Components of Audited Financial Statements in Philippines

By: Garry Pagaspas, CPA

For a simple layman or average entrepreneur, financial statement is just a simple document that needs to be signed by a certified public accountant in the Philippines and needs to be attached to the annual income tax return. On a technical sense, they, are not just simple documents, but a sacred report or statement about the business that is being looked upon by related government authorities as a serious requirement upon business establishment.

Under the present rules, audited financial statement in the Philippines is something that business owners, entrepreneurs, company officers, and corporate board members or trustees should give due regard. Securities and Exchange Commission (SEC) is now looking into the details of the audited financial statements in the Philippines to determine extent of compliance with accounting rules, e.g. Philippine Financial Reporting Standards (PFRS). Bureau of Internal Revenue (BIR) is likewise looking at the audited financial statements in the Philippines in determining compliance with tax laws, rules, and regulations. Other agencies (BSP, CDA, IC, etc0 are likewise checking on them and all of those agencies are imposing monetary fines and penalties on certain violations and deficiencies in the audited financial statements in the Philippines.

On a simple note, it is not enough just to be transmitted by a certified public accountant with a duly signed audited financial statements without knowing what components should be in it. For easy reference, the following are the basic components of the audited financial statements that you should be aware of:

Statement of Comprehensive Income

This is used to be known as income statement and would normally contain details about the revenues generated during the year and the expenses incurred – cost of sales and operating expenses. This statement would tell you about the resulting net income from operations and other incidental items during the period.

Statement of Financial Position

Previously known as “balance sheet”, this statement provides details about assets (properties of value owned), liabilities (obligations requiring financial settlement), and equity (those relating to investments of owners). In other words, this would provide answers on the following questions:

• How much does the company own at any point in time?
• How much does the company owe at a particular time?
• How much is left for the owners at a certain point in time?

Please note that the determination is for specific assets, liabilities, and equity at a particular period of time. Different cut-off period could mean different balances of assets, liabilities, and equity.

Statement of Cash Flows

If you are interested to know about purely cash matters, this one is for you. This would provide you the where cash came from and where cash goes based on the three (3) criteria – operating activities for cash generated by operations, financing activities from long-term loans sourced from third parties, and investing activities on long-term assets and cash transactions with owners related to equity. This could be prepared in two ways – direct method specifying direct sources and uses of case, or indirect method using the net income under accrual basis accounting and converting the same into cash basis net income making necessary adjustments for non-cash items on revenue and expenses.

Statement of Changes in Equity

As a business owner, this statement would give you figures on the movements of your investments with the business entity. This will provide you the latest balance of your equity investment and the related movements of related accounts effecting either increase for net income during the period and additional investment or decrease for the net loss, if any, and related withdrawals.

Notes to Financial Statements

So much for the figures, this component would give you narrative explanations and important notes about the figures, details on the amounts, and other vital information intended to enhance your understanding of the audited financial statements in the Philippines. Securities and Exchange Commission (SEC) normally prescribes accounting and financial reporting standards that would dictates what items and information needs to be noted upon or disclosed in here. Bureau of Internal Revenue (BIR) is likewise prescribing some information on the audited financial statements from time to time such as details about taxes and licenses. This component could go for pages or for volume of pages depending on the complexity of the business entity financial reporting.

Additional Components

Additional component may be required for certain entities and it should be a lookout on the audited financial statements because their absence could mean monetary penalties on the business entity. Following are sample additional components:

•  Schedule of Receipts and disbursements for non-stock and non-profit organization;
• Reconciliation of Retained Earnings for Dividend Declaration;
• Tabular schedule of standards and interpretations as of reporting date for large and/or publicly-accountable entities;
• Supplementary schedules required by Annex 68-E for issuers of securities to the public;
• A map of conglomerate or group of companies within which the reporting entity belongs for listed companies and investment houses

Summary

Please bear in mind the above components of audited financial statements and you must see those upon being provided by your independent certified public accountant in the Philippines. On a more technical sense, you need not only see they are there, but it could be better if you could pinpoint their technical completeness on presentation as the Securities and Exchange Commission (SEC) is becoming more meticulous in seeing to it that audited financial statements should be what the SEC rules would want it to be. More importantly, choosing your independent certified public accountant in the Philippines must be in a manner that will ensure their expertise, or at least capability, on the technical requirements of your business entity.

Garry is a Certified Public Accountant (CPA) and a law degree holder in tax practice for about ten (10) years now helping out taxpayers on tax compliance, tax savings, tax assessments, tax refunds, financial statements audit, and other related professional accounting services. He is presently a frequent speaker of Tax and Accounting Center, Inc. and you may send him mail at garry.pagaspas(@)taxacctgcenter.ph.

Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances.