PAS 8 basis of preparation of financial statements

PAS 8

sets the rules for preparing financial statements, including selecting/changing accounting policies, accounting estimates, and correcting errors, to improve relevance, reliability, and comparability.

Inter-comparability

comparing different companies in the same period (e.g., ABC vs. XYZ in 20x1).

Intra-comparability

comparing the same company across different periods (e.g., ABC in 20x1 vs. 20x2).

Basis of Preparation – General Matters

Explains how financial statements are prepared, including the standards and accounting policies used.

Fair Presentation

Financial statements must faithfully represent the economic effects of transactions based on definitions of assets, liabilities, income, and expenses in the Conceptual Framework for Financial Reporting.

Applying Philippine Financial Reporting Standards normally results in fair presentation.

Requirements for Fair Presentation

1. Proper selection and application of accounting policies

2. Proper presentation of information

3. Additional disclosures when necessary

Important Rule

Wrong accounting cannot be corrected by disclosure alone.

Compliance with PFRS

If financial statements follow all PFRS requirements, the entity must make an explicit and unreserved statement of compliance in the notes.

Standards are issued by the International Accounting Standards Board and adopted in the Philippines by the Financial and Sustainability Reporting Standards Council.

When an Entity Cannot Claim Compliance

If any PFRS requirement is not followed, the entity cannot state compliance with PFRS.

Departure from PFRS

Under PAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, an entity may depart from a requirement if compliance would be misleading and the regulatory framework allows it.

Example regulator: Bangko Sentral ng Pilipinas.

Regulatory Accounting Principles (RAP)

Accounting rules prescribed by regulators (e.g., BSP requirements for banks).

Banks also submit Financial Reporting Package (FRP) to BSP.

Required Disclosures When Departing from PFRS

The entity must disclose:

1. Management’s conclusion that the financial statements still present fairly

2. Statement that all other PFRS requirements are complied with

3. Title of the PFRS standard departed from

4. Financial effect of the departure

going concern

Financial statements are prepared assuming the business will continue operating.

If management plans to liquidate or has no choice but to close, another basis is used.

Management must assess the ability to continue for at least 12 months after the reporting date.

• If the business is profitable and has access to funds, detailed analysis may not be needed.

• If there are material uncertainties, they must be disclosed.

• If the entity is not a going concern, the different basis used and reason must be disclosed.

Management’s Responsibility over Financial Statements

a. Preparing and fairly presenting financial statements under the PFRSs

b. Internal control over financial reporting

c. Assessing going concern

d. Overseeing the financial reporting process

e. Reviewing and approving the financial statements

Accrual Basis of Accounting

• Financial statements use accrual basis, except the PAS 7 Statement of Cash Flows which uses cash basis.

• Under accrual basis, assets, liabilities, equity, income, and expenses are recognized when they meet the definitions and recognition criteria in the Conceptual Framework for Financial Reporting (not when cash is received or paid).

accounting policies

specific principles, bases, conventions, rules, and practices used to prepare and present financial statements.

Hierarchy of reporting standards

1. PFRS Standards – follow first

2. Judgment – if no standard; consider:

Must: other PFRS, Conceptual Framework

May: other standard bodies, literature/practices

PFRS accounting standards compromise:

a. Philippine financial reporting standards (PFRS)

b. Philippine accounting standards (PAS)

c. interpretations

Hierarchy of Accounting References

Use PFRS first; if none applies, management uses judgment to create relevant, reliable policies, considering references in order. Guidance may be mandatory if part of PFRS.

Changes in Accounting Policies (PAS 8)

ALLOWED changes:

• Required by a PFRS

• Gives more relevant/reliable info

Examples:

FIFO → Weighted Average for inventories

Cost → Fair value for investment property

Cost → Revaluation for PPE/intangibles

• Change in business model for financial assets

• Change in revenue recognition for long-term contracts

• New policy due to new PFRS

• Framework change (e.g., PFRS for SMEs → PFRS)

Not changes in accounting policies

a. Applying an existing policy to different/new transactions/events

b. Applying policy to transactions/events that didn’t occur before or are immaterial

counting for changes in accounting policies

follow PFRS transitional rules → retrospective → prospective if retrospective impossible.

Retrospective application

adjust opening equity and prior comparatives as if new policy was always used. If fully impracticable, apply from earliest practicable period; if still impracticable, apply prospectively.

Impracticable

effects cannot be determined or need impossible prior estimates. Voluntary changes use retrospective application; early PFRS adoption is not voluntary.

Changes in Accounting Estimates

revisions of monetary amounts in financial statements due to measurement uncertainty. Examples: depreciation, bad debts, provisions, inventory NRV, fair value of financial assets/liabilities. Estimates use judgment and latest info; changes reflect new info or experience. They affect only current/future periods and are not errors.

change in accounting policy vs accounting estimates

Change in Accounting Policy = change in measurement basis (e.g., FIFO → Weighted Average).

Change in Accounting Estimate = change in expected asset inflows or liability outflows.

Examples of changes in accounting estimates

a. Depreciation/amortization method, useful life, or residual value

b. Allowance for uncollectible accounts or impairment losses

c. Estimated warranty obligations and other provisions

d. Net realizable value of inventory

e. Fair value estimates

Accounting for Changes in Estimates

use prospective application: recognize effects in:

a. current period; or

b. current and future periods if affected.

Prior statements and opening retained earnings are not restated.

Errors

misapplied policies, math mistakes, oversights, misinterpretations, or fraud. Material errors misstate financials;

intentional errors

fraud. Fraudulent reporting ≠ PFRS compliance. Errors can be:

• Commission = doing something wrong

• Omission = failing to do something required

types by period

a. current period errors

b. prior period errors

Current period errors

found in current period; corrected via adjusting entries

Prior period errors

found from prior periods; corrected by retrospective restatement

Retrospective Restatement

correct prior period errors as if they never occurred:

a. Restate comparatives for the periods with the error

b. If before earliest period presented, restate opening balances of assets, liabilities, and equity

Retrospective application

new policy applied as if always used

Retrospective restatement

prior period error corrected as if never happened