclose the following
a. The period covered by the financial statements:
b. The reason for using a longer or shorter period, and
c. The fact that amounts presented in the financial statements are not entirely comparable.
7. Comparative Information
- PAS 1 requires an entity to present comparative information in respect of the preceding
period for all amounts reported in the current period's financial statements, unless another
PFRS requires otherwise.
- As a minimum, an entity presents two of each of the statements and related notes.
- PAS 1 permits entities to provide comparative information in addition to the minimum
requirement.
Additional Statement of financial position
- a complete set of financial statements includes an additional statement of financial
position when certain instances occur. Those instances are as follows:
a. The entity applies an accounting policy retrospectively, makes a retrospective restatement of
items in its financial statements, or reclassifies items in its financial statements; and
b. The instance in (a) has a material effect on the information in the statement of financial
position at the beginning of the preceding period.
8. Consistency of presentation
- The presentation and classification of items in the financial statements is retained from
one period to the next unless a change in presentation:
a. is required by a PFRS; or
b. results in information that is reliable and more relevant.
- A change in presentation requires the reclassification of items in the comparative
information.
- If the effect of a reclassification is material, the entity shall provide the "additional
statement of financial position" discussed earlier.
Summary: General Features
1. Fair presentation & Compliance with PFRSS
2. Going Concern
3. Accrual Basis
4. Materiality & aggregation
5. Offsetting
6. Frequency of reporting period
7. Comparative information
8. Consistency of presentation
Structure and content of financial statements
- Each of the financial statements shall be presented with equal prominence and shall be
clearly identified and distinguished from other information in the same published
document.
The following information shall be displayed prominently and repeatedly whenever relevant to
the understanding of the information presented:
a. The name of the reporting entity
b. Whether the statements are for the individual entity or for a group of entities
c. The date of the end of the reporting period or the period covered by the financial statements
d. The presentation currency
e. The level of rounding used (e.g., thousands, millions, etc.)
- The statement of financial position is dated as at the end of the reporting period while the
other financial statements are dated for the period that they cover.
- PAS 1 requires particular disclosures to be presented either in the notes or on the face of
the other financial statements (e.g., footnote disclosures). Other disclosures are addressed
by other PFRSS.
Management's Responsibility over Financial Statements
- The management is responsible for an entity's financial statements. The responsibility
encompasses:
a. the preparation and fair presentation of financial statements in accordance with PFRS;
b. internal control over financial reporting;
c. going concern assessment;
d. oversight over the financial reporting process; and
e. review and approval of financial statements.
The responsibilities are expressly stated in a document called "Statement of Management's
Responsibility for Financial Statements," which is attached to the financial statements as a cover
letter. This document is signed by the entity's
a. Chairman of the Board (or equivalent),
b. Chief Executive Officer (or equivalent), and
c. Chief Financial Officer (or equivalent)
Statement of Financial Position
- The statement of financial position shows the entity's financial condition (i.e., status of
assets, liabilities and equity) as at a certain date.
- PAS 1 does not prescribe the order or format of presenting items in the statement of
financial position.
- Accordingly, an entity may modify the descriptions used and the sequence of their
presentation to suit the nature of the entity and its transactions.
Presentation of statement of financial position
- A statement of financial position may be presented in a "classified" or an "unclassified"
manner.
a. A classified presentation shows distinctions between current and noncurrent assets and
current and noncurrent liabilities.
b. An unclassified presentation (also called 'based on liquidity') shows no distinction between
current and noncurrent items.
- A classified presentation shall be used except when an unclassified presentation provides
information that is reliable and more relevant.
- PAS 1 also permits a mixed presentation, i.e., presenting assets and liabilities using a
current/non-current some classification and others in order of liquidity.
- Whichever method is used, PAS 1 requires the disclosure of items that are expected to be
recovered or settled (a) within 12 months and (b) beyond 12 months, after the reporting
period.
A classified presentation highlights an entity's working capital and facilitates the computation of
liquidity and solvency ratios.
> Working capital = Current Assets - Current Liabilities

All other assets and liabilities are classified as noncurrent.

