Module 5

INTERIM FINANCIAL REPORTING Course Materials:

Overview: OBJECTIVE OF IAS 34
An interim financial report is a complete or condensed set of financial The objective of this Standard is to prescribe the:
statements for a period shorter than a financial year. IAS 34 does not • minimum content of an interim financial report
specify which entities must publish an interim financial report. That is • recognition and measurement in complete or condensed financial
generally a matter for laws and government regulations. IAS 34 applies if an statements in an interim period.
entity using International Financial Reporting Standards (IFRSs) in its annual
financial Timely and reliable interim financial reporting improves the ability of
statements publishes an interim financial report that asserts compliance stakeholders (investors, creditors, and others) to understand an entity’s capacity
with IFRSs. IAS 34 prescribes the minimum content of such an interim to generate earnings and cash flows and its financial condition and liquidity.
financial report. It also specifies the accounting recognition and
measurement principles applicable to an interim financial report. SCOPE OF IAS 34
The minimum content is a set of condensed financial statements for This Standard does not mandate which entities should produce interim
the current period and comparative prior period information, i.e. statement financial reports, how frequently, or how soon after the end of an interim period.
of financial position, statement of comprehensive income, statement of IAS 34 is applied when an entity chooses, or is required by the government or
cash flows, statement of changes in equity, and selected explanatory notes. other institution, to publish interim financial report that complies with IFRSs.
In some cases, a statement of financial position at the beginning of the prior This Standard applies if an entity is required or elects to publish an interim
period is also required. Generally, information available in the entity’s most financial report in accordance with IFRSs.
recent annual report is not repeated or updated in the interim report. The IAS 34, however, encourages publicly listed entities to provide at least a semi-
interim report deals with changes since the end of the last annual reporting annual financial report for the first half the year to be issued not later than 60
period. days after the end of the interim period.
The same accounting policies are applied in the interim report as in the Financial reports, whether annual or interim, are evaluated for conformity to
most recent annual report, or special disclosures are required if an the IFRSs on their own. Non-preparation of interim reports or non-compliance
accounting policy is changed. Assets and liabilities are recognized and with IAS 34 does not necessarily prevent the entity’s annual financial statements
measured for interim reporting based on information available on a year-to from conforming to the IFRS. If an entity’s interim financial reporting is described
date basis. While measurements in both annual financial statements and as conforming with IFRSs, it must comply with all the requirements of this
interim financial reports are often based on reasonable estimates, the Standard.
preparation of interim financial reports will generally require a greater use
of estimation methods than annual financial statements. DEFINITIONS
❖ Interim period is a financial reporting period shorter than a full financial
Module Objectives: year.
After successful completion of this module, you should be able to: ❖ Interim financial report means a financial report containing either a
❖ Define interim financial statements and understand its purpose; complete set of financial statements (IAS 1) or a set of condensed
❖ Enumerate the components of interim financial statements; financial statements (IAS 34) for an interim period.
❖ Recognize and measure items reported in the interim financial
statements CONTENT OF AN INTERIM FINANCIAL REPORT
In the interest of timeliness and cost considerations and to avoid annual financial statements and the selected explanatory notes required by IAS
repetition of information previously reported, an entity may be required to 34. Additional line items or notes are provided if their omission makes the
or may elect to provide less information at interim dates as compared with condensed financial statements misleading.
its annual financial statements. This Standard defines the minimum content
of an interim financial report as including condensed financial statements Significant events and transactions
and selected Interim reports are intended to provide an update on the latest complete set
explanatory notes. The interim financial report is intended to provide an of annual financial statements. Hence, they focus on providing information on
update on the latest complete set of annual financial statements. significant events and transactions that have occurred since the latest annual
Accordingly, it focuses on new activities, events, and circumstances and period, rather than duplicating previously reported information or providing
does not duplicate information previously reported. relatively insignificant updates on them. Consequently, users of interim financial
An entity is not prohibited or discouraged from preparing a complete report are assumed to also have access to the entity’s latest annual financial
set of financial statements (in accordance with IAS 1) for its interim financial report. Examples of events and transactions for which disclosures would be
reporting. required if they are
significant:
Minimum components of an interim financial report a. write-down of inventories to net realizable value and reversal thereof
An entity presenting an interim financial report has the option of b. impairment losses and reversal thereof
applying either IAS 1 or IAS 34. The entity applies IAS 1 if it opts to provide a c. reversal of provision for restructuring costs
complete set of financial statements in its interim financial report. The d. acquisitions and disposals of PPE, including purchase commitments
entity applies IAS 34 if it opts to provide a condensed set of financial e. litigation settlements
statements in its interim financial report. f. corrections of prior period errors
IAS 1 – Complete set of FS IAS 34 – Condensed set of FS g. business or economic circumstances affecting the fair value of financial
• Statement of financial position • Condensed statement of financial assets and financial liabilities
position h. unremedied loan default or breach of loan agreement
• Statement of profit or loss and • Condensed statement of profit or i. related party transactions
other comprehensive income loss and other comprehensive j. transfers between levels of the fair value hierarchy used in measuring the
income fair value of financial instruments
• Statement of changes in equity • Condensed statement of changes in k. changes in the classification of financial assets
equity l. changes in contingent liabilities
• Statement of cash flows • Condensed statement of cash flows
• Notes (5.a) Comparative • Selected explanatory notes When an event or transaction is significant to an understanding of the
information changes in an entity’s financial position or performance since the last annual
• Additional statement if financial reporting period, its interim financial report should provide an explanation of and
position (required only when certain an update to the relevant information included in the financial statements of the
instances occur) last annual reporting period.

