INSTRUCTIONAL MATERIALS FOR

ACCO 20063
CONCEPTUAL FRAMEWORK
AND ACCOUNTING
STANDARDS

COMPILED BY:
Concepcion M. Vedasto
Jonathan P. Binaluyo
Ruth P. Carlos
Gerwin M. Ortega
Dale C. Ison
Edelwin T. Fajutagana
Noel A. Bergonia

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 MODULE 1
DEVELOPMENT OF FINANCIAL REPORTING FRAMEWORK
AND STANDARD SETTING BODY

Overview:
This module describes the environment that has influenced both the development and use
of the financial accounting process. The chapter traces the development of financial accounting
standards, focusing on the groups that have had or currently have the responsibility for developing
such standards. Certain groups other than those with direct responsibility for developing financial
accounting standards have significantly influenced the standard-setting process.
World markets are becoming increasingly intertwined. And, due to technological advances
and less onerous regulatory requirements, investors can engage in financial transactions across
national borders, and to make investment, capital allocation, and financing decisions involving
many foreign companies. As a result, an increasing number of investors are holding securities of
foreign companies, and a significant number of foreign companies are found on national exchanges.
The move toward adoption of international financial reporting standards has and will continue to
facilitate this movement.
Accounting is important for markets, free enterprise, and competition because it assists in
providing information that leads to capital allocation. Reliable information leads to a better, more
effective process of capital allocation, which in turn is critical to a healthier economy.
Financial accounting is the process that culminates in the preparation of financial reports
on the enterprise for use by both internal and external parties.
Financial statements are the principal means through which a company communicates
its financial information to those outside it. The financial statements most frequently provided are
(1) the statement of financial position, (2) the income statement or statement of comprehensive
income, (3) the statement of cash flows, and (4) the statement of changes in equity. Note
disclosures are an integral part of each financial statement. Other means of financial reporting
include the president’s letter or supplementary schedules in the corporate annual report,
prospectuses, and reports filed with government agencies.
The major standard-setters of the world, coupled with regulatory authorities, now
recognize that capital formation and investor understanding is enhanced if a single set of high-
quality accounting standards is developed.

Module Objectives:
❖ describe the purpose of accounting and financial reporting;
❖ identify the need for information of the users of accounting information;
❖ describe the branches of accounting;
❖ discuss the development of accounting standards and financial reporting standards;
❖ identify the organizations involved in the promulgation of the accounting standards;
❖ describe the due process of developing the international financial reporting standards; and
❖ describe the due process of developing and promulgating Philippine Financial Reporting
Standards.

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OBJECTIVE OF FINANCIAL REPORTING
The objective of general-purpose financial reporting is to provide financial information
about the reporting entity that is useful to present and potential equity investors, lenders, and
other creditors in making decisions about providing resources to the entity.
a. General-purpose financial statements provide at the least cost the most useful
information possible to a wide variety of users.
b. Equity investors and creditors are the primary user groups and have the most critical
and immediate needs for information in the financial statements. Investors and creditors
need this information to assess a company’s ability to generate net cash inflows and to
understand management’s ability to protect and enhance the assets of a company.
c. The entity perspective means that the company is viewed as being separate and
distinct from its investors (both shareholders and creditors). Therefore, the assets of the
company belong to the company, not a specific creditor or shareholder. Financial reporting
focused only on the needs of the shareholder—the proprietary perspective—is not
considered appropriate.
d. Decision-usefulness means that information contained in the financial statements
should help investors assess the amounts, timing, and uncertainty of prospective cash
inflows from dividends or interest, and the proceeds from the sale, redemption, or
maturity of securities or loans. For investors to make these assessments, the financial
statements and related explanations must provide information about the company’s
economic resources, the claims to those resources, and the changes in them.

To facilitate efficient capital allocation, investors need relevant information and a faithful
representation of that information to enable them to make comparisons across borders. A
single, widely accepted set of high-quality accounting standards is a necessity to ensure
adequate comparability. In order to achieve this goal the following element must be present:
a. A single set of high-quality accounting standards est ablished by a single standard-
setting body.
b. Consistency in application and interpretation.
c. Common disclosures.
d. Common high-quality auditing standards and practices.
e. A common approach to regulatory review and enforcement.
f. Education and training of market participants.
g. Common delivery systems (e.g., extensible Business Reporting Language—XBRL).
h. A common approach to corporate governance and legal frameworks around the world.

BRANCHES OF ACCOUNTING
❖ Financial Accounting is focused on the recording of business transactions and the
periodic preparation of reports on financial position and results of operations. Financial
accountants accord importance to existing accounting standards.
❖ Management Accounting, as defined by Institute of Management Accountants (IMA) is
a profession that involves partnering in management decision making, devising planning
and performance management systems, and providing expertise in financial reporting and
control to assist management in the formulation and implementation of organization’s
strategy.

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 ❖ Cost Accounting deals with the collection, allocation and control of the cost of producing
specific goods and services.
❖ Auditing is an independent examination that ensures the fairness and reliability of the
reports that management submits to users outside the business entity.
❖ Government Accounting is concerned with the identification of the sources and uses of
government funds.
❖ Tax Accounting includes preparation of tax returns and the consideration of tax
consequences of proposed business transactions.
❖ Accounting Education employs accountants either as researchers, professors or
reviewers. They guarantee the continued development of the profession.

STANDARD-SETTING ORGANIZATIONS
The main international standard setting organization is the International Accounting
Standards Board (IASB), based in London, United Kingdom. The IASB issues International
Financial Reporting Standards (IFRS) which are used by most foreign exchanges.

The two organizations that have a role in international standard-setting are the
International Organization of Securities Commissions (IOSCO) and the IASB.
a. The IOSCO does not set accounting standards; it is dedicated to ensuring that the global
markets can operate in an efficient and effective basis.
b. The member agencies have agreed to:
1. Cooperate to promote high standards of regulation in order to maintain just,
efficient, and sound markets.
2. Exchange information on their respective experiences in order to promote the
development of domestic markets.
3. Unite their efforts to establish standards and an effective surveillance of
international securities transactions.
4. Provide mutual assistance to promote the integrity of the markets by a rigorous
application of the standards and by effective enforcement against offenses.

IOSCO recommends that its members allow multinational issuers to use IFRS in cross-
folder offerings and listings, as supplemented by reconciliation, disclosure, and interpretation
where necessary, to address outstanding substantive issues at a national or regional level.

The international standard-setting structure is composed of the following four organizations:

a. The IFRS foundation (22 trustees) provides oversight to the IASB, IFRS Advisory
Council, and IFRS Interpretations Committee. It appoints members, reviews
effectiveness, and helps in fundraising efforts for these organizations.
b. The International Accounting Standards Board (IASB) consisting of 16 members,
develops in the public interest, a single set of high-quality, enforceable, and global
international financial reporting standards for general-purpose financial statements.
c. The IFRS Advisory Council (30 or more members) provides advice and council to the
IASB on major policies and technical issues.

d. The IFRS Interpretations Committee (22 members) assists the IASB through the
timely identification, discussion, and resolution of financial reporting issues within the
framework of IFRS.

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 In addition, as part of the governance structure, a Monitoring Board was created. It
establishes a link between accounting standard-setters and those public authorities that
generally oversee them (e.g. IOSCO). It also provides political legitimacy to the overall
organization.
The IASB has a thorough, open and transparent due process in establishing financial
accounting standards. It consists of the following elements:
a. An independent standard-setting board overseen by geographically and professionally
diverse body of trustees.
b. A thorough and systematic process for developing standards.
c. Engagement with investors, regulators, business leaders, and the global accountancy
profession at every stage of the process.
d. Collaborative efforts with the worldwide standard-setting community.

To implement its due process, the IASB follows specific steps to develop a typical IFRS.
a. Topics are identified and placed on the Board’s agenda.
b. Research and analysis are conducted, and preliminary views of pros and cons are
issued.
c. Public hearings are held on the proposed standard.
d. The Board evaluates research and public responses and issues an exposure draft.
e. The Board evaluates the responses and changes the exposure draft, if necessary. Then
the final standard is issued.

The following characteristics of the IASB are meant to reinforce the importance of an open,
transparent, and independent due process.
a. Membership: The Board consists of 16 well-paid members, from different countries,
serving 5-year renewable terms.
b. Autonomy: The IASB is not part of any professional organization. It is appointed by
and answerable only to the IFRS Foundation.
c. Independence: Full-time IASB members must sever all ties with their former employer.
Members are selected for their expertise in standard-setting rather than to represent a
given country.
d. Voting: Nine of 16 votes are needed to issue a new IFRS.

The IASB issues three major types of pronouncements:

a. International Financial Reporting Standards: To date the IASB has issued 13
standards. In addition, the previous international standard-setting body, the International
Accounting Standards Committee (IASC) issued 41 International Accounting Standards
(IAS). Those that have not been amended or superseded are considered under the
umbrella of IFRS.
b. Conceptual Framework for Financial Reporting: The IASB issued the Framework
for the Preparation and Presentation of Financial Statements (referred to as the
Framework) with the intent to create a conceptual framework that would serve as a tool
for solving existing and emerging problems in a consistent manner. However, the
Framework is not an IFRS and does not define standards for any measurement or
disclosure issue. Nothing in the Framework overrides any specific IFRS.

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 c. International Financial Reporting Interpretations: Interpretations are issued by the
IFRS Interpretations Committee and are considered authoritative and must be followed.
Twenty have been issued to date. These interpretations cover (1) newly identified
financial reporting issues not specifically dealt with in IFRS, and (2) issues where
unsatisfactory or conflicting interpretations have developed, or seem likely to develop,
in the absence of authoritative guidance.

The IASB has no regulatory mandate and no enforcement mechanism. It relies on other
regulators to enforce the use of its standards. For example, the European Union requires publicly
traded member country companies to use IFRS. Any company indicating that it prepares its
financial statements in conformity with IFRS must use all of the standards and interpretations. The
hierarchy of authoritative pronouncements is: IFRS, IAS, Interpretations issued by either the IFRS
Interpretation Committee or its predecessor the IAS Interpretations Committee, the Conceptual
Framework for Financial Reporting, and pronouncements of other standard-setting bodies that
use a similar conceptual framework to develop accounting standards (e.g., U.S. GAAP).

Financial Reporting Challenges

Although IFRS are developed by using sound research and a conceptual framework that
has its foundation in economic reality, a certain amount of pressure and influence is brought to
bear by groups interested in or affected by IFRS. The IASB does not exist in a vacuum, and
politics and special-interest pressure remain a part of the standard-setting process.
The expectations gap is the difference between what the public thinks accountants should
do and what accountants think they can do. It has been highlighted by the many accounting
scandals that have occurred. In order to meet the needs of society with highly transparent, clean,
and reliable systems, considerable costs will be incurred.

The significant financial reporting challenges facing the accounting profession are:
a. Non-financial measurements such as customer satisfaction indexes, backlog infor-
mation, and reject rates on goods purchased.
b. Forward-looking information.
c. Soft assets (intangibles).
d. Timeliness.

In accounting, ethical dilemmas are encountered frequently. The whole process of ethical
sensitivity and selection among alternatives can be complicated by pressures that may take the
form of time pressure, job pressures, client pressures, personal pressures, and peer pressures.
And, there is no comprehensive ethical system to provide guidelines.
Convergence to a single set of high-quality global financial reporting standards is a real
possibility. For example, the IASB and the FASB (of the United States) have spent the last 12
years working to converge their standards.
In addition, U.S. and European regulators have agreed to recognize each other’s standards
for listing on the various world securities exchanges. As a result, costly reconciliation re-
quirements have been eliminated and hopefully will lead to greater comparability and transparency.
Why the need for high-quality standards?
1. To facilitate efficient capital allocation.

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 2. In order to ensure adequate comparability across borders, a single, widely accepted set
of high-quality accounting standards is a necessity.
3. Identify the elements involved:
a. A single set of high-quality accounting standards established by a single standard-
setting body.
b. Consistency in application and interpretation.
c. Common disclosures.
d. Common high-quality auditing standards and practices.
e. Common approach to regulatory review and enforcement.
f. Education and training of market participants.
g. Common delivery systems.
h. Common approach to corporate governance and legal frameworks around the world.

Major standard-setters and regulatory authorities around the world recognize that capital
formation and investor understanding will be enhanced by a single set of high-quality accounting
standards.

ACCOUNTING STANDARDS IN THE PHILIPPINES

On November 18, 1981, the Philippine Institute of Certified Public Accountants (PICPA)
created the Accounting Standards Council (ASC) to establish and improve accounting standards
that will be generally accepted in the Philippines.
The creation of the Council received the support of the following: the Securities and
Exchange Commission (SEC) and the Central Bank of the Philippines (CB)-regulatory agencies
where the financial statements are filed; the Professional Regulation Commission (PRC) through
the Board of Accountancy—which supervises CPAs and auditors, and the Financial Executives
Institute of the Philippines (FINEX)—which is the largest organization of financial executives who
are responsible for the preparation of the financial statements. The ASC was composed of eight
(8) members-four from PICPA including the designated Chairman; and one each from SEC, CB,
PRC and FINEX.
The standards would generally be based on the following: existing practices in the
Philippines, research or studies by the Council; locally or internationally available literature on the
topic or subject; and statements, recommendations, studies or standards issued by other
standard-setting bodies such as the International Accounting Standards Board (LASB) and the
Financial Accounting Standards Board (FASB).
The statements and interpretations issued by the Council represented represent generally
accepted accounting principles in the Philippines. Accounting principles become generally
accepted if they have substantial authoritative support from the relevant parties interested in the
financial statements-the preparers and users, auditors and regulatory agencies.

Financial Reporting Standards Council

When created per Section 9(A) of the Rules and Regulations Implementing Republic Act
No. 9298 otherwise known as the Philippine Accountancy Act of 2004, the Financial Reporting
Standards Council (FRSC) shall be the new accounting standard setting body.
The FRSC shall be composed of fifteen (15) members with a Chairman, who had been or
presently a senior accounting practitioner in any of the scope of accounting practice and fourteen
(14) representatives from the following: one each from the BOA, SEC, BSP, BIR, COA and a
major organization composed of preparers and users of financial statements, and two
representatives each from the accredited national professional organization of CPAs in public
practice, commerce and industry, education/academe and government.

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Assessment Activities

TRUE-FALSE
1. Financial statements are the principal means through which financial information is
communicated to those outside an enterprise.
2. The major financial statements used under International Financial Reporting Standards
(IFRS) include the statement of changes in financial position and the statement of
stockholders’ equity.
3. In order to provide information that is useful in decision making and capital allocation, the
International Financial Reporting Standards (IFRS) requires all companies to use a common
currency.
4. Users of the financial information provided by a company use that information to make
capital allocation decisions.
5. The passage of a new International Financial Reporting Standards Statement requires the
support of ten of the sixteen board members.
6. International Financial Reporting Standards preceded International Accounting Standards.
7. The standard-setting structure used by the International Accounting Standards Board is very
similar to that used by the Financial Accounting Standards Board.
8. The International Accounting Standards Board issues International Financial Reporting
Standards.
9. International Accounting Standards are no longer considered applicable because they have
been replaced by International Financial Reporting Standards.
10. The two major standard-setting organizations in the world are the International Accounting
Standards Board (IASB) and International Organization of Securities Commission (IOSCO).
11. IFRS is considered more comprehensive than U.S. GAAP and the standards contain more
implementation guidance than U.S. GAAP.
12. The International Accounting Standards Board (IASB) follows specific steps in developing
International Financial Reporting Standards (IFRS); the first step in the process is holding a
public hearing.
13. The International Accounting Standards Board (IASB) has 16 members and each member
of the IASB must come from a different country.
14. Interpretations issued by the IFRS Interpretations Committee are more authoritative than
IASB Standards and Interpretations.
15. The International Accounting Standards Board (IASB) is a regulatory agency with
enforcement powers for its International Financial Reporting Standards (IFRS).
16. Accounting standards are now less likely to require the recording or disclosure of fair value
information due to its inherent subjectivity.
17. IFRS are a product of careful logic or empirical findings and are not influenced by political
action.
18. The expectations gap is caused by what the public thinks accountants should be doing and
what accountants think they can do.
19. Significant financial reporting issues facing global financial reporting and efficient capital
allocation include how to provide backward-looking information.
20. The IASB relies primarily on the International Organization of Securities Commissions
(IOSCO) for regulation and enforcement of its standards.

MULTIPLE CHOICE

1. The financial statements most frequently provided include all of the following except the

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 a. statement of financial position.
b. income statement.
c. statement of cash flows.
d. statement of retained earnings.

2. All the following are differences between financial and managerial accounting in how
accounting information is used except to
a. plan and control company's operations.
b. decide whether to invest in the company.
c. evaluate borrowing capacity to determine the extent of a loan to grant.
d. All of these answers are differences.

3. Which of the following represents a form of communication through financial reporting but
not through financial statements?
a. Statement of financial position.
b. President's letter.
c. Income statement.
d. Notes to financial statements.

4. The process of identifying, measuring, analyzing, and communicating financial information

needed by management to plan, evaluate, and control an organization’s operations is
called
a. financial accounting.
b. managerial accounting.
c. tax accounting.
d. auditing.

5. The major financial statements include all of the following except :

a. Statement of financial position.
b. Statement of changes in financial position.
c. Statement of comprehensive income.
d. Statement of changes in equity.

6. How does accounting help the capital allocation process attract investment capital?
a. Provides timely, relevant information.
b. Encourages innovation.
c. Promotes productivity.
d. Provides timely, relevant information and encourages innovation.

7. What would be an advantage of having all countries adopt and follow the same accounting
standards?
a. Consistency.
b. Comparability.
c. Lower preparation costs.
d. Comparability and lower preparation costs

8. General-purpose financial statements are the product of

a. financial accounting.
b. managerial accounting.
c. both financial and managerial accounting.

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 d. neither financial nor managerial accounting.

9. Users of financial reports include all of the following except:

a. creditors.
b. government agencies.
c. unions.
d. All of these are users.

10. The information provided by financial reporting pertains to

a. individual business enterprises, rather than to industries or an economy as a whole or
to members of society as consumers.
b. business industries, rather than to individual enterprises or an economy as a whole or
to members of society as consumers.
c. individual business enterprises, industries, and an economy as a whole, rather than to
members of society as consumers.
d. an economy as a whole and to members of society as consumers, rather than to
individual enterprises or industries.

11. What is the major objective of financial reporting?

a. Provide information that is useful to management in making decisions.
b. Provide information that clearly portray nonfinancial transactions.
c. Provide information that is useful to present and potential equity investors, lenders,
and other creditors in making decisions.
d. Provide information that excludes claims to the resources.

12. Which of the following statements is not an objective of financial reporting?

a. Provide information that is useful in investment and credit decisions.
b. Provide information about enterprise resources, claims to those resources, and changes
to them.
c. Provide information on the liquidation value of an enterprise.
d. Provide information that is useful in assessing cash flow prospects.

13. One element of the objective of financial reporting is to provide

a. information about the investors in the business entity.
b. information about the liquidation values of the resources held by the enterprise.
c. information that is useful in assessing cash flow prospects.
d. information that will attract new investors.

14. As part of the objective of general-purpose financial reporting, there is an emphasis on

“assessing cash flow prospects.” Under International Financial Reporting Standards (IFRS)
this is interpreted to mean:
a. Cash basis accounting is preferred over accrual-based accounting.
b. Information about the financial effects of cash receipts and cash payments is
generally considered the best indicator of a company’s present and continuing ability
to generate favorable cash flows.
c. Over the long run, trends in revenues and expenses are generally more meaningful
than trends in cash receipts and disbursements.
d. All of the choices are correct regarding “assessing cash flow prospects” under IFRS.

15. The purpose of the International Accounting Standards Board is to

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 a. issue enforceable standards which regulate the financial accounting and reporting of
multinational corporations.
b. develop a uniform currency in which the financial transactions of companies through-
out the world would be measured.
c. develop a single set of high-quality IFRS.
d. arbitrate accounting disputes between auditors and international companies.

16. In the past, many countries have relied on their own standard-setting organizations. The
standards issued by these various standard-setting organizations around the world
include
a. Tax-oriented standards.
b. Business-based standards.
c. Principles-based standards.
d. All of these answers are correct.

17. The two major standard-setting organizations in the world are

a. Financial Accounting Standards Board (FASB) and the International Organization of
Securities Commission (IOSCO).
b. Financial Accounting Standards Board (FASB) and the International Accounting
Standards Board (IASB).
c. The International Accounting Standards Board (IASB) and International Organization
of Securities Commission (IOSCO).
d. The International Accounting Standards Board (IASB) and the Standards Advisory
Council (SAC).

18. Which of the following organizations is not among the four-international standard-setting
organizations?
a. IFRS Foundation.
b. IFRS.
c. IFRS.
d. International Organization of Securities Commissions (IOSCO).

19. International financial reporting interpretations (issued by the International Accounting

Standards Board)
a. Are considered authoritative and must be followed.
b. Cover newly identified financial reporting issues not specifically addressed by the
IASB.
c. Cover issues where unsatisfactory or conflicting interpretations have developed.
d. All of the choices are correct regarding International financial reporting
interpretations.

20. Which of the following is not one of the major types of pronouncements issued by the
International Accounting Standards Board (IASB)?
a. International financial reporting standard.
b. Memorandum of understanding.
c. Framework for financial reporting.
d. International financial reporting interpretations.

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21. Which of the following has the highest authoritative support?
a. International Financial Reporting Standards.
b. International Accounting Standards.
c. Interpretations of the IFRIC.
d. Framework for Financial Reporting.

22. Which of the following is not a major challenge facing the accounting profession?
a. Nonfinancial measurements.
b. Timeliness.
c. Accounting for hard assets.
d. Forward-looking information.

23. Significant financial reporting issues facing global financial reporting and efficient capital
allocation include all of the following except :
a. How to provide backward-looking information.
b. How to report nonfinancial measures such as customer satisfaction.
c. How to provide forward-looking information.
d. How to provide real-time financial statement information.

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 Module 2
CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING

Overview
A conceptual framework can be defined as a system of ideas and objectives that lead to
the creation of a consistent set of rules and standards. Specifically, in accounting, the rule and
standards set the nature, function and limits of financial accounting and financial statements.
Different companies and countries follow different methods of financial accounting and
reporting. This might not always be due to choose but also a requirement of the business model
itself. For example, a company working with the distributorship model records its sale when the
goods leave the factory against a purchase order from the distributor. On the other hand, a
company working under the consignment sale model can record a sale only when goods are sold
to customer (and not the sale channel intermediaries). As such, there arise differences in financial
accounting and reporting, which magnify upon reaching the analysis and reporting stage.
The main reasons for developing an agreed conceptual framework are that it provides:
• a framework for setting accounting standards;
• a basis for resolving accounting disputes; and
• fundamental principles which then do not have to be repeated in accounting standards.
Having a fixed set of definitions of each line item, hence, becomes useful and rather
indispensable to ensure conceptual consistency amongst the audience of the report. It also helps
the potential investor better gauge and compare the performances of target companies,
regardless of their physical location and differences in business models.
The International Accounting Standards Board (Board) issued the revised Conceptual
Framework for Financial Reporting (Conceptual Framework), a comprehensive set of concepts
for financial reporting, in March 2018. It sets out, the objective of financial reporting; the qualitative
characteristics of useful financial information; a description of the reporting entity and its
boundary; definitions of an asset, a liability, equity, income and expenses; criteria for including
assets and liabilities in financial statements (recognition) and guidance on when to remove them
(derecognition); measurement bases and guidance on when to use them; and concepts and
guidance on presentation and disclosure.

Module Objectives:
After successful completion of this module, you should be able to:
❖ Understand the objective of financial reporting;
❖ Identify the qualitative characteristics of financial information;
❖ Describe the objective of financial statement;
❖ Identify the elements of financial statements;
❖ Understand the criteria for recognition and derecognition of the elements of financial
statement;
❖ Understand the measurement principles of financial reporting;
❖ Understand the presentation and disclosure principles of financial reporting; and
❖ Understand the concepts of capital and capital maintenance

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Course Materials

STATUS AND PURPOSE OF THE CONCEPTUAL FRAMEWORK

The Conceptual Framework for Financial Reporting (Conceptual Framework) describes
the objective of, and the concepts for, general purpose financial reporting. The purpose of the
Conceptual Framework is to:
a) assist the International Accounting Standards Board (Board) to develop IFRS Standards
(Standards) that are based on consistent concepts;
b) assist preparers to develop consistent accounting policies when no Standard applies to
a particular transaction or other event, or when a Standard allows a choice of accounting
policy; and
c) assist all parties to understand and interpret the Standards.

The Conceptual Framework is not a Standard. Nothing in the Conceptual Framework

overrides any Standard or any requirement in a Standard. To meet the objective of general-
purpose financial reporting, the Board may sometimes specify requirements that depart from
aspects of the Conceptual Framework. If the Board does so, it will explain the departure in the
Basis for Conclusions on that Standard.

Objective, usefulness and limitations of general-purpose financial reporting

The objective of general-purpose financial reporting forms the foundation of the
Conceptual Framework. Other aspects of the Conceptual Framework—the qualitative
characteristics of, and the cost constraint on, useful financial information, a reporting entity
concept, elements of financial statements, recognition and derecognition, measurement,
presentation and disclosure—flow logically from the objective.
The objective of general-purpose financial reporting is to provide financial information about the
reporting entity that is useful to existing and potential investors, lenders and other creditors in
making decisions relating to providing resources to the entity. Those decisions involve decisions
about:
a) buying, selling or holding equity and debt instruments;
b) providing or settling loans and other forms of credit; or
c) exercising rights to vote on, or otherwise influence, management’s actions that affect the
use of the entity’s economic resources.

The decisions described depend on the returns that existing and potential investors,
lenders and other creditors expect, for example, dividends, principal and interest payments or
market price increases. Investors’, lenders’ and other creditors’ expectations about returns
depend on their assessment of the amount, timing and uncertainty of (the prospects for) future
net cash inflows to the entity and on their assessment of management’s stewardship of the entity’s
economic resources. Existing and potential investors, lenders and other creditors need
information to help them make those assessments. To make the assessments described in
paragraph 1.3, existing and potential investors, lenders and other creditors need information
about:
a) the economic resources of the entity, claims against the entity and changes in those
resources and claims; and
b) how efficiently and effectively the entity’s management and governing board have
discharged their responsibilities to use the entity’s economic resources.

Many existing and potential investors, lenders and other creditors cannot require reporting
entities to provide information directly to them and must rely on general purpose financial reports
for much of the financial information they need. Consequently, they are the primary users to whom

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general purpose financial reports are directed. To a large extent, financial reports are based on
estimates, judgements and models rather than exact depictions. The Conceptual Framework
establishes the concepts that underlie those estimates, judgements and models. The concepts
are the goal towards which the Board and preparers of financial reports strive. As with most goals,
the Conceptual Framework’s vision of ideal financial reporting is unlikely to be achieved in full, at
least not in the short term, because it takes time to understand, accept and implement new ways
of analyzing transactions and other events. Nevertheless, establishing a goal towards which to
strive is essential if financial reporting is to evolve to improve its usefulness.

Economic resources and claims

Information about the nature and amounts of a reporting entity’s economic resources and
claims can help users to identify the reporting entity’s financial strengths and weaknesses. That
information can help users to assess the reporting entity’s liquidity and solvency, its needs for
additional financing and how successful it is likely to be in obtaining that financing. That
information can also help users to assess management’s stewardship of the entity’s economic
resources. Information about priorities and payment requirements of existing claims helps users
to predict how future cash flows will be distributed among those with a claim against the reporting
entity.

Changes in economic resources and claims

Changes in a reporting entity’s economic resources and claims result from that entity’s
financial performance and from other events or transactions such as issuing debt or equity
instruments. To properly assess both the prospects for future net cash inflows to the reporting
entity and management’s stewardship of the entity’s economic resources, users need to be able
to identify those two types of changes.

Financial performance reflected by accrual accounting

Accrual accounting depicts the effects of transactions and other events and circumstances
on a reporting entity’s economic resources and claims in the periods in which those effects occur,
even if the resulting cash receipts and payments occur in a different period. This is important
because information about a reporting entity’s economic resources and claims and changes in its
economic resources and claims during a period provides a better basis for assessing the entity’s
past and future performance than information solely about cash receipts and payments during
that period.

QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL INFORMATION

The qualitative characteristics of useful financial information discussed in this chapter
identify the types of information that are likely to be most useful to the existing and potential
investors, lenders and other creditors for making decisions about the reporting entity on the basis
of information in its financial report (financial information). Financial reports provide information
about the reporting entity’s economic resources, claims against the reporting entity and the effects
of transactions and other events and conditions that change those resources and claims. (This
information is referred to in the Conceptual Framework as information about the economic
phenomena.) Some financial reports also include explanatory material about management’s
expectations and strategies for the reporting entity, and other types of forward-looking information.
If financial information is to be useful, it must be relevant and faithfully represent what it purports
to represent. The usefulness of financial information is enhanced if it is comparable, verifiable,
timely and understandable.

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Fundamental qualitative characteristics

Relevance
Relevant financial information can make a difference in the decisions made by users.
Information may be capable of making a difference in a decision even if some users choose not
to take advantage of it or are already aware of it from other sources. Financial information can
make a difference in decisions if it has predictive value, confirmatory value or both.

Faithful representation
Financial reports represent economic phenomena in words and numbers. To be useful,
financial information must not only represent relevant phenomena, but it must also faithfully
represent the substance of the phenomena that it purports to represent. In many circumstances,
the substance of an economic phenomenon and its legal form are the same. If they are not the
same, providing information only about the legal form would not faithfully represent the economic
phenomenon. To be a perfectly faithful representation, a depiction would have three
characteristics. It would be complete, neutral and free from error. Of course, perfection is seldom,
if ever, achievable. The Board’s objective is to maximize those qualities to the extent possible.

Enhancing qualitative characteristics

Comparability, verifiability, timeliness and understandability are qualitative characteristics
that enhance the usefulness of information that both is relevant and provides a faithful
representation of what it purports to represent. The enhancing qualitative characteristics may also
help determine which of two ways should be used to depict a phenomenon if both are considered
to provide equally relevant information and an equally faithful representation of that phenomenon.

Comparability
Users’ decisions involve choosing between alternatives, for example, selling or holding an
investment, or investing in one reporting entity or another. Consequently, information about a
reporting entity is more useful if it can be compared with similar information about other entities
and with similar information about the same entity for another period or another date.
Comparability is the qualitative characteristic that enables users to identify and understand
similarities in, and differences among, items. Unlike the other qualitative characteristics,
comparability does not relate to a single item. A comparison requires at least two items.

Verifiability
Verifiability helps assure users that information faithfully represents the economic
phenomena it purports to represent. Verifiability means that different knowledgeable and
independent observers could reach consensus, although not necessarily complete agreement,
that a depiction is a faithful representation. Quantified information need not be a single point
estimate to be verifiable. A range of possible amounts and the related probabilities can also be
verified.

Timeliness
Timeliness means having information available to decision-makers in time to be capable
of influencing their decisions. Generally, the older the information is the less useful it is. However,
some information may continue to be timely long after the end of a reporting period because, for
example, some users may need to identify and assess trends.

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Understandability
Classifying, characterizing and presenting information clearly and concisely makes it
understandable. Financial reports are prepared for users who have a reasonable knowledge of
business and economic activities and who review and analyze the information diligently. At times,
even well-informed and diligent users may need to seek the aid of an adviser to understand
information about complex economic phenomena.

The cost constraint on useful financial reporting

Cost is a pervasive constraint on the information that can be provided by financial
reporting. Reporting financial information imposes costs, and it is important that those costs are
justified by the benefits of reporting that information. There are several types of costs and benefits
to consider.

Financial statements
Financial statements provide information about economic resources of the reporting entity,
claims against the entity, and changes in those resources and claims, that meet the definitions of
the elements of financial statements. The objective of financial statements is to provide financial
information about the reporting entity’s assets, liabilities, equity, income and expenses that is
useful to users of financial statements in assessing the prospects for future net cash inflows to
the reporting entity and in assessing management’s stewardship of the entity’s economic
resource. That information is provided:
a) in the statement of financial position, by recognizing assets, liabilities and equity;
b) in the statement(s) of financial performance, by recognizing income and
expenses; and
c) in other statements and notes, by presenting and disclosing information about:
i. recognized assets, liabilities, equity, income and expenses, including information
about their nature and about the risks arising from those recognized assets and
liabilities;
ii. assets and liabilities that have not been recognized, including information about
their nature and about the risks arising from them;
iii. cash flows;
iv. contributions from holders of equity claims and distributions to them; and
v. the methods, assumptions and judgements used in estimating the amounts
presented or disclosed, and changes in those methods, assumptions and
judgements.

Reporting period
Financial statements are prepared for a specified period of time (reporting period) and
provide information about:
a) assets and liabilities—including unrecognized assets and liabilities—and equity that
existed at the end of the reporting period, or during the reporting period; and
b) income and expenses for the reporting period.
To help users of financial statements to identify and assess changes and trends, financial
statements also provide comparative information for at least one preceding reporting period.

Going concern assumption

Financial statements are normally prepared on the assumption that the reporting entity is
a going concern and will continue in operation for the foreseeable future. Hence, it is assumed
that the entity has neither the intention nor the need to enter liquidation or to cease trading. If such
an intention or need exists, the financial statements may have to be prepared on a different basis.
If so, the financial statements describe the basis used.

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THE ELEMENTS OF FINANCIAL STATEMENTS

An asset is a present economic resource controlled by the entity as a result of past events.
An economic resource is a right that has the potential to produce economic benefits. This section
discusses three aspects of those definitions:
a) right;
b) potential to produce economic benefits; and
c) control.

A liability is a present obligation of the entity to transfer an economic resource as a result

of past events. For a liability to exist, three criteria must all be satisfied:
a) the entity has an obligation;
b) the obligation is to transfer an economic resource; and
c) the obligation is a present obligation that exists as a result of past events.

Equity is the residual interest in the assets of the entity after deducting all its liabilities.
Equity claims are claims on the residual interest in the assets of the entity after deducting all its
liabilities. In other words, they are claims against the entity that do not meet the definition of a
liability. Such claims may be established by contract, legislation or similar means, and include, to
the extent that they do not meet the definition of a liability:
a) shares of various types, issued by the entity; and
b) some obligations of the entity to issue another equity claim.

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 Income is increases in assets, or decreases in liabilities, that result in increases in equity,
other than those relating to contributions from holders of equity claims.

Expenses are decreases in assets, or increases in liabilities, that result in decreases in

equity, other than those relating to distributions to holders of equity claims.

Income and expenses are the elements of financial statements that relate to an entity’s
financial performance. Users of financial statements need information about both an entity’s
financial position and its financial performance. Hence, although income and expenses are
defined in terms of changes in assets and liabilities, information about income and expenses is
just as important as information about assets and liabilities.

THE RECOGNITION PROCESS

Recognition is the process of capturing for inclusion in the statement of financial position
or the statement(s) of financial performance an item that meets the definition of one of the
elements of financial statements—an asset, a liability, equity, income or expenses. Recognition
involves depicting the item in one of those statements—either alone or in aggregation with other
items—in words and by a monetary amount and including that amount in one or more totals in
that statement. The amount at which an asset, a liability or equity is recognized in the statement
of financial position is referred to as its ‘carrying amount’.
The statement of financial position and statement(s) of financial performance depict an
entity’s recognized assets, liabilities, equity, income and expenses in structured summaries that
are designed to make financial information comparable and understandable. An important feature
of the structures of those summaries is that the amounts recognized in a statement are included
in the totals and, if applicable, subtotals that link the items recognized in the statement.
Recognition links the elements; the statement of financial position and the statement(s) of
financial performance as follows (see Diagram 5.1):
a) in the statement of financial position at the beginning and end of the reporting period,
total assets minus total liabilities equal total equity; and
b) recognized changes in equity during the reporting period comprise:
i. income minus expenses recognized in the statement(s) of financial
performance; plus
ii. contributions from holders of equity claims, minus distributions to holders of
equity claims.

The statements are linked because the recognition of one item (or a change in its carrying
amount) requires the recognition or derecognition of one or more other items (or changes in the
carrying amount of one or more other items). For example:
a) the recognition of income occurs at the same time as:
i. the initial recognition of an asset, or an increase in the carrying amount of an
asset; or
ii. the derecognition of a liability, or a decrease in the carrying amount of a liability.

b) the recognition of expenses occurs at the same time as:

i. the initial recognition of a liability, or an increase in the carrying amount of a
liability; or
ii. the derecognition of an asset, or a decrease in the carrying amount of an asset.

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How recognition links the elements of financial statements

Recognition criteria
Only items that meet the definition of an asset, a liability or equity are recognized in the
statement of financial position. Similarly, only items that meet the definition of income or expenses
are recognized in the statement(s) of financial performance. However, not all items that meet the
definition of one of those elements are recognized. Not recognizing an item that meets the
definition of one of the elements makes the statement of financial position and the statement(s)
of financial performance less complete and can exclude useful information from financial
statements. On the other hand, in some circumstances, recognizing some items that meet the
definition of one of the elements would not provide useful information. An asset or liability is
recognized only if recognition of that asset or liability and of any resulting income, expenses or
changes in equity provides users of financial statements with information that is useful.

Derecognition
Derecognition is the removal of all or part of a recognized asset or liability from an entity’s
statement of financial position. Derecognition normally occurs when that item no longer meets the
definition of an asset or of a liability:
a) for an asset, derecognition normally occurs when the entity loses control of all or part
of the recognized asset; and
b) for a liability, derecognition normally occurs when the entity no longer has a present
obligation for all or part of the recognized liability.

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 Module 2
CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING

Overview
A conceptual framework can be defined as a system of ideas and objectives that lead to
the creation of a consistent set of rules and standards. Specifically, in accounting, the rule and
standards set the nature, function and limits of financial accounting and financial statements.
Different companies and countries follow different methods of financial accounting and
reporting. This might not always be due to choose but also a requirement of the business model
itself. For example, a company working with the distributorship model records its sale when the
goods leave the factory against a purchase order from the distributor. On the other hand, a
company working under the consignment sale model can record a sale only when goods are sold
to customer (and not the sale channel intermediaries). As such, there arise differences in financial
accounting and reporting, which magnify upon reaching the analysis and reporting stage.
The main reasons for developing an agreed conceptual framework are that it provides:
• a framework for setting accounting standards;
• a basis for resolving accounting disputes; and
• fundamental principles which then do not have to be repeated in accounting standards.
Having a fixed set of definitions of each line item, hence, becomes useful and rather
indispensable to ensure conceptual consistency amongst the audience of the report. It also helps
the potential investor better gauge and compare the performances of target companies,
regardless of their physical location and differences in business models.
0
The International Accounting Standards 0 Board (Board) issued the revised Conceptual
Framework for Financial Reporting (Conceptual Framework), a comprehensive set of concepts
for financial reporting, in March 2018. It sets out, the objective of financial reporting; the qualitative
characteristics of useful financial information; a description of the reporting entity and its
boundary; definitions of an asset, a liability, equity, income and expenses; criteria for including
assets and liabilities in financial statements (recognition) and guidance on when to remove them
(derecognition); measurement bases and guidance on when to use them; and concepts and
guidance on presentation and disclosure.

Module Objectives:
After successful completion of this module, you should be able to:
❖ Understand the objective of financial reporting;
❖ Identify the qualitative characteristics of financial information;
❖ Describe the objective of financial statement;
❖ Identify the elements of financial statements;
❖ Understand the criteria for recognition and derecognition of the elements of financial
statement;
❖ Understand the measurement principles of financial reporting;
❖ Understand the presentation and disclosure principles of financial reporting; and
❖ Understand the concepts of capital and capital maintenance

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Course Materials

STATUS AND PURPOSE OF THE CONCEPTUAL FRAMEWORK

The Conceptual Framework for Financial Reporting (Conceptual Framework) describes
the objective of, and the concepts for, general purpose financial reporting. The purpose of the
Conceptual Framework is to:
a) assist the International Accounting Standards Board (Board) to develop IFRS Standards
(Standards) that are based on consistent concepts;
b) assist preparers to develop consistent accounting policies when no Standard applies to
a particular transaction or other event, or when a Standard allows a choice of accounting
policy; and
c) assist all parties to understand and interpret the Standards.

The Conceptual Framework is not a Standard. Nothing in the Conceptual Framework

overrides any Standard or any requirement in a Standard. To meet the objective of general-
purpose financial reporting, the Board may sometimes specify requirements that depart from
aspects of the Conceptual Framework. If the Board does so, it will explain the departure in the
Basis for Conclusions on that Standard.

Objective, usefulness and limitations of general-purpose financial reporting

The objective of general-purpose financial reporting forms the foundation of the
Conceptual Framework. Other aspects of the Conceptual Framework—the qualitative
characteristics of, and the cost constraint on, useful financial information, a reporting entity
concept, elements of financial statements, recognition and derecognition, measurement,
presentation and disclosure—flow logically from the objective.
The objective of general-purpose financial reporting is to provide financial information about the
reporting entity that is useful to existing and potential investors, lenders and other creditors in
making decisions relating to providing resources to the entity. Those decisions involve decisions
about:
a) buying, selling or holding equity and debt instruments;
b) providing or settling loans and other forms of credit; or
c) exercising rights to vote on, or otherwise influence, management’s actions that affect the
use of the entity’s economic resources.

The decisions described depend on the returns that existing and potential investors,
lenders and other creditors expect, for example, dividends, principal and interest payments or
market price increases. Investors’, lenders’ and other creditors’ expectations about returns
depend on their assessment of the amount, timing and uncertainty of (the prospects for) future
net cash inflows to the entity and on their assessment of management’s stewardship of the entity’s
economic resources. Existing and potential investors, lenders and other creditors need
information to help them make those assessments. To make the assessments described in
paragraph 1.3, existing and potential investors, lenders and other creditors need information
about: 0 0
a) the economic resources of the entity, claims against the entity and changes in those
resources and claims; and
 b) how efficiently and effectively the entity s management and governing board have
discharged their responsibilities to use the entity’s economic resources.

Many existing and potential investors, lenders and other creditors cannot require reporting
entities to provide information directly to them and must rely on general purpose financial reports
for much of the financial information they need. Consequently, they are the primary users to whom

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general purpose financial reports are directed. To a large extent, financial reports are based on
estimates, judgements and models rather than exact depictions. The Conceptual Framework
establishes the concepts that underlie those estimates, judgements and models. The concepts
are the goal towards which the Board and preparers of financial reports strive. As with most goals,
the Conceptual Framework’s vision of ideal financial reporting is unlikely to be achieved in full, at
least not in the short term, because it takes time to understand, accept and implement new ways
of analyzing transactions and other events. Nevertheless, establishing a goal towards which to
strive is essential if financial reporting is to evolve to improve its usefulness.

Economic resources and claims

Information about the nature and amounts of a reporting entity’s economic resources and
claims can help users to identify the reporting entity’s financial strengths and weaknesses. That
information can help users to assess the reporting entity’s liquidity and solvency, its needs for
additional financing and how successful it is likely to be in obtaining that financing. That
information can also help users to assess management’s stewardship of the entity’s economic
resources. Information about priorities and payment requirements of existing claims helps users
to predict how future cash flows will be distributed among those with a claim against the reporting
entity.

Changes in economic resources and claims

Changes in a reporting entity’s economic resources and claims result from that entity’s
financial performance and from other events or transactions such as issuing debt or equity
instruments. To properly assess both the prospects for future net cash inflows to the reporting
entity and management’s stewardship of the entity’s economic resources, users need to be able
to identify those two types of changes.

Financial performance reflected by accrual accounting

Accrual accounting depicts the effects of transactions and other events and circumstances
on a reporting entity’s economic resources and claims in the periods in which those effects occur,
even if the resulting cash receipts and payments occur in a different period. This is important
because information about a reporting entity’s economic resources and claims and changes in its
economic resources and claims during a period provides a better basis for assessing the entity’s
past and future performance than information solely about cash receipts and payments during
that period.

QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL INFORMATION

The qualitative characteristics of useful financial information discussed in this chapter
identify the types of information that are likely to be most useful to the existing and potential
investors, lenders and other creditors for making decisions about the reporting entity on the basis
of information in its financial report (financial information). Financial reports provide information
about the reporting entity’s economic resources, claims against the reporting entity and the effects
of transactions and other events and conditions that change those resources and claims. (This
information is referred to in the Conceptual Framework as information about the economic
phenomena.) Some financial reports also include explanatory material about management’s
expectations and strategies for the reporting entity, and other types of forward-looking information.
If financial information is to be useful, it must be relevant and faithfully represent what it purports
to represent. The usefulness of financial information is enhanced if it is comparable, verifiable,
timely and understandable.

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Fundamental qualitative characteristics

Relevance
Relevant financial information can make a difference in the decisions made by users.
Information may be capable of making a difference in a decision even if some users choose not
to take advantage of it or are already aware of it from other sources. Financial information can
make a difference in decisions if it has predictive value, confirmatory value or both.

Faithful representation
Financial reports represent economic phenomena in words and numbers. To be useful,
financial information must not only represent relevant phenomena, but it must also faithfully
represent the substance of the phenomena that it purports to represent. In many circumstances,
the substance of an economic phenomenon and its legal form are the same. If they are not the
same, providing information only about the legal form would not faithfully represent the economic
phenomenon. To be a perfectly faithful representation, a depiction would have three
characteristics. It would be complete, neutral and free from error. Of course, perfection is seldom,
if ever, achievable. The Board’s objective
0 is to0maximize those qualities to the extent possible.
Enhancing qualitative characteristics
 Comparability, verifiability, timeliness and understandability are qualitative characteristics
that enhance the usefulness of information that both is relevant and provides a faithful
representation of what it purports to represent. The enhancing qualitative characteristics may also
help determine which of two ways should be used to depict a phenomenon if both are considered
to provide equally relevant information and an equally faithful representation of that phenomenon.

Comparability
Users’ decisions involve choosing between alternatives, for example, selling or holding an
investment, or investing in one reporting entity or another. Consequently, information about a
reporting entity is more useful if it can be compared with similar information about other entities
and with similar information about the same entity for another period or another date.
Comparability is the qualitative characteristic that enables users to identify and understand
similarities in, and differences among, items. Unlike the other qualitative characteristics,
comparability does not relate to a single item. A comparison requires at least two items.

Verifiability
Verifiability helps assure users that information faithfully represents the economic
phenomena it purports to represent. Verifiability means that different knowledgeable and
independent observers could reach consensus, although not necessarily complete agreement,
that a depiction is a faithful representation. Quantified information need not be a single point
estimate to be verifiable. A range of possible amounts and the related probabilities can also be
verified.

Timeliness
Timeliness means having information available to decision-makers in time to be capable
of influencing their decisions. Generally, the older the information is the less useful it is. However,
some information may continue to be timely long after the end of a reporting period because, for
example, some users may need to identify and assess trends.

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Understandability
Classifying, characterizing and presenting information clearly and concisely makes it
understandable. Financial reports are prepared for users who have a reasonable knowledge of
business and economic activities and who review and analyze the information diligently. At times,
even well-informed and diligent users may need to seek the aid of an adviser to understand
information about complex economic phenomena.

The cost constraint on useful financial reporting

Cost is a pervasive constraint on the information that can be provided by financial
reporting. Reporting financial information imposes costs, and it is important that those costs are
justified by the benefits of reporting that information. There are several types of costs and benefits
to consider.

Financial statements
Financial statements provide information about economic resources of the reporting entity,
claims against the entity, and changes in those resources and claims, that meet the definitions of
the elements of financial statements. The objective of financial statements is to provide financial
information about the reporting entity’s assets, liabilities, equity, income and expenses that is
useful to users of financial statements in assessing the prospects for future net cash inflows to
the reporting entity and in assessing management’s stewardship of the entity’s economic
resource. That information is provided:
a) in the statement of financial position, by recognizing assets, liabilities and equity;
b) in the statement(s) of financial performance, by recognizing income and
expenses; and
c) in other statements and notes, by presenting and disclosing information about:
i. recognized assets, liabilities, equity, income and expenses, including information
about their nature and about the risks arising from those recognized assets and
liabilities;
ii. assets and liabilities that have not been recognized, including information about
their nature and about the risks arising from them;
iii. cash flows;
iv. contributions from holders of equity claims and distributions to them; and
v. the methods, assumptions and judgements used in estimating the amounts
presented or disclosed, and changes in those methods, assumptions and
judgements.
0 0
Reporting period
Financial statements are prepared for a specified period of time (reporting period) and
provide information about:
a) assets and liabilities—including unrecognized assets and liabilities—and equity that
existed at the end of the reporting period, or during the reporting period; and
b) income and expenses for the reporting period.
To help users of financial statements to identify and assess changes and trends, financial
statements also provide comparative information for at least one preceding reporting period.

Going concern assumption

Financial statements are normally prepared on the assumption that the reporting entity is
a going concern and will continue in operation for the foreseeable future. Hence, it is assumed
that the entity has neither the intention nor the need to enter liquidation or to cease trading. If such
an intention or need exists, the financial statements may have to be prepared on a different basis.
If so, the financial statements describe the basis used.

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THE ELEMENTS OF FINANCIAL STATEMENTS

An asset is a present economic resource controlled by the entity as a result of past events.
An economic resource is a right that has the potential to produce economic benefits. This section
discusses three aspects of those definitions:
a) right;
b) potential to produce economic benefits; and
c) control.

A liability is a present obligation of the entity to transfer an economic resource as a result

of past events. For a liability to exist, three criteria must all be satisfied:
a) the entity has an obligation;
b) the obligation is to transfer an economic resource; and
c) the obligation is a present obligation that exists as a result of past events.

Equity is the residual interest in the assets of the entity after deducting all its liabilities.
Equity claims are claims on the residual interest in the assets of the entity after deducting all its
liabilities. In other words, they are claims against the entity that do not meet the definition of a
liability. Such claims may be established by contract, legislation or similar means, and include, to
the extent that they do not meet the definition of a liability:
a) shares of various types, issued by the entity; and
b) some obligations of the entity to issue another equity claim.

0 0 AND ACCOUNTING STANDARDS

ACCO 20063: CONCEPTUAL FRAMEWORK
17
 Income is increases in assets, or decreases in liabilities, that result in increases in equity,
other than those relating to contributions from holders of equity claims.

Expenses are decreases in assets, or increases in liabilities, that result in decreases in

equity, other than those relating to distributions to holders of equity claims.

Income and expenses are the elements of financial statements that relate to an entity’s
financial performance. Users of financial statements need information about both an entity’s
financial position and its financial performance. Hence, although income and expenses are
0 liabilities,
defined in terms of changes in assets and 0 information about income and expenses is
just as important as information about assets and liabilities.
THE RECOGNITION PROCESS
Recognition is the process of capturing for inclusion in the statement of financial position
or the statement(s) of financial performance an item that meets the definition of one of the
elements of financial statements—an asset, a liability, equity, income or expenses. Recognition
involves depicting the item in one of those statements—either alone or in aggregation with other
items—in words and by a monetary amount and including that amount in one or more totals in
that statement. The amount at which an asset, a liability or equity is recognized in the statement
of financial position is referred to as its ‘carrying amount’.
The statement of financial position and statement(s) of financial performance depict an
entity’s recognized assets, liabilities, equity, income and expenses in structured summaries that
are designed to make financial information comparable and understandable. An important feature
of the structures of those summaries is that the amounts recognized in a statement are included
in the totals and, if applicable, subtotals that link the items recognized in the statement.
Recognition links the elements; the statement of financial position and the statement(s) of
financial performance as follows (see Diagram 5.1):
a) in the statement of financial position at the beginning and end of the reporting period,
total assets minus total liabilities equal total equity; and
b) recognized changes in equity during the reporting period comprise:
i. income minus expenses recognized in the statement(s) of financial
performance; plus
ii. contributions from holders of equity claims, minus distributions to holders of
equity claims.

The statements are linked because the recognition of one item (or a change in its carrying
amount) requires the recognition or derecognition of one or more other items (or changes in the
carrying amount of one or more other items). For example:
a) the recognition of income occurs at the same time as:
i. the initial recognition of an asset, or an increase in the carrying amount of an
asset; or
ii. the derecognition of a liability, or a decrease in the carrying amount of a liability.

b) the recognition of expenses occurs at the same time as:

i. the initial recognition of a liability, or an increase in the carrying amount of a
liability; or
ii. the derecognition of an asset, or a decrease in the carrying amount of an asset.

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How recognition links the elements of financial statements

0 0
Recognition criteria
Only items that meet the definition of an asset, a liability or equity are recognized in the
statement of financial position. Similarly, only items that meet the definition of income or expenses
are recognized in the statement(s) of financial performance. However, not all items that meet the
definition of one of those elements are recognized. Not recognizing an item that meets the
definition of one of the elements makes the statement of financial position and the statement(s)
of financial performance less complete and can exclude useful information from financial
statements. On the other hand, in some circumstances, recognizing some items that meet the
definition of one of the elements would not provide useful information. An asset or liability is
recognized only if recognition of that asset or liability and of any resulting income, expenses or
changes in equity provides users of financial statements with information that is useful.

Derecognition
Derecognition is the removal of all or part of a recognized asset or liability from an entity’s
statement of financial position. Derecognition normally occurs when that item no longer meets the
definition of an asset or of a liability:
a) for an asset, derecognition normally occurs when the entity loses control of all or part
of the recognized asset; and
b) for a liability, derecognition normally occurs when the entity no longer has a present
obligation for all or part of the recognized liability.

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MEASUREMENT BASES
Elements recognized in financial statements are quantified in monetary terms. This
requires the selection of a measurement basis. A measurement basis is an identified feature—for
example, historical cost, fair value or fulfilment value—of an item being measured. Applying a
measurement basis to an asset or liability creates a measure for that asset or liability and for
related income and expenses.

Historical cost
Historical cost measures provide monetary information about assets, liabilities and related
income and expenses, using information derived, at least in part, from the price of the transaction
or other event that gave rise to them. Unlike current value, historical cost does not reflect changes
in values, except to the extent that those changes relate to impairment of an asset or a liability
becoming onerous.

Current value
Current value measures provide monetary information about assets, liabilities and related
income and expenses, using information updated to reflect conditions at the measurement date.
Because of the updating, current values of assets and liabilities reflect changes, since the
previous measurement date, in estimates of cash flows and other factors reflected in those current
values. Unlike historical cost, the current value of an asset or liability is not derived, even in part,
from the price of the transaction or other event that gave rise to the asset or liability. Current value
measurement bases include:
a) fair value;
b) value in use and fulfilment value for liabilities; and
c) current cost

Measurement of equity
The total carrying amount of equity (total equity) is not measured directly. It equals the
total of the carrying amounts of all recognized assets less the total of the carrying amounts of all
recognized liabilities.

Presentation and disclosure as communication tools

A reporting entity communicates information about its assets, liabilities, equity, income
and expenses by presenting and disclosing information in its financial statements. Effective
communication of information in financial statements makes that information more relevant and
contributes to a faithful representation of an entity’s assets, liabilities, equity, income and
expenses. It also enhances the understandability and comparability of information in financial
statements. Just as cost constrains other financial reporting decisions, it also constrains
decisions about presentation and disclosure. Hence, in making decisions about presentation and
disclosure, it is important to consider whether the benefits provided to users of financial
statements by presenting or disclosing particular information are likely to justify the costs of
providing and using that information.

Classification
Classification is the sorting of assets, liabilities, equity, income or expenses based on
shared characteristics for presentation and
0 disclosure
0 purposes. Such characteristics include—
but are not limited to—the nature of the item, its role (or function) within the business activities
conducted by the entity, and how it is measured.
ACCO 20063: CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS
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Classification of assets and liabilities

Classification is applied to the unit
0 of account
0 selected for an asset or liability. However, it
may sometimes be appropriate to separate an asset or liability into components that have different
characteristics and to classify those components separately. That would be appropriate when
classifying those components separately would enhance the usefulness of the resulting financial
information. For example, it could be appropriate to separate an asset or liability into current and
non-current components and to classify those components separately.

Offsetting
Offsetting occurs when an entity recognizes and measures both an asset and liability as
separate units of account, but groups them into a single net amount in the statement of financial
position. Offsetting classifies dissimilar items together and therefore is generally not appropriate.

Classification of equity
To provide useful information, it may be necessary to classify equity claims separately if
those equity claims have different characteristics

Classification of income and expenses

Classification is applied to:
a) income and expenses resulting from the unit of account selected for an asset or liability;
or
b) components of such income and expenses if those components have different
characteristics and are identified separately. For example, a change in the current value
of an asset can include the effects of value changes and the accrual of interest. It would
be appropriate to classify those components separately if doing so would enhance the
usefulness of the resulting financial information.

Profit or loss and other comprehensive income

Income and expenses are classified and included either:
a) in the statement of profit or loss; or
b) outside the statement of profit or loss, in other comprehensive income.

The statement of profit or loss is the primary source of information about an entity’s
financial performance for the reporting period. That statement contains a total for profit or loss
that provides a highly summarized depiction of the entity’s financial performance for the period.
Many users of financial statements incorporate that total in their analysis either as a starting point
for that analysis or as the main indicator of the entity’s financial performance for the period.
Nevertheless, understanding an entity’s financial performance for the period requires an analysis
of all recognized income and expenses—including income and expenses included in other
comprehensive income—as well as an analysis of other information included in the financial
statements.

Aggregation
Aggregation is the adding together of assets, liabilities, equity, income or expenses that
have shared characteristics and are included in the same classification. Aggregation makes
information more useful by summarizing a large volume of detail. However, aggregation conceals
some of that detail. Hence, a balance needs to be found so that relevant information is not
obscured either by a large amount of insignificant detail or by excessive aggregation.

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CONCEPTS OF CAPITAL
A financial concept of capital is adopted by most entities in preparing their financial
statements. Under a financial concept of capital, such as invested money or invested purchasing
power, capital is synonymous with the net assets or equity of the entity. Under a physical concept
of capital, such as operating capability, capital is regarded as the productive capacity of the entity
based on, for example, units of output per day.

Concepts of capital maintenance and the determination of profit

The concepts of capital in paragraph 8.1 give rise to the following concepts of capital
maintenance:
a) Financial capital maintenance. Under this concept a profit is earned only if the financial
(or money) amount of the net assets at the end of the period exceeds the financial (or
money) amount of net assets at the beginning of the period, after excluding any
distributions to, and contributions from, owners during the period. Financial capital
maintenance can be measured in either nominal monetary units or units of constant
purchasing power.
b) Physical capital maintenance. Under this concept a profit is earned only if the physical
productive capacity (or operating capability) of the entity (or the resources or funds
needed to achieve that capacity) at the end of the period exceeds the physical
productive capacity at the beginning of the period, after excluding any distributions to,
and contributions from, owners 0 during
0 the period.
The concept of capital maintenance is concerned with how an entity defines the capital
that it seeks to maintain. It provides the linkage between the concepts of capital and the concepts
of profit because it provides the point of reference by which profit is measured; it is a prerequisite
for distinguishing between an entity’s return on capital and its return of capital; only inflows of
assets in excess of amounts needed to maintain capital may be regarded as profit and therefore
as a return on capital. Hence, profit is the residual amount that remains after expenses (including
capital maintenance adjustments, where appropriate) have been deducted from income. If
expenses exceed income the residual amount is a loss.
The physical capital maintenance concept requires the adoption of the current cost basis
of measurement. The financial capital maintenance concept, however, does not require the use
of a basis of measurement. Selection of the basis under this concept is dependent on the type of
financial capital that the entity is seeking to maintain.
Under the concept of financial capital maintenance where capital is defined in terms of
nominal monetary units, profit represents the increase in nominal money capital over the period.
Thus, increases in the prices of assets held over the period, conventionally referred to as holding
gains, are, conceptually, profits. They may not be recognized as such, however, until the assets
are disposed of in an exchange transaction. When the concept of financial capital maintenance
is defined in terms of constant purchasing power units, profit represents the increase in invested
purchasing power over the period. Thus, only that part of the increase in the prices of assets that
exceeds the increase in the general level of prices is regarded as profit. The rest of the increase
is treated as a capital maintenance adjustment and, hence, as part of equity.
Under the concept of physical capital maintenance when capital is defined in terms of the
physical productive capacity, profit represents the increase in that capital over the period. All price
changes affecting the assets and liabilities of the entity are viewed as changes in the
measurement of the physical productive capacity of the entity; hence, they are treated as capital
maintenance adjustments that are part of equity and not as profit.

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Course Assessment

A. Identification - Write the word(s) best described by the statements below:

1. The standard-setting body who issues the International Financial Reporting Standards
2. The standard-setting organization who issues the U.S. GAAP
3. The process of identifying, measuring and communicating economic information to permit
informed judgment and decision by users of the information.
4. This was created to issue implementing guidelines on PFRS.
5. The amount of time that is expected to elapse until an asset is realized or otherwise converted
into cash
6. The financial report that shows the reporting entity’s economic resources and claims
7. The financial report that shows the changes due to events and transactions other than
financial performance such as the issue of equity instruments and distributions of cash or
other assets to shareholders
8. This is used when assets are recorded at the amount of cash or cash equivalents or the fair
value of the consideration given to acquire them at the time of their acquisition.
9. Refers to the ability of the business to raise cash to meet unexpected cash requirements.
10. Those responsible for the preparation and presentation of financial statements.
11. The standard that sets out the requirements for the presentation of the cash flow statement
and related disclosures.
12. Portray the financial effects of transactions and other events by grouping them into broad
classes according to their economic characteristics.
13. Result if an asset is sold more than book value.
14. One of its recognition criteria is that it is probable that the future economic events will flow to
the enterprise.
15. Under this concept a profit is earned only if the physical productive capacity (or operating
capability) of the entity (or the resources or funds needed to achieve that capacity) at the end
of the period exceeds the physical productive capacity at the beginning of the period, after
excluding any distributions to, and contributions from, owners during the period.

B. Fill in the Blanks - Write the word(s) to make the statements complete and correct.

1. _______________ provide financial reporting information to a wide variety of users.

2. As part of the objective of general-purpose financial reporting, an _______________ is
adopted. This means that companies are viewed as separate and distinct from their owners.
3. Accounting standards set out the recognition, _______________, presentation and
_______________ requirements of 0transactions
0 and events that are important in financial
statements.
4. The creation of FRSC in 2006 replaced the _______________.
5. The objective of the _______________ is to establish generally accepted accounting
principles in the Philippines.
6. _______________ sets out the concepts that underlie the preparation and presentation of
financial statements for external users.
7. If there are any conflict in the framework and IFRS, the _______________ prevails.
8. _______________ is a resource controlled by the enterprise as a result of past events and
from which future economic events are expected to flow to the enterprise.
9. _______________ are decreases in economic benefits during the accounting period in the
form of outflows or depletions of assets or incurrence of liabilities that result in decreases in
equity other than those relating to distributions to equity participants.

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10. The conceptual framework specifically mentions one underlying assumption, namely,
_______________.
11. The four sectors of accountancy under PICPA are: _______________, _______________,
_______________, _______________.
12. One constraint on useful financial reporting is that costs should be justified by the
_______________ of the reported financial information.
13. Assets that are carried at the amount of cash or cash equivalents that would have to be paid
if the same or an equivalent asset was acquired currently is measured using the
_______________.
14. Under the _______________ approach, investment must be recovered before a company
can have income.
15. The objective of PAS 1 is to prescribe the basis for presentation of general-purpose financial
statements in order to ensure _______________.

C. Matching – Write the letter of the term under List B that corresponds to the statement
indicated under List A.

LIST A LIST B
Concerns the relative size of an item and its effect on
1 a. Predictive value
decisions.
2 Information confirms expectations. b. Relevance
3 Important for making inter-firm comparisons. c. Timeliness
Accrual basis of
4 Applying the same accounting practices over time. d.
accounting
5 Implies consensus among different measures. e. Feedback value
A complete set of financial statements (including
6 comparative information) should be presented at least f. Frequency of reporting
annually.
7 Information is available prior to the decisions. g. Faithful representation
8 Pertinent to the decision at hand. h. Understandability
Along with relevance, a fundamental qualitative
9 i. Materiality
characteristic.
Requires consideration of the cost and value of
10 j. Comparability
information.
The process of admitting information into financial
11 k. Offsetting
statements.
An entity reports separately both assets and liabilities,
12 l. Recognition
and income and expenses.
13 Information is useful in determining the future m. Consistency
Effects of transactions on an entity’s economic
resources and claims are recognized in the periods in
14 n. Cost effectiveness
which those effects occur, even if the resulting cash
receipts and payments occur in a different period.
It requires that users have some knowledge of the
complex economic activities of enterprises, the
15 o. Verifiability
accounting process and the technical terminology in the
statements.
p. Prudence
q. Substance over form

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D. Sequencing - Arrange the following according to the correct sequence.
A. IASB Due Process
1. An exposure draft, which is IASB’s main vehicle for consulting the public, is published for
public comment.
2. All comments received on discussion document and exposure draft are considered.
3. Topics are identified and placed on IASB’s agenda.
4. After the due process is completed, all outstanding issues are resolved, and the IASB
members have balloted in favor of publication, the IFRS is issued.
5. After comments on the first exposure draft have been affected, the IASB considers whether
to publish its revised proposals for another round of comments.

B. FRSC Due Process

0
1. Approval of a standard or an interpretation0by a majority of the FRSC members.
2. Consideration of pronouncement of IASB.
3. Consideration of all comments received within the comment period and, when appropriate,
 preparing a comment letter to the IASB.
4. An exposure draft approved by a majority of the FRSC members for comments (comment
period 60 – 30 days)

E. True or False: Write A if the statement is correct or B if incorrect.

1. The principal difference between two concepts of capital maintenance is the treatment of the
effects of changes in the prices of assets and liability of the entity.
2. The selection of the appropriate concept of capital by an entity should be based on the needs
of the users of its financial statements.
3. The concept of capital maintenance chosen by an entity shall determine the accounting model
used in the preparation of its financial statements.
4. The Conceptual Framework serves as a guide in developing future financial reporting
standards and in reviewing existing ones.
5. The Conceptual Framework is a source of guidance for determining an accounting treatment
where a standard does not provide specific guidance.
6. The Conceptual Framework does not in any was assist prepares of financial statements in
applying PFRS and in dealing with topics that have yet to form the subject of PFRS.
7. The Conceptual Framework is not a PFRS, and nothing in it overrides any specific PFRS,
including PFRS that is in some respect in conflict with the Conceptual Framework.
8. The GPFS show the results of the stewardship of the management for the resources entrusted
to it by the capital providers.
9. The GPFS are prepared at least annually and are directed to both the common and specific
information needs of a wide range of statement users.
10. The GPFS provide information about the financial position, performance and cash flows of an
enterprise that is useful to a wide range of users in making economic decisions.

F. Multiple Choices: Select the best answer for each of the following.

1. According to the Preface to International Financial Reporting Standards, which of the following
are objectives of the IASB?
I. To harmonize financial reporting between IFRS and US GAAP and European
II. To work actively with national standard setters
III. To promote the use and strict application of financial accounting standards
A. I and II C. II and III
B. I and III D. I, II and III

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2. Which of the following are parts of the “due process” of the IASB in issuing a new International
Financial Reporting Standard?
I. Establishing an advisory committee to give advice
II. Developing and publishing a discussion document for public comment
III. Issuance of an interpretation as authoritative guidance
IV. Reviewing compliance and enforcement procedures
V. Issuance of the final standard with number and title
A. I, II and III only C. I, II, III & IV only
B. I, II and V only D. I, II, III, IV & V

3. Which of the following bodies is responsible for reviewing accounting issues that are likely to
receive divergent or unacceptable treatment in the absence of authoritative guidance, whit a
view to reaching consensus as to the appropriate accounting treatment?
A. Standards Advisory Council (SAC)
B. International Accounting Standards Board (IASB)
C. International Financial Reporting Interpretations Committee (IFRIC)
D. International Accounting Standards Committee Foundation (IASC Foundation)

4. Which of the following statements about international accounting standards is true?

A. Accounting professionals in the USA consider US GAAP superior to IAS and has no
intention to adopt International Accounting Standards.
B. The IASB is able to enforce its standards by prohibiting the listing of companies which do
not comply on stock exchanges which sell internationally.
C. The International Accounting Standards Board (IASB) was established with the purpose
of narrowing the range of divergence in accounting standards throughout the world.
D. Legal and psychological hurdles to achieving common reporting standards will be fully
overcome by the year 2012, the time frame set for convergence between IAS and US
GAAP.

5. Which of the following bodies report to the IFRS Foundation?

A. The IASB and AASB. 0 0
B. The IASB and the FASB.
C. The IASB and the IFRS Advisory Council.
 D. The IASB, AASB, and the IFRS Advisory Council.

6. Which body appoints the members of International Accounting Standards Board (IASB) that
make the present IFRS?
A. IFRS Foundation.
B. IFRS Advisory Council.
C. International Accounting Standards Committee.
D. International Financial Reporting Interpretations Committee.

7. Financial accounting standard-setting

A. is based solely on research and empirical findings.
B. is a legalistic process based on rules promulgated by governmental agencies.
C. is democratic in the sense that a majority of accountants must agree with a standard
before it becomes enforceable.
D. can be described as a social process which reflects political actions of various interested
user groups as well as a product of research and logic.

8. The “due process” system in developing financial reporting standards

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 A. is an efficient system for collecting dues from members.
B. identifies the accounting issues that are the most important.
C. enables interested parties to express their views on issues under consideration.
D. requires that all accountants must receive a copy of financial accounting standards.

9. What is due process in the context of standard setting at the IASB?

A. IASB operates in full view of the public.
B. Interested parties can make their views known.
C. Public hearings are held on proposed accounting standards.
D. All of these.

10. What is the chronological order in the evaluation of a typical standard?

A. Discussion paper, Exposure draft and Standard.
B. Exposure draft, Discussion paper and Standard.
C. Exposure draft, Standard and Discussion paper.
D. Standard, Discussion paper, and Exposure draft.

11. The IASB declared that the merits of proposed standards are assessed
A. from a position of neutrality.
B. from a position of materiality.
C. based on arguments of lobbyist.
D. based on possible impact on behavior.

12. Under Philippine Financial Reporting Standards

A. the cash basis of accounting is accepted.
B. events are recorded in the period in which the event occurs.
C. net income will be lower under the cash basis than accrual basis accounting.
D. all of the choices are correct.

13. RA 9298 is officially known as

A. The Revised Accountancy Act.
B. The Revised Accountancy Law.
C. The Philippine Accountancy Act of 2004.
D. The Accountancy Law of the Philippines, 2007.

14. Under Section 5 of RA 9298, who shall appoint the members of the Professional Regulatory
Board of Accountancy?
A. The chairman of the Board of Accountancy.
B. The president of the Republic of the Philippines.
C. The chairperson of Professional Regulations Commission.
D. The president of Philippine Institute of Certified Public Accountants.

15. The following statements relate to the Board of Accountancy. Select the incorrect statement:
A. The Board consists of a Chairman and six members.
B. The chairman and members of the Board are appointed by the President of the
Philippines upon recommendation of the Professional Regulation Commission.
C. The Professional Regulation Commission may remove from the Board of
Accountancy, any member whose certificate to practice has been revoked or
suspended.
D. All sectors of accountancy0 practice 0 shall as much as possible be equitably
represented in the Board.
ACCO 20063: CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS
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16. Which of the following is not an economic entity?

A. SM Group of Companies.
B. Lions Club International, a civic organization.
C. ABS-CBN Foundation, a charitable institution.
D. Chris James, a Quezon City resident who owns a chain of beauty salons.
0 0
17. This accounting objective emphasizes the importance of the Income Statement as it is geared
toward proper income or performance determination of the enterprise.
 A. Entity theory. C. Proprietary theory.
B. Fund theory D. Residual equity theory.

18. Which of the following is not a description or a function of the Financial Reporting Standards
Council (FRSC)?
A. It establishes generally accepted accounting principles in the Philippines.
B. It receives financial support principally from the Professional Regulations Commission
(PRC).
C. It is the successor of Accounting Standards Council (ASC) and the creator of Philippine
Interpretations Committee (PIC).
D. It assists the Professional Regulatory Board of Accountancy (BOA) in carrying out its
power and function to promulgate accounting standards in the Philippines.

19. Which of the following situations violates the concept of reliability?

A. Data on segments having the same expected risks and growth rates are reported to
analysts estimating future profits.
B. Financial statements are issued nine months late.
C. Management reports to stockholders’ new projects undertaken, but the financial
statements never report the projected results.
D. Financial statements include a property with a carrying amount increased to
management’s estimate of market value.

20. Which of the following statements about financial statements is incorrect?

A. They are the primary responsibility of the management of the enterprise.
B. They show the results of the stewardship of the management for the resources entrusted
to it by the capital providers.
C. They are prepared at least annually and are directed to both the common and specific
information needs of a wide range of statement users.
D. The provide information about the financial position, performance and cash flows of an
enterprise that is useful to a wide range of users in making economic decisions.

21. Under the Conceptual Framework for Financial Reporting which of the following statements
is not a feature of financial information’s “comparability” characteristics?
A. Comparability is uniformity.
B. A comparison requires at least two items.
C. Consistency, although related to comparability, is not the same.
D. Comparability is the goal; consistency helps to achieve that goal.

22. When fair value is used in measuring assets in the financial statements, current GAAP
provides following references as basis of fair value, except
A. Price in active market.
B. Price in recent transaction.
C. Price taken from industry or sector benchmarks.

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 D. Price based on assessed value of government bodies.

23. The objectives of financial reporting for business enterprises are based on
A. the need for conservative information
B. the needs of the users of the information
C. the need to report on management’s stewardship
D. the need to comply with financial accounting standards

24. Which of the following statements regarding users of financial information is correct?
A. Managers of an entity are considered to be internal decision makers.
B. Accounting information is prepared for and useful to only outside decision makers.
C. External decision makers can obtain whatever financial data they need and whenever
they need it.
D. The members of the Board of Directors are not internal rather than external users of
financial information.

25. Which of the following statements is (are) true, concerning the Going Concern assumption?
I. When preparing financial statements, management is required to make an assessment
of an enterprise’s ability to continue as a going concern which should be at least twelve
months from balance sheet date.
II. When an enterprise has a history of profitable operations and ready access to financial
resources it is not a detailed analysis as to is ability to operate as a going concern is not
necessary.
III. When the financial statements are0 not 0prepared on a going-concern basis, this fact should
disclose
A. I and II only C. II and III
 B. II and III only D. I, II, and III

26. If accounting information is timely, and has predictive as well as feedback value, then it is
considered to be
A. relevant C. understandable
B. reliable D. verifiable

27. In the first week of December 2016, Elisa Company signs a major contract to develop an
accounting information system for Edward Inc. No work is begun the current year, yet the
notes to the financial statements discuss the nature and peso amount of the contract. This is
an example of:
A. completeness or full disclosure C. historical cost
B. conservatism D. relevance

28. Which of the following statements best describes the term “going concern”?
A. The expenses of an entity exceed its income
B. When current liabilities of an entity exceed current assets
C. The ability of the entity to continue in operation for the foreseeable future
D. The potential to contribute to the flow of cash and cash equivalents to the entity

29. Which TWO of the following are listed in the IASB Framework as ‘underlying assumptions’
regarding financial statements?
A. The financial statements are prepared under the accrual basis
B. The entity can be viewed as a going concern
C. The financial statements are reliable

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 D. Accounting policies are consistently applied
A. A and B C. B and D
B. B and C D. C and D

30. Which of the following situations violates the concept of reliability?

I. Relevance is the capacity of information to make difference in decision by helping users
from predictions about outcome of past, present and future events or confirm/correct prior
expectations
II. The quality of reliability assures readers that the financial information is free from bias
and faithfully represents what it purports to show, including adequate disclosure of
significant information
III. Under the IASB Framework for the Preparation and presentation of financial statements,
conservatism is not a concept that is recognized as a qualitative objective.
A. I and II only C. II and III only
B. I and III only D. I, II and III

31. Which of the following is the best description of reliability in relation to information in financial
statements?
A. Comprehensibility to users C. Influence on the economic decisions
B. Freedom from material error and bias D. Inclusion of degree of caution of
users

32. According to the IASB Framework for the preparation and presentation of financial
statements, which TWO of the following are examples of expenses?
I. A loss on the disposal of a non-current asset
II. A decrease in equity arising from a distribution to equity participants
III. A decrease in economic benefits during the accounting period
IV. A reduction in income for the accounting period
A. I and II C. II and III
B. I and III D. III and IV

33. An expiration of cost which is incurred without compensation or return and is not absorbed as
cost of revenue is called
A. Deferred charge C. Indirect cost
B. Deferred credit D. Loss

34. Which of the following best describes the distinction between expenses and losses?
A. Losses are material items whereas expenses are immaterial items
B. Losses are extraordinary charges whereas expenses are ordinary charges
C. Losses are reported net-of-related-tax effect whereas expenses are not reported not-of-
tax
D. Losses results from peripheral 0or incidental
0 transactions whereas expenses result from
ongoing major or central operations of the entity
35. Which of the following statements about accounting recognition is (are) true?
I. In accounting, there are instances when a gain/loss would arise upon initial recognition
of an asset.
II. No asset can simultaneously be an asset of more than one entity
III. At times, two or more entities may share the benefits that an asset provides
IV. An appropriate basis for recognizing an asset is when a particular enterprise acquires the
right to utilize and control access to the asset’s benefits

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 A. I and II only C. I, II and III only
B. I and IV only D. I, II, III and IV

36. Which one of the following terms best describes the amount of cash or cash equivalents that
could currently be obtained by selling an asset in an orderly disposal?
A. Fair value C. Residual value
B. Realizable value D. Value in use

37. Which of the following assets are initially and subsequently measured at Fair Value?
I. Biological assets IV. Property and Equipment
II. Available for sale securities V. Held for trading securities
III. Inventories VI. Intangible assets

A. I and II only C. I, II, III and V only

B. I, II and III only D. I, II, IV, and V only

38. The capital maintenance concept followed under present GAAP is

A. Economic capital C. Physical capital
B. Financial and physical capital D. Real capital

39. What concept is critical in distinguishing an enterprise’s return on investment from return of
its investment?
A. Capital maintenance concept C. Current operating performance concept
B. Comprehensive income concept D. Return on investment concept

40. Under the Conceptual Framework of Financial Reporting, users of financial information may
be classified into
A. Heavy users (management) and slight users (public, government).
B. Primary users (existing and potential investors and creditors) and other users.
C. Internal users (employees, customers) and external users (investors, creditors).
D. Main users (existing investors, creditors) and incidental users (potential investors,
creditors)

41. Which of the following situations violates the concept of reliability?

A. Data on segments having the same expected risks and growth rates are reported to
analysts estimating future profits.
B. Financial statements are issued nine months late.
C. Management reports to stockholders’ new projects undertaken, but the financial
statements never report the projected results.
D. Financial statements include a property with a carrying amount increased to
management’s estimate of market value.

