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CFAS Reviewer Chapter 1-5

Conceptual Framework and Accounting Standards (New Era University)

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CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS

CHAPTER 1: Accountancy Profession
DEFINITION
1. ASC “Accounting is a service activity, useful in making economic decision”
2. AICPA “..is the art of recording, classifying, and summarizing in a ACCOUNTANCY PROFESSION
significant o RA No. 9298: Philippine Accountancy Act of 2004– law
manner and in terms of money, transactions and events which are in part regulating the
practice of accountancy
at least of a financial character and interpreting the results thereof”
o Board of Accountancy (BOA) – body authorized by law to
3. AAA “...is the process of identifying, measuring and communicating
promulgate
economic information to permit informed judgment and decision by the rules affecting practice of accountancy profession in PH,
users of the information” preparing/grading the PH CPA Exam
Purpose – provide quantitative info to be useful in making an economic decision o Certificate of Accreditation – issued to CPA in public practice,
min of
IMPORTANT POINTS 3 years of experience in taxation/auditing
1.Quantitative information o Securities and Exchange Commission – not register any
2.Financial in nature corporation
3.Useful in decision making for practice of public accountancy
o Certificate of Registration – valid for 3 years, renewable every
COMPONENTS 3years
1.IDENTIFYING – analytical
o Recognition – accountable/quantifiable MAIN AREAS (Profession)
 Effect on A,L,E 1. PUBLIC ACCOUNTING
o Non-recognition – hiring, death, contract, meeting 1. Auditing – primary service
o External transactions – involving one entity and another o External Auditing – attest function
o Internal transactions – involving the entity only 2. Taxation – preparation of annual income tax returns and
 Production – resources transformed into products determination of tax consequences
 Casualty – unanticipated loss from a disaster(act of 3. Management Advisory Services – services to clients on
God) Phases of business conduct and operations
2. PRIVATE ACCOUNTING
2.MEASURING – technical, assigning of peso amounts (Philippine Peso) o Acctg staff, chief accnt, internal auditor, controller
o Historical Cost – original acquisition cost, most common (highest)
measure o Major Objective: assist management in
o Current Value – fair value, value in use, current cost, fulfillment planning/controlling
val the entity’s operations
o Maintaining records, producing financial reports, preparing
3.COMMUNICATING – formal, preparing/distributing accounting reports to budgets, controlling/allocating resources of entity,
potential users determination of taxes
o Accounting is the universal language of business 3. GOVERNMENT ACCOUNTING – involving receipt, disposition of
o Recording/Journalizing – record business transactions gov’t
o Classifying – sorting/grouping similar interrelated transactions funds and property
 Ledger – group of accounts o Custody and Administration of Public Funds
o Summarizing – preparation of financial statements o BIR, COA, DOBM, SEC, BSP

Financial Statements – key product of the info system

o Financial reports “how well an entity is performing in terms of CONTINUING PROFESSIONAL DEVELOPMENT (CPD)
profit and loss and where it stands in financial terms” o Inculcation and acquisition of advanced knowledge skill,…,
Overall Objective: provide quantitative about a business useful to and moral values after the initial registration of the CPA for
statement users (owners/creditors) in making economic decisions assimilation into professional practice and lifelong learning
Primary Task: supply financial info to help users make informed judgment o Technical skill and competence of CPA
and better decision o RA No. 10912 – mandating and strengthen the CPD
Essence: decision-usefulness program for all regulated professions

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o CPD Credit Units/Hours IASB – International Accounting Standards Board