Form and content of interim financial statements Other disclosures

At a minimum, condensed interim financial statements include each of The following disclosures shall be given either in the interim financial
the headings and subtotals that were included in the entity’s most recent statements or incorporated by cross-reference form the interim financial
statements to some other statement that is available to users of the Periods for which interim financial statements are required to be presented
financial statements on the same terms as the interim financial statements Interim reports shall include interim financial statements (condensed or complete)
and at the same time. If users of the financial statements do not have as follows:
access to the information incorporated by cross-reference on the same a. statement of financial position as of the end of the current interim period
terms and at the same time, the interim financial report is incomplete. and a comparative statement of financial position as of the end of the
In addition to significant events and transactions, the following are also immediately preceding financial year.
disclosed in the interim financial report: b. statement of profit or loss and other comprehensive income for the
a. a statement that the same accounting policies were used in the current interim period and cumulatively for the current financial year to date, with
interim financial statements as those used in the latest annual financial comparative statements of profit or loss and other comprehensive income for the
statements. If there have been changes, those changes are disclosed. comparable interim periods (current and year-to-date) of the immediately
b. explanation of seasonality or cyclicality of interim operations preceding financial year. As permitted by IAS 1, an interim report may present
c. unusual items affecting the financial statement elements each period a statement or statements of profit or loss and other comprehensive
d. changes in accounting estimates income.
e. issuances and settlements of debt and equity securities c. statement of changes in equity cumulatively for the current financial year-
f. dividends paid to-date, with a comparative statement for the comparable year-to-date period of
g. segment information (if the entity is covered by IFRS 8) the immediately preceding financial year.
h. events after the reporting period d. statement of cash flows cumulatively for the current financial year-to-date,
i. changes in the composition of the entity, e.g., business combinations, with a comparative statement for the comparable year-to-date period of the
obtaining or losing control of subsidiaries, restructurings, and immediately preceding financial year.
discontinued operations
j. disclosures on the fair value of financial instruments Illustration of periods required to be presented
k. disclosures required by IFRS 12 when the entity becomes or ceases  Entity publishes interim financial reports half-yearly/semi-annually. The
to be an investment property entity’s financial year ends 31 December (calendar year). The entity will
l. disaggregation of revenue from contracts with customers as required present the following financial statements (condensed or complete) in its
by IFRS 15 half-yearly interim financial report as of 30 June 20X1:
m. The entity presents basic and diluted earnings per share if the entity
is within the scope of IAS 33.  Entity

The entity discloses its compliances with IFRSs if it has complied with
IAS 34 and all the requirements of other IFRSs.

Disclosures of compliance with IFRSs

If an entity’s interim financial report is in compliance with this
Standard, that fact shall be disclosed. An interim financial report shall not
be described as complying with IFRSs unless it complies with all the
requirements of IFRSs.
publishes interim financial reports quarterly
The entity’s financial year ends 31 December (calendar year). The entity will nature and amount of that change in estimate shall be disclosed in a note to the
present the following financial statements (condensed or complete) in its annual financial statements for that financial year.
quarterly interim financial report as of 30 June 20X1:
RECOGNITION AND MEASUREMENT
Same accounting policies as usual
An entity shall apply the same accounting policies in its interim financial
statements as are applied in its annual financial statements, except for accounting
policy changes after the date of the most recent annual financial statements that
are to be reflected in the next annual financial statements. However, the
frequency of an entity’s reporting (annual, semi-annual, or quarterly) shall not
affect the measurement of its annual results. Measurements for interim reporting
purposes shall be made on a year-to-date basis. Two point-of-views in interim
reporting:
1. Discrete view – According to paragraph 29 of this Standard, “requiring that an
entity apply the same accounting policies in its interim financial statements as in
its annual statements may seem to suggest that interim period measurements are
made as if each interim period stands alone as an independent reporting period
2. Integral view – According to paragraph 29 of this Standard, “providing that the
frequency of an entity’s reporting shall not affect the measurement of its annual
results, paragraph 28 acknowledges that an interim period is a part of a larger
If an entity’s business is highly seasonal, financial information for the financial year.
twelve months up to the end of the interim period and comparative
information for the prior twelve-month period may be useful. Year-to-date measurements may involve changes in estimates of amounts
reported in prior interim periods of the current financial year. But the principles
Materiality for recognizing assets, liabilities, income, and expenses for interim periods are the
Materiality shall be assessed in relation to the interim period financial same as in annual financial statements. IAS 34 provides the following accounting
data. In making assessments of materiality, it shall be recognized that the principles:
interim measurements may rely on estimates to a greater extent than a. Losses from inventory write-downs, restructurings, or impairments in an
measurements of annual financial data. interim period are accounted for in the same way as in annual financial
The overriding goal is to ensure that an interim financial report statements (i.e., losses are recognized immediately in the interim period in which
includes all information that is relevant to understanding an entity’s they arise).The original estimate is adjusted by accruing an additional loss or by
financial position and performance during the interim period. reversing a previously recognized loss, if there are subsequent changes in
estimates. Financial statements in previous interim periods are not restated.
DISCLOSURE IN ANNUAL FINANCIAL STATEMENTS b. A cost that does not qualify as an asset in an interim period is not deferred
If an estimate of an amount reported in an interim period is changed either to wait if it qualifies in the next period or to smooth earnings over the
significantly during the final interim final period of the financial year but a interim periods within a financial year.
separate financial report is not published for that final interim period, the A liability at the end of an interim period must meet all the recognition criteria at
that date, just as it must at the end of an annual reporting period.
c. Income tax expenses in interim periods are based on the best b. Prospectively – when it is impracticable to determine the cumulative
estimate of the weighted average annual income tax rate expected for the effect at the beginning of the financial year of applying
full financial year. a new accounting policy to all prior periods, adjusting
the financial statements of prior interim periods of the
The recognition principles of assets, liabilities, income and expenses current financial year, and comparable interim periods of
under the Conceptual Framework are applied in the interim period in the prior financial years to apply the new accounting policy
same way as in the annual period. Thus, items that do not qualify as assets, prospectively from the earlies date practicable.
liabilities, income or expenses in the annual period do not also qualify as
such in the interim period. Assessment Activities:
Choose the letter of the best answer.
