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Conceptual Framework and Accounting Standards Chapter

1-3
Conceptual Framework and Accounting Standards (Ateneo de Naga University)

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CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS

ACCOUNTING according to:  transactions that are classified as external or
internal events
ACCOUNTING ASSOCIATION COUNCIL (ASC) – is a
service activity which functions to provide quantitative EXTERNAL TRANSACTIONS – economic events that
information, primarily financial in nature, about involves the entity and another entity
economic entities, intended to be useful in making
economic decision. INTERNAL TRANSACTIONS –economic events involving
the entity only
AMERICAN INSTITUTE OF CERTIFIED PUBLIC
ACCOUNTANTS (AICPA) – is the art of recording, Ex. Production and Casualty
classifying, and summarizing in a significant manner, and
MEASURING
in term of money, transactions and event which are in
part at least of financial character and interpreting the -the process which assigns peso amount to accountable
results thereof. transactions and events
AMERICAN ACCOUNTING ASSOCIATION (AAA) –is the -Philippine peso is the unit of measure
process of identifying, measuring, and communicating
economic information to permit informed judgement -To be useful, it must be expressed in common financial
and decision by users of the information. denominator

3 IMPORTANT POINTS BASES OF MEASUREMENT

1. Accounting is about quantitative information  HISTORICAL COST – most common measure of

2. Information is likely financial in nature financial statements
3. Information should be useful in decision-  CURRENT VALUE – includes fair value, value in
making use, fulfillment and cost value

Overall objective: to provide quantitative financial COMMUNICATING

information about a business that is useful to stamen
users particularly owners and creditors in making -The process of preparing and distributing financial
economic decision. reports to potential users

Essence of accounting: decision-usefulness -Primary reason why accounting is called the “universal
language of business”
AAA definition stated that accounting has 3
components: a. RECORDING – journalizing or process of
maintaining systematic record of all economic
a. Identifying as the analytical component business transactions after identifying and
b. Measuring as the technical component measuring.
c. Communicating as the formal component  done in the book of original entry (journal)
b. CLASSIFYING – sorting of the interrelated
IDENTIFYING transactions into their respective accounts.
 Accomplished by posting to the ledger
 the process of recognition or non-recognition
of ACCOUNTABLE EVENTS (business activities) Ledger – group of accounts including ASSETS,
 Refers to the economic activities or the LIABILITIES, EQUITY, REVENUE AND EXPENSE
measurement of economic resources and
obligations c. SUMMARIZING – preparation of financial
 Transactions that has an effect on the accounting statements (quantitative information)
equation
Accounting as an INFORMATION SYSTEM
ECONOMIC ACTIVITIES
 Measures the business act, processes
 subject matter of accounting; information into reports and communicate
reports to decision makers

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CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS

 Key product of IS are the set of FS and  encompasses the process of analyzing,
documents that report financial info about an classifying, summarizing, and communicating
entity to decision makers all transactions involving the receipt and
disposition of government fun and property
FINANCIAL REPORTS – reflect the entity’s performance and interpreting the results thereof.
in terms of profit, loss, and where it stands on financial
terms. GOV. ORGS: BIR, COA, DBM, SEC AND BSP

ACCOUNTANCY PROFESSION 4. ACADEME/EDUCATION

 Republic Act no. 9298 “Philippine Accountancy LIMITATIONS OF PUBLIC ACCOUNTANCY and BOA
Act of 2004” – the law regulating the practice of ACCREDITATION OF CPA IN PH
accountancy signed by GMA
 BOARD OF ACCOUNTANCY (BOA) – governing  Passed the CPALE and should be registered as
body authorized by law to promulgate rules and CPA in PH
regulations affecting the practice of the  Certificate of accreditation shall be issued
accountancy.
Requirements for BOA Accreditation:
Accountancy profession:
 Registered in BOA and Professional Regulation
1. Public Accounting – individual practitioner, Comission
small firms and large multinational  Continuing professional development and
organizations that focuses on rendering requirement to earn CPD credits
independent and expert public financial  120 CPD units for accountancy
services.  Must have 3 meaningful experience
a. Auditing – primary service offered by public
REPUBLIC ACT. 10912- is the law mandating and
practitioners.
strengthening the continuing professional development
 also called as external auditing
(CPD) program for all professions.
 examines financial statement for the purpose
of expressing an opinion as to the fairness GUIDE/ STANDARDS IN PREPARING FINANCIAL
with which the FS is prepared. STATEMENT
b. Taxation – preparation of annual income tax
returns and determination of tax GENERALLY ACCEPTED ACCOUNTING PRINCIPLE (GAAP)
consequences with the guidance of tax laws
and regulations in taxation laws and court  accounting rules, procedures, practice, and
cases concerned in interpreting taxation standards followed in the preparation of and
c. Management advisory services- has no presentation of financial statements
precise coverage but generally used to refer  developed on the basis of experience, reason,
services to clients on matters of accounting, custom, usage, and practical necessity.
finance, business policies, org. procedures,  formalized initially the creation of ASC
product cost, and many other phases of  purpose: create common understanding;
business conduct and operations. identify proper accounting practice for the
2. Private Accounting – includes maintaining the preparation and presentation of F.S; to ensure
records, producing the financial reports, comparability and uniformity
preparing the budgets, and controlling and  FORMAL GAAP IN PH – PAS ND PFRS
allocating the resources of an entity
PHILIPPINE FINANCIAL REPORTING STANDARDS (PFRS)
a. Accounting staff
b. Chief Accountant  pronounce standards issued by FRSC
c. Internal Auditor  collectively include:
d. Controller– highest acc. Officer o PFRS which correspond to IFRS
3. Government Accounting – focuses on the o PAS which correspond to IAS
custody and administration of public funds. o PIC which corresponds to IFRIC, SIC and
interpretations developed by PIC

