CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS CONRADO T. VALIX, BSC, LLB Certified Public Accountant and Lawyer President, CPA Review Director and CPA Reviewer ‘CPA Review School cf the Philippines (CPAR) Lifetime Member Integrated Bar of the Philippines JOSE F. PERALTA, BBA, MBA, DBA Certified Pyblic Accountant _ President and Dean Philippine Schoc! of Business Administration CHRISTIAN ARIS M. VALIX, BSME, BSA Certified Public Accountant Ateneo Management Engineering Graduate ‘Assistant Review Director and CPA Reviewer ‘CPA Review School of the Philippines (CPAR) ‘ 2018 First Edition Elpacenlnae hee taal elon:Copyright 2018 by | | i \ Conrado T. Valix dose F. Peralta Christian Aris M. Valix Any copy of this book not bearing the signature of one of the authors on this page is unauthorized and shall be considered as proceeding-from an egal ure 7 ALLRIGHTS RESERVED ISBN: 978-621-416-052-5, Published & Printed by: GIC ENTERPRISES & CO., INC. 2017C.M. Recto Manila, Philippines ePrice heecnaal All yeh ee to el authors:PREFACE. ‘This new book is in accordance with the memorandum of the u wr the degree of Cominission on Higher Education required fo Bachelor of Science in Accountancy. The book covers description of the Accountancy Profession, the Conceptual Framework, an introduction to the preparation of financial statements and concise discussion of all Philippine Accounting Standards or PAS and Philippine Financial Reporting Standards or PFRS related to financial accounting. The book will introduce the Bachelor of Science in Accountancy students to the wide world of accounting standards known as International Financial Reporting Standards or IFRS. Moreover, the book will provide a solid foundation for the Bachelor of Science in Accountancy students before taking up the three intermediate or financial accounting subjects. VALIX PERALTA VALIX ‘June 2018Accounting Standards The following accounting atandards related to finangigy accounting are discusses PAS ea wee 10 12 16 19 20 23 24 28 29 32 33 34 36 37 38 40 41 d and exemplified in this new book. Presentation of financial statements Inventories , Statement of cash flows Accounting policies, changes in accounting estimate and errors Events after the reporting period Income taxes Property, plant and equipment Employee benefits Accounting for government grant and disclosure of government assistance Borrowing costs Related party disclosures Investment in associates Financial reporting in hyperinflationary economy Financial instruments —.presentation Earnings per share Interim financial reporting Impairment of assets Provisions, contingent liabilities and contingent, assets Intangible assets Investment property AgriculturePFRS 1 13 15 16 IFRIC 1 17 19 First time adoption of PFES Share-based payment Noncurrent assets‘ held for sale and discontinued operation Exploration and evaluation of mineral resources Operating segments Financial instruments Fair value measurement Revenue from ¢ontracts with customers Leases Changes in existing decommissioning, restoration and similar tisbilities Members’ shares in cooperative entities and similar instruments Distribution of noncash' assets to owners Extinguishing financial liabilities with equity instruments The accounting standards related to advanced accounting are not covered in this new book but are taken up in an advanced accounting course. Epacenmnuae hese camel belongs to respective authors b mn\ CONTENTS CHAPTER 1 1 THE ACCOUNTANCY PROFESSION Definition of accounting The accountancy profession - public accounting, private accounting and government accounting Limitation of the practice of public accountancy Acereditation to practice public accountancy Continuing professional development CPD credit units Generally accepted accounting principles Financial Reporting Standards Council Philippine Interpretations Committee International Accounting Standards Committee International Accounting Standards Board International Financial Reporting Interpretations Committee CHAPTER 2 aL CONCEPTUAL FRAMEWORK _ Financial reporting and assumptions Definition of Conceptual Framework Purpose of Conceptual Framework Scope of Conceptual Framework Objective of financial reporting Limitations of financial reporting in i ions — going concel : Uni ty period and monetary. unit are ES All rights belongs to respective at thors der Cees meen eroneCHAPTER 8 a CONCEPTUAL FRAMEWORK Quatitative characteristics / Fundamental qualitative characteristics Relevance Faithful representation ; Enhancing qualitative characteristics Comparability Understaadability Verifiability Timeliness Cost constraint on useful information CHAPTER 4 és CONCEPTUAL FRAMEWORK Elements of financial statements Definition of elements of financial statements Asset recognition principle Liability recognition principle Income recognition principle Expense recognition principle Measurement of elements (ee eie eae Une n= iecnaal ‘ights belongs to respec feonnsiottals)CHAPTER 6 PASI 126 PRESENTATION OF FINANCL | Statement of financial position a Definition of financial statements Components of financial statements Objective of financial statements Frequency of reporting Definition of statement of financial position Definition of asset Current and noncurrent assets Definition of liability | Current and noncurrent liabilities Definition of equity Notes to financial statements Report form of statement of financial position Account form of statement of financial position Line items in the statement of financial position CHAPTER 6 160 PAS1 PRESENTATION OF FINANCIAL STATEMENTS Statement of comprehensive income Definition of incéme statement Definition of comprehensive income Components of profit or loss a Components of other comprehensive income Line items in the statement of comprehensive income Functional presentation of income statement Natural presentation of income statement EPs kaal belongs to respeCHAPTER 7 tie PAS 2 INVENTORIES Definition of inventories Cost of inventories Cost formulas - FIFO and average method. Measurement of inventory at LCNRV CHAPTER 8 226 PAS7 STATEMENT OF CASH FLOWS Definition of statement of cash flows Cash and cash equivalents Operating activities Investing activit Financing activities Noncash investing and financing activities CHAPTER 9 244 PAS 8 ACCOUNTING POLICIES, ESTIMATE AND ERRORS Definition of accounting policy Change. in accounting policy Definition of accounting estimate Change in accounting estimate Prior period errors (eeeieie Parco nla hase caalCHAPTER 10 PAS 10 260 EVENTS AFTER THE REPORTING PERIOD Definition of events after reporting period ‘Adjusting events ial Nonadjusting events CHAPTER 11 269 PAS 12 . INCOME TAXES Accounting income and taxable income Permanent and temporary differences Deferred tax liability Deferred tax asset Measurement of deferred tax asset and liability CHAPTER 12 284 PAS 16 PROPERTY, PLANT AND EQUIPMENT Definition of property, -plant and equipment Recognition of property, plant and equipment Measurement of property, plant and equipment Cost of property, plant and equipment Derecognition of property, plant and equipment Coneeptof depreciation Depreciable amount, residual value and useful life Straight line, production method, sum of years’ digits and double balance method of depreciation epacen Mahe chmal Lelelal Bt‘CHAPTER 13 ing PAS 19 EMPLOYEE BENEFITS Definition of employee benefits Recognition and measurement of short-term employee benefits Postemployment benefits Defined contribution plan Defined benefit plan ‘ce cost, net interest and remeasurement Servi Fair value of plan assets Projected benefit obligation Other long-term employee benefits ‘Termination benefits CHAPTER 14 PAS 20 GOVERNMENT GRANT 339 Definition of government grant ition and measurement Government grant related to asset Government grant related to income Accounting for government grant Government assistance Disclosures related to government grant CHAPTER 15 mn PAS 23 BORROWING COSTS Definition of borrowing cost Qualifying asset Accounting for borrowing cost Disclosures related to borrowing cost PEE ETT Tights slates ico eda authorsre _ CHAPTER 16 372 PAS 24 RELATED PARTY DISCLOSURES Definition of related parties . Examples of related parties Required disclosures about related party traneactions Examples of unrelated parties CHAPTER 17 383 - PAS 28 INVESTMENT IN ASSOCIATES Definition of associate Definition of significant influence Equity method of accounting Excess cost and excess fair value Impairment of investment in associate Discontinuance of equity method Equity method not applicable