- "The operating cycle of an entity is the time between the acquisition of assets for
processing and their realization in cash or cash equivalents. When the entity's normal
operating cycle is not clearly identifiable, it is assumed to be 12 months."
- Assets and liabilities that are realized or settled as part of the entity's normal operating
cycle are presented as current, even if they are expected to be realized or settled beyond
12 months after the reporting period.
- Deferred tax assets and liabilities are always presented as noncurrent items in a classified
statement of financial position, regardless of their expected dates of reversal.
Refinancing agreement
- A long-term obligation that is maturing within 12 months after the reporting period is
classified as current, even if a refinancing agreement to reschedule payments on a long-
term basis is completed after the reporting period but before the financial statements are
authorized for issue.
- obligation is classified as noncurrent if the entity expects, and has the discretion, to
refinance it on a long-term basis under an existing loan facility.
- If the refinancing is not at the discretion of the entity (for example, there is no
arrangement for refinancing), the financial liability is current.

➤ Refinancing
- refers to the replacement of an existing debt with a new one but with different terms, e.g.,
an extended maturity date or a revised payment schedule.
- Refinancing normally entails a fee or penalty.
- A refinancing where the debtor is under financial distress is called "troubled debt"
restructuring.
Loan facility- refers to a credit line.
Liabilities payable on demand
- Liabilities that are payable upon the demand of the lender are classified as current.
- A long-term obligation may become payable on demand as a result of a breach of a loan
provision.
- the entity does not have an unconditional right to defer settlement of the liability for at
least twelve months after the reporting period.
- Liability is noncurrent if the lender provides the entity by the end of the reporting period
a grace period ending at least twelve months after the reporting period, within which the
entity can rectify the breach and during which the lender cannot demand immediate
repayment.
Statement of Profit or Loss and Other Comprehensive Income
- Income and expenses for the period may be presented in either:
a. A single statement of profit or loss and other comprehensive income (statement of
comprehensive income); or
b. Two statements (1) a statement of profit or loss (income statement) and (2) a statement
presenting comprehensive income.
PAS 1 requires an entity to present information on the following:
a. Profit or loss;
b. Other comprehensive income; and
c. Comprehensive income
Presenting a separate income statement is allowed as long as a separate statement
showing comprehensive income is also presented (i.e., 'Two-statement presentation'). Presenting
only an income statement is prohibited.
Profit or loss
- Profit or loss is income less expenses, excluding the components of other comprehensive
income.
- This method of computing for profit or loss is called the "transaction approach."
Income and expenses are usually recognized in profit or loss unless:
a. They are items of other comprehensive income; or
b. They are required by other PFRSS to be recognized outside of profit or loss.
- Additional line items shall be presented whenever relevant to the understanding of the
entity's financial performance.
- The nature and amount of material items of income or expense shall be disclosed
separately.
Circumstances that would give rise to the separate disclosure of items of income and expense
include:
a. write-downs of inventories to net realizable value or of property, plant and equipment to
recoverable amount, as well as reversals of such write-downs;
b. restructurings of the activities of an entity and reversals of any provisions for restructuring
costs;
c. disposals of items of property, plant and equipment;
d. disposals of investments; discontinued operations;
f. litigation settlements; and
g. other reversals of provisions.
- PAS 1 prohibits the presentation of extraordinary items in the statement of profit or loss
and other comprehensive income or in the notes.
Presentation of Expenses
- Expenses may be presented using either of the following methods:
a. Nature of expense method - Under this method, expenses are aggregated according to their
nature and are not reallocated according to their functions within the entity.
b. Function of expense method (Cost of sales method) - Under this method, an entity classifies
expenses according to their function. At a minimum, cost of sales shall be presented separately
from other expenses.
- If the function of expense method is used, additional disclosures on the nature of
expenses shall be provided, including depreciation and amortization expense and
employee benefits expense.
Other Comprehensive Income (OCI)
- "comprises items of income and expense (including reclassification adjustments) that are
not recognized in profit or loss as required or permitted by other PFRSS."
- Amounts recognized in OCI are usually accumulated as separate components of equity.
Reclassification Adjustments
Items of OCI include reclassification adjustments.
> Reclassification adjustments "are amounts reclassified to profit or loss in the current period
that were recognized in other comprehensive income in the current or previous periods."
- Reclassification adjustments arise, for example, on disposal of a foreign operation,
derecognition of debt instruments measured at FVOCI, or when a cash flow hedge
becomes ineffective or affects profit or loss.
- On derecognition (or when the cash flow hedge becomes ineffective), the cumulative
gains and losses that accumulated in equity on these items are reclassified from OCI to
profit or loss.
- The amount reclassified is called the reclassification adjustment.
- A reclassification adjustment for a gain is a deduction in OCI and an addition to profit or
loss.
- On the other hand, a reclassification adjustment for a loss is an addition to OCI and a
deduction from profit or loss.
- On derecognition, the cumulative gains and losses that were accumulated in equity on
these items are transferred directly to retained earnings, rather than to profit or loss as
reclassification adjustment.
Presentation of OCI
The other comprehensive income section shall group items of OCI into the following:
a. Those for which reclassification adjustment is allowed; and
b. Those for which reclassification adjustment is not allowed.
- The entity's share in the OCI of an associate or joint venture accounted for under the
equity method shall also be presented separately and also grouped according to the
classifications above.
- Items of OCI, including reclassification adjustments, may be presented at either net of tax
or gross of tax.
Total Comprehensive Income
- Total comprehensive income is "the change in equity during a period resulting from
transactions and other events, other than those changes resulting from transactions with
owners in their capacity as owner.”
- Total comprehensive income is the sum of profit or loss and other comprehensive
income.
- It comprises all 'non-owner' changes in equity.
- Presenting information on comprehensive income, and not just profit or loss, helps users
better assess the overall financial performance of the entity.
Statement of Changes in Equity
- The statement of changes in equity shows the following information:
a. Effects of change in accounting policy (retrospective application) or correction of prior period
error (retrospective restatement);
b. Total comprehensive income for the period; and
c. For each component of equity, a reconciliation between the carrying amount at the beginning
and the end of the period, showing separately changes resulting from:
i. profit or loss;
ii. other comprehensive income; and
iii. transactions with owners, e.g., contributions by and distributions to owners.
- Retrospective adjustments and retrospective restatements are presented in the statement
of changes in equity as adjustments to the opening balance of retained earnings rather
than as changes in equity during the period.
PAS 1 allows the disclosure of dividends, and the related amount per share, either in the
statement of changes in equity or in the notes.
Statement of Cash Flows
- PAS 1 refers the discussion and presentation of statement of cash flows to PAS 7
Statement of Cash Flows.
Non owner changes in equity- are presented in the statement of comprehensive income
Owner changes- are presented in the statement of changes in equity.
Notes
- The notes provide information in addition to those presented in the other financial
statements.
- It is an integral part of a complete set of financial statements.
- Accordingly, information in the other financial statements shall be cross- referenced to
the notes.
- PAS 1 requires an entity to present the notes in a systematic manner.
Notes are normally structured as follows:
1. General information on the reporting entity.