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CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS

INTERNATIONAL FINANCIAL REPORTING STANDARDS PHILIPPINE INSTITUTE OF CERTIFIED PUBLIC
ACCOUNTANTS (PICPA)
 is where the PFRS and PAS standards are based
 collectively include:  organization of CPAs which keeps the
o IFRS professional accountant up-to-date on technical
o IAS and ethical standards through trainings and
o Interpretations conventions
ACCOUNTING STANDARDS SETTING BODY AND OTHER
RELEVANT ORG

FINANCIAL REPORTING STANDARD COUNCIL (FRSC)

 standard setting body created by the PRC upon

the recommendation of Board of Accountancy
 composed of 15 members:
 (1) Chairman who is a senior accounting
practitioner
 (1) representative from BOA, SEC, BSP, BIR,
COA, Major organization of preparers and
users of financial statements- Financial
Executives Institute of the Philippines or
FINEX
 (2) accredited national professional org of
CPA: Public practice, Commerce and
Industry, Academe/Education, and
Government

PHILIPPINE INTERPRETATIONS COMMITTEE (PIC)

 prepare interpretations of PFRS for approval of

FRSC
 Provide timely guidance and financial reporting
issues not specifically addressed in current
PFRS.

INTERNATIONAL ACCOUNTING STANDARDS BOARDS

 Standard setting-body of the IFRS foundation

with the main objectives of developing and
promoting global accounting standards

INTERNATIONAL FINANCIAL REPORTING

INTERPRETATTIONS COMMITTEE (IFRIC)

 Prepares interpretations of how specific issues

should be accounted for under application of
IFRS where:

a. standards do not include specific authorization

guidance; and
b. there is a risk of divergent and unacceptable

 oa

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CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS

COUNCILS AND COMMITTEE
International Setting OLD Philippine Setting
International Accounting Standards Committee setting body Accounting Standards Council
(IASC) (ASC)
 independent private sector body with the
objective of achieving uniformity and
accounting principles which are used by
business and other organizations for
financial reporting around the world
 formed in June 1973
 through an agreement of made by
professional accountancy bodies of
Australia, Canada, France, Germany, Japan,
Mexico, Netherlands, United Kingdom,
Ireland and United States
 headquarters in London, UK
 pronouncements are called IAS
OBJECTIVE OF IASC
 To formulate and publish in the public
interest accounting standard, observes
in presenting financial statements and
promote their worldwide acceptance
and observance.
 To improve and harmonize their
regulations, accounting standards and
procedures relating to the presentation
of financial statements
International Accounting Standards (IAS) pronouncement Philippine Accounting
Standards (PAS)
Standing Interpretations Committee (SIC) interpretations Interpretations Committee (IC)

International Setting NEW Philippine Setting

International Accounting Standards setting body Financial Reporting Standard Council
Board (IASB) (FRSC)
 Replaced the IASC  official standard- setting body
 publishes series of  created by the PRC upon the
pronouncement called IFRS recommendation of BOA
 adopted the IAS but the new  created to assist BOA in caring out its
pronouncements made by IASB power and functions provided under
are called IFRS the act of RA 9298
 standard setting process  main function: establish and improve
includes the correct order: accounting standards that will be
1. research generally accepted in PH
2. discussion paper  standards promulgated by FRSC
3. exposure draft constitute the highest hierarchy of
4. pronouncement of accounting generally accepted accounting
standard standards

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CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS

 Composed of 15 members
International Financial Reporting pronouncement Philippine Financial Reporting Standards
Standard (IFRS) (PFRS)
PHILIPPINE ACCOUNTING STANDRADS (PAS) –
old
International Financial Reporting Interpretations – Philippine Interpretations Committee (PIC)
Interpretations Committee (IFRIC) intended to give  prepare interpretations of the PFRS
authoritative guidance on which will be approved by FRSC
issues that are unlikely to  the approved interpretations are
receive unacceptable intended to give authoritative
guidance on issues that are likely to
receive divergent or unacceptable
treatment because the standard do
not provide specific and clear-cut rules
and guideline
 counterpart of PIC is the IFRIC of UK
which are replaced by standards
interpretations committee
 formed by the FRSC in August 2006
which replace the international
committee

ACCOUNTING VS. AUDITING Financial- focuses on preparation on general urpose

reports known as F.S intended for external and internal
Accounting – constructive in nature and embraces users
auditing
Managerial – accumulation and preparation of financial
Auditing – analytical; the work of an auditor starts when reports based on their need for internal users.
the work of accountants ends
 Emphasizes developing accounting info. for use
Auditor – examines the F.S to ascertain whether they in within an entity
conformity with GAAP
CHAPTER 2: CONCEPTUAL FRAMEWORK
ACCOUNTING VS. BOOKKEEPING
CONCEPTUAL FRAMEWORK
Accounting- conceptual; concerned with the “why” for
any action adopted  is a complete, comprehensive, and a single
document promulgated by the IASB.
Bookkeeping- “how” procedural and largely concerned  summary of terms and concepts that underlie
with development and maintenance of accounting the preparation and presentation of FS for
records external users
 describes the concept for general purpose
ACCOUNTING VS. ACCOUNTANCY
financial reporting
Accounting- theory or practice; used in reference only  intended to guide standard-setters, preparers
of accountancy such as the 3 fields and users of financial information in the
preparation and presentation of statements.
Accountancy- profession of accounting practice  underlying theory for the development of
accounting standards and revision of previously
FINANCIAL VS. MANGERIAL ACCOUNTING issued accounting standards.
 Will be used in future standard setting decision
but no changes will be made to the current IFRS