CHAPTER 18 401 PAS 29 REPORTING IN HYPERINFLATIONARY ECONOMY Definition of hyperinflation Monetary and nonmonetary items Constant peso accounting Gain or loss on purchasing power Procedures for restatement Eco neha hme belongs to respecCHAPTER 19 417 PAS 32 FINANCIAL INSTRUMENTS - PRESENTATION Definition of financial instrument Financial asset and financial liability Equity instrument Compound financial instrument CHAPTER 20 431 PAS 83 EARNINGS PER SHARE Basic earnings per share Basic loes per share Diluted earnings per share Dihited loss per share Potential ordinary shares Presentation of earnings per share CHAPTER 21 453 PAS 34 INTERIM FINANCIAL REPORTING _ Definition of interim reporting Frequency of interim reporting Components of interim financial report Basic principles of interim reporting FB: Digital Accounting Books PH All Medes eg aCe slate lle tSCHAPTER 22 IMPAIRMENT OF ASSETS Definition of impairment Indication of impairment Measurement of recoverable amount Fair value less cost of disposal Value in use Recognition of impairment loss Reversal of impairment loss Definition of cash generating unit Impairment of cash generating unit 474 CHAPTER 23 497 PAS 87 PROVISION, CONTINGENT LIABILITY AND ASSET Definition of provisi Recognition of provision Measurement of provision Contingent liability Treatment of contingent liability Contingent asset Treatment of contingent assetCHAPTER 24 8 PAS 38 INTANGIBLE ASSETS Definition of intangible asset Recognition of intangible asset Measurement of intangible asset Internally generated intangible asset Amortization of intangible asset Amortization period ‘Useful life of intangible asset Amortization method Impairment of intangible asset Derecognition of intangible asset Research and development cost Accounting for reacarch cost Accounting for development cost CHAPTER 26 PAS 40 INVESTMENT PROPERTY 549 Definition of investment property Definition of owner-occupied pi Examples of investment ieee ay Recognition of investment property ‘Measurement of investment property ee value of investment property asurement of transfers of investment Derecognition of investment property ’ Property eee tr ieee aan Tights belongs to fais Elly :CHAPTER 26 568 PAS 41 AGRICULTURE Definition of biological asset and agricultural produce Agricultural activity Recognition and measurement of biological asset and agricultural produce Bearer plants Bearer animals Animal-related recreational activities CHAPTER 27 687 PFRS 1 FIRST TIME ADOPTION OF PFRS Firet PFRS financial statements Firet time adopter Opening PFRS statement of financial position CHAPTER 28 596 PFRS 2 SHARE-BASED PAYMENT Equity settled and cash settled share-based payment Share options Recognition and measurement of share options Recognition and measurement of share appreciation rights jital Accounting Books PH. eyCHAPTER 29 612 , PFRS 5 NONCURRENT ASSET HELD FOR SALE Definition of noncurrent asset held for sale Conditions for classification a8 held for sale Measurement of noneurrent asset held for sale Presentation of noncurrent asset held for sale CHAPTER 30 626 PFRS 5 DISCONTINUED OPERATION Definition of discontinued operation Presentation in the income statement Presentation in the statement of financial position CHAPTER 31 © a PFRS 6 EXPLORATION AND EVALUATION OF MINERAL RESOURCES Definition of exploration and evaluation of mineral resources Exploration and evaluation asset Exploration cost Accounting for exploration assetCHAPTER. 32 a PFRS 8 OPERATING SEGMENTS Definition of operating segment Criteria for a reportable operating segment Chief operating decision maker Information to be disclosed for a reportable segment CHAPTER 33 660 PFRS 9 FINANCIAL INSTRUMENTS Initial and subsequent measurement of financial asset Financial asset at fair value through profit or losss Financial asset at fair value through other comprehensive income Debt investment at amortized cost Debt investment at fair value through other comprehensive income CHAPTER 34 PFRS 18 FAIR VALUE MEASUREMENT Definition of fair value . Valuation method for measuring fair value Fair value hierarchyCHAPTER 36 a PFRS 15 REVENUE FROM CONTRACTS WITH CUSTOMERS Core principle of revenue recognition Five-step model for revenue recognition _ Definition of contract, performance obligation and transaction price . Recognition of revenue at @ point in time Recognition of revenue over time Sale‘with a right of return Consignment arrangement Bill and hold arrangement Customer loyalty program CHAPTER 36 ‘fn PFRS 16 LEASES Definition of lease Operating lease model for lessee Finance lease model for lessee Measurement of right of use asset Measurement of lease liability Operating lease model for lessor Finance lease model for lessor = Breen ctarCHAPTER 37 780 IFRIC INTERPRETATIONS IFRIC 1 Changes in existing decommissioning, restoration and similar liabilities IFRIC 2 Members’ shares in cooperative entities and similar instruments IFRIC 17 Distribution of noncash assets to owners IFRIC 19 : / Extinguishing financial liabilities with equity instrumentsCHAPTER 1 THE ACCOUNTANCY PROFESSION TECHNICAL KNOWLEDGE To understand the definition of accounting. To identify the overall objective of accounting. | To describe the Practice of the accountancy profession in the Philippines. To understand the Continuing Professional Development in the field of accounting. : To know the meaning of generally aecerted accounting principles. To identify the standard-setting body in the Philippines. To describe the creation of Standards Board. To know the meaning of IFRS. the Interngticnal Accounting float ‘al Accounting Books PH eeu yDefinition of accounting The Accounting Standards Council provides the following definition: Accounting is a service activity. The accounting function is to provide quantitatiy, information, primarily financial in nature, abo; se omic entities, thatis intended tobe useful in making economic decision. The Committee on ‘Accounting Terminology of the American Institute of Certified Public Accountants defines accounting as follows: Accounting is the art of recording, classifying and ‘summarizing in a significant manner and in terms of money, transactions and eventa which are in part.at least ofa financial character and interpreting the results thereof. The American Accounting Association in its Statement of Basic Accounting Theory defines accounting as follows: Accounting is the process of identifying, measuring and communicating economic information to permit informed Judgment and decision by users of the information.Important points The following important z accounting should be ant Boints made in the definition of One ~ Accounting is about quantitative information, Two ~ The information is likely tobe fingnetal im nature, Three ~ The information should be useful in decision “making, The definition that h: ‘ —_ iy the Amen Sho tee inelaie iefaitin dives ‘This definitior on states that the very purpose ofacccuuntingis to provide quantitative information to be useful in making ar. economic decision. ‘The definition also states that accounting has a number of components, namely: a is the anclytical component. b. the technical component. ©. 88 the forma! component. Identifying ~ ‘This accounting process is the recognition ornonréeognition of business activities as “accountable” events. Not‘all business activities are accountable, For example, the hiring of employees, the death of the entity president and the entering into a contract are all business activities but such events are not accountable because they cannot be quantified or expressed in terms ofa unit of measure. An event is or quantifiable when it has an effect on assets, 8 and equity. In other words, the subject matter of accounting is economic activity or the measurement of economic resources and economic obligations. Only economic activities are emphasized and recognized in aceounting. ' : ‘ Sociological and psychological matters are beyond the province of accounting.External and internal transactions . a: ity are referred to as . Economic activities of an ent rnal ne Boonomic pe classified as external angiiens ng or exchange trangactions are tho, nsacttons | : EetsinGl _ to involving one entity and another entity Examples of external transactions are: ‘a. Purchase of goods from a sup) lier im Internal transactions are economic events involving the entity only. Internal transactions are the economic attivities that take place entirely within the entity. and casualty loss are examples of internal transactions, t . chon ia the process by which resources are transformed into products. Casualty is any sudden and unanticipated loss from fire, flood, earthquake and other event ordinarily termed as an act of God. Measuring ‘This accounting process is the assignil to the accountable economic transactions and If accounting information is to be useful, it must be expreased in terms of a r i Financial statements without monetary amounts would be largely unintelligible or diicaaprehenslile, ‘The Philippine peso is the unit of measuring accountable economic transactions. The measurement bases are hi realigablowsiue und praseab es oom current cot Historical cost is the most common measure of financial transactions. a Err Pern ae neinCommunicating Communicating is the 5. ting process of preparing and distributing unt an hei reports to potential users of accounting information. lentifying ai . i and measuring are pointless if the information contained in the accountii : $i eome:form bo pountat peounliieabnat te communicated Actually, the communie b ating process ia the xeason.why. accounting has heen called the avescal language of business Implicit in ip communication process are the recording, Summarizing aspects of accounting. Recording or journalizing is the i ae process of systematically maintaining a record of all economic busizess transactions after they have been identified and measured. ‘Classifying ie the sorting or grouping of similar and interrelated economic transactions into their respective classes. fving i lished . pe The ledger|is a group of accounts which are systematically categorized into asset accounts, liability accounts, equity accounts, revenue accounts and expense accounts. Summerinitel's the preparation of financial statements which include the statement of financial position, income Matement, statement of comprehensive income, statement of changes in equity and statement of cash flows. s Accounting as an information system. i that measures business activities,. processes information into reports and communicates the reports to decision makers. Akey product of this information system is a set of, poancial — the documents that report financial i jakers. information about an entity to decision mi Financial reports tell us ity 7 in f profit and lose an ere it stands in financial terms. terms 0! 5 Rare eel) ireom Overall objective oF accounting The overall objective of accounting is to provide quantizs,;, financial information out a business that is usefy) , statement users particularly owners and creditors in making economic decisions. An accountant’s primary task is to supply finane; information so that the statement users could make informed judgment and better decision. ‘The ceaence of accounting is decision-usefulness. Investors and other users are interested in financia) accounting information necessary 1" making important ang significant-economic decisions. THE ACCOUNTANCY PROFESSION | ‘At present, Republic Act No, 9298 is the law regulating the practice of accountancy in the Philippines. This law is known as the "Philippine Accountancy Act of 2004". Accountancy has developed as 2 profession attaining a status equivalent to that of law and medicine. ; In the Philippines, in order to qualify to practice the accountancy profession, a person must finish a degree in Bachelor of Science in Accountancy and pass a very difficult government examination given by the Board of Accountancy. ‘The Board of Accountancy is the body authorized by law promulgate rules and regulations affecting the practice of the accountancy profession in the Philippines, ‘The Board of Accountancy is responsible for preparing and grading the Philippine CPA examination, fb is offered twice a your inMa autho : around the country. 4 ateLimitation of the practice ’ of public accountancy _ Single practitioners and tancy shall be the Philippines. Partnerships for the practice of public registered certified public accountants in A seme of accreditation shall be issued to certified public ac ‘ane in public practice only upon showing in accordance with rules and regulations Promulgatec by the Board of Accountancy and approved by the Professional Regulation Commission that such registrant has acquired a i 8 of meani, experience in of the areas of public practice including taxation, ay ‘The Securities and Exchange Commission shall not register any corporation organized for the practice of public accountancy. Sait a Accreditation to practice public accountancy Certified public accountants, firms and partnerships of certified public accountants, including partners and staff members thereof, are required to register with the Board of Accountancy and Professional Regulation Commission for the practice of public accountancy. The Professional Regulation Commission upon favorable recommendation of the Board of Accountancy shall issue the Certificate of Registration to practice public accountancy d renewable every 3 pon payment of required fees. Certified Public ntants generally practice their profession in namely: ‘ a, Public accounting b. Private accounting — ¢. Government, accounting.PUBLIC ACCOUNTING . public accountancy i8 com; ‘The field of public accounting OT. ounting firms and lage Of individual practtionse® re Tic independent and expe Sal t eel services to the public. - ie ts usually offer three kinds of servic, Public eat. 4 8 es = of fact, large multinational accounting firms hays sane acai for each of these services. Auditing ° : Auditing has traditionally been the primary service offereg by most public ‘accounting practitioners. ‘Auditing or external auditing is the SRR! Fine ts by inde nt certified public accountant for the ‘statements by independent ¢ he at fet the finar statements are jared. Actually, external auditing is the attest function of independent CPAs. ‘The Bureau of Internal Revenue requires audited financial statements to accompany the filing of annual income tax return Banks and other lending institutions frequently require an audit by an independent CPA before granting & Joan to the borrower. Creditors and prospective investors place considerable rene on audited financial statements on making economic lecision. Taxation Taxation service includes the preparation of and determination of tax consequences of ce! iness endeavors. The CPA not infrequently repres fient in tax Taveatieations. ly represents the client in ‘To offer this service effectively and efficient]s able ReAUnRaRE pause be Akasaophly Ene Ca ke cae and regulations and updated with changes in taxation !«¥ and court cases concerned with interpreting taxation law. 5-3 Digital era hse caaal All rights ates iC eStats Uae ase consider buving ibManagement advisory services Management i et Advisory services have become increasingly impor in Tecent years alth i u ough audit and tax services are undoubtedly the mainstay of public aceuntants ‘ The term management advisor: . 5 -y services has no precise coverage but is used generally to refer to services to clients atters of accounting, finance, business policies, organization procedures, product costa, distribution and many other phases of business conduct and operations. Specifically, management advisory services include: a. Advice on installation of & Quality control Seperate ¢. Installation and modificati i @. Budgeting ication of accounting system e. Forward planning and forecasting £ Design and modification of retirement plans g. Advice on mergers and consolidations PRIVATE ACCOUNTING Many Certified Public Accountants are employed in business entities in various capacity as accounting staff, chief accountant, internal auditor and controller. Tilsen accounting officer in an entity is known as the of thfe private accountant is to assist management in planning and contro the entity's Private accounting includes the records, moteenatee financial report budgets and controlling and allocating the resources of the entity. ‘The private accountant has also the responsibility for the e entity is obliged to pay. BaF: Digital Accounting Books PH ‘ights belongs to respective authors aedGOVERNMENT ACCOUNTING ing encompasses the proces, Government accounting g and communicating x “fying, summarizing: ing al analyzing, lane the receipt and dispositio;, “4 transactions i and interpreting 1, ‘The focus of government accounting is the custody any administration of ‘public ji : 2 employed in m Many Certified Public Accountants are emp! any | branches of the government, more particularly: a. Bureau of Internal Revenue | b. Commission on Audit | c. Departm d. Securities and hange Comm: | e. Bangko Sentral ng Pilipinas CONTINUING PROFESSIONAL DEVELOPMENT (CPD) 12 is the law mandating and strengthening the continuing professional development program for all regulated professions, including the accountancy profession. All certified public accountants shall abide by the requirements, rules and regulations on continuing professional development to be promulgated by the Board of Accountancy, subject to the approval of the Professional Regulation Commission, in coordination with the accredited » national professional organization of certified public accountants or any duly accredited educational institutions. gis d Public Accountant for assimiletion into professional practice and lifelong learning, = Continuing professional development raises and enhances the technical gail and competence of the Certified Public ‘Books PH bic A : i IrisCPD credit units The CPD credit units refer to the CPI) credit hours required for the renewal of CPA license aad accreditation of a CPA to practice the accountancy profession every three years. Under the new BOA Resolution, all Certified Public Accountants regardless of area or sector of practice shall be required to comply with 126 CPD credit units in a compliance period of three years, However, the initial implementation of the 120 CPD credit units is gradual in the following period: gy OT? 80 credit units 2018 100 credit unite 2019 120 credit unite Excess credit units earned shall not be carried over to the next three-year period, except credit units earned for masteral and doctoral degrees. It is to be emphasized that the Continuing Professional Development has become mandatory for Certified Public Accountants. ve The Continuing Professional Development.is required for the renewal of CPA licerise and accreditation. of CPA to practice the accountancy profession. Exemption from CPD A CPA shall be permanently exempted from CPD requirements upon reaching the age of 65 years. However, this exemption applied only to she renewal of CPA license and not for the purpose of accreditation to practice the accountancy profession. s ; al Accounting Books PH | | belongs to respective authors bpAccounting versus auditing Ina broad sense, accounting embraces auditing. Auditing is one of the areas of accounting specialization ecounting is essentially constructi i. ; In a limited sense, acto when financial statement, 1" a : nature. Accounting ce! already prepared. On the other hand, auditing 18 analytical. The work of g, auditor begins when the work of the accountant ends. After the financial statements are prepared, the auditor wij) begin to perform the task of auditing. ‘The auditor examines the financial statements whether they are in conformity with generally accepteq accounting principles. Accounting versus bookkeeping Bookkeeping is procedurg! and largely concerned with ‘and a cords, Bookkeeping is the “how” of accounting. Accounting is conceptual and is concerned with the why, reason or justification for any action adopted. Bookkeeping is a procedural element of accounting as arithmetic is a procedural element of mathematics. Accounting versus accountancy Broadly speaking, the two terms are synonymous becat both refer to the entire field of accounting theory yee Technically speaking, however a i don Gk eooouig a ccountancy refers to the Accounting is used in reference only to a particular field of accountancy such as public accountis i : orecanant abemeabgie ee ava abortion aSFinancial acc; m ccounting versus managerial accou nting Financial aceou . nti recording of busine. > Ptimarily concerned with the i iness tr; ‘i preparation of financial sespuantions and the eventual Oe ‘Ocuses on, eemal use intended for internal and Financial accounti . nting is the area of accounting that emphasizes reporting to creditors and investors, 4 ial roped is the accumulation and preparation In other words, mana; accounting that information for use gerial accounting is the area of emphasizes developing accounting GENERALLY ACCEPTED ACCOUNTING PRINCIPLES Accounting has evolved through time changing with the needs of society. As new types of transactions occur in trade and commerce, accountants develop rules and procedures for recording them. These accounting rules, procedures and practices came to be known as generally accepted accounting principles or simply GAAP. The principles have developed on the basis of experience, reason, custom, usage and practical necessity. Generally accepted accounting principles represent the rules, ,_Bractice and Standards followed in the preparation and presentation ancial statements. Generally accepted accounting principles are like laws that must be followed in financial reporting. ‘The process of establishing GAAP is a political process which incorporates political actions of various interested user grotips as well ds professional judgment, logic and research,Purpose of accounting standards arpo: i darde is to ideny se of accounting stant fh BY A atigere aati practices for the Preparation a,j presentation of financial statements. : create a commeiaifitinderstand Accounting standards ¢f Dr iinanciel statea< et Nt ee ie eae a assets and liabilities. 7 igh-quality accounting standards is a necessity ¢, A sel:of i quality ae raiformity.in nancial statement: based on the same i ation. FINANCIAL REPORTING STANDARDS COUNCIL In the Philippines, the. development of generally accepted accounting principles is formalized initially through the creation of the Accounting Standards Council or ASC. The Financial Reporting Standards Council or FRSC now replaces the Accounting Standards Council. The FRSC is the accounting standard setting body created by the Professional Regulation Commission upon recommendation of the Board of Accountancy to assist the Board of Accountancy in carrying out its powers and functions provided under R.A. Act No. 9298. The main function is io establish and improve accounting standards that will be generally accepted in the Philippines. ‘The accounting standards promulgated by the Financial Reporting Standards Council constitute the "highest hierarchy” of generally accepted accounting principles in the Philippines. The approved statements of the FRSC are known #8 Philippine Accounting Standards or PAS and Philippis® Financial Reporting Standards or PERS.Composition of FRSC bs PESC i conipoend of 15 members with a Chairman who or is presently a senior accounting practitioner and 14 representatives from the following Beard of ecountancy Securities and Exchange Commisei Bangko Sentral ng Pilipinay Bureau of Internal Revenue Commission on Audit, Major organization of preparers end financial statements Finaabial tenn ppinesor Fl Accredited national professional organizati : Public Practice slorganization of CPAS: Commerce and Industry eo Education Government Total ‘The Chairman and members of the FRSC shail have a term i of 3 years renewable for another term. Any member of the ASC shall not be disqualified from being appointed to the i Il fro ae as v9 Philippine Interpretations Committee The Phi ippine Interpretations Committee or PIC was formed by the FRSC in August 2006 and has replaced the : Interpretations Committee or IC formed by the Accounting \ Standards Council in May 2000. The role of the PIC is to prepare interpretations of PFRS for approval by the FRSC and to provide timely 7 uidanse on Beensial reporting issues not specifically addressed in current . In other words, interpretations are intended to give authoritative guidance on issues that are likely to receive divergent or unacceptable treatment because the standards do not provide specific and clearcut rules and guidelines. The counterpart of the PIC in the United Kingdom is the International Financial Reporting Interpretations ammitize or IFRIC which has a! ead replaced the Standing Interpretations Committee or iC. 15TIONAL ACCOUNTING STANDARDS COMMITT, INTERNA’ The International Accounting Standards Committee or [4g,, is an independent private sector body, with the objective , achieving uniformity in.the accounting principles which «°! ani eyebusiness and other organizations for financisy reporting around the world. It was formed in June 4973 through an agreement made by professional accountancy bodies from Australia, Canada Mexico, the Netherlands, thg France, Germany, Japan, d Ireland, and the United States o; United Kingdom an 2 js headquartered in London, United America. The IASC Kingdom. Objectives of IASC a. To formulate and pub! standards to be observed statements and to promot and observance. lish in the public interest accounting in the presentation of financial te their worldwide acceptance for the improvement and harmonization tandards and procedures f financial statements. b, To work generally of regulations, accounting s' relating to the presentation o! 