- This includes the domicile and legal form of the entity, its country of incorporation and
the address of its registered office and a description of the nature of the entity's operations
and its principal activities.
2. Statement of compliance with the PFRSS and Basis of preparation of financial
statements.
3. Summary of significant accounting policies.

- This includes narrative descriptions of the line items in the other financial statements,
their recognition criteria, measurement bases, derecognition, transitional provisions, and
other relevant information.
4. Disaggregation (breakdowns) of the line items in the other financial statements and other
supporting information.
5. Other disclosures required by PFRSS.
6. Other disclosures not required by PFRSS but the management deems relevant to the
understanding of the financial statements.
Notes are prepared in a necessarily detailed manner.
- They are voluminous and occupy a bulk portion of the financial statements.
- Only excerpts of notes to the financial statements are provided below, sufficient to give
you an idea on how the concepts discussed above are presented in the notes.
PAS 2
INVENTORIES
- PAS 2 prescribes the accounting treatment for inventories.
- PAS 2 recognizes that a primary issue in the accounting for inventories is the
determination of cost to be recognized as asset and carried forward until it is expensed.
- Accordingly, PAS 2 provides guidance in the determination of cost of inventories,
including the use of cost formulas, and their subsequent measurement and recognition as
expense.
PAS 2 applies to all inventories except for the following: > Assets accounted for under other
standards
a. Financial instruments (PAS 32 and PFRS 9); and
b. Biological assets and agricultural produce at the point of harvest (PAS 41).
Assets not measured under the lower of cost or net realizable value (NRV) under PAS 2
a. Inventories of producers of agricultural, forest, and mineral products measured at net
realizable value in accordance with well-established practices in those industries.
b. Inventories of commodity broker-traders measured at fair value less costs to sell.
Inventories
Inventories are as assets:
a. Held for sale in the ordinary course of business (finished goods);
b. In the process of production for such sale (work in process); or
c. In the form of materials or supplies to be consumed in the production process or in the
rendering of services (raw materials and manufacturing supplies).
Examples of inventories:
a. Merchandise purchased by a trading entity and held for resale.
b. Land and other property held for sale in the ordinary course of business.
c. Finished goods, goods undergoing production, and raw materials and supplies awaiting use in
the production process by a manufacturing entity.
Ordinary course of business- refers to the necessary, normal or usual business activities of an
entity.
Measurement
Inventories are measured at the lower of cost and net realizable value.
Cost
The cost of inventories comprises the following:
a. Purchase cost- this includes the purchase price, import duties, non-refundable or non-
recoverable purchase taxes, and transport, handling and other costs directly attributable to the
acquisition of the inventory.
b. Conversion costs- these refer to the costs necessary converting raw materials into finished
goods. Conversion in costs include the costs of direct labor and production overhead.
C. Other costs- necessary in bringing the inventories to their present location and condition.
The following are excluded from the cost of inventories and are expensed in the period in which
they are incurred:
a. Abnormal amounts of wasted materials, labor or other production costs;
b. Storage costs, unless those costs are necessary in the production process before a further
production stage (e.g., the storage costs of partly finished goods may be capitalized as cost of
inventory, but the storage costs of completed goods are expensed);
c. Administrative overheads that do not contribute to bringing inventories to their present
location and condition; and
d. Selling costs.
When a purchase transaction effectively contains a financing element, such as when
payment of the purchase price is deferred, the difference between the purchase price for normal
credit terms and the amount paid is recognized as interest expense over the period of the
financing.
Cost Formulas
- The cost formulas deal with the computation of cost of inventories that are charged as
expense when the related revenue is recognized as well as the cost of unsold inventories
at the end of the period that are recognized as asset.
- PAS 2 provides the following cost formulas:
1. Specific identification - this shall be used for inventories that are not ordinarily
interchangeable and those that are segregated for specific projects.
- Under this formula, specific costs are attributed to identified items of inventory.
- Accordingly, cost of sales represents the actual costs of the specific items sold while
ending inventory represents the actual costs of the specific items on hand.
2. First-In, First-Out (FIFO) - it is assumed that inventories that were purchased or produced
first are sold first, and therefore unsold inventories at the end of the period are those most
recently purchased or produced.
- cost of sales represents costs from earlier purchases while the cost of ending inventory
represents costs from the most recent purchases.
3. Weighted Average - cost of sales and ending inventory are determined based on the weighted
average cost of beginning inventory and all inventories purchased or produced during the period.
The cost formulas refer to "cost flow assumptions," meaning they pertain to the flow of
costs and not necessarily to the actual physical flow of inventories.
Same cost formula shall be used for all inventories with similar nature and use. Different
cost formulas may be used for inventories with different nature or use.
However, a difference in geographical location of inventories, by itself, is not sufficient
to justify the use of different cost formulas.
PAS 2 does not permit the use of a last-in, first out (LIFO) cost formula.
Net realizable value (NRV)
- Net realizable value is "the estimated selling price in the ordinary course of business less
the estimated costs of completion and the estimated costs necessary to make the sale."
- "Net realizable value refers to the net amount that an entity expects to realize from the
sale of inventory in the ordinary course of business.
- Fair value reflects the price at which an orderly transaction to sell the same inventory in
the principal (or most advantageous) market for that inventory would take place between
market participants at the measurement date.
- The former is an entity-specific value; the latter is not.
 Measuring inventories at the lower of cost and NRV is in line with the basic accounting
concept that an asset shall not be carried at an amount that exceeds its recoverable
amount.
 If the NRV subsequently increases, the previous write- down is reversed. However, the
amount of reversal shall not exceed the original write-down.
 Write-downs of inventories are usually carried out on an item by item basis, although in
some circumstances, it may be appropriate to group similar items.
 It is not appropriate to write down inventories on the basis of their classification (e.g.,
finished goods or all inventories of an operating segment).
 Raw materials inventory is not written down below cost if the finished goods in which
they will be incorporated are expected to be sold at or above cost.
 The best evidence of NRV for raw materials is replacement cost.
Recognition as an expense
- The carrying amount of an inventory that is sold is charged as expense (i.e., cost of sales)
in the period in which the related revenue is recognized.
- the write-down of inventories to NRV and all losses of inventories are recognized as
expense in the period the write-down or loss occurs.
- "The amount of any reversal of any write-down of inventories, arising from an increase in
net realizable value, shall be recognized as a reduction in the amount of inventories
recognized as an expense in the period in which the reversal occurs."
- Inventories that are used in the construction of another asset is not expensed but rather
capitalized as cost of the constructed asset
Disclosures
a. Accounting policies adopted in measuring inventories, including the cost formula used;
b. Total carrying amount of inventories and the carrying amount in classifications appropriate to
the entity;
c. Carrying amount of inventories carried at fair value less costs to sell;
d. Amount of inventories recognized as an expense during the period;
e. Amount of any write-down of inventories recognized as an expense in the period;
f. Amount of any reversal of write-down that is recognized as a reduction in the amount of
inventories recognized as expense in the period;
g. Circumstances or events that led to the reversal of a write- down of inventories; and
h. Carrying amount of inventories pledged as security for liabilities.