Revenues received seasonally, cyclically, or occasionally 1. Which of the following is not an objective of IAS 34?
Revenues that are received seasonally, cyclically, or occasionally (e.g., a. To prescribe the minimum content of an interim financial report
dividends revenue, royalties, government grants, or season revenues of b. To prescribe which entities are required to publish interim financial reports,
retailers) within a financial year shall not be anticipated or deferred as of an how frequently and how soon after the end of the reporting period
interim date if anticipation or deferral would not be appropriate at the end c. To prescribe the principles of recognition and measurement in complete or
of the entity’s financial year. condensed financial statements for an interim period.
d. None of the above
Costs incurred unevenly during the financial year
Costs that are incurred unevenly during an entity’s financial year shall 2. What does the International Accounting Standards Committee encourage
be anticipated or deferred for interim reporting purposes if, and on if, it is publicly
also appropriate to anticipate or defer that type of cost at the end of the traded entities to do?
financial year. a. To provide interim financial reports at least as of the end of the first
quarter of their financial year
Use of estimates b. To make their interim financial reports available not later than 60 days
While measurements in both annual and interim financial reports are after the end of the interim period
based on reasonable estimates, the preparation of interim financial reports c. To apply the same accounting policies in its interim report as are applied in
generally will require greater use of estimation methods than annual its annual financial statements, including accounting policy changes made after
financial reports. the date of the most recent annual financial statements that are to be reflected in
the next annual financial statements.
Restatement of previously reported interim periods d. All of the above
A change in accounting policy, other than one for which the transition
is specified by a new IFRS, shall be reflected by: 3. Interim financial report means a financial report containing ________ for an
a. Retrospectively – restating the financial statements of prior interim interim
periods of the current financial year and the period.
comparable interim periods of any prior financial a. A complete set of financial statements
years that will be restated in accordance with IAS 8; b. An adjusted set of financial statements
or c. A set of condensed financial statements
d. A or B
e. A or C ❖ understand the entity-wide disclosures in accordance with IFRS 8.

4. Which of the following is true with regards to the disclosure of Course Materials:
compliance with IFRSs provided in IAS 34?
a. If an entity’s interim financial report is not in compliance with IAS 34, OPERATING SEGMENTS DEFINED IN IFRS 8
that fact shall be disclosed IFRS 8 defines an operating segment as follows. An operating segment is a
b. An interim financial report shall not be described as complying with component of an entity: [IFRS 8.2]
IFRSs unless it complies with all the requirements of IAS 34  that engages in business activities from which it may earn revenues and incur
c. An interim financial report shall not be disclosed as complying with expenses (includes the revenues and expenses relating to transactions with
IFRSs unless it complies with all the requirements of IFRSs. other components of the same entity)
d. A and B  whose operating results are reviewed regularly by the entity's chief operating
decision maker to make decisions about resources to be allocated to the
segment and assess
5. If an entity does not prepare interim financial reports, its performance, and the chief operating decision maker could be an individual,
a. Its annual financial statements would not conform to the IFRSs. such as the chief executive officer or the chief operating officer or it could be a
b. Its annual financial statements should not be described to have been group of executives such as the board of directors or a management committee.
prepared in accordance with IFRSs.  for which discrete financial information is available
c. The conformance of its annual financial statements with the IFRSs is
not affected. REPORTABLE SEGMENTS
d. A and B IFRS 8 requires an entity to report financial and descriptive information about
its reportable segments. Reportable segments are operating segments or
Module 6 aggregations of operating segments
OPERATING SEGMENTS that meet specified criteria (IFRS 8.13):
Overview:  its reported revenue, from both external customers and intersegment sales
IFRS 8 Operating Segments requires an entity whose debt or equity or transfers, is 10 per cent or more of the combined revenue, internal and
securities are publicly traded to disclose information to enable users of its external, of all operating segments, or
financial statements to evaluate the nature and financial effects of the  he absolute measure of its reported profit or loss is 10 per cent or more of
different business activities in which it engages and the different economic the greater, in absolute amount, of (i) the combined reported profit of all
environments in which it operates. It specifies how an entity should report operating segments that did not report a loss and (ii) the combined reported
information about its operating segments in annual financial statements loss of all operating segments that reported a loss,
and in interim financial reports. It also sets out requirements for related  or its assets are 10% or more of the combined assets of all operating
disclosures about products and services, geographical areas and major segments
customers.
Two or more operating segments may be aggregated into a single operating
Module Objectives: segment if aggregation is consistent with the core principles of the standard, the
At the end of the module, you will be able to: segments have similar economic characteristics and are similar in various
❖ define operating segments; prescribed respects (IFRS 8.12).