'GUNTING STANDARDS BOARD Standards Board or IASB now ‘Standards Committee INTERNATIONAL ACC! ‘The International Accounting replaces the International Accounting or IASC. ‘The IASB publishes standards in a serice of pronouncement? called International Financial Reporting ‘Standards or IFRS. However, the IASB has adopted the body of standards issued by the IASC. The pronouncements of the IASC continue to be designated “International Accounting Standards" or IAS. ‘The IASB standard-setting process includes in the correct order research, discussion paper, exposure draft a¥ accounting stai |Move toward IFRS In the past years, most of ili 7 the Philippine standards issued ased on American accounting standards. SC has adopted in. their entirety ali ce Ccounting Standards and International Financial Reporting Standards, The move toward IFRS is essential to achieve the goal of one uniform and globally accepted financial reporting standards. The Philippines is fully.compliant with IFRS effective January 2005, a process which was started back in 1997 in moving from USA GAAP to IFRS. The following factors are considered in deciding to move totally to international accounting standards: a. Support of international accounting standards by Philippine organizations, such as the Philippine SEC, Board of Accountancy and PICPA. b. Increasing internalization of bus:ness which has heightened interest in a common language for financial reporting. c. Improvement of international accounting standards or removal of free choices of accounting treatments. Pp Increasing recognition of international accounting standards by the World Bank, Asian Development Bank and World Trade Organization.Philippine Financial Reporting Standards on Council issues stang The ial Reporting Standards Counc. “shu ar in cen of pronouncement called "Philippine Fina, _ Reporting Standards" or PFRM. ‘The Philippine Financial Reporting Standards collectives, include all of the following: ilippi ii i ting Standards whj,, Philippine Financial Repor g ich a. Norra to International Financial Reporting Standards. ‘The Philippine Financial Reporting Standards arg numbered the same as their counterpart in Internationa) Financial Reporting Standards. b. Philippine Accounting Standards which correspond ty Interhational Accounting Standards. The Philippine Accounting Standards are numbered the same as their counterpart in International Accounting Standards. ¢ Philippine Interpretations which correspond to Interpretations of the IFRIC and the Standing Interpretations Committee, and Interpretations developed by the Philippine Interpretations Committee.QUESTIONS 1. Define accounting. 2. What are the im F accounting? portant points made in the definition of 3. Explain "identifying" a5 a component of accounting. 4, What are transactions? 5. Distinguish externa 1 transaction: d’ internal transactions, fons angi 6, When is a transaction accountable or quantifiable? 1. Explain "measuring" as a component cf accounting? 8. What are the measurement bases used in accounting? 9. Explain "communicating" as component of accounting. 10. Explain recording, classifying and summarizing in relation to the communicating component of accounting. 11. Explain why accounting has been called the "universal language of business". 12. Explain accounting as an information aystem. 13. What is the overall objective of accounting? 14. Describe the accountancy profession. 15. What is R.A. No. 9298? 16. What do you understand by the Board of Accountancy?, 17. Explain the limitation of the wrintion of public accountancy.7 19. What are the three main areas in the practice of 4 accountancy profession? 18. Explain the accreditation to practice of accountancy 20. Explain public accounting. 21. What are the three kinds of services offered by Cp, AS ig the practice of public accounting. 22, Explain auditing. 28. Describe the taxation service offered by CPAs. 24, Explain management advisory services. 25, What are some management advisory services offered by CPAs? 26. Explain private acocunting. 27. Explain government accounting. 28. What do you understand by the Continuing Professional Development of CPAs? 29, What is the meaning of CPD credit units? 30. How many CPD credit units are required? 31. What is the purpose of the required CPD credit units? 32. What is the exemption from the CPD requirements? 39. Distinguish accounting and. auditing. 34. Distinguish accounting and bookkeeping. 35. Distinguish accounting and accountancy.36. What is financial accounting? 37. What is managerial accounting? 38. What is the mean; pundgles on @ of generally accepted accounting 39, What constitute GAAP in the Philippines? 40. Explain the purpose of accounting stardarda, 41. What do you understa; inanci i Standards Cent ind about the Financial Reporting 42. What is the composition of FRSC? 43. What do you understand about PIC and IFRIC? 44. What do you understand about the International Accounting Standards Committee? 45. What are the twin objectives of the IASC? 46. What is IASB? 47. What do you understand by IFRIC? 48. Explain why the Philippines has moved totally from American accounting standards to international accounting standards. 49. What do you understand by the “International Financial Reporting Standards"? 50. What are collectively included in "Philippine Financial Reporting Standards"? a oF Seen belongs to respecPROBLEMS (ACP) and ite function is to proyj 1. Accounting is a service act arily financial in nat, information, i Intended to be useful Problem 1-L Multiple enol quantitative infor tl atau econ decision. This accounting definition jy ce nting Standard Council Standards , , AICPA Committee on Accounting Terminology .. American ‘Accounting Association d. Board of Accountancy 2. All of the following describe accounting, except a portant made in the definition of accounting include ell all of the alte, except counting information is quantita’ counting information is both i ntitative and e op Gig information is financial in nature. @. Accounting information is useful in decision making. 4, This accounting process is the seer or nonrecognition of business activities as accountable events. a, Identifying b. Measuring ¢c. Communicating d. Reporting 5. The events that affect the entity and in whi , pareyate ae aoe ity and in which other entitiet a. Internal events b. External events c, Current events d. Obligating events Priel Ta) Books PH6. Which stateme; i tp nt is incorrect in relation to an accountable a. An event i ies oe untae when it has an effect on asset, b. The subj 2 scons Seana eescunting is the measurement of & ‘Gnipeconmen ind obligations. * coon Activities are emphasized and recognized Sociological and peychological matters are quantifiable. . What i i . a a dectuanee measuring component in the definition of a. The recognition or no: iti busi iviti a atable a ehtecoeattion of ousiness activities b. Pe assigning of peso amounts to the accountable events. c. The preparation and distribution of accounting reports to users of accounting information. 4. The preparation of audit report by CPAs. 8.The most common financial attribute used in-measuring financial information is a. Historical coat b. Curtent cost ¢. Realizable value d. Present value 9. The communicating process of accounting includes all of the following, except a. Recording b. Classifying c. Summarizing d. Interpreting 10. What is the overall objective of accounting? a, To provide the information that the managers of an economic entity need to control the operations. b. To provide information that the creditors can use in deciding whether to grant loans to an entity. ©. ‘To measure the periodic income of the economic entity. a. To provide quantitative financial information about an entity that is useful in making economic decision. belongs to respective authorsz ice (ACP) Problem 1-2 Multiple choice : 1. What is the law, regulating the practice of accountancy in . What i the Philippines? i sed by law to promulgate ry) 2. What is be. bs ting the proce of the accouniane profession in the Philippines? Board of Accountancy ; | a. Board of Arma of Certified Public Acrountanis | ti ‘Exchange Commission | Securities and Ex a Financial Reporting ‘Standards Co’ he three main areas in the practice of the accountancy profession? ; Public accounting, private accounting and managerial counting. : . | be eaeatne xation and managerial accounting. | ¢. Financial accounting, managerial accounting and ! corporate accounting. . 4. Public accounting, private accouating and government accounting. 4, Which statement is incorrect in relation to the practice of public accountancy? a. Single practitioners for the practice of public accountancy shall be registered CPAs in the Philippines. b. Partners of partnerships formed for the practice of ublic accountancy shall be registered CPAs in the | 3. What are t hilippines. ; c. The Securities and Exchange Commission can register any corporation organized for the practice of public accountancy. d. All of these statements are incorrect. 5. CPAs are licensed by a, The PICPA b. The SEC ¢. The city government d. State government PY=B: Digital Accounting Books PH bs. rN belongs to respective authors " Please consider buving the original copyProblem 1-3 Multiple choice (ACP) 1. What is the standard-setti ‘lippi -setti the present time? SOME TOBE The a i a. Accounting Standards Council b. Auditing and Assurance Standards Council e. Philippine Accounting Standards Board 4. Financial Reporting Standards Council 2. All of the following are represented in FRSC, except . Board of Accountaney Securities and Exchange Commission mmission on Audit |. Department of Budget and Management Regp e The Philippine Financial Reporting Standards ‘collectively include a. PFRS Corresponding to IFRS. b. PAS corresponding to IAS c. Philippine Interpretations corresponding to IFRIC and SIC Interpretations and Interpretations developed by PIC. d. All of these are included in Philippine Financial Reporting Standards ® - Accounting standard-setting has been characterized as A political process Using the scientific method Pure deductive reasoning A legal process © Bere 5. Q ‘AAP is an abbreviation for Generally authorized accounting procedures . Generally applied accounting. procedures. Generally accepted auditing practices . Generally accepted accounting principles Bese ERMC taal belongs to resp6, What ia the primary service of CPAS in public practic,, a. Auditing b. Taxation : ¢. Managerial aecountin€ d. Controllership joyed in entities in various capacity ti Accountants el ‘aqountant or controller are said te be engaged in a. Public accounting b. Private accounting ¢. Government accounting eoncal d. ting g It is the area of the accountancy profession that encompasses the process. of analyzing, classifying, guinmarizing and comm ing all transactions involving the receipt and disposition of government funds ‘and property and interpreting the results a. Internal auditing b. External auditing ¢. Private accounting d. Government accounting 9. The Continuing Profeesional Development is required for a, Renewal of CPA license. b. Accreditation to practice the accountancy profession. ¢. Both renewal of CPA license and accreditation to practice the accountancy profession. d. Neither renewal of CPA license nor acereditation to practice the accountancy profession. 10.4 CPA shall be permanently exempted from renewal of ' ‘CPA license a. At the age of 65 years be Dk working abroad. c n practicing the « Beaty rae te vteesion abreedy ee i i Problem 1-4 Multiple choice (IFRS) 1, The International Accounting Standards Board was formed a. To enforce IFRS in fore ‘n countries Bo develop a single cet of high quality IFRS % ence lish accounting standards for multinational d To develop accounting standarda for countries that do not have their own standard-setting bodies 2. The International Accounting Standards Board a. Was the predecessor to the IASC. b. Can overrule the USA GAAP when their policies disneres. c. Promotes the use of high-quality and understandable global accounting standends ™ marr d. Has its headquarters in Geneva 8. The IASB declared it ’ ce that the merits of proposed standards a. From a position of neutrality b. From a position of materiali ¢, Based on possible impact on behavior d. Based on arguments of lobbyist 4, The standard-setting process includes in the correct order | a. Exposure draft, research, discussion paper and accounting standard . b. Research, exposure draft, discussion paper and accounting standard c. Research, discussion paper, exposure draft and } accounting sta: 4. Discussion paper, research, exposure draft, and accounting sta 5. The IASB employs a due process system which Is an efficient system for collecting dues from members, : a b. Enables interested ipestiee to express their views on issues under consideration. ¢. Identifies the accounting issues'that are the most important. 4. Requires that all CPAs must receive a copy of IFRS. ease heen) belongs to respective authors6. What is due aeop +The standards published P & What is a possible dan process in standard-seting by IASB? TASB operates in if the ae a 07 Public Pearings are propose’ ate ards Interested parties can make their sees a own, Allof these are part aque process in standard-setting full view 0} y IASB are called i counting Standards & nan ational “ing Standards ; nancial Reporting Standards tional Fi 4 Peseaient of Financial Accounting Standards ger if politics plays too big a role in developing IFRS? a. Financial reporting st accepted. b. Individuals may influence the standards. co.’ User groups become active. d. The IASB delegates its authority to elected officials andards are not truly generally 9. Accounting standard-setting a. . Can be described as a political process which reflects political actions of various-interested user groups.as well aa a product of research and logic. b. Is based solely on research and empirical findings. c. Is a legalistic process d. Is democratic in the sense that a majority of accountants must agree with a standard before it becomes enforceable. 10. IFRIC Interpretations issued by IASB e are sensi authoritative and must be followed. . Cover newly identified financi ing i spect eet ncial reporting issues 12 ¢. Cover issues where unsati icti interpretations have inipan ae * d. All of these are true about IFRIC InterpretationsProblem 1-5 Multiple choice (IAA) 1. Fin i ‘ancial accounting is concerned with a. General . ‘ Bane al fern ot on financial position and 7 Special reports for inventory management. a, Cece ee for income tax computation. Tal purpose reports on changes in share prices. 2. Financial accounting ¢ : an be E accounting that p _ broadly defined as the area of a. General Purpose financial statement ‘ Parties internal to the entity, ne ey . Financial statements to be used by investors. ¢. General Purpose financial statements to be used by Parties both internal and external to the entity. 4. Financial statements to be used primarily by management. 3. Financial accounting emphasizes reporting to a. Management b. Regulatory bodies c. Internal auditors d. Creditors and investors 4. Managerial accounting emphasizes a. Reporting financial information to external users b. Reporting to the SEC c. Expertise in data processing d. Developing accounting information for use within an entity 5. Which statement is true regarding managerial and financial accounting? a.’ Managerial accounting is generally more precise. b. Managerial accounting need not follow generally accepted accounting principles while financia] accounting must follow GAAP. c. Managerial accounting has a future focus. d. The emphasis on managerial accounting is relevanc: and the emphasis on financial accounting is timeliness—— 6 Multiple choice aaa) Problem 1. ted accounting principles 1. Generally accep! dinate ing adaptations base’ law. a. Are seoountng Sanity and aueborty fom logy * gulin rt prece' i. : ©, Derive ane gf croability ond authority from , : Jatory authority. government Eby ‘and authority from genera) recognition and ‘acceptance by the accountancy profession. 2. Which statement best describes GAAP? the acootnting principles have been formulated in the yublic sector. «ig ptinciples have been developed on the eat practical sce. . The ting principles are the same as laws. a The seer Tocinaples do not apply to small and medium-sized entities. 8. Proper application of accounting principles is most dependent upon a. Existence of specific guidelines b. Oversight of pogaleiey bodies ¢. External audit tion n d. Professional judgment of the accountant 4, Once an accounting standard has been established a. The standard is continually reviewed to see if modification is necessary. b. The standard is not reviewed unless a regulatory authority makes a complaint.’ c. The task of reviewing the standard is given to the 2 ee ae . ‘iple of consistency requil isions seconde a neieeded faapneae™ b The Primary responsibility for properly applying GAA? a. External auditor b. Internal auditor . c. Management . . d, National accounting organizationCHAPTER 2 CONCEPTUAL FRAMEWORK Financial reporting and assumptions TECHNICAL KNOWLEDGE To know the nature of a conceptual framework. To describe the purpose and usefulness of a conceptual framework. To understand the authoritative status of a conceptual framework. * To understand the objective of financial reporting. To know the limitations of financial reporting. To understand the underlying assumptions of accounting.Definition » for Financial Reporting is The Conceptual Framework for a carigiate, cemprehensiv and single document promulgated by the International Accounting Standards Board. neeptual Framework is & Sum and mae that underlie the preparation and presentation of financial statements for external users. | Framework is an attempt to provide an The Concepiua' veal tear for accounting. overall work is intended to guide standard. The Conceptual Frame e stan setters, preparers and users of financial information in the preparation and presentation of statements. Tt is the underlying theory for the development of accounting standards and revision of previously issued accounting standards. . The Conceptual Framework is: concerned with general purpose financial statements, including consolidated financial statements. ‘The financial statements are prepared at least annually and are directed toward the common needs of a wide range of users. & However, special purpose financial reports, for example, prospectuses and computations prepared for taxation purposes, are outside the scope of the Conceptual Framework.Purposes of Conceptual Framework a. To assist the FRSC in developing accounting standards and reviewing existing standards. b, To assist preparers of financial statements in and in ‘clings ea ¢, To assist the FRSC in the and adoption of International Financial Reporting Standards 4. To assist users of financial statements in interpreting’ the information contained in the financial statements. e. To assist auditors ii as to whether financial statements conform wit! hilippine GAAP. £ To to those interested in the work of the FRSC in the formulation of PFRS. Authoritative status of Conceptual Framework If there is a standard or an interpretation that specifically appliés to a transaction, the standard or interpretation overrides the Conceptual Framework, In the absence of @ standard or an interpretation that specifically applies to a transaction, management shall consider the applicability of the Conceptual Framework in that results in information that is However, it is to be stated that the Conceptual Framework is not a Philippine Financial Reporting Standard. The Conceptual Framework does not define standard for any particular measurement or disclosure issue. Nothing in this Conceptual Framework overrides any specific Philippine Financial Reporting Standard. In case where there is a conflict, the requirements of the Philippine Financial Reporting Startdards shall prevail over the Conceptual Framework. ‘al Accounting Books PH belongs to respective authors bUsers of financial information 1 k for Financial Repor Uder the Concept maton may be classified into tee namely: a., Primary users b. Other users users include the existing and potenti) The primar: 2 ahedora, lenders and other creditors. ther users include the employees, customers, Frreeanenta and their agencies, an‘ the public. The primary users of financial information whom general purpase i directed. Such numero eannot ties reporting entities to provide information directly to them and Serie as general for much of the financi ‘Existing and potential investors Existing and potential investors are concerned with the risk inherent in and return provided by their investments. ‘The investors need information to help them determine whether they should buy, hold or sell. Shareholders are also interested in information which enables them to assess.the ability of the entity to pay dividends. Lenders and other creditors Existing and potential lenders and oth i are inated information which enables rea Y whether their loans, interest th nt owing to them will be paid when din ee| By residual definition, "other users" are users of financial information other than. the existing and potential investors, lenders and other creditors. Other users are so called because they that may find the general purpose financial r Rete but the Employees Employees are interested in information about the stability and profitability of the entity. The employees are interested in information which enables them to assess the ability of the entity to provide remuneration, retirement benefits and employment opportunities. Customers Customers have an interest in information about the continuance of an entity especially when they have a long-term involvement with or are dependent on the entity. Governments and their agencies Governments and their agencies are interested in the allocation of'resources and therefore the activities of the entity. These users require information to regulate the activities of the entity, determine taxation policies and as a basis for national income and similar statistics, Public 5 Entities affect members of the public in a variety of ways. For example, entities make substantial contribution to the local economy in many ways including the number of people they employ and their patronage of local suppliers. Financial statements may assist the public by providing information about the trend:and the range of its activities. as ‘al Accounting Books PH belongs to respective authorsScope of Conceptual Framework jecti jal reporting ; a. Objective of inane te of useful nancial infring b. Qualitative chara rand measurement of the eleme ion “ Definition pnancial ‘statements are constructed d. Concepts of capital and capital maintenance Financial reporting scial iriformat; i i ing is the pr Financial reporting 38 oe that is useful to then, | ut an entity to external use! : { oasing Same decisions and for assessing the effectivencs, of the entity's management. ‘The principal way of providing financial information y, external users is throut However, financial reporting encompassee not only financig) statements but also other means of communicatin; information, that relates directly or indirectly to the financial accounting process. Financial reports include not only financial statements but _also other information ‘such as financial highlights, summary of important financial figures, analysis of financial statements and significant ratios. Financial reports also include nonfinancial information such as description of major products and a listing of corporate officers and directors. OBJECTIVE OF FINANCIAL REPORTING ‘The objective of financial reporting fo: tion 0! the Conceptual Fromaork” @ forms tho:founda The overall objective of financial reporting i it [The overa t porting is to prov financial information about the reporting entty that is seh to existing and potential investors, lenders and other credite’ in making decisions about providing resources to the enti’! The objective of financial Bees 7 a goal of accounting. _ reporting is the "why", puro”Target users Financial reporting is directed. primarily to the existing and potential investors, lenders and other creditors which compose the primary user group, The reason is that existing and potential investors, lenders and other creditors have the most critical and immediate need for information in financial reports Asa matter of fact, th of financial information are the parties that Moreover, information that meeis the needs of the specified primary users is likely to meet the needs of other users such as employees, customers, governments and their agencies. The management of a reporting entity is also interested in financial information about the entity. However, management need not rely on general purpose financial reports because it is able to obtain or access additional financial information internally. The overall objective of financial reporting is to provide information that is useful jor decision making. Specifically, the Conceptual Framework for Financial Reporting states the following objectives of financial reporting: z a ‘Towmpopldadinfommationsanluinsmakinttlsistine, qos providing resources to the entity. b. To provide information useful in assessing the cashflow ¢. To provide information about entity resources, claims andEconomic decisions _ igh investors need general Existing and potet’ tp enable them in malting sen Sth ik will or