 120 CPD credit units accreditation o Replaces IASC
 15 CPD credit units for renewal o Publishes standards in series of pronouncements (IFRS)
 Permanently exempted from renewal 65 y/o o Continue to be designated as International Accounting Standard
ACCOUNTING AUDITING
ACCOUNTING BOOKKEEPING - beginning - begins after FS
- constructive in nature - analytical
- WHY or reason for action - HOW of accounting
- embraces auditing - professional skepticism
- conceptual - Procedural
- mechanical recording o Standard-setting process
ACCOUNTING ACCOUNTANCY  Research
 Discussion paper
- reference only to a - profession of accounting  Exposure draft
particular field practice  Accounting standard
IFRS – International Financial Reporting Standard
o Uniform and globally accepted FR Standards
FINANCIAL ACCOUNTING MANAGERIAL ACCOUNTING o Factors deciding to move to IAS
- recording transactions, - accumulation/preparation of  Common language and removal of free choices of accounting
preparing FS financial reports treatments
- internal/external users - only for internal users PFRS – Philippine Financial Reporting Standards
o Corresponds to IFRS
o PAS = IAS
GAAP – generally accepted accounting principles o PH Interpretations = Interpretations of IFRIC, SIC, PIC
o Like laws that must be followed in financial reporting
o Political process incorporates political actions
Accounting Standards
o Identify proper accounting practices for FS
o Create common understanding CHAPTER 2: OBJECTIVE OF FINANCIAL REPORTING
o Ensure comparability and uniformity
FRSC – Financial Reporting Standards Council CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING
o Replaced the Accounting Standards Council o Complete, comprehensive, single document promulgated by
o Accounting standard setting body created by PRC IASB
o To assist the Board of Accountancy in its power and functions o Summary of terms and concepts that underlie the
o Highest hierarchy of gaap preparation/presentation of FS for external users
o Approved statements: o For general purpose financial reporting and overall
 PAS – Philippine Accounting Standards theoretical foundation for accounting
 PFRS – Philippine Financial Reporting Standards FOUNDATION FOR STANDARDS
Composition of FRSC 1. Contribute to transparency
o 1 Chairman and 14 Representatives 2. Strengthen accountability
PIC – Philippine Interpretations Committee 3. Contribute to economic efficiency
o By FRSC and replaced the Interpretations Committee
PURPOSES OF REVISED CONCEPTUAL FRAMEWORK
o Prepare interpretations of PFRS for approval of FRSC
a) Assist IASB: develop IFRS Standards
o Authoritative guidance
b) Assist preparers of FS: develop consistent accounting policy
IFRIC – International Financial Reporting Interpretations Committee
(when no applies)
o United Kingdom and replaced the Standing Interpretations Committee
IASC – International Accounting Standards Committee c) Assist preparers of FS: develop accounting policy (when
o Independent private sector body allows a choice)
o Achieve uniformity around the world d) Assist all parties: understand/interpret IFRS Standards
o Objectives: AUTHORITATIVE STATUS OF CONCEPTUAL FRAMEWORK
 Formulate and publish in the public interest accounting standards o 1st – Standard/Interpretation (overrides CF)
 Promote worldwide acceptance and observance o 2nd – Conceptual Framework (not an IFRS, not overrides
 Improvement and harmonization relating to FS Standard)