❖ identify and apply the criteria for reportable segments; and
If the total external revenue reported by operating segments • Types of products/services generating revenues
constitutes less than 75% of the entity's revenue, additional operating
segments must be identified as reportable segments (even if they do not Information about Profit or Loss, Assets and Liabilities
meet the quantitative thresholds set out above) until at least 75% of the  Measurement of segment items equal to the measure reported to the Chief
entity's revenue is included in reportable segments (IFRS 8.15). Operating Decision Maker (CODM)
 Disclose separately the following amounts if it is included in items of segment
Illustration: profit or loss reported to Chief Operating Decision Maker or regularly
ABS Company has the following segments for the year: reported to him:
Revenue Profit ▪ Revenue from external customers
Segment 1 P6,000,000 ▪ “Internal” revenue
P1,500,000 ▪ Interest revenue
Segment 2 4,500,000 850,000 ▪ Interest expense
Segment 3 1,000,000 ▪ Depreciation and amortization
(300,000) ▪ Material items of income and expense
Segment 4 800,000 200,000 ▪ Interest in P/L of associates and joint venture
▪ Income tax expense or income
What are the reportable segments? ▪ Material non-cash items
Solution:  Provide an explanation of measurement basis of segment profit or loss,
Revenue: segment assets and segment liabilities for each reportable segment:
(P6,000,000 + P4,500,000 + P1,000,000 + P800,000) = P12,300,000 ▪ Basis of accounting for transaction between reportable segments
P12,300,000 x 10% = P1,230,000; Qualify: 1, 2 ▪ Nature of differences between measurements of reportable segments’
Profit: (P1,500,000 + P850,000 + P200,000) = P2,550,000 x 10% = P/L and entity’s P/L after income tax + discounted operations
P255,000 ▪ Nature of differences between measurements of reportable segments’
Loss: P300,000 assets and entity’s assets
Qualify: 1, 2 and 3 ▪ Nature of differences between measurements of reportable segments’
**Segment 3 is included since the threshold is P255,000 profit or loss liabilities and entity’s liabilities
▪ Nature of any changes from prior periods in the measurement methods
OPERATING SEGMENTS: DISCLOSURES to determine segment’s P/L and their effects
This can be classified into four categories: ▪ Nature and effect of asymmetrical allocations to reportable segments
 General Information
• Information about profit or loss, assets and liabilities Reconciliations
• Reconciliations  Total of reportable segments’ revenue to entity’s revenue
• Entity-wide Disclosures • Total of reportable segment’s profit or loss to entity’s profit or loss before
and after tax and discounted operations
General Information includes disclosures of: • Total of reportable segment’s assets to entity’s assets
 Factors used to identify reportable segments – especially the basis of • Total of reportable segment’s liabilities to entity’s liabilities
organizations • Total of reportable segment’s amounts for every other material item of
• Judgements in applying aggregation criteria information disclosed to the corresponding amount of the entity
Entity-wide Disclosures 3. When is an operating segment is reportable?
These are not at a segment level but at the entity level of all the segments A. The segment external and internal revenue is 10% or more of the
 Information about the products and services combined external and internal revenue of all operating segments.
• Information about geographical areas B. The segment profit or loss is 10% or more of the greater between the
✓ Revenue from external customers combined profit of all profitable operating segments and the combined
o Attributed to entity’s country of domicile loss of all unprofitable operating segments
o Attributed to all foreign countries C. The assets of the segment are 10% or more of the total assets of all
✓ Non-current assets operating segments.
o Located in entity’s country of domicile D. Under all of these circumstances
o Located in all foreign countries
• Information about major customers 4. Operating segments that do not meet any of the quantitative thresholds
- Report if revenue with single customer is 10% or more of the A. Cannot be considered reportable
total revenue B. May be considered reportable and separately disclosed if management
believes that information about the segment would be useful to the users
of the financial statements
C. May be considered reportable if the information is for internal use only
Assessment Activities D. May be considered reportable and separately disclosed if this is the
Choose the letter of the best answer. practice within the economic environment in which the entity operates
1. If financial report contains both the consolidated financial statements of
a parent and the parent’s separate financial statements, segment 5. Which is true concerning the 75% overall size test for operating segments?
information is required in A. The total external and internal revenue of all reportable segments is 75%
A. The separate financial statement only or more of the entity’s external revenue
B. The consolidated financial statement only B. The total external revenue of all reportable segments is 75% or more of the
C. Both the separate and consolidated financial statements entity’s consolidated revenues
D. Neither the separate nor the consolidated financial statement C. The total external revenue of all reportable segments is 75% or more of the
entity’s unconsolidated revenues.
2. Which statement is true with respect to a chief operating decision D. Total internal revenue of all reportable segments is 75% or more of the
maker? entity’s internal revenue
A. The term chief operating decision maker identifies a function and
not necessarily a manager with a specific title. 6. Which of the following statements about major customer disclosure is true?
B. In some cases, the chief operating decision maker could be the chief A. A major customer is defined as one providing revenue which amounts to
operating officer 10% or more of the combined external revenue of all operating segments.
C. The board of directors acting collectively could qualify as the chief B. The identities of major customers need not be disclosed
operating decision maker. C. The entity shall disclose the total amount of revenue from major customer
D. The chief internal auditor who reports to the board of directors and the identity of the segment reporting the revenue
usually plays a very important role and would generally qualify as chief D. All of these statements are true about major customer disclosure
operating decision maker
7. Under PFRS 8, which is not a required reconciliation of segment D. Segment profits and loss and related information
information?
A. The total of the reportable segments’ revenue to the entity’s 11. The sum of the reportable segment’s external sales must be at least equal to
revenue what percent of
B. The total of the reportable segments’ profit or loss to the entity’s total operating segment’s external sales?
profit or loss before tax expense and discounted operations. A. 60%
C. The total number of major customers of all segments to the total B. 75%
number of major customers of the entity. C. 50%
D. The total of the reportable segments’ assets to the entity’s assets D. 65%

8. Which quantitative threshold is not a requirement in qualifying a 12. Under PFRS 8, the management approach of identifying reportable operating
reportable segment? segments means that operating segments are identified on the basis of internal
A. The segment revenue, both external and internal, is 10% or more of reports about the components of an entity that are regularly reviewed by:
the combined external and internal revenue of all operating segments. A. The chief accountant.
B. The segment profit or loss is 10% or more of the greater between B. The chief audit executive
the combined profit or profitable segments and combined loss of C. The chief operating decision maker
unprofitable segments. D. The respective head of each operating segment
C. The segment assets are 10% or more of the combined assets of all
operating segments Problem Solving:
D. The segment assets are 20% or more of the combined assets of all 1. An entity and its division are engaged solely in manufacturing. The following
operating segments data pertain to the industries for the year ended December 31, 2019
Operating Profit (Loss)
9. Which of the following is not a required disclosure about operating Segment 1 P20,000,000
segments? Segment 2 (10,000,000)
A. The total of revenue from major external customers exceeding 50% Segment 3 ( 6,000,000)
of the entity’s revenue Segment 4 ( 9,000,000)
B. The identity of the major customer that accounts for 20% of the Segment 5 ( 3,000,000)
entity’s revenue To be reportable segment, the segment profit or loss should be at least what
C. Revenue from external customers attributable to the entity’s amount?
country of domicile and attributed to all foreign countries in total from
which the entity derives revenue. 2. An entity identified the following segments for the current year:
D. Revenue from external customers for each product and service. Segment Revenue Profit Assets
A P10,000,000 P1,750,000 P20,000,000
10. PFRS 8 (Operating Segments) requires that a company report all to the B 8,000,000 1,400,000 17,500,000
following, except. C 6,000,000 1,200,000 12,500,000
A. Major customers D 3,000,000 550,000 7,500,000
B. Segment assets and liabilities E 4,000,000 575,000 5,500,000
C. Liquidity ratios F 2,000,000 525,000 3,000,000
What are the reportable segments? RELATED PARTIES AND RELATED PARTY TRANSACTIONS
A related party is a person or entity that is related to the entity that is
3. An entity reported the following segment profit or loss for the current preparing its financial statements.
year ❖ A person or a close member of that person’s family is related to a reporting
Segment 1 7,000,000 Profit entity if that person:
Segment 2 3,000,000 Profit ➢ has control or joint control of the reporting entity;
Segment 3 4,000,000 (Loss) ➢ has significant influence over the reporting entity; or
Segment 4 1,000,000 Profit ➢ is a member of the key management personnel of the reporting entity
Segment 5 500,000 (Loss) or of a parent of the reporting entity.
What segments are qualified as reportable? ❖ An entity is related to a reporting entity if any of the following conditions
applies:
➢ The entity and the reporting entity are members of the same group
(which means that each parent, subsidiary and fellow subsidiary is
related to the others).
➢ One entity is an associate or joint venture of the other entity (or an
associate or joint venture of a member of a group of which the other entity is a
member).
➢ Both entities are joint ventures of the same third party.
➢ One entity is a joint venture of a third entity and the other entity is an
associate of the third entity
Module 7 ➢ The entity is a post-employment benefit plan for the benefit of employees
RELATED PARTY DISCLOSURES of either the reporting entity or an entity related to the reporting entity. If
Overview: the reporting entity is itself such a plan, the sponsoring employers are also
In 2001 the International Accounting Standards Board (Board) adopted related to the reporting entity.
IAS 24 Related Party Disclosures. The objective of this standard is to ensure ➢ The entity is controlled or jointly controlled by a person identified.
that an entity’s financial statements contain the disclosures necessary to ➢ The entity, or any member of a group of which it is a part, provides key
draw attention to the possibility that its financial position and profit or loss management personnel services to the reporting entity or to the parent of
may have been affected by the existence of related parties and by the reporting entity.
transactions and outstanding balances, including commitments, with such
parties. On the other hand, in considering each possible related party relationship,
attention is directed to the substance of the relationship and not merely the legal
Module Objectives: form. The following are not related parties:
After successful completion of this module, you should be able to: ❖ two entities simply because they have a director or other member of key
❖ understand the purpose of related party disclosures; and management personnel in common or because a member of key
❖ identify the required disclosures related to IAS 24. management personnel of one entity has significant influence over the other
entity.
Course Materials: ❖ two joint venturers simply because they share joint control of a joint
venture.
❖ providers of finance, trade unions, public utilities, and departments Moreover, an entity shall disclose key management personnel compensation
and agencies of a government that does not control, jointly control or in total and for each of the short-term employee benefits, post-employment
significant influence the reporting entity, simply by virtue of their benefits, other long-term benefits, termination benefits and share-based
normal dealings with an entity (even though they may affect the payment. Amounts incurred by the entity for the provision of key management
freedom of action of an entity or participate in its decision-making personnel services that are provided by a separate management entity shall also
process). be disclosed.
❖ a customer, supplier, franchisor, distributor or general agent with If an entity had related party transactions during the periods covered by the
whom an entity transacts a significant volume of business, simply by financial statements, it shall disclose the nature of the related party relationship
virtue of the resulting economic dependence. as well as information about those transactions and outstanding balances,
including commitments, necessary for users to understand the potential effect of
A related party transaction is a transfer of resources, services or obligations the relationship on the financial statements. At a minimum
between a reporting entity and a related party, regardless of whether a the disclosure includes:
price is charged. The following are  the amount of the transactions.
examples of related party transactions that are to be disclosed:  the amount of outstanding balances, including commitments, their terms and
 purchases or sales of goods (finished or unfinished) conditions and details of any guarantees given or received.
 purchases or sales of property and other assets  provisions for doubtful debts related to the amount of outstanding balances.
 rendering or receiving of services  the expense recognized during the period in respect of bad or doubtful debts
 leases due from related parties.