hold equity investments my nd. potential lenders and other creditons Sane © financial reports in order to enable the, ee general purpose ji eile Iaing aya making decisions iMpother to provide cr settle Loans ang cy, 8 forms of credit. Assessing cash flow prospects Decisions by existing and potential investors about bu selling or pelding equity instruments depend on the Teturn: that they expect from an investment, for example, divideng, Similarly, decisions by existing and potential Jenders an, other creditors about providing or settling loans and othe, forms of eredit depend on the principal and interes _ payments or other returns that they expect. « Consequently, financial reporting should provide informatic, that is useful in assessing the amount, timing and uncertainy of prospects for future net cash inflows to the entity. Economic resources and claims General purpose financial reports provide information abot the financial position of a reporting entity. Financial position is information about the entity's econo resources and the claims against the reporting entity. The economic resources are the assets and the claim a the liabilities and equity of the entity. In other words, the financial position compri ® Rene) ¥ ee abiities and equity of an entity at-a particular monet? Ame. ” .- Information about the nature and amounts of an entity's economic resources and claims can help users identify the entity's financial strength and weakness. Otherwise stated, information about financial position can help users to assess the entity's liquidity, solvency and the eee the availal eh in the near future to cover ‘Solvency is the availability of Pica to meet financial commitments when they fall due. Information about priorities and payment requirements of existing claims can help users to predict how future cash flows will be distributed among those wita a claim against the reporting entity. ; Changes in economic resources and claims General purpose financial reports also provide information about the effects of transactions and other events that change the economic resources and claims. i Taiaatta in economic resources and claims sei and from other events or transactions, as issuing debt or equity instruments a ‘The La pecyialanapdel an entity comprises revenue, expenses and net income or loss for a period of time. In other words, earned by the ent and ‘The financial performance of an entity is r and is portrayed in the income statement and ment of comprehensive income. 39 FB: Digital Accounting Books PH ay Ae belongs to eee Ere tSUsefulness of financial performance ancial performance helps users to jon about fin! Information hat the entity has produced on the understand the at he entity has produced Information about the return tl provides vn indication of how well management has pr harged its responsibilities to make efficient and effective use of the entity's economic resources. ast financial performance is usually Information about p u the future returns on the entity's helpful in predicting economic resources. Information about financial performance curing a period is Accrual accounting ‘Accrual accounting depicts the effects of transactions and other events and circumstances on an entity's economic . resources and claims in the periods in In other words, transactions and o' 8, the effects of Simply stated, accrual accounting means thai income is recognized when earned regardless of when received and expense is recognized when incurred regardless of when. paid. ’ Information about financial performance m. i \ easured in perordante with accrual accounting provides a better basis cee past and future performance than information ly about cash receipts and payments during a period.Limitations of financial] reporting a General purpose financial reports Provide all of the information that existing and potential investors, lenders and other creditors need. These users need to pertinent for example, general cconomic conditions, political events and industry outlook b. General purpose financial reports ere not designed to show the value of an entity but the Gee help the Primary users c. General purpose financial reports are intended to provide ‘\Searininapation to users and cannot accommodate ry request for information. 4. To a large extent, general purpose financial reports are based on estimate and judgment rather than exactNS UNDERLYING ASSUMPTIO cor 7 Accounting assumptions 2°6 se asi ocent tn mata, esate aC2002 EE og postulates tions #1 ’ ° res a solid foundation ty % at requil : Like a building structs espe e8 it provide room 1° revent ayenacion end so with accounting: ; Accot assumptions serve aS the ene te bedrock veuntiag order to. avoid misunderstant ae ut rather Sita accountng understanding and usefulness of the financial statements. ‘The Conceptual Fram only one aseumetion, are the basic assumption However, implicit in accounting s of accounting entity, time period and monetary unit. ting assut re ework for Financial Reporting mentions namely q Going concern The going concern or continuity assumption means that in the sbvence of evidence to the contrary, the accounting entity is viewed as continuing in operation indefinitely. In other words, the financial statements are normally prepared on the assumption that the entity will continue in operations for the foreseeable future. The going concern postulate is the very foundation of the cost principle. Thus, assets are normally recorded at cost. As a rule, market values are ignored. However, some new standards require measurement of certain assets at fair value. If there is évidence that the entity would experi i erience large and persistent losses or that the entity's apierationn are to be terminated, the going concern assumption is abandoned. In this case, the users of the statemer ee : 2 te - interest in the amount of cash that will Se seated from the entity's assets in the short term, -Accounting enti ty In financial accounting, the Aevounting business organization, which may partnership or corporation. zentity is the specific be @ proprietorship, Under this assumption, the entity is separate from the owners, managers, and employees who constitute the entity. Accordingly, the transactions of the entity stall not be merged with the transactions of the owners. The reason for the entity assumption is to have a fair Presentation of financial statements. The personal transactions of the owners chall not be allowed to distort the financial statements of the entity, For example, the cash invested by the Froprietor is treated as an asset of the Proprietorship. If an enterprising entrepreneur owns department store, restaurant and bookstore, separate statements shall be prepared for each business in order to determine which business is profitable. Each business is an independent accounting entity. When a major sharcholder of a corporation borrows money from a bank on his own personal account, the loan ie a lability of the shareholder alone and not of the corporation. The shareholder is not the corporation and the corporation is not the shareholder. . However, where parent and subsidiary relationship exists, consolidated statements for the affiliates are usually made because for practical and economic purposes, the parent and the subsidiary aré a “single economic entity”. The consolidation, however, does not eliminate the legal boundary segregating the affiliated entities. Accounting will continue to be done separately for each entity.ee socal he financial positi ct on the Bt sition ey A completely 3504 ray cannot be Sptained until the engi performanesolved and liquidate income and networth of the entity t Only then can the final ne be determined precisely: information need timely jnancia! decision. ‘an economic However, users of fi information for making . to prepare periodic reports ~~ pe aa cash flows of an entity. “= It becomes nece! financial position, pe ‘The time period assumpl an entity is subdivic aceeeeee naually of equal length for the ori on financial position, performance and cash flows, By convention, the agcounting period or fiscal period is ong year or a period of twelve months. is traditionally the accounting period fter one year that government reports ‘The “one-year period” because usually it is al are required, The accounting period may be a calendar year or a natural business year. A calendar year, is a twelve-month period that ends on December 81. A neve is a twelve-month period that ends on any month when the business is at the lowest or experiencing slack season. belongs to respective authors b