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ACCRUAL ACCOUNTING
USERS OF FINANCIAL INFORMATION No money involved
 Primary Users – general purpose financial reports are Only recognized when they occur
primarily directed (must rely) Income when earned and Expense when incurred
o Existing and Potential Investors – risk/return
provided by investment LIMITATIONS OF FINANCIAL REPORTING
o Lenders and Other Creditors – if amounts owing to Don’t provide all information needed by primary users
them will be paid b) Not designed to show value of entity, estimate value of entity
Provide common information, can’t accommodate every request for info
d) Based on estimate and judgment rather than exact depiction
 Other Users – reports are not directed to them primarilyMANAGEMENT STEWARDSHIP – predicting how management will use entity’s
o Employees – stability/profitability of entity and their
economic resources in
benefits future periods
o Customers – continuance of entity Your peso today is worth more than tomorrow.” TIME VALUE MONEY
o Governments and their Agencies – allocation of
resources and activities, determine taxation policies CHAPTER 3: QUALITATIVE CHARACTERISTICS
o Public – trend and the range of its activities QUALITATIVE CHARACTERISTICS
OBJECTIVE OF FINANCIAL REPORTING o Qualities/attributes that make info useful to users
o Forms the foundations of the CF 1. FUNDAMENTAL QUALITATIVE CHARACTERISTICS
o Overall objective of Financial Reporting: provide financial info about o Application:
the reporting entity useful to primary users in making decisions about  Identify if economic phenomenon is useful
providing resources to the entity  Identify type of information (relevant and faithfully
 Why, purpose, goal of accounting represented)
o Financial Reporting – provision of financial info about an entity to  Determine if information is available
external users useful for economic decisions and effectiveness of entity’s 1. RELEVANCE – capacity of information to influence a decision
management o INGREDIENTS:
 Annual financial statements – way of providing FS to external users 1. Predictive Value – forecast/predict future
 Nonfinancial information – description of products/listing officers outcome
and directors 2. Confirmatory Value – if it provides feedback
TARGET USERS/PRIMARY USERS about previous evaluations
o Have the most critical and immediate need for financial information o MATERIALITY – practical rule that strict adherence to
o Provide resources to the entity GAAP is not required when items are not significant
enough to affect the FS
SPECIFIC OBJECTIVES OF FINANCIAL REPORTING (to provide information…) 1. Doctrine of Convenience
a) Economic Decisions – investors to buy, sell, hold equity/creditors to 2. Subquality of relevance based on
provide or settle loans nature/magnitude
b) Assessing Cash Flow Prospects – principal and interest payments, 3. Relative size rather than absolute size, may be
future net cash inflows to entity immaterial for another
c) Economic Resources and Claims 4. ITEM OF MATERIALITY - if it could reasonably
 Economic Resources – assets affect economic decision
 Claims – liabilities and equity 5. Rounding off amounts
 Liquidity – availability of cash in near future to cover currently o IMPORTANT ASPECTS
maturing obligation a) Could Reasonably be Expected to Influence
 Solvency – availability of cash over a long term to meet financial b) Obscuring Information – FS is not readily
commitment understood/not clearly expressed
 Financial Position – financial strength and weakness c) Primary Users – primarily affected by general
d) Changes in Economic Resources and Claims purpose FS
 Financial Performance – results of operations, assess ability to o FACTORS OF MATERIALITY
generate future cash inflows from operations 1. Size of the Item
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2. Size of the Entity d) Timeliness – financial info must be available and communicated early
3. Nature of the Item  Cost – pervasive constraint on info
2. FAITHFUL REPRESENTATION – represented in words  Cost Constraint – consideration of the cost incurred, judgment
and numbers, process
description/figures must match what really existed,  Benefit should exceed cost incurred
properly accounted  Cost Benefit Principle, financial information is not free
o INGREDIENTS
a) Completeness – facilitates understanding and
avoids erroneous disclosure, all necessary
description/explanation
 Standard of Adequate Disclosure – CHAPTER 4: FS AND REPORTING ENTITY, UNDERLYING
principle of full disclosure, clearly ASSUMPTIONS
reported
 Notes to FS – narrative FINANCIAL STATEMENTS – info about economic resources, claims
description/disaggregation against entity, changes in economic resources and claims
b) Neutrality – without/free from bias, principle of o Statement of Financial Position - ALE
fairness o Statement of Financial Performance - IE
 Prudence – exercise of care and caution, o Other Statements and Notes
deal with uncertainties  TYPES OF FS
 Conservatism – alternative that has 1. Consolidated FS – both parent and its
least effect on equity subsidiaries
 Contingent Loss –reliably 2. Unconsolidated FS – parent alone
measured 3. Combined FS – comprises 2 or more
 Contingent Gain – not entities not linked by a parent and subsidiary
recognized, disclosed relationship
c) Free from Error – no errors/omissions, accurately as an estimate REPORTING ENTITY – entity required to prepare financial statements,
 Measurement Uncertainty – monetary amount can’t be not a legal entity
observed, estimated REPORTING PERIOD – period when FS are prepared
 Substance Over Form – substance prevails o ALE – end of reporting period
o IE – during reporting period
2. ENAHNCING QUALITATIVE CHARACTERISTICS – increase the o Comparative Information for atleast one preceeding reporting
usefulness of the financial period
Information
a) Comparability – ability to bring together, likeness and difference
 Horizontal Comparability (Intracomparability) – within an
entity, one accounting period to another ACCOUNTING ASSUMPTIONS (POSTULATES) – basic notions or
 Comparability between entities – 2 or more entities engaged in fundamental premises, accounting process is based,
same industry bedrock/foundation of accounting
 Dimensional Comparability (Intercomparability) – across 1. GOING CONCERN – continuing in operation indefinitely/
entities foreseeable future
 Consistency – uniform application from period to period within  very foundation of cost principle
entity, helps to achieve comparability  abandoned when there’s persistent losses and operations
 Full disclosure of the change terminated
b) Understandability – comprehensible/intelligible, clearly/concisely, for 2. ACCOUNTING CONCEPT – entity is separate from the owner to
users who have reasonably knowledge of business have fair presentation, each business is independent, single
c) Verifiability – implies consensus that is supported by evidence to assure economic entity
users 3. TIME PERIOD – completely accurate report and can’t be
 Direct Verification – direct observation obtained until entity is
 Indirect Verification – uses formula, technique, recalculating dissolved/liquidated, one year period