FORMULAS:
FIFO Perpetual & FIFO Periodic (same answer)
 TGAS = Beg Inventory + Purchases
 COS = TGAS – End Inventory
Weighted Average Periodic
 Weighted Average Unit Cost (WAUC)
 TGAS / total # of units
Weighted Average Perpetual (MOVING AVERAGE METHOD)
PAS 7
STATEMENT OF CASH FLOWS
The statement of cash flow
- Provides information about the sources and utilization of cash and cash equivalents
during the period.
- Also provide information on the quality of earnings of an entity.
- It enhances inter-comparability among different entities because it eliminates the effects
of using different accounting treatments for the same transactions and events.
Cash- comprises cash on hand and cash in bank.
Cash Equivalents
- short-term, highly liquid investments that are readily convertible to known amounts of
cash and which are subject to an insignificant risk of changes in value
- only debt instruments acquired within 3 months or less before maturity date can qualify
as cash equivalents.
Cash flows
- includes inflows and outflows of cash and cash equivalents
Statement of Cash flows help users assess
1. the ability of the entity to generate cash and cash equivalents
2. the timing and certainty of the generation of cash flows, and
3. the needs of the entity to utilize those cash flows
Classification of Cash Flow
1. Operating activities
- cash flows from operating activities are primarily derived from the principal revenue-
producing activities of the entity.
- Includes cash inflows and outflows on items of income and expenses, are those that enter
into determination of profit or loss.
Examples:
1. Cash Receipts from the sale of goods
2. Cash payments for purchase of goods
3. Cash payments for operating expenses
4. Cash receipts and payments from contracts

2. Investing activities
- Involve the acquisition and disposal of non-current assets and other investments.
- include transactions that affect long-term assets and other non-operating assets.
- Disposals of subsidiaries or other business units resulting to loss or obtaining of control
are classified as investing activities
Examples Investing activities:
- cash receipts and cash payments in the acquisition and disposal of property, plant and
equipment, investment property, intangible assets and other noncurrent assets
- cash receipts and cash payments in the acquisition and sale of equity or debt instruments
of other entities (other than those that are classified as cash equivalents or held for
trading)
- cash receipts and cash payments on derivative assets and liabilities (other than those that
are held for trading or classified as financing activities)
- loans to other parties and collections thereof (other than loans made by a financial
institution.)
3. Financing activities
- include transactions that affect equity and non-operating liabilities.
- Affect the entity’s equity capital and borrowing structure
- Those that do not result to loss or obtaining of control are classifies as financing
activities.
Examples of Financial Activities
a. cash receipts from issuing shares or other equity instruments and cash payments to
redeem them
b. cash receipts from issuing notes, loans, bonds and mortgage payable and other short-term
or long-term borrowings, and their repayments
c. cash payments by a lessee for the reduction of the outstanding liability relating to a lease.
Cash flows excluded from the activities section
 Cash flows on movements between cash and cash equivalents are not presented
separately.
 Bank overdrafts that cannot be offset to cash are presented as financing activities. Those
that can be offset to cash forms are therefore not presented separately in the activities
section
 Exchange differences are not cash flows.
General Concept in the Preparation of Statement of Cash Flows
- The statement of cash flows is prepared using cash basis.
Cash basis- income is recognized only when collected and expenses are recognized only when
paid.
- Only transactions that affected cash and cash equivalents are reported in the statement of
cash flows.