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CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS

The CF provides for foundation standards that: o Requirements in other PFRS dealing
with similar transactions
a. Contribute to transparency by enhancing o Conceptual Framework
international comparability and quality financial  Management may consider the ff:
info. o Pronouncement issued by other
b. Strengthen accountability by reducing standard-setting bodies
information gap between the providers of o Other accounting literature and
capital and the people to whom they have
industry practices
entrusted their money
c. Contribute to economic efficiency by helping USERS OF FINANCIAL INFORMATION
investors to identify opportunities and risks
across the world PRIMARY USERS – are the parties to whom general
purpose financial reports are primarily directed.
PURPOSES OF REVISED CONCEPTUAL FRAMEWORK
-Such users cannot require reporting entities to provide
a. To assist IASB to develop IFRS Standards based directly to them and therefore must rely on general
on consistent concepts purpose financial reports for much of the financial
b. To assist preparers of financial statements to information they need
develop consistent accounting policy when NO
STANDARD applies to a particular transaction Includes:
or other event or where an issue is not yet
addresses by an IFRS.  existing and potential investors
c. To assist prepares of F.S to develop accounting - need information to help them
policy when a standard allows a choice of an determine whether they should buy,
accounting policy hold or sell
d. To assist all parties to understand and interpret - concerned with the risk and returns by
the IFRS their investment; and info to assess the
ability to pay dividends
AUTHORITATIVE STATUS OF CONCEPTUAL  lenders, and other creditors
FRAMEWORK  Interested to info to determine whether their
loans, interests, and other amounts owing to
 The conceptual framework is not PFRS and them will be paid when due.
therefore does not prescribe any measurement
or disclosure requirement. OTHER USERS – parties other than the primary user that
 If there is a conflict between PFRS and may find general purpose financial reports useful but
Conceptual Framework, the requirement of the the reports are not directly to them.
PFRS will prevail.
 The Hierarchy guidance means that in the Includes:
absence of a standard or interpretation the  Employees- to know stability and profitability of the
specifically applies to a transaction, entity; assess ability to provide remuneration,
management shall consider the applicability of retirement benefits and employment opportunities
the CF in developing and applying an accounting  Customers – to know the continuance of an entity;
policy that will result in an information that is long-term involvement and dependence.
relevant and reliable.  Government and their agencies- allocation of
HIERARCHY GUIDANCE OF REPORTING STANDARDS resources or the activities of the entity; require info
to regulate entity activities, determine taxation
1. PFRS policies, and as a basis of national income and
2. Judgement similar stats
 Public- assist public by providing info about the
When making the judgment: trend and the range of its activities
 Management shall consider the ff:

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CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS

SCOPE OF REVISED CONCEPTUAL FRAMEWORK b. Provide info useful in assessing the cash flow
prospects of the entity
a. Objective of Financial Reporting c. Provide info about entity’s resources, claims,
b. Qualitative characteristics of useful financial and changes in resources and claims
information
c. Financial statements ad reporting entity Economic Decisions
d. Elements of financial statements
e. Recognition and derecognition  Existing and potential investor need GPFR to
f. Measurement determine whether to buy, sell, or hold
g. Presentation and disclosure investments
h. Concepts of capital and capital maintenance  Existing and potential lenders nd creditors need
GPFR to determine whether to provide, settle
A. OBJECTIVE OF FINANCIAL REPORTING loans and other forms of credit
 Overall objective of financial reporting is to
Assessing cash flow prospects
provide financial information about the
reporting entity that is useful to existing and  Decision of investors- depend on returns and
potential investors, lenders, and other creditors dividends
in making economic decisions about providing  Decision of lenders/creditors – depend on
resources to the entity principal and interest payments
 “why”, purpose or goal of accounting  Other: GPFR must provide info useful in
assessing the amount, timing and uncertainty of
FINANCIAL REPORTING – provision of financial info.
prospects for future net cash inflows to the
about an entity to external users that is useful in
entity
making economic decision and for assessing the
efficiency of the entity’s management Economic resources and claims
 However financial reporting also other info:  GPFR provide info about the financial position
financial highlights, summary of important of a reporting entity.
financial figures, analysis of financial  FINANCIAL POSITION – comprises information
statements, significant ratios and; about the reporting entity’s economic resources
 Nonfinancial info: description of major products (ASSETS) and claims (LIABILITIES AND EQUITY) at
and listing of corporate officers and directors a particular moment in time
o FP helps user identify entity’s financial
TARGET USER OF FINANCIAL REPORTING
strength and weakness and asses the
 Directed primarily to the primary users as they entity’s liquidity, solvency, and the need
have the most crucial and immediate need of for additional financing
financial info in financial reports
LIQUIDITY- the availability of cash near future to cover
 Other users and management - (however, they
currently maturing obligations; the ability to meet short-
can access info internally)
term obligations.
SPECIFIC OBJECTIVES OF FINANCIAL REPORTING
SOLVENCY- the availability of cash over a longterm
 Overall objective (stated above) obligations to meet financial commitments when they
 Conceptual framework places more emphasis fall due; to be realized and commonly the non-currents
on the importance of providing info needed to assets.
assess management stewardship (entity’s
Changes in economic resources and claims
efficiency) of the entity’s economic resources
 GPFR provide info about the effects of
Specific objectives:
transactions and other events that change the
a. Provide info useful in making decisions about entity’s accounting equation.
providing resources to the entity
FINANCIAL PERFORMANCE:

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CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS

 Refers to the level of income earned by the B. QUALITATIVE CHARACTERISTICS OF USEFUL INFO.
entity through the efficient and effective use of
resources; comprise of revenue, expenses, and  Qualities or attributes that make financial
net income or loss for a period of time accounting information useful to users
 Also known as results of operation portrayed in  Objective: ensure that the information is useful
income statement and SOCI to the users in making economic decision.

Usefulness of FINANCIAL PERFORMANCE info: 2 CLASSIFICATIONS of QC in CONCEPTUAL

FRAMEWORK:
 to ensure users to understand the return that
the company produced on the economic 1. Fundamental Qualitative Characteristics
resources.  Characteristics that make information useful to
 provides indication of how well the users
management perform their responsibilities to  Relate to the content and substance of financial
use the resources information
 helpful in predicting future returns
 useful in assessing the ability of the company to APPLICATIONS OF QC/ PROCESS TO APPLY FQC:
generate future cash inflows from operations.
1. Identify an economic phenomenon that has a
ACCRUAL ACCOUNTING – means that the income is potential to be useful
recognized when earned regardless of when received 2. Identify the type of information about the
payment and expense is recognized when incurred phenomenon that would be most relevant and
regardless of when paid. can be faithfully represented
3. Determine whether the information is available
 Accrual basis provide a better basis for assessing
past and future financial performance that Consist of the ff:
information solely about cash receipts and
1. Relevance- capacity of the information to
payments during a period.
influence a decision; capability of making a
LIMITATIONS OF FINANCIAL REPORTING difference in the decisions made by the users;
requires the financial info to be related or
a. GPFR do not and cannot provide all of the pertinent to the economic decision; info that
information that the primary users need, they has no bearing on an accounting decision to be
need to consider pertinent info from other made is useless.
sources.
b. GPFR are not constructed to show the value of Ingredients of Relevance
an entity but only provide info to help the
a. Predictive value – the information can be used to
primary users estimate the value of the entity.
make predictions; forecasting outcome events.
c. GPFR are intended to provide common
b. Confirmatory value (feedback value) - the
information to users and cannot accommodate
information can be used in confirming previous
every request for info.
predictions; enables users confirm or correct
d. To a large extent, GPFR are based on estimate
earlier expectations.
and judgement rather than exact depiction.
Materiality
ROLE OF MANAGEMENT IN FINANCIAL REPORTING
 doctrine of convenience; a quantitative
 Management Stewardship
threshold linked very closely to the qualitative
 Refers to the info about how efficiently and
characteristics of relevance
effectively management discharged it
 subquality of relevance based on the nature or
responsibilities to use the entity’s economic
magnitude, both of the items to which the
resources and help users assess management
information relates
stewardship of those resources.
 Information can be useful for assessing the Materiality is a relativity
entity’s prospects for future net cash flows.

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CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS

 Materiality of an item depends on relative size Standard of adequate disclosure
than absolute size.
 What is material for one entity may be  Means that all significant and relevant
immaterial for another. information leading in preparation of FS shall
 When: depends on good judgement, be clearly reported
professional expertise and common sense.  Disclosure of any financial facts significant
 Guide: an item is material if knowledge of it enough to influence the judgement of informed
would affect or influence the decision of the users.
informed users of the financial statements.  The accountant shall disclose a material known
 Factors: relative size, nature to him which is not disclosed in the financial
statements but disclosure is of which is
New definition of materiality accdg. to IASB necessary in order that the financial statements
would not be misleading.
Materiality – info is material if omitting, misstating or
obscuring it could reasonably be expected to influence Notes to FS
the economic decisions that primary users of general
purpose financial statements make on the basis of those  To be complete, notes to fs is required as it
statements which provide financial information about a provide necessary disclosures required by PFRS
specific reporting entity.  It provide narrative description or
disaggregation of the items presented in the
Factors of materiality financial statements and information about
items that do not qualify for recognition.
 Depends on the magnitude and nature if the
financial info b. Neutrality
 Size of the item – in relation to total of the  without bias in the preparation or
group to which the item belongs is taken into presentation of financial info; to be neutral is
account. to be fair; free from bias
 Nature of the item – may inherently material  not slanted, weighted, emphasized, de-
because its very nature it affects economic emphasized or otherwise manipulated to
decision. increase the probability that financial info.
will be received favorably or unfavorably by
Faithful representation
users
 Means that financial report represent economic  synonymous to principle of fairness
phenomena or transactions in words and a. Prudence- exercise of care and caution
numbers. when dealing with the uncertainties in
 Descriptions and figures must match what the measurement process such that
really existed or happened assets are not overstated and liabilities
 means the information provides a true, correct, or expenses are not understated.
and complete depiction of what it purports to b. Conservatism- synonymous with
represent prudence; when alternatives exist, the
 actual effects of the transactions shall be alternatives which has least effect on
properly accounted for and reported in the equity should be chosen; in case of
financial statements. doubt do not record any loss and do not
record any gain
Ingredients of faithful representation:
Contingent loss – recognized as a provision if the loss is
a. Completeness – requires that relevant probable and the amount of can be reliably measured
information should be in a way that facilitates
understanding and avoids erroneous Contingent gain – not recognized but disclosed only.
implications.
c. Free from error- no errors or omissions in the
 Is the result of the adequate disclosure or the
description of the phenomenon or transaction.
principle of full disclosure.
a. Measurement uncertainty – if there is
uncertainty, an estimate must be clearly