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Calendar Year – 12month ends on Dec. 31

  Constructive obligations – maintain good business
Natural Business Year – 12month ends on any month
 relations and equitable manner
(slack season) 2. Transfer of an Economic Resource – unfavorable terms and
4. MONETARY UNIT uncertain future event
 Quantifiable Aspect – stated in peso (PH) 3. Past Event – has already obtained economic benefits and must
 Stability of the Peso – purchasing power of the peso is transfer economic resource
stable/constant
INCOME – increase in AE, decrease in L
 Stable Peso Postulate – adjustments are
o Revenue – ordinary regular activities, regularity
unnecessary to reflect any changes in purchasing
o Gains – don’t arise ordinary regular activities, disposal,
power, not necessarily valid expropriation

CHAPTER 5: ELEMENTS OF FS EXPENSE – decreases in AE, increases in L

o Losses – ordinary regular activities
ELEMENTS OF FS – quantitative information, building blocks o Losses – don’t arise if resulting from disasters
o Equity – residual interest in the assets after deducting liabilities
STATEMENT OF FINANCIAL PERFORMANCE
ASSET – present economic resource by entity as a result of past events o Profit or loss and presenting other comprehensive income
o Economic Resource – produce economic benefits o Recycling – permitted as long as it would result to relevant and
o Economic Benefits – no longer need to be expected to flow to the faithfully represented information about financial performance
entity
o ESSENTIAL CHARACTERISTICS
 Present economic resources
 Right to produce economic benefits
 Controlled by entity as a result of past events
1. Right
a. Correspond to an obligation of another entity (favorable
terms)
b. Don’t correspond to an obligation of another entity
c. Established by contract/legislation
2. Potential to Produce Economic Benefits
 Don’t need to be certain that the right will produce
 Right already exist
3. Control of an Economic Resource
 Ability to prevent others from using such asset
 If an entity enforces legal rights
 No legal rights, no other party can benefit from asset

LIABILITY – present obligation to transfer economic resource, IAS 37

o ESSENTIAL CHARACTERISTICS
 Entity has an obligation
 Obligation to transfer an economic resource
 Present obligation as a result of past event
1. Obligation – duty or responsibility that can’t be avoided
 Legally enforceable – contract/statutory requirement

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