 transfers of research and development
 transfers under license agreements Assessment Activities
 transfers under finance arrangements (including loans and equity Choose the letter of the best answer.
contributions in cash or in kind) 1. Which of the following is not a related party?
 provision of guarantees or collateral a. Entities with joint control or significant influence over the entity
 commitments to do something if an event occurs or does not occur in b. The parent company of the entity
the future, including executory contracts (recognized and c. An entity that has a common director with the entity
unrecognized) d. Joint ventures in which the entity is a venture
 settlement of liabilities on behalf of the entity or by the entity on
behalf of that related party. 2. Which of the following are not necessarily related parties?
a. Affiliates
REQUIRED DISCLOSURES b. Two enterprises that have common director
Relationships between a parent and its subsidiaries shall be disclosed c. Two enterprise and its key management personnel, directors and officers
irrespective of whether there have been transactions between them. An d. The enterprise and its associates
entity shall disclose the name of its parent and, if different, the ultimate
controlling party. If neither the entity’s parent nor the ultimate controlling 3. Which of the following is conclusively a party (or parties) related to the
party produces consolidated financial statements available for public use, reporting entity?
the name of the next most senior parent that does so shall also be a. A venture sharing joint control with the reporting enterprise over a joint
disclosed. venture.
b. Providers of finance, trade unions, public utilities and government c. Dependents of the individual or the individual’s spouse
departments and agencies simply by virtue of their normal dealings d. Brothers and sisters.
with an entity.
c. A customer, supplier, franchisor of general agent with whom an 8. Which of the following does not fall within the definition of an entity’s related
entity transacts a significant volume of business merely by virtue of the party?
resulting economic dependence. a. Joint party in which the entity is a venture
d. Post-employment benefit plan for the benefit of employees of the b. A post-employment benefit plan for the benefit of the employees of
entity. the entity’s parent
c. An executive director of the entity
4. Which of the following falls within the definition of “related parties” as d. The partner of a key manager is a major supplier of the entity
defined in IAS 24?
a. Providers of finance in the course of their normal dealings with an 9. A related party transaction is a transfer of resources or obligations
enterprise by virtue only of those dealings a. Between related parties when a price is charged.
b. A supplier with whom the reporting entity has a one-year contract b. Between related parties, regardless of whether a price is charged.
for the supply of raw materials c. Between unrelated parties when price is charged.
c. Government department and agencies d. Between unrelated parties, regardless of whether a price is charged.
d. The wife of a key management personnel who has the authority to
plan, direct, and control the activities of the reporting enterprise. 10. If there had been transactions between related parties, the entity shall
disclose
5. Which of the following statements is true? a. The nature of the relationship only.
I. A party is related to another entity that is jointly controlled b. The information about the transaction and outstanding balances.
II. A party is related to another entity that is controls c. The nature of the relationship, information about the transaction and
a. I only outstanding balances.
b. II only d. Neither the nature of the relationship nor the information about the
c. Both I and II transaction and outstanding balances.
d. Neither I nor II
6. Which of the following is not a related party of an entity? 11. Which is not a related party transaction?
a. A shareholder of the entity owning 30% of the ordinary shares a. Between and among subsidiaries of a common parent
b. An entity providing banking facilities to the entity b. Between a parent and its subsidiaries
c. An associate of the entity c. Between the enterprise and its key management and close members of the
d. Key management personnel of the entity family
d. Between an enterprise and its branch
7. Under IAS 24, close family members of a person are those family
members who may be expected to influence or be influenced by that 12. Which of the following situations will require disclose as a related party?
person in their dealings with the entity. Who, among the following, is not a. In consolidated financial statements in respect to intra-group transactions.
included in this definition of close family members? b. In the financial statements of state-controlled enterprises of transactions
a. The individual’s spouse and children with other state-controlled enterprises
b. Children of the individual’s spouse
c. In the aren’t financial statements when they are made available or
published with the consolidated financial statements Module 8
d. In related party relationships where control exists, irrespective of CASH TO ACCRUAL ACCOUNTING AND SINGLE-ENTRY SYSTEM
whether there have been transactions between related parties Overview:
Although predicting future cash flows is the primary goal of many users of
13. Which of the following disclosures is not a mandated disclosure under financial reporting, the model best able to achieve that goal is accrual accounting.
IAS 24? A competing model is cash-basis accounting. Each model produces a periodic
a. Relationships between parents and subsidiaries irrespective of measure of performance that could be used by investors and creditors for
whether there have been transactions between those related parties. predicting future cash flows. In this module, we will be discussing about the cash
b. Names of all the “associates: that an entity has dealt with during the and accrual basis of accounting and the underlying concept about single-entry
year. system.
c. Name of the entity’s parent and, if different, the ultimate controlling
party. Module Objectives:
d. If neither the entity’s parent nor its ultimate controlling entity After successful completion of this module, you should be able to:
produces financial statements available for public use, then the name  understand the features of a single-entry system of accounting and
of the next most senior parent that does so. differentiate from double entry system; and
 compute revenue and expense items on an accrual basis taken from the
14. If there had been related party transactions during the year, which of records of entities using cash basis accounting and single-entry system.
the following is not a required minimum disclosure?