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CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS

and accurately described and explained of the same industry while consistency is the
to have a faithful representation. uniform application of accounting method from
b. Substance over form – transactions and period to period within an entity.
events are accounted in accordance
with their substance and reality and UNDERSTANDABILITY
note merely their legal form
 requires that financial info must be be
comprehensive or intelligible if it is to be most
ENHANCING QUALITATIVE CHARACTERISTICS useful
 clearly and concise
 characteristics that enhance the usefulness of  info should be presented in a form and
information expressed in terminology that a user
 relate to the presentation or form of the understands but users must have reasonable
financial information knowledge of busines
 intended to increase the usefulness of the
financial information that is relevant and VERIFIABILITY
faithfully represented.
 implies consensus
Ingredients:  means that different knowledgeable and
independent observers could reach consensus,
Comparability although not necessarily complete agreement,
that a particular depiction is a faithful
 means the ability to bring together for the representation.
purpose of noting points of likeness and  info must be supported with evidence, it is
difference verifiable if different users could reach an
 helps users identify similarities and differences agreement as to what the inf purports to
between one information and another represent.
information
Types of Verification
types:
 Direct- through direct observation
[Link] within an entity (intracomparability/  Indirect- checking inputs to a model or
horizontal comparability) formula/other technique and recalculating the
inputs using the same methodology
 comparison within a single entity through time
or from one accounting period to the next TIMELINESS
2. Comparability across entities (Intercomparability  Financial info must be available or
/Dimensional comparability) communicated early enough when a decision is
to be made
 Between two or more entities engage in the
 The older the information, the less useful
same industry
 It enhances truism that without knowledge of
Consistency the past, the basis for prediction will usually be
lacking and without interest in the future,
 principle of consistency is implicit in knowledge of the past is sterile
comparability; essential to achieve
comparability of financial statements Cost constraint on useful info
 refers to the use of the same method for the
 Cost is pervasive constraint on the entity’s
same item, either from period to period within
ability to provide useful financial information.
an entity or in a single period across entities
 Cost constraint is a consideration of the cost
Difference of comparability and consistency incurred win generating financial info against
the benefit to be obtained from having the info.
 comparability is the uniform application of  Benefit > cost
accounting method between and across entities

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CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS

 The evaluation of cost constraint is substantially c. parent and its subsidiaries as single reporting
a judgemental process. entity
d. two or more entities without parent and
CHAPTER 4: FS and reporting entity underlying assumpt. subsidiary relationship as a single reporting
entity.
General objective of FS
e. A reportable business segment of an entity.
 Provide information about economic resources
Reporting period
of the reporting entity, claims against the entity
and changes in the economic resources and  The period when financial statements are
claims. prepared for general purpose financial reporting
 Provide info about an entity assets, liabilities,
equity, income, and expenses useful to users in May be prepared on:
assessing future cash flow and management
stewardship. A. Interim basis – 3,6,9 months
B. Annual basis – 12 months
Types of FS
UNDERLYING ASSUMPTION
1. Consolidated financial statements – these are the
financial statements prepared when the reporting entity Accounting assumption
comprises of both the parent and its subsidiaries
 basic notion or fundamental premises on which
 Provide information about assets, liabilities, the accounting process is based
equity, income, and expenses of both the parent  postulates; serve as the foundation or bedrock
and its subsidiaries as a single reporting entity. of accounting in order to avoid
 Useful for the primary user of the parent in their misunderstanding but rather enhance
assessment of future net cash inflows to then understanding and usefulness of the financial
parent. statements
 Conceptual framework for FR has only has one
PARENT – exercises control over the subsidiaries assumption, the going concern. However,
implicit in accounting are the basic assumptions
2. Unconsolidated f.s – these are the f.s prepared when of accounting entity, time period, and monetary
the reporting entity is the parent alone unit.
 Designed to provide info about the parent’s GOING CONCERN
ALEIE
 Such info is useful for primary users of the  Also called continuity assumption means that in
parent because a claim against the parent the absence of evidence to the contrary, the
typically does not give the holder of that claim accounting entity is viewed as continuing in
of against subsidiaries. operation indefinitely.
 Fs are prepared on the assumption that the
3. Combined f.s – provide financial info of two or more entity will continue in operations for the
entities not linked with parent and subsidiary foreseeable future.
relationship.  It is also the very foundation of cost principle.
Thus, assets are normally recorded at cost.
Reporting entity
ACCOUNTING ENTITY
 An entity that is required or chooses to prepare
financial statements  Specific business org
 Not necessarily a legal entity  This assumption means that the entity is
separate from the owners, managers,
The ff can be considered a reporting entity:
employees who constitutes the entity
a. individual corp, partnership or proprietorship  Transactions of the entity shall not be merged
b. parent alone with the transaction of the owners