Interests and Dividends

 Only interests and dividends received or paid in cash are included in the statement of
cash flows.
Presentation
Direct Method
- Shows each major class of gross cash receipts and gross cash payments
Indirect Method
- Profit or loss is adjusted for the effects of non-cash items and changes in operating assets
and liabilities.
 PAS 7 does not require any particular method; both are acceptable
 However, PAS 7 encourages the direct method because it provides information that may
be useful in estimating future cash flows.
 Indirect method is most commonly used
Cash flows relating to investing and financing activities are presented separately at gross
amounts, unless they qualify for net presentation.

Changes in ownership interest in subsidiaries

Cash flows arising from acquisitions and disposals of subsidiaries or other business units
resulting to loss or obtaining of control are classified as investing activities. Those that do not
result to loss or obtaining of control are classified as financing activities.

Disclosure
PAS 7 requires the following disclosures:
a. Components of cash and cash equivalents and a reconciliation of amounts in the statement of
cash flows with the equivalent items in the statement of financial position.
b. Significant cash and cash equivalents held by the entity that are not available for use by the
group, together with a management commentary.
PAS 8
ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERROR
PAS 8
- Prescribes the criteria for selecting, applying, and changing accounting policies and the
accounting and disclosure of changes in accounting policies, changes in accounting
estimates and correction of prior period errors.
- Tend to enhance the relevance, reliability and comparability of the entity’s financial
statements
Accounting Policies
- The specific principles, bases, conventions, rules and practices applies by an entity in
preparing and presenting financial statements.

PFRS are accompanied by guidance to assist entities in applying their requirements.

A guidance states whether it is an integral part of the PFRS.
A guidance that is an integral part of the PFRS is mandatory.
Changes in Accounting Policies
- PAS 8 requires the consistent selection and application of accounting policies.
PAS 8 permits a change in accounting policy only if the change:
a. Is required by a PFRS
b. Results in reliable and more relevant information
Accounting for Changes in Accounting Policies
Changes in accounting policies are accounted for using the following order of priority
1. Transitional provision in PFRS, if any
2. Retrospective application, in the absence of a transitional provision
3. Prospective application, if retrospective application is impracticable.
Retrospective Application
- Adjusting the opening balance of each affected component of equity for the earliest prior
period presented and the other comparative amounts disclosed for each prior period
presented as if the new accounting policy had always been applied
- If retrospective application is impracticable for all periods presented, the entity shall
apply the new accounting policy as at the beginning of the earliest period.
- If retrospective application is still impracticable as at the beginning of the current period,
the entity is allowed to apply the new accounting policy prospectively from the earliest
date.
Impracticable
- It cannot be done after making every reasonable effort to do so.
A voluntary change in accounting policy is accounted for by retrospective applications. Early
application of a PFRS is not a voluntary change in accounting policy.
Changes in Accounting Estimates
- An adjustment of the carrying amount of an asset or a liability, or the amount of the
periodic consumption of an asset or liability.
Estimates
- Are an essential part of financial reporting and do not undermine the reliability of
financial reports.
- Involve judgements based on latest available information
- Needs to be revised when there is a change in circumstances such that new information or
more experience is obtained.
If a change is difficult to distinguish between these two, the change is treated as a change in an
accounting estimate.
Accounting for Changes in Accounting Estimates
- Changes in accounting estimates are accounted for by prospective application.

Prospective application
- Recognizing the effects of the change in profit/loss either in;
a. The period of change
b. The period of change and future periods, if both are affected
- In prospective application, the beginning balance of retained earnings and the previous
financial statements are not restated.
Errors
- Include misapplication of accounting policies, mathematical mistakes, oversights or
misinterpretations of facts, and fraud.
Financial statements do not comply with PFRS if they contain either material errors or
immaterial errors made intentionally to achieve a particular presentation of an entity’s position,
financial performance or cash flows.
Material errors- Are those that cause the financial statements to be misstated.
Intentional errors-Are fraud
Errors of commission- Doing something wrong
Errors of omission- Not doing something that should have been done.
Types of errors
1. Current period errors- errors in the current period that were discovered either during
the current period or after the current period. These are corrected by correcting entities.
2. Prior period error- errors in one or more prior periods that were only discovered wither
during the current period or after the current period. Corrected by retrospective
restatement.
Retrospective Restatement
- Restating the comparative amounts for the prior periods presented in which the error
occurred
- If the error occurred before the earliest prior period presented, restating the opening
balances of assets, liabilities and equity for the earliest prior period presented.