a. The amount of the related party transactions Course Materials:
b. The amount of the outstanding related party balances and their
terms and conditions along with details of guarantees given and CASH TO ACCRUAL BASIS
received. Under cash basis of accounting, income is recognized when received
c. The amount of similar transaction with unrelated parties to establish regardless of when earned, and expense is recognized when paid regardless of
the comparable related party transactions have been entered at arm’s when incurred. In other words, this approach does not recognize accounts
length. receivable, accounts payable, accrued income, deferred income, accrued expense
d. Provisions for doubtful debts related to the amount of outstanding and prepaid expenses. The measure is the difference between
related party balances and expense recognized during the year in respect cash receipts and cash payments from transactions related to providing goods and
of bad or doubtful debts due from related parties. services to customers during a reporting period. This basis is simple, less costly
and more reliable since estimates and judgement is not required. However, it is
not useful in evaluating performance because it does not reflect the results of all
15. Which of the following would not be considered “compensation” of key profit-directed activities which took place during the period and cash receipt and
management payments and the related accomplishments and effort occur in different periods.
personnel? Moreover, it doesn’t present the financial position or operating result of an
a. Short-term benefits enterprise in conformity with generally accepted accounting principles.
b. Termination benefits On the other hand, accrual basis of accounting recognizes income when
c. Share-based payments earned
d. Reimbursement of out-of-pocket expenses
regardless when cash is received and recognizes expense when incurred  Decrease in Accounts/ Notes Receivable- trade (A,N/R, ending < A,N/R,
regardless of when paid. Thus, the essence of this approach is the beginning),
recognition accounts receivable, accounts payable, accrued income, means that there was more collection than sales on account (this, Add
deferred income, accrued expense and prepaid expenses. the decrease to the accrual basis to get the cash basis sales or deduct the
decrease from the cash basis to get the accrual basis sales)
Comparison of cash basis and accrual basis Accrual basis sales XX Cash basis sales XX
Cash Basis Accrual Basis Decrease in Accounts/ Decrease in Accounts/
Sales Cash sales plus collection of Cash sales plus sales on Notes Receivable XX or Notes Receivable (XX)
trade receivables. account. Cash basis sales XX Accrual basis sales XX
Purchases Cash purchases plus payment Cash purchases plus
to trade creditors. purchases on account.  Increase in the Accounts/ Notes Payable- trade (A,N/P, ending > A,N/P,
Income other Amount received is considered Amount earned are beginning) ,
than sales as income regardless when considered as income means that there were more purchases on account than payments to
earned. regardless when it is suppliers (thus, add the increase to the cash basis purchases (payments
received. made) to get the accrual basis purchases or Deduct the increase from the
Expenses, in Amounts paid is treated as Amount incurred are accrual basis purchases to get the cash basis purchases)
general expense regardless of when considered as expense Accrual basis purchases XX Cash basis purchases XX
incurred. regardless when it is Increase in Accounts/ Increase in Accounts/
Depreciation Depreciation is provided Depreciation is provided Notes Payable (XX) or Notes Payable XX
normally. normally. Cash basis purchases XX Accrual basis purchases XX
Bad debts No bad debts are recognized Doubtful accounts are
because trade receivables are treated as bad debts.  Decrease on Accounts/ Notes Payable- trade (A,N/P, ending < A,N/P,
not recognized. beginning),
means that there were more payments to supplies (cash basis purchases)
Conversion from Cash Basis to Accrual Basis than accrual basis purchases (thus, add the decrease to the accrual basis
 Increase in Accounts/ Notes Receivable- trade (A,N/R, ending > purchases to get the cash basis purchases or the total payments made or
A,N/R, beginning) , Deduct the decrease from the cash basis purchases to get the accrual basis
means there were more sales on account than collection (thus, Add the purchases).
increase to cash basis to get accrual basis sales or deduct increase from Accrual basis purchases XX Cash basis purchases XX
the accrual basis to get the cash basis sale) Increase in Accounts/ Increase in Accounts/
Notes Payable XX or Notes Payable (XX)
Cash basis purchases XX Accrual basis purchases XX

 The conversion of data from cash basis to accrual basis focuses on the
Accrual basis sales XX Cash basis sales XX
recognition of accruals and deferrals, since these are the items that are
Increase in Accounts/ Increase in Accounts/
usually taken under the accrual basis that are not considered under cash
Notes Receivable (XX) or Notes Receivable XX
basis.
Cash basis sales XX Accrual basis sales XX
Computation for converting cash basis data to accrual would include the Accrued Revenue
following: Beginning balance Collections (cash basis)
Recognized income (accrual basis)
Cash receipts representing revenue XX Ending balance
Accrual revenue, beginning of the period (XX)
Accrual revenue, end of the period XX Unearned Revenue
Unearned revenue, beginning of the period XX Recognized income (accrual basis) Beginning balance
Unearned revenue, end of the period (XX) Collections (cash basis)
Revenue under accrual basis XX Ending balance

Cash payments representing expense XX Prepaid Expense

Accrual expenses, beginning of the period (XX) Beginning balance Recognized expense (accrual basis)
Accrual expenses, end of the period XX Payment of cash (cash basis)
Prepaid Expenses, beginning of the period XX Ending balance
Prepaid Expenses, end of the period (XX)
Expense under accrual basis XX Accrued Expense
Payment of cash (cash basis) Beginning balance
Other computation guides: Recognized expense (accrual basis)
Ending balance
Accounts Receivable/ Notes Receivable
Beginning balance (AR/NR) Cash collections (Cash basis) SINGLE ENTRY ACCOUNTING SYSTEM
Sales on account (accrual basis) Sales discounts
Recovery of prev. write offs ** Sales returns* Bookkeeping System
Sales allowances Bookkeeping system is the systematic and chronological recording of
Write offs transactions and events in the books of accounts. It is also known as the recording
Ending balance (AR/NR) phase of accounting.