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 The reason for this assumption is to have a fair  they are the building blocks from which financial
presentation of financial statements. statements are constructed
 Each business is a independent accounting  the presentation of these elements in the
entity. statements involves process of classification and
subclassification
TIME PERIOD
Elements directly related to the measurement of
 Explains that it is necessary to prepare periodic financial position:
reports on financial position, performance and
cash flows of an entity to have timely info for  ASSET
making economic decision.  LIABILITY
 This assumption requires that the indefinite life  EQUITY
of an entity is subdivided into accounting
periods which are usually equal length for the Elements directly related to the measurement of
purpose on financial position, performance, and financial performance:
cash flows.
 INCOME
 A fiscal period or one year period is necessary
 EXPENSES
o Calendar year – 12 months that ends on
Dec 31 EQUITY
o Natural business year – 12 months that
ends any month when the business is at  Residual interest in the assets of the entity after
the lowest or experiencing slack season. deducting all the liabilities

MONETARY UNIT ASSETS

 Has two aspects, namely quantifiability and  Under Revised CF, an asset is defined as a
stability of the peso. present economic resource controlled by the
entity as a result of past events.
a. Quantifiability – means that assets, liabilities, equity,  This clarifies that an asset is an economic
income, and expenses should be stated in terms of a resource and that the potential economic
unit of measure which is the peso in the PH benefits no longer need to be expected to flow
to the entity.
b. Stability of the peso
Economic resource – is a right that has the potential to
– means that the purchasing of the peso is stable produce economic benefits.
or constant and that its instability is insignificant
and therefore may be ignored. Essential charac. of asset
– Amplification od the going concern assumption
so that adjustments are unnecessary to reflect a. present economic resources
any changes in purchasing power. b. economic resource is a right that has the
– Accounting function is to account for nominal potential to produce economic benefit
peso only not for changes in purchasing power c. economic resource is controlled by the entity as
a result of past events
CHAPTER 5: ELEMENTS OF THE F. S
Right that has the potential to produce economic
Financial statements – portray the financial effects of benefits may take the following:
transactions and other events by grouping them into
broad classes accdg. to their economic characteristics 1. Rights that correspond to an obligation of another
entity:
Elements of FINANCIAL STATEMENTS
a. Rights to receive cash
 broad classes of transactions b. Right to receive goods or services
 refer to the QUANTITATIVE info reported in the c. Right to exchange economic resources with
statement of financial position and income another party on favorable terms
statement

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d. Right to benefit from an obligation of another  Outflow econ benefits no longer needs to be
party if a specified uncertain future event occurs expected
 The new definition to some extent is inconsistent
2. Right that do not correspond to an obligation of with the definition of liability under IAS 37
another entity
Essential characteristics of liability:
a. Right over physical objects, such as property,
plant and equipment or inventories a. The entity has an obligation
b. Right to intellectual property b. The obligation is to transfer an economic
resource
3. Rights established by contract or legislation such c. The obligation is a present obligation that exists
as owning a debt instrument or an equity instrument as a result of past events – a liability mut be
or owning a registered patent. recognized when incurred
Potential to produce economic benefits Obligation
 Potential exists if the rights already exists  A duty or responsibility that an entity has no
 A right can meet the definition of an practical ability to avoid; can either be legal or
economic resource even if the probability to constructive.
produce econ benefit is low  Obligations may be legally enforceable as a
 Economic resource is the present right that consequence of a binding contract or statutory
contains the potential and not the future requirement.
economic benefits that the right may  Constructive arise from normal business
produce. practice, custom, and a desire to maintain good
business relations or act in an equitable manner.
An econ resource could produce econ benefits is an
entity is entitled: Obligations to transfer of an economic resource:
a. to receive contractual cash flows a. Obligation to pay cash
b. to exchange economic resources with another b. To deliver goods or noncash resource
party on favorable terms c. To provide services at some future time
c. to produce cash inflows or avoid cash outflows d. To exchange economic resources with another
d. to receive cash by selling the economic resource party on favorable terms
e. to extinguish a liability by transferring an e. To transfer an economic resource if specified
economic resource uncertain future event occurs
Control Past Event
 an entity controls an asset if it has the present An obligation exists as a result of past event if both
ability to direct the use of the asset and obtain conditions are satisfied:
the economic benefits that flow from it
 included the ability to prevent other from using a. an entity has already obtained econ benefits
such asset and preventing others from obtaining b. an entity must transfer an economic resource
the econ benefit from the asset
 may arise if an entity enforces legal rights INCOME

LIABILITY  defined as an increase in asset or decrease in

liabilities that result an increase in equity, other
 Under the Revised CF, liability is defined as present than those relating to contributions from equity
obligation of an entity to transfer an economic holders
resource as a result of past events.  encompasses both revenue and gains
 This clarifies that a liability is the obligation to
transfer an economic resource and not the Revenue – the essence of revenue is regularity
ultimate outflow of econ benefits because it arises in the course of the ordinary
regular activities, and is referred to by the variety of

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CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS

different names including sales, fees, interest, d. Recognition does not focus anymore on how
dividends, royalties and rent. probable economic benefits will flow; even low
probability is recognized.
Gains – represent other items that meet the
definition of income, do not arise from regular Income recognition
business activity which includes gain from disposal
of noncurrent asset, unrealized gain on trading  The basic principle of income recognition is that
investment and gain expropriation. income shall be recognized when earned.
 At the point of sale of goods is the point of
EXPENSES income recognition

 defined as decreases in assets or increases in

liabilities that result in decreases in equity,
other than those relating to distributions to Point of sale – is when the entity has transferred to
equity holders the buyer the legal title, control, and significant risks
 encompass losses as well as expenses and rewards of ownership of goods.
 Expenses – arise in the course of ordinary
 However, under certain conditions, income may
activities includes COGS, wages, depreciation
be recognized at the point of production,
 Losses – do not arise in the course of regular act
during production, and at the point of
but losses from disaster
collection.
CHAPTER 6: RECOGNITION & MEASUREMENT
Expense recognition
RECOGNITION
 Expenses are recognized when incurred
 The process of capturing inclusion in the  Expense recognition principle is the application
financial statements an item that meets the of the matching principle
definition of an asset, liability, equity,  To acquire revenue, it has some cost
income or expense.  There is no gain if there is no pain
 Links the elements to the statement of
Matching Principle – requires that those costs and
financial position and statement of financial
expenses incurred in earning a revenue shall be
performance
reported in the same period.
 Recognition of an item in one statement
requires the recognition of the same item in Three applications of matching principle:
other statement
 the recognition of expense happens a. Cause and effect association
simultaneously with the recognition of a  Expense is recognized when the revenue is
decrease in asset or increase in liability already recognized to presumed direct
association of the expense with specific items of
Carrying amount – amount which an asset, liability or income.
equity is recognized in the financial position.  “strict matching concept” – the process of the
matching of cost with revenue, involves the
Recognition criteria
simultaneous or combined recognition of
a. only items that meet the definition of an asset, revenue and expenses that result directly and
liability or equity are recognized in the financial jointly from the same transactions and events
position.  Ex. Cost of merchandise inventory, doubtful
b. Only items that meet the definition of income accounts, warranty expense and sales
or expense are recognized in the statement of commission
financial performance
c. Items are recognized only when their b. Systematic and rational allocation
recognition provides users of financial  This principle means that some costs are
statements with information that is both expensed by simply allocating them over
relevant and faithfully represented. periods benefited.

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 Reason: the cost incurred will benefit future  An application of this is to measure financial
periods and that there is an absence of a direct asset and liability at amortized cost
association of the expense with specific revenue  Amortized cost – reflects the estimate of future
 When economic benefits are expected to arise cash flows discounted at a rate determined at
over several accounting periods and the initial recognition
association of income can be broadly  Historical cost of an asset is the cost incurred in
determined, expenses are recognized on the acquiring or creating the asset comprising the
basis of systematic and allocation procedures. consideration plus transaction cost.
 Ex. Depreciation of PPE, Amortization of  Historical cost of liability is the consideration
intangibles, and allocation of prepaid rent, received to incur the liability minus transaction
insurance, and other prepayments cost.

c. Immediate recognition Current value

 The cost incurred is expensed outright because
a. Fair value
of uncertainty of future economic benefits or
difficulty of reliably associating certain costs  Can be observed directly using market price of
with future revenue the asset or liability in an active market
 An expense is recognized immediately:  Not adjusted for transaction cost
o When an expenditure produces no  An exit price or exit value
future economic benefit  Fair value of an asset – is the price that would
o When cost incurred does not qualify or be received to sell an asset in an orderly
ceases to qualify for recognition as an transaction between market and participants at
asset measurement date
 Fair value of liability – is the price that would be
DERECOGNITION paid to transfer a liability in an orderly
 Defined as the removal of all or part of a transaction between market and participants at
recognized asset or liability from the statement measurement date
of financial position b. Value in use
 Normally occurs when an item no longer meets
the definition of an asset or liability  The present value of the cash flows that an
 Derecognition of an asset – occurs when an entity expects to derive from the use of an asset
entity loses control of all part of the asset and from the ultimate disposal
 Derecognition of liability – occurs when the  Does not include transaction cost on acquiring
entity no longer has a present obligation for all the asset but includes transaction cost on the
or part of the liability. disposal of the asset
 Exit price or exit value
MEASUREMENT
c. Fulfillment value
 Defined as quantifying in monetary terms of the
elements of financial statements  The present value of cash that an entity expects
 Two categories: to transfer in paying or settling a liability
o Historical cost  Does not include transaction cost on incurring a
o Current value liability but includes transaction cost on
fulfillment of a liability
Historical cost  Exit price or exit value
 Original acquisition cost d. Current cost
 Commonly adopted in preparing financial
statements  Based on the entry price or entry value, but
 Generally well understood and verifiable reflects market conditions on measurement
 Entry price or entry value to acquire an asset or date
to incur liability

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 Current cost of an asset – the cost of an  Statement of financial position and financial
equivalent asset at measurement date performance provide summarized and
comprising the consideration paid and condensed information
transaction cost.
 Current cost of a liability – the consideration Two approaches in determining financial performance
that would be received less any transaction cost
1. Transaction approach – traditional preparation
at measurement date.
of an income statement
CHAPTER 7: Presentation and disclosure, concepts of 2. Capital maintenance approach – net income
capital occurs only after the capital used from the
beginning of the period is maintained
Presentation and disclosure  Net income is the amount an entity can
distribute to its owners and be as well-
 An effective communication tool about the off at the end of the year as the
information in financial statements beginning
 Effective communication of info. makes  Return ON capital – amount in excess of
information more relevant and contributes to a their original investment
faithful representation  Return OF capital – erosion of the
 Enhances the understandability and capital invested in the entity
comparability of information in the f.s
 Duplication- unnecessary and make f.s less 2 concepts of capital maintenance
understandable.
1. Financial capital
Classification
 Monetary amount of the net assets contributed
 Sorting of assets, liabilities, equity, income, and by shareholders and the amount increase in
expenses on the basis of shared or similar the net assets resulting from earning retained
charac. by the entity.
 Net asset approach
Classification of income and expense  Traditional concept based on historical cost and
adopted by most entities
 Income and expenses are classified as
 Invested money, capital is synonymous with net
components of profit or loss and components of
assets or equity
other comprehensive income
 Under this concept, net income occurs “when
 Statement of financial performance – refer to
the nominal amount of the net assets (assets –
the statement of profit or loss together with the
liabilities) at the end of the year exceeds the
statement of other comprehensive income
nominal amount of the net assets at the
o Statement of profit or loss – primary
beginning of the period, after excluding
source of info about an entity’s financial
distributions to and contributions by owners
performance for the reporting period
during the period.
o OCI – other items of income and
expense 2. Physical capital
Aggregation  Quantitative measure of the physical productive
capacity to produce goods and services
 Adding together the assets, liabilities, equity,
 Requires to be measured at current cost
income and expenses that have the similar or
 Physical capital is equal to the net assets of the
shared characteristics and are included in the
entity expressed in terms of current cost
same classification
 Must be adopted if the main concern of users is
 Makes info more useful by summarizing a large
the operating capability of the entity
volume of details. However, it may conceal
 Under this concept, net income occurs, when
detail
the physical productive capital of the entity at
the end of the year exceeds the physical
productive capital at the beginning of the

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CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS

period, also after excluding distributions to and  Users analyze SFP to evaluate such factors as
the contributions from owners during the liquidity, solvency and the need of the entity for
period. additional financing

CHAPTER 8: FINANCIAL STATEMENTS AND SFP PAS 1 Asset – an economic resource controlled by an entity as
a result of past event
FINANCIAL STATEMENTS
Classification:
 The means by which the info accumulated and
processed in financial accounting is periodically Current Assets
communicated to users
 End product or main output of the financial PAS 1 paragraph 66, provides that an entity shall classify
accounting process. an asset as current when:

General purpose F.S a. asset is cash or cash equivalent

b. holds the asset primarily for the purpose of
 Intended to meet the needs of users who are trading
not in a position to require an entity to prepare c. expects to realize the asset within twelve
reports tailored to their particular information months after the reporting period
needs. d. entity expects to realize the asset or intends to
 Directed to all common users sell or consume it within the entity’s normal
operating cycle
Components
Presentation of Current asset
1. Statement of financial position (A,L,E)
2. Income statement (I,E) PAS 1, paragraph 54, provides that as a minimum, the
3. Statement of comprehensive income line items under current assets are
4. Statement of changes in equity
5. Statement of cash flows a. Cash and cash equivalents
6. Notes, comprising a summary of significant b. Financial assets at fair value such as trading
accounting policies and other explanatory notes securities and other investments in quoted
equity instruments
Objective of F.S c. Trade and other receivables
d. Inventories
 Provide information about the financial e. Prepaid expenses
position, financial performance and cash flows
of an entity that is useful to a wide range of Noncurrent Asset - residual definition
users in making economic decisions
PAS 1, paragraph 66, simply states that an entity shall
Frequency of reporting classify all other assets not classified as current as
noncurrent. The ff are line items of noncurrent assets:
 Annually
 When reporting period changes an entity shall a. PPE -
disclose: b. Long-term investments
o period covered by the f.s c. Intangible assets
o Reason for using longer or shorter d. Deferred tax assets
period e. Other noncurrent assets
o Fact that amounts presented in the f.s
are not entirely comparable LIABILITY – a present obligation of an entity to transfer
an economic resource as a result of past event
STATEMENT OF FINANCIAL POSITION PAS1
Classification:
 A formal statement showing the assets,
liabilities and equity 1. Current liabilities

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PAS 1 paragraph 69, provides that an entity shall classify reporting period and before the statements are
a liability as current when entity: authorized for issue, not to demand payment as a
consequence of the breach
a. entity expects to settle the liability within the
entity’s normal operating cycle PAS 1 paragraph 75, provides that the liability is
b. holds the liability primarily for the purpose of classified as noncurrent if the lender has agreed on or
trading before the end of the reporting period to provide a
c. liability due to be settled within 12 months after grace period ending at least 12 months after the end of
reporting period reporting period
d. does not have an unconditional right to defer
settlement of the liability for at least twelve
months after the reporting period

Presentation of current liabilities

PAS 1, paragraph 54, provides the ff line items of current

liabilities:

a. trade and other payables

b. current provisions
c. short term borrowing
d. current portion of long-term debt
e. current tax liability

2. Noncurrent liabilities

PAS 1 paragraph 69, provides the line items classified as

noncurrent liabilities:

a. noncurrent portion of long-term debt

b. finance lease liability
c. deferred tax liability
d. long-term obligations to company officers
e. long-term deferred revenue

other info:

 discretion to refinance is an extension or

refinancing of a loan

COVENANTS

 often attached to borrowing agreements which

represent undertakings by the borrower
 restrictions on the borrower as to undertaking
further borrowings, paying dividends,
maintaining specified level of working capital
and etc
 when breached, a liability become a payable
demand

Effect of breach of covenants

PAS 1 paragraph 74, provides that the liability is

classified as current even if the lender has agreed, after

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