*excluding refunded sales returns to customers
** included in the analysis only if collections included the said recovery Bookkeeping vs. Accounting
Bookkeeping Accounting
Accounts Payable/ Notes Payable Recording part of accounting Broader field
Payments (Cash basis) Beginning balance (AP/NP) Mechanical, Repetitive Analytical, judgmental, conceptual
Purchase discounts Purchases on account (accrual Follows method prescribe by Determines accounting principles and
basis) accounting methods
Purchase returns *
Purchase allowances
Ending balance (AP/NP)
*excluding refunded purchase returns from suppliers Systems of Bookkeeping
1. Single-entry bookkeeping- as system of bookkeeping whereby, as a rule, *Items may include:
only cash and personal accounts are recognized. The system may range  Changes in the revaluation surplus related to property, plant and equipment
from mere narrative (in line with IAS 16)
transactions to one that approximates but does not completely adopt  Actuarial gains and losses (in line with IAS 19)
double entry system. The use of the single-entry system is simple and  Gains and losses arising from translating the financial statements in foreign
economical. However, the accounting record will be incomplete and the operations.
double entry automatic check (debit is equal to credit) is missing. Below are  The effective portion of gains and losses on hedging instruments in a cash
some other characteristics of single-entry system: flow hedge
 Accounting equation is disregarded  Gains and losses on remeasuring FVTOCI (in line with IFRS 9)
 Usually one effect of each transaction is recognized
 Typically, only cash is recording, and personal accounts are maintained Assessment Activities:
 Trial balance cannot be prepared Compute for the following and show your solutions on a separate paper.
 Data needed for preparation of financial statement is incomplete
 Net income is determined by reconstructing revenue and expenses or 1. 2Moons Company reported the following balances at the end of each year:
comparing beginning and ending capital. 2020 2019
Inventory P2,600,000 P2,900,000
2. Double-entry bookkeeping – a system of bookkeeping which views a Accounts Payable 750,000 500,000
transaction as having two-fold effect on accounting values that provides The entity paid suppliers P4,900,000 during the year ended December 31, 2020.
automatic check on certain bookkeeping errors. This system uses the What should be the amount to be reported for cost of goods sold in 2020?
concept of accounting equation (Assets= Liabilities +Equity).
2. For the year ended Dec. 31, 2020, Pha Company paid interest totaling P100,000.
Summary of Distinction between Double Entry and Single Entry The prepaid interest expense is P23,500 and P18,000, respectively, on December
Financial Capital Maintenance Approach Double entry Single Entry
Under this concept a profit is earned only if the financial (or money) Principles Involved 1. Duality Recognizes only one phase
amount of the net assets at the end of the period exceeds the financial (or 2. Equality of transactions.
money) amount of net assets at the beginning of the period, after excluding Transactions and events Records every type of Records only transactions
any distributions to, and contributions from, owners during the period. recorded accountable involving cash and personal
events accounts.
Increase in assets XX Accounts recognized Assets, liabilities,equity, Cash, accounts receivable,
Decrease in assets (XX) revenues and expenses accounts payable, equity
Increase in liabilities (XX) Books used Journal and ledger Cash book, subsidiary ledger
Decrease in liabilities XX XX/ (XX)
Issuance of share capital (XX) Financial statement Financial statements are Income (loss) and statement
Other items that increase SHE but no profit or loss * (XX) preparation prepared in a systematic of assets and liabilities are
Other items that decrease SHE but no profit or loss * XX processing data; known as the
prepared using the analysis
Dividends XX accounting process, income
(loss) is computed using the or
Net profit (loss) XX (XX) matching principle. indirect approach.
31, 2019 and 2020. The interest payable is P45,000 and P53,500, Account payable - Jan 1 150,000 Interest receivable - Dec 31 20,000
respectively, on December 31, 2019 and 2020. Account payable - Dec 31 200,000
What amount of interest expense should be reported on December 31,
2020? On July 1 of the current year, an equipment was acquired for P200,000. The terms
are P50,000 down and the balance to be paid after one year. The useful life is 10
3. During 2020, Wayo Corp. received P8,000,000 from tenants. The balance years with no residual value.
sheet contained the following data:
2019 2020 What is the net income under cash & accrual basis?
Rentals receivable P 960,000
P1,240,000 6. Tee Company reported the following changes in all the account balances for
Unearned rentals 3,200,000 2016, except for retained earnings:
2,400,000 Increase (Decrease) Increase (Decrease)
What amount of rental revenue should be reported for 2020? Cash P 790,000 Accounts payable P(380,000)
AR, net 2,400,000 Bonds payable 820,000
4. Forth owned a 20% royalty interest in an oil well. Forth received royalty Inventory 1,270,000 Share capital 1,250,000
payments on January 31 for the oil sold between the previous June 1 and Investments (470,000) Share premium 130,000
November 30, an on July 31 for oil between December 31 and May 31.
Production revealed the following sales: There were no entries in retained earning account except for the net income and a
divided declaration of P190,000 which was paid in the current year.
June 1, 2019 - November 30, 2019 3,000,000
December 1, 2019 - December 31, 2019 500,000 What is the net income in the current year?
December 1, 2019 - May 31, 2020 4,000,000
June 1, 2020 - November 30, 2020 3,250,000
December 1, 2020 - December 31, 2020 700,000
What amount should be reported as royalty revenue for 2020?

5. Beam Company provided the following data for the current year:
Cash sales P2,500,000 Inventory - Jan 1 P 500,000
Sales on account 850,000 Inventory - Dec 31 600,000
Cash purchases 1,700,000 Accrued expenses - Dec 31
20,000
Credit purchases 400,000 Prepaid expense - Dec 31
30,000
Expenses paid 750,000 Equipment- Dec 31
1,000,000
Accounts receivable- Jan 1 250,000 Interest received 40,000
Accounts receivable- Dec 31 300,000 Interest receivable - Jan 1
10,000