42. What is the authoritative status of the Conceptual Framework?

A. The Framework applies when FRSC develops new or revised Standards. An enterprise
is never required to consider the framework.
B. It has the highest level of authority. In case of a conflict between the Framework and s
Standard or Interpretation, the Framework overrides the Standard or Interpretation.
C. If there is a Standard or Interpretation that specifically applies to a transaction, it overrides
the Framework. In the absence of a Standard or an Interpretation that specifically
applies, the Framework should be followed.

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 D. If there is a Standard or Interpretation that specifically applies to a transaction,
management should consider the applicability of the Framework in developing and
applying an accounting policy which results in information that is relevant and reliable.

43. Which of the following is the first step within hierarchy of guidance to which management
refers, and whose applicability at considers, when selecting accounting policies?
A. Apply the requirements in PFRS dealing with similar and related issues.
B. Apply a standard from PFRS if it specifically relates to the transaction, event, or condition.
C. Consider the applicability of the definitions, recognition criteria, and measurement
concepts in the Conceptual Framework.
D. Consider the most recent pronouncements of other standard-setting bodies to the extent
they do not conflict with PFRS or the Conceptual Framework?

44. Under the Conceptual Framework for Financial Reporting 2010, which of the following is a
new item added in its scope but is still a work-in-progress?
A. Consolidated financial statements. C. The government entity.
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B. Mergers and acquisitions. D. The reporting entity.

45. What is the qualitative characteristic of financial statements according to the Framework?
45. What is the qualitative characteristic of financial statements according to the Framework?
A. Qualitative characteristics are broad classes of financial effects of transactions and other
events.
B. Qualitative characteristics are the attributes that make the information provided in
financial statements useful to others.
C. Qualitative characteristics measure the extent to which an entity has complied with all
relevant Standards and Interpretations.
D. Qualitative characteristics are non-quantitative aspects of an entity’s position and
performance and changes in financial position.

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 MODULE 3
REVIEW OF ACCOUTING PROCESS

Overview:
The accounting process also known as accounting cycle is a series of steps to be
completed during an accounting period or reporting period. This process is a set of steps that are
repeated in the same order every reporting period and demonstrates the purpose of financial
accounting–to create useful financial information in the form of financial statements
The end results of the accounting process is the financial statements such as a statement
of financial position, a statement of profit or loss and other comprehensive income; a statement
of changes in equity for the period; a statement of cash flows for the period and notes, comprising
significant accounting policies and other explanatory information.
For some entities, financial statements are prepared on a monthly, quarterly, and / or
annually depending on the purpose of reporting. Financial statements are the main source of
financial information for most decision by the management. That is why financial
accounting and reporting places such a high emphasis on the accuracy, reliability, and relevance
of the information on these financial statements. On the other hand, these statements are also
prepared to give users outside of the entity like investors and creditors for more information about
the entity’s financial positions and financial performance. along with other users such as
regulatory agencies on a timely manner.
The entities have various options on how the accounting process shall be made. In the
past they used manual systems process but now in this time of globalization various technology.
arises using the computerized accounting system. However, the manner the entity chose the
accounting process, they are being observed to capture the transactions for financial reporting
purposes.

Module Objectives:
After successful completion of this module, you should be able to:
❖ review the phases of accounting process;
❖ acquire mastery in preparing year-end adjusting entries; and
❖ understand the nature of reversing entries.
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Course Materials:
REVIEW THE PHASES OF ACCOUNTING PROCESS
The steps in accounting process includes:
1. Business events/ Transactions are documented.
2. Analyze the transactions, and for record in the journal.
3. Post journal entries to applicable ledger accounts
4. Trial Balance is prepared
5. Adjusting entries are journalized and posted
6. Preparation of Adjusted Trial Balance
7. Preparation of Financial Statements
8. Preparation of closing entries
9. Preparation of Post Closing Trial Balance
10.Reversing entries are journalized and posted

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Business events/ Transactions are documented
This cycle starts with a business event or simply called transactions. Verifiability of
transactions must be supported by underlying business documents such as sales receipts, sales
invoice, purchase invoice, check vouchers among others. These source documents will be the
basis for recording of transactions.

Analyzation of the Transactions and for Record in the Journal

Accounting journals are often called the book of original entry. It is a record of business
transactions and events for a specific account in chronological order. For the transactions to be
recorded it must influence the elements of financial statements and meet the criteria of recognition
identified in the framework of accounting:
a. There is a future economic benefit associated with the item that flow to the entity
b. There is monetary amount at which the elements are to be recognized and reported.

The accounting system that requires every business transactions or event to be recorded
in at least two accounts is called double entry accounting system. This is the same concept behind
the accounting equation. Every debit that is recorded must be matched with a credit and must be
equal in every accounting transaction in their total There are two general classification of journal,
the General Journal and the Special Journal
The general journal is often used by small entity with only few transactions and also called
two column journals. For an entity with numerous transactions, special journals are being used in
addition to general journal that are used to help divide and organize business transactions.
Here’s a list of the special accounting journals used:
• Cash Receipts Journal
• Cash Disbursements Journal
• Purchases Journal
• Sales Journal

Each of the journals has a specific purpose and are used for recording specific types of
transactions. For example, the cash receipts journal contains all of the cash sale transactions.
The accounts receivable or credit sales journal contains all the transactions for credit sales.
Purchases Journal are used for all credit purchase, while cash purchases transactions are
recorded in cash disbursement journal. All other transactions such as adjusting and closing, and
reversing entries are recorded in the general journal. The use of special journal the help
management organize and analyze accounting information.

Post journal entries to applicable ledger accounts

Ledger is a complete listing of all the accounts use in the chart of accounts. The entries
from the journals are transferred to this ledger accounts. Each journal entry is transferred from
the journal to the corresponding ledger accounts. The debits are always transferred to the left
side and the credits are always transferred to the right side of the ledger. Since most accounts
will be affected by multiple journal entries and transactions, there are usually several numbers in
both the debit and credit columns. The account balances of each account are calculated at the
bottom and get its total. This process is called pencil footing. Notice that these are account
balances—not column balances. The total difference between the debit and credit columns will
be displayed on the bottom of the corresponding side. The purpose of this process is to show the
effects of transactions on the elements of financial statements. The use of special journals
facilitates the posting process and only the total are entered in the ledger. However, the general
journal is posted individually. For controlling account in the ledger, the entity has subsidiary ledger

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for accounts with various details. For instance, the customers account serves as subsidiary ledger
for accounts receivable, creditors accounts for accounts payable, raw materials inventory
accounts and different property items for property and equipment accounts.
Most entities have computerized accounting systems that update ledger accounts as soon
as the journal entries are input into the accounting system. Manual accounting systems are
usually posted weekly or monthly. Just like journalizing, posting entries is done throughout each
accounting period.

Trial Balance is prepared 0 0

The preparation of Trial Balance determined the equality of debits and credits in the ledger
but does not give assurance of error free during journalizing and posting process. The total
 • Summary of Significant Polices based on the chart of accounts and additional information
provided in the succeeding paragraphs
• Significant Accounting Judgments, Estimates and Assumptions
• Supporting computations and other information on account presented on the face of the
financial statements as required by PAS 1

Evaluation: Upon submission of the complete set of financial statements, you get 100 points. Your
work will be evaluated based on the requirements of PAS 1. You will get a demerit for every non-
compliance with PAS 1.

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 Module 5
INTERIM FINANCIAL REPORTING

Overview:
An interim financial report is a complete or condensed set of financial statements for a
period shorter than a financial year. IAS 34 does not specify which entities must publish an interim
financial report. That is generally a matter for laws and government regulations. IAS 34 applies if
an entity using International Financial Reporting Standards (IFRSs) in its annual financial
statements publishes an interim financial report that asserts compliance with IFRSs.
IAS 34 prescribes the minimum content of such an interim financial report. It also specifies the
accounting recognition and measurement principles applicable to an interim financial report.
The minimum content is a set of condensed financial statements for the current period and
comparative prior period information, i.e. statement of financial position, statement of
comprehensive income, statement of cash flows, statement of changes in equity, and selected
explanatory notes. In some cases, a statement of financial position at the beginning of the prior
period is also required. Generally, information available in the entity’s most recent annual report
is not repeated or updated in the interim report. The interim report deals with changes since the
end of the last annual reporting period.
The same accounting policies are applied in the interim report as in the most recent annual
report, or special disclosures are required if an accounting policy is changed. Assets and liabilities
are recognized and measured for interim reporting based on information available on a year-to-
date basis. While measurements in both annual financial statements and interim financial reports
are often based on reasonable estimates, the preparation of interim financial reports will generally
require a greater use of estimation methods than annual financial statements.

Module Objectives:
After successful completion of this module, you should be able to:
❖ Define interim financial statements and understand its purpose;
❖ Enumerate the components of interim financial statements;
❖ Recognize and measure items reported in the interim financial statements

Course Materials:

OBJECTIVE OF IAS 34
The objective of this Standard is to prescribe the:
• minimum content of an interim financial report
• recognition and measurement in complete or condensed financial statements in an
interim period.

Timely and reliable interim financial reporting improves the ability of stakeholders
(investors, creditors, and others) to understand an entity’s capacity to generate earnings and cash
flows and its financial condition and liquidity.

SCOPE OF IAS 34
This Standard does not mandate which entities should produce interim financial reports,
how frequently, or how soon after the end of an interim period. IAS 34 is applied when an entity
chooses, or is required by the government or other institution, to publish interim financial report
that complies with IFRSs.
This Standard applies if an entity is required or elects to publish an interim financial report
in accordance with IFRSs.

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 IAS 34, however, encourages publicly listed entities to provide at least a semi-annual
financial report for the first half the year to be issued not later than 60 days after the end of the
interim period.
Financial reports, whether annual or interim, are evaluated for conformity to the IFRSs on
their own. Non-preparation of interim reports or non-compliance with IAS 34 does not necessarily
prevent the entity’s annual financial statements from conforming to the IFRS. If an entity’s interim
financial reporting is described as conforming with IFRSs, it must comply with all the requirements
of this Standard.

DEFINITIONS
❖ Interim period is a financial reporting period shorter than a full financial year.
❖ Interim financial report means a financial report containing either a complete set of
financial statements (IAS 1) or a set of condensed financial statements (IAS 34) for an
interim period.

CONTENT OF AN INTERIM FINANCIAL REPORT

In the interest of timeliness and cost considerations and to avoid repetition of information
previously reported, an entity may be required to or may elect to provide less information at interim
dates as compared with its annual financial statements. This Standard defines the minimum
content of an interim financial report as including condensed financial statements and selected
explanatory notes. The interim financial report is intended to provide an update on the latest
complete set of annual financial statements. Accordingly, it focuses on new activities, events, and
circumstances and does not duplicate information previously reported.
An entity is not prohibited or discouraged from preparing a complete set of financial
statements (in accordance with IAS 1) for its interim financial reporting.

Minimum components of an interim financial report

An entity presenting an interim financial report has the option of applying either IAS 1 or
IAS 34. The entity applies IAS 1 if it opts to provide a complete set of financial statements in its
interim financial report. The entity applies IAS 34 if it opts to provide a condensed set of financial
statements in its interim financial report.
IAS 1 – Complete set of FS IAS 34 – Condensed set of FS
• Statement of financial position • Condensed statement of financial
position
• Statement of profit or loss and other • Condensed statement of profit or loss
comprehensive income and other comprehensive income
• Statement of changes in equity • Condensed statement of changes in
equity
• Statement of cash flows • Condensed statement of cash flows
• Notes (5.a) Comparative information • Selected explanatory notes
• Additional statement if financial position
(required only when certain instances
occur)

Form and content of interim financial statements

At a minimum, condensed interim financial statements include each of the headings and
subtotals that were included in the entity’s most recent annual financial statements and the
selected explanatory notes required by IAS 34. Additional line items or notes are provided if their
omission makes the condensed financial statements misleading.

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Significant events and transactions
Interim reports are intended to provide an update on the latest complete set of annual
financial statements. Hence, they focus on providing information on significant events and
transactions that have occurred since the latest annual period, rather than duplicating previously
reported information or providing relatively insignificant updates on them. Consequently, users of
interim financial report are assumed to also have access to the entity’s latest annual financial
report. Examples of events and transactions for which disclosures would be required if they are
significant:
a. write-down of inventories to net realizable value and reversal thereof
b. impairment losses and reversal thereof
c. reversal of provision for restructuring costs
d. acquisitions and disposals of PPE, including purchase commitments
e. litigation settlements
f. corrections of prior period errors
g. business or economic circumstances affecting the fair value of financial assets and
financial liabilities
h. unremedied loan default or breach of loan agreement
i. related party transactions
j. transfers between levels of the fair value hierarchy used in measuring the fair value of
financial instruments
k. changes in the classification of financial assets
l. changes in contingent liabilities

When an event or transaction is significant to an understanding of the changes in an entity’s

financial position or performance since the last annual reporting period, its interim financial report
should provide an explanation of and an update to the relevant information included in the financial
statements of the last annual reporting period.

Other disclosures
The following disclosures shall be given either in the interim financial statements or
incorporated by cross-reference form the interim financial statements to some other statement
that is available to users of the financial statements on the same terms as the interim financial
statements and at the same time. If users of the financial statements do not have access to the
information incorporated by cross-reference on the same terms and at the same time, the interim
financial report is incomplete.
In addition to significant events and transactions, the following are also disclosed in the
interim financial report:
a. a statement that the same accounting policies were used in the interim financial
statements as those used in the latest annual financial statements. If there have been
changes, those changes are disclosed.
b. explanation of seasonality or cyclicality of interim operations
c. unusual items affecting the financial statement elements
d. changes in accounting estimates
e. issuances and settlements of debt and equity securities
f. dividends paid
g. segment information (if the entity is covered by IFRS 8)
h. events after the reporting period
i. changes in the composition of the entity, e.g., business combinations, obtaining or
losing control of subsidiaries, restructurings, and discontinued operations
j. disclosures on the fair value of financial instruments

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 k. disclosures required by IFRS 12 when the entity becomes or ceases to be an
investment property
l. disaggregation of revenue from contracts with customers as required by IFRS 15
m. The entity presents basic and diluted earnings per share if the entity is within the
scope of IAS 33.

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

Disclosures of compliance with IFRSs

If an entity’s interim financial report is in compliance with this Standard, that fact shall be
disclosed. An interim financial report shall not be described as complying with IFRSs unless it
complies with all the requirements of IFRSs.

Periods for which interim financial statements are required to be presented

Interim reports shall include interim financial statements (condensed or complete) as follows:
a. statement of financial position as of the end of the current interim period and a
comparative statement of financial position as of the end of the immediately preceding
financial year.
b. statement of profit or loss and other comprehensive income for the current interim
period and cumulatively for the current financial year to date, with comparative
statements of profit or loss and other comprehensive income for the comparable
interim periods (current and year-to-date) of the immediately preceding financial year.
As permitted by IAS 1, an interim report may present each period a statement or
statements of profit or loss and other comprehensive income.
c. statement of changes in equity cumulatively for the current financial year-to-date, with
a comparative statement for the comparable year-to-date period of the immediately
preceding financial year.
d. statement of cash flows cumulatively for the current financial year-to-date, with a
comparative statement for the comparable year-to-date period of the immediately
preceding financial year.

Illustration of periods required to be presented

• Entity publishes interim financial reports half-yearly/semi-annually. The entity’s financial year
ends 31 December (calendar year). The entity will present the following financial statements
(condensed or complete) in its half-yearly interim financial report as of 30 June 20X1:

• Entity publishes interim financial reports quarterly

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 The entity’s financial year ends 31 December (calendar year). The entity will present the
following financial statements (condensed or complete) in its quarterly interim financial
report as of 30 June 20X1:

If an entity’s business is highly seasonal, financial information for the twelve months up
to the end of the interim period and comparative information for the prior twelve-month period
may be useful.

Materiality
Materiality shall be assessed in relation to the interim period financial data. In making
assessments of materiality, it shall be recognized that the interim measurements may rely on
estimates to a greater extent than measurements of annual financial data.
The overriding goal is to ensure that an interim financial report includes all information
that is relevant to understanding an entity’s financial position and performance during the interim
period.

DISCLOSURE IN ANNUAL FINANCIAL STATEMENTS

If an estimate of an amount reported in an interim period is changed significantly during
the final interim final period of the financial year but a separate financial report is not published
for that final interim period, the nature and amount of that change in estimate shall be disclosed
in a note to the annual financial statements for that financial year.

RECOGNITION AND MEASUREMENT

Same accounting policies as usual

An entity shall apply the same accounting policies in its interim financial statements as are
applied in its annual financial statements, except for accounting policy changes after the date of
the most recent annual financial statements that are to be reflected in the next annual financial
statements. However, the frequency of an entity’s reporting (annual, semi-annual, or quarterly)
shall not affect the measurement of its annual results. Measurements for interim reporting
purposes shall be made on a year-to-date basis. Two point-of-views in interim reporting:
1. Discrete view – According to paragraph 29 of this Standard, “requiring that an entity apply
the same accounting policies in its interim financial statements as in its annual statements
may seem to suggest that interim period measurements are made as if each interim period
stands alone as an independent reporting period”.

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 2. Integral view – According to paragraph 29 of this Standard, “providing that the frequency
of an entity’s reporting shall not affect the measurement of its annual results, paragraph
28 acknowledges that an interim period is a part of a larger financial year.

Year-to-date measurements may involve changes in estimates of amounts reported in

prior interim periods of the current financial year. But the principles for recognizing assets,
liabilities, income, and expenses for interim periods are the same as in annual financial
statements. IAS 34 provides the following accounting principles:
a. Losses from inventory write-downs, restructurings, or impairments in an interim period are
accounted for in the same way as in annual financial statements (i.e., losses are
recognized immediately in the interim period in which they arise).The original estimate is
adjusted by accruing an additional loss or by reversing a previously recognized loss, if
there are subsequent changes in estimates. Financial statements in previous interim
periods are not restated.
b. A cost that does not qualify as an asset in an interim period is not deferred either to wait if
it qualifies in the next period or to smooth earnings over the interim periods within a
financial year.
A liability at the end of an interim period must meet all the recognition criteria at that date,
just as it must at the end of an annual reporting period.
c. Income tax expenses in interim periods are based on the best estimate of the weighted
average annual income tax rate expected for the full financial year.

The recognition principles of assets, liabilities, income and expenses under the
Conceptual Framework are applied in the interim period in the same way as in the annual period.
Thus, items that do not qualify as assets, liabilities, income or expenses in the annual period do
not also qualify as such in the interim period.

Revenues received seasonally, cyclically, or occasionally

Revenues that are received seasonally, cyclically, or occasionally (e.g., dividends
revenue, royalties, government grants, or season revenues of retailers) within a financial year
shall not be anticipated or deferred as of an interim date if anticipation or deferral would not be
appropriate at the end of the entity’s financial year.

Costs incurred unevenly during the financial year

Costs that are incurred unevenly during an entity’s financial year shall be anticipated or
deferred for interim reporting purposes if, and on if, it is also appropriate to anticipate or defer
that type of cost at the end of the financial year.

Use of estimates
While measurements in both annual and interim financial reports are based on reasonable
estimates, the preparation of interim financial reports generally will require greater use of
estimation methods than annual financial reports.

Restatement of previously reported interim periods

A change in accounting policy, other than one for which the transition is specified by a
new IFRS, shall be reflected by:
a. Retrospectively – restating the financial statements of prior interim periods of the
current financial year and the comparable interim periods of any prior financial years
that will be restated in accordance with IAS 8; or
b. Prospectively – when it is impracticable to determine the cumulative effect at the
beginning of the financial year of applying a new accounting policy to all prior periods,

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 adjusting the financial statements of prior interim periods of the current financial year,
and comparable interim periods of prior financial years to apply the new accounting
policy prospectively from the earlies date practicable.

Assessment Activities:
Choose the letter of the best answer.

1. Which of the following is not an objective of IAS 34?

a. To prescribe the minimum content of an interim financial report
b. To prescribe which entities are required to publish interim financial reports, how
frequently and how soon after the end of the reporting period
c. To prescribe the principles of recognition and measurement in complete or
condensed financial statements for an interim period.
d. None of the above

2. What does the International Accounting Standards Committee encourage publicly

traded entities to do?
a. To provide interim financial reports at least as of the end of the first quarter of their
financial year
b. To make their interim financial reports available not later than 60 days after the end
of the interim period
c. To apply the same accounting policies in its interim report as are applied in its annual
financial statements, including accounting policy changes made after the date of the
most recent annual financial statements that are to be reflected in the next annual
financial statements.
d. All of the above

3. Interim financial report means a financial report containing ________ for an interim
period.
a. A complete set of financial statements
b. An adjusted set of financial statements
c. A set of condensed financial statements
d. A or B
e. A or C

4. Which of the following is true with regards to the disclosure of compliance with IFRSs
provided in IAS 34?
a. If an entity’s interim financial report is not in compliance with IAS 34, that fact shall
be disclosed
b. An interim financial report shall not be described as complying with IFRSs unless it
complies with all the requirements of IAS 34
c. An interim financial report shall not be disclosed as complying with IFRSs unless it
complies with all the requirements of IFRSs.
d. A and B

5. If an entity does not prepare interim financial reports,

a. Its annual financial statements would not conform to the IFRSs.
b. Its annual financial statements should not be described to have been prepared in
accordance with IFRSs.
c. The conformance of its annual financial statements with the IFRSs is not affected.
d. A and B

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 Module 6
OPERATING SEGMENTS

Overview:
IFRS 8 Operating Segments requires an entity whose debt or equity securities are publicly
traded to disclose information to enable users of its financial statements to evaluate the nature
and financial effects of the different business activities in which it engages and the different
economic environments in which it operates. It specifies how an entity should report information
about its operating segments in annual financial statements and in interim financial reports. It also
sets out requirements for related disclosures about products and services, geographical areas
and major customers.

Module Objectives:
At the end of the module, you will be able to:
❖ define operating segments;
❖ identify and apply the criteria for reportable segments; and
❖ understand the entity-wide disclosures in accordance with IFRS 8.

Course Materials:

OPERATING SEGMENTS DEFINED IN IFRS 8

IFRS 8 defines an operating segment as follows. An operating segment is a component
of an entity: [IFRS 8.2]
• that engages in business activities from which it may earn revenues and incur expenses
(includes the revenues and expenses relating to transactions with other components of
the same entity)
• whose operating results are reviewed regularly by the entity's chief operating decision
maker to make decisions about resources to be allocated to the segment and assess
its performance, and the chief operating decision maker could be an individual, such
as the chief executive officer or the chief operating officer or it could be a group of
executives such as the board of directors or a management committee.
• for which discrete financial information is available

REPORTABLE SEGMENTS
IFRS 8 requires an entity to report financial and descriptive information about its reportable
segments. Reportable segments are operating segments or aggregations of operating segments
that meet specified criteria (IFRS 8.13):
• its reported revenue, from both external customers and intersegment sales or transfers,
is 10 per cent or more of the combined revenue, internal and external, of all operating
segments, or
• the absolute measure of its reported profit or loss is 10 per cent or more of the greater,
in absolute amount, of (i) the combined reported profit of all operating segments that
did not report a loss and (ii) the combined reported loss of all operating segments that
reported a loss,
• or its assets are 10% or more of the combined assets of all operating segments.

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 Two or more operating segments may be aggregated into a single operating segment if
aggregation is consistent with the core principles of the standard, the segments have similar
economic characteristics and are similar in various prescribed respects (IFRS 8.12).
If the total external revenue reported by operating segments constitutes less than 75% of
the entity's revenue, additional operating segments must be identified as reportable segments
(even if they do not meet the quantitative thresholds set out above) until at least 75% of the entity's
revenue is included in reportable segments (IFRS 8.15).

Illustration:
ABS Company has the following segments for the year:
Revenue Profit
Segment 1 P6,000,000 P1,500,000
Segment 2 4,500,000 850,000
Segment 3 1,000,000 (300,000)
Segment 4 800,000 200,000

What are the reportable segments?

Solution:
Revenue:
(P6,000,000 + P4,500,000 + P1,000,000 + P800,000) = P12,300,000
P12,300,000 x 10% = P1,230,000; Qualify: 1, 2

Profit: (P1,500,000 + P850,000 + P200,000) = P2,550,000 x 10% = P255,000

Loss: P300,000
Qualify: 1, 2 and 3

**Segment 3 is included since the threshold is P255,000 profit or loss

OPERATING SEGMENTS: DISCLOSURES

This can be classified into four categories:
• General Information
• Information about profit or loss, assets and liabilities
• Reconciliations
• Entity-wide Disclosures

General Information includes disclosures of:

• Factors used to identify reportable segments – especially the basis of organizations
• Judgements in applying aggregation criteria
• Types of products/services generating revenues

Information about Profit or Loss, Assets and Liabilities

• Measurement of segment items equal to the measure reported to the Chief Operating
Decision Maker (CODM)
• Disclose separately the following amounts if it is included in items of segment profit or loss
reported to Chief Operating Decision Maker or regularly reported to him:
▪ Revenue from external customers
▪ “Internal” revenue
▪ Interest revenue

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 ▪ Interest expense
▪ Depreciation and amortization
▪ Material items of income and expense
▪ Interest in P/L of associates and joint venture
▪ Income tax expense or income
▪ Material non-cash items
• Provide an explanation of measurement basis of segment profit or loss, segment assets
and segment liabilities for each reportable segment:
▪ Basis of accounting for transaction between reportable segments
▪ Nature of differences between measurements of reportable segments’ P/L and
entity’s P/L after income tax + discounted operations
▪ Nature of differences between measurements of reportable segments’ assets and
entity’s assets
▪ Nature of differences between measurements of reportable segments’ liabilities
and entity’s liabilities
▪ Nature of any changes from prior periods in the measurement methods to
determine segment’s P/L and their effects
▪ Nature and effect of asymmetrical allocations to reportable segments

Reconciliations
• Total of reportable segments’ revenue to entity’s revenue
• Total of reportable segment’s profit or loss to entity’s profit or loss before and after tax and
discounted operations
• Total of reportable segment’s assets to entity’s assets
• Total of reportable segment’s liabilities to entity’s liabilities
• Total of reportable segment’s amounts for every other material item of information
disclosed to the corresponding amount of the entity

Entity-wide Disclosures
These are not at a segment level but at the entity level of all the segments
• Information about the products and services
• Information about geographical areas
✓ Revenue from external customers
o Attributed to entity’s country of domicile
o Attributed to all foreign countries
✓ Non-current assets
o Located in entity’s country of domicile
o Located in all foreign countries
• Information about major customers
- Report if revenue with single customer is 10% or more of the total revenue

Assessment Activities
Choose the letter of the best answer.

1. If financial report contains both the consolidated financial statements of a parent and the
parent’s separate financial statements, segment information is required in
A. The separate financial statement only
B. The consolidated financial statement only
C. Both the separate and consolidated financial statements
D. Neither the separate nor the consolidated financial statement

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2. Which statement is true with respect to a chief operating decision maker?
A. The term chief operating decision maker identifies a function and not necessarily a
manager with a specific title.
B. In some cases, the chief operating decision maker could be the chief operating officer
C. The board of directors acting collectively could qualify as the chief operating decision
maker.
D. The chief internal auditor who reports to the board of directors usually plays a very
important role and would generally qualify as chief operating decision maker

3. When is an operating segment is reportable?

A. The segment external and internal revenue is 10% or more of the combined external
and internal revenue of all operating segments.
B. The segment profit or loss is 10% or more of the greater between the combined profit
of all profitable operating segments and the combined loss of all unprofitable operating
segments
C. The assets of the segment are 10% or more of the total assets of all operating
segments.
D. Under all of these circumstances

4. Operating segments that do not meet any of the quantitative thresholds

A. Cannot be considered reportable
B. May be considered reportable and separately disclosed if management believes that
information about the segment would be useful to the users of the financial statements
C. May be considered reportable if the information is for internal use only
D. May be considered reportable and separately disclosed if this is the practice within the
economic environment in which the entity operates

5. Which is true concerning the 75% overall size test for operating segments?
A. The total external and internal revenue of all reportable segments is 75% or more of
the entity’s external revenue
B. The total external revenue of all reportable segments is 75% or more of the entity’s
consolidated revenues
C. The total external revenue of all reportable segments is 75% or more of the entity’s
unconsolidated revenues.
D. Total internal revenue of all reportable segments is 75% or more of the entity’s internal
revenue

6. Which of the following statements about major customer disclosure is true?

A. A major customer is defined as one providing revenue which amounts to 10% or more
of the combined external revenue of all operating segments.
B. The identities of major customers need not be disclosed
C. The entity shall disclose the total amount of revenue from major customer and the
identity of the segment reporting the revenue
D. All of these statements are true about major customer disclosure

7. Under PFRS 8, which is not a required reconciliation of segment information?

A. The total of the reportable segments’ revenue to the entity’s revenue
B. The total of the reportable segments’ profit or loss to the entity’s profit or loss before
tax expense and discounted operations.
C. The total number of major customers of all segments to the total number of major
customers of the entity.

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 D. The total of the reportable segments’ assets to the entity’s assets

8. Which quantitative threshold is not a requirement in qualifying a reportable segment?

A. The segment revenue, both external and internal, is 10% or more of the combined
external and internal revenue of all operating segments.
B. The segment profit or loss is 10% or more of the greater between the combined profit
or profitable segments and combined loss of unprofitable segments.
C. The segment assets are 10% or more of the combined assets of all operating segments
D. The segment assets are 20% or more of the combined assets of all operating segments

9. Which of the following is not a required disclosure about operating segments?

A. The total of revenue from major external customers exceeding 50% of the entity’s
revenue
B. The identity of the major customer that accounts for 20% of the entity’s revenue
C. Revenue from external customers attributable to the entity’s country of domicile and
attributed to all foreign countries in total from which the entity derives revenue.
D. Revenue from external customers for each product and service.

10. PFRS 8 (Operating Segments) requires that a company report all to the following, except.
A. Major customers
B. Segment assets and liabilities
C. Liquidity ratios
D. Segment profits and loss and related information

11. The sum of the reportable segment’s external sales must be at least equal to what percent of
total operating segment’s external sales?
A. 60%
B. 75%
C. 50%
D. 65%

12. Under PFRS 8, the management approach of identifying reportable operating segments
means that operating segments are identified on the basis of internal reports about the
components of an entity that are regularly reviewed by:
A. The chief accountant.
B. The chief audit executive
C. The chief operating decision maker
D. The respective head of each operating segment

Problem Solving:
1. An entity and its division are engaged solely in manufacturing. The following data pertain to the
industries for the year ended December 31, 2019
Operating Profit (Loss)
Segment 1 P20,000,000
Segment 2 (10,000,000)
Segment 3 ( 6,000,000)
Segment 4 ( 9,000,000)
Segment 5 ( 3,000,000)
To be reportable segment, the segment profit or loss should be at least what amount?

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2. An entity identified the following segments for the current year:
Segment Revenue Profit Assets
A P10,000,000 P1,750,000 P20,000,000
B 8,000,000 1,400,000 17,500,000
C 6,000,000 1,200,000 12,500,000
D 3,000,000 550,000 7,500,000
E 4,000,000 575,000 5,500,000
F 2,000,000 525,000 3,000,000
What are the reportable segments?

3. An entity reported the following segment profit or loss for the current year
Segment 1 7,000,000 Profit
Segment 2 3,000,000 Profit
Segment 3 4,000,000 (Loss)
Segment 4 1,000,000 Profit
Segment 5 500,000 (Loss)
What segments are qualified as reportable?

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 Module 7
RELATED PARTY DISCLOSURES

Overview:
In 2001 the International Accounting Standards Board (Board) adopted IAS 24 Related
Party Disclosures. The objective of this standard is to ensure that an entity’s financial statements
contain the disclosures necessary to draw attention to the possibility that its financial position and
profit or loss may have been affected by the existence of related parties and by transactions and
outstanding balances, including commitments, with such parties.

Module Objectives:
After successful completion of this module, you should be able to:
❖ understand the purpose of related party disclosures; and
❖ identify the required disclosures related to IAS 24.

Course Materials:

RELATED PARTIES AND RELATED PARTY TRANSACTIONS

A related party is a person or entity that is related to the entity that is preparing its financial
statements.
❖ A person or a close member of that person’s family is related to a reporting entity if that
person:
➢ has control or joint control of the reporting entity;
➢ has significant influence over the reporting entity; or
➢ is a member of the key management personnel of the reporting entity or of a parent of
the reporting entity.
❖ An entity is related to a reporting entity if any of the following conditions applies:
➢ The entity and the reporting entity are members of the same group (which means that
each parent, subsidiary and fellow subsidiary is related to the others).
➢ One entity is an associate or joint venture of the other entity (or an associate or joint
venture of a member of a group of which the other entity is a member).
➢ Both entities are joint ventures of the same third party.
➢ One entity is a joint venture of a third entity and the other entity is an associate of the
third entity
➢ The entity is a post‑employment benefit plan for the benefit of employees of either the
reporting entity or an entity related to the reporting entity. If the reporting entity is itself
such a plan, the sponsoring employers are also related to the reporting entity.
➢ The entity is controlled or jointly controlled by a person identified.
➢ The entity, or any member of a group of which it is a part, provides key management
personnel services to the reporting entity or to the parent of the reporting entity.

On the other hand, in considering each possible related party relationship, attention is
directed to the substance of the relationship and not merely the legal form. The following are not
related parties:

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 ❖ two entities simply because they have a director or other member of key management
personnel in common or because a member of key management personnel of one entity
has significant influence over the other entity.
❖ two joint venturers simply because they share joint control of a joint venture.
❖ providers of finance, trade unions, public utilities, and departments and agencies of a
government that does not control, jointly control or significant influence the reporting entity,
simply by virtue of their normal dealings with an entity (even though they may affect the
freedom of action of an entity or participate in its decision‑making process).
❖ a customer, supplier, franchisor, distributor or general agent with whom an entity transacts
a significant volume of business, simply by virtue of the resulting economic dependence.

A related party transaction is a transfer of resources, services or obligations between a

reporting entity and a related party, regardless of whether a price is charged. The following are
examples of related party transactions that are to be disclosed:
❖ purchases or sales of goods (finished or unfinished)
❖ purchases or sales of property and other assets
❖ rendering or receiving of services
❖ leases
❖ transfers of research and development
❖ transfers under license agreements
❖ transfers under finance arrangements (including loans and equity contributions in cash or
in kind)
❖ provision of guarantees or collateral
❖ commitments to do something if an event occurs or does not occur in the future, including
executory contracts (recognized and unrecognized)
❖ settlement of liabilities on behalf of the entity or by the entity on behalf of that related party.

REQUIRED DISCLOSURES
Relationships between a parent and its subsidiaries shall be disclosed irrespective of
whether there have been transactions between them. An entity shall disclose the name of its
parent and, if different, the ultimate controlling party. If neither the entity’s parent nor the ultimate
controlling party produces consolidated financial statements available for public use, the name of
the next most senior parent that does so shall also be disclosed.
Moreover, an entity shall disclose key management personnel compensation in total and
for each of the short‑term employee benefits, post‑employment benefits, other long‑term benefits,
termination benefits and share‑based payment. Amounts incurred by the entity for the provision
of key management personnel services that are provided by a separate management entity shall
also be disclosed.
If an entity had related party transactions during the periods covered by the financial
statements, it shall disclose the nature of the related party relationship as well as information
about those transactions and outstanding balances, including commitments, necessary for users
to understand the potential effect of the relationship on the financial statements. At a minimum
the disclosure includes:
❖ the amount of the transactions.
❖ the amount of outstanding balances, including commitments, their terms and conditions
and details of any guarantees given or received.

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 ❖ provisions for doubtful debts related to the amount of outstanding balances.
❖ the expense recognized during the period in respect of bad or doubtful debts due from
related parties.

Assessment Activities
Choose the letter of the best answer.

1. Which of the following is not a related party?

a. Entities with joint control or significant influence over the entity
b. The parent company of the entity
c. An entity that has a common director with the entity
d. Joint ventures in which the entity is a venture

2. Which of the following are not necessarily related parties?

a. Affiliates
b. Two enterprises that have common director
c. Two enterprise and its key management personnel, directors and officers
d. The enterprise and its associates

3. Which of the following is conclusively a party (or parties) related to the reporting entity?
a. A venture sharing joint control with the reporting enterprise over a joint venture.
b. Providers of finance, trade unions, public utilities and government departments and
agencies simply by virtue of their normal dealings with an entity.
c. A customer, supplier, franchisor of general agent with whom an entity transacts a
significant volume of business merely by virtue of the resulting economic dependence.
d. Post-employment benefit plan for the benefit of employees of the entity.

4. Which of the following falls within the definition of “related parties” as defined in IAS 24?
a. Providers of finance in the course of their normal dealings with an enterprise by virtue
only of those dealings
b. A supplier with whom the reporting entity has a one-year contract for the supply of raw
materials
c. Government department and agencies
d. The wife of a key management personnel who has the authority to plan, direct, and
control the activities of the reporting enterprise.

5. Which of the following statements is true?

I. A party is related to another entity that is jointly controlled
II. A party is related to another entity that is controls
a. I only
b. II only
c. Both I and II
d. Neither I nor II

6. Which of the following is not a related party of an entity?

a. A shareholder of the entity owning 30% of the ordinary shares
b. An entity providing banking facilities to the entity
c. An associate of the entity
d. Key management personnel of the entity

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 7. Under IAS 24, close family members of a person are those family members who may be
expected to influence or be influenced by that person in their dealings with the entity. Who,
among the following, is not included in this definition of close family members?
a. The individual’s spouse and children
b. Children of the individual’s spouse
c. Dependents of the individual or the individual’s spouse
d. Brothers and sisters.

8. Which of the following does not fall within the definition of an entity’s related party?
a. Joint party in which the entity is a venture
b. A post-employment benefit plan for the benefit of the employees of the entity’s parent
c. An executive director of the entity
d. The partner of a key manager is a major supplier of the entity

9. A related party transaction is a transfer of resources or obligations

a. Between related parties when a price is charged.
b. Between related parties, regardless of whether a price is charged.
c. Between unrelated parties when price is charged.
d. Between unrelated parties, regardless of whether a price is charged.

10. If there had been transactions between related parties, the entity shall disclose
a. The nature of the relationship only.
b. The information about the transaction and outstanding balances.
c. The nature of the relationship, information about the transaction and outstanding
balances.
d. Neither the nature of the relationship nor the information about the transaction and
outstanding balances.

11. Which is not a related party transaction?

a. Between and among subsidiaries of a common parent
b. Between a parent and its subsidiaries
c. Between the enterprise and its key management and close members of the family
d. Between an enterprise and its branch

12. Which of the following situations will require disclose as a related party?
a. In consolidated financial statements in respect to intra-group transactions.
b. In the financial statements of state-controlled enterprises of transactions with other
state-controlled enterprises
c. In the aren’t financial statements when they are made available or published with the
consolidated financial statements
d. In related party relationships where control exists, irrespective of whether there have
been transactions between related parties

13. Which of the following disclosures is not a mandated disclosure under IAS 24?
a. Relationships between parents and subsidiaries irrespective of whether there have
been transactions between those related parties.
b. Names of all the “associates: that an entity has dealt with during the year.
c. Name of the entity’s parent and, if different, the ultimate controlling party.
d. If neither the entity’s parent nor its ultimate controlling entity produces financial
statements available for public use, then the name of the next most senior parent that
does so.

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 14. If there had been related party transactions during the year, which of the following is not
a required minimum disclosure?
a. The amount of the related party transactions
b. The amount of the outstanding related party balances and their terms and conditions
along with details of guarantees given and received.
c. The amount of similar transaction with unrelated parties to establish the comparable
related party transactions have been entered at arm’s length.
d. Provisions for doubtful debts related to the amount of outstanding related party
balances and expense recognized during the year in respect of bad or doubtful debts
due from related parties.

15. Which of the following would not be considered “compensation” of key management
personnel?
a. Short-term benefits
b. Termination benefits
c. Share-based payments
d. Reimbursement of out-of-pocket expenses

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 Module 8
CASH TO ACCRUAL ACCOUNTING AND SINGLE-ENTRY SYSTEM

Overview:
Although predicting future cash flows is the primary goal of many users of financial
reporting, the model best able to achieve that goal is accrual accounting. A competing model is
cash-basis accounting. Each model produces a periodic measure of performance that could be
used by investors and creditors for predicting future cash flows. In this module, we will be
discussing about the cash and accrual basis of accounting and the underlying concept about
single-entry system.

Module Objectives:
After successful completion of this module, you should be able to:
❖ understand the features of a single-entry system of accounting and differentiate from
double entry system; and
❖ compute revenue and expense items on an accrual basis taken from the records of entities
using cash basis accounting and single-entry system.

Course Materials:

CASH TO ACCRUAL BASIS

Under cash basis of accounting, income is recognized when received regardless of
when earned, and expense is recognized when paid regardless of when incurred. In other words,
this approach does not recognize accounts receivable, accounts payable, accrued income,
deferred income, accrued expense and prepaid expenses. The measure is the difference between
cash receipts and cash payments from transactions related to providing goods and services to
customers during a reporting period. This basis is simple, less costly and more reliable since
estimates and judgement is not required. However, it is not useful in evaluating performance
because it does not reflect the results of all profit-directed activities which took place during the
period and cash receipt and payments and the related accomplishments and effort occur in
different periods. Moreover, it doesn’t present the financial position or operating result of an
enterprise in conformity with generally accepted accounting principles.
On the other hand, accrual basis of accounting recognizes income when earned
regardless when cash is received and recognizes expense when incurred regardless of when
paid. Thus, the essence of this approach is the recognition accounts receivable, accounts
payable, accrued income, deferred income, accrued expense and prepaid expenses.

Comparison of cash basis and accrual basis

Cash Basis Accrual Basis
Sales Cash sales plus collection of trade Cash sales plus sales on account.
receivables.
Purchases Cash purchases plus payment to Cash purchases plus purchases
trade creditors. on account.
Income other Amount received is considered as Amount earned are considered as
than sales income regardless when earned. income regardless when it is
received.

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 Cash Basis Accrual Basis
Expenses, in Amounts paid is treated as expense Amount incurred are considered
general regardless of when incurred. as expense regardless when it is
paid.
Depreciation Depreciation is provided normally. Depreciation is provided normally.
Bad debts No bad debts are recognized because Doubtful accounts are treated as
trade receivables are not recognized. bad debts.

Conversion from Cash Basis to Accrual Basis

❖ Increase in Accounts/ Notes Receivable- trade (A,N/R, ending > A,N/R, beginning) ,
means there were more sales on account than collection (thus, Add the increase to cash
basis to get accrual basis sales or deduct increase from the accrual basis to get the cash
basis sale)
Accrual basis sales XX Cash basis sales XX
Increase in Accounts/ Notes Increase in Accounts/ Notes
Receivable (XX) or Receivable XX
Cash basis sales XX Accrual basis sales XX

❖ Decrease in Accounts/ Notes Receivable- trade (A,N/R, ending < A,N/R, beginning),
means that there was more collection than sales on account (this, Add the decrease to
the accrual basis to get the cash basis sales or deduct the decrease from the cash basis
to get the accrual basis sales)
Accrual basis sales XX Cash basis sales XX
Decrease in Accounts/ Notes Decrease in Accounts/ Notes
Receivable XX or Receivable (XX)
Cash basis sales XX Accrual basis sales XX

❖ Increase in the Accounts/ Notes Payable- trade (A,N/P, ending > A,N/P, beginning) ,
means that there were more purchases on account than payments to suppliers (thus, add
the increase to the cash basis purchases (payments made) to get the accrual basis
purchases or Deduct the increase from the accrual basis purchases to get the cash basis
purchases)
Accrual basis purchases XX Cash basis purchases XX
Increase in Accounts/ Notes Increase in Accounts/ Notes
Payable (XX) or Payable XX
Cash basis purchases XX Accrual basis purchases XX

❖ Decrease on Accounts/ Notes Payable- trade (A,N/P, ending < A,N/P, beginning),
means that there were more payments to supplies (cash basis purchases) than accrual
basis purchases (thus, add the decrease to the accrual basis purchases to get the cash
basis purchases or the total payments made or Deduct the decrease from the cash basis
purchases to get the accrual basis purchases).
Accrual basis purchases XX Cash basis purchases XX
Decrease in Accounts/ Notes Decrease in Accounts/ Notes
Payable XX or Payable (XX)
Cash basis purchases XX Accrual basis purchases XX

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 ❖ The conversion of data from cash basis to accrual basis focuses on the recognition of
accruals and deferrals, since these are the items that are usually taken under the accrual
basis that are not considered under cash basis.

Computation for converting cash basis data to accrual would include the following:

Cash receipts representing revenue XX

Accrual revenue, beginning of the period (XX)
Accrual revenue, end of the period XX
Unearned revenue, beginning of the period XX
Unearned revenue, end of the period (XX)
Revenue under accrual basis XX

Cash payments representing expense XX

Accrual expenses, beginning of the period (XX)
Accrual expenses, end of the period XX
Prepaid Expenses, beginning of the period XX
Prepaid Expenses, end of the period (XX)
Expense under accrual basis XX

Other computation guides:

Accounts Receivable/ Notes Receivable

Cash collections (Cash
Beginning balance (AR/NR) basis)
Sales on account (accrual basis) Sales discounts
Recovery of prev. write offs ** Sales returns*
Sales allowances
Write offs
Ending balance (AR/NR)
*excluding refunded sales returns to customers
** included in the analysis only if collections included the said recovery

Accounts Payable/ Notes Payable

Payments (Cash basis) Beginning balance (AP/NP)
Purchases on account (accrual
Purchase discounts basis)
Purchase returns *
Purchase allowances
Ending balance (AP/NP)
*excluding refunded purchase returns from suppliers

Accrued Revenue
Beginning balance Collections (cash basis)
Recognized income (accrual basis)
Ending balance

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 Unearned Revenue
Recognized income (accrual basis) Beginning balance
Collections (cash basis)
Ending balance

Prepaid Expense
Beginning balance Recognized expense (accrual basis)
Payment of cash (cash basis)
Ending balance

Accrued Expense
Payment of cash (cash basis) Beginning balance
Recognized expense (accrual basis)
Ending balance

SINGLE ENTRY ACCOUNTING SYSTEM

Bookkeeping System
Bookkeeping system is the systematic and chronological recording of transactions and
events in the books of accounts. It is also known as the recording phase of accounting.

Bookkeeping vs. Accounting

Bookkeeping Accounting
Recording part of accounting Broader field
Mechanical, repetitive Analytical, judgmental, conceptual
Follows method prescribed by Determines accounting principles and
accounting methods

Systems of Bookkeeping
1. Single-entry bookkeeping- as system of bookkeeping whereby, as a rule, only cash and
personal accounts are recognized. The system may range from mere narrative
transactions to one that approximates but does not completely adopt double entry system.
The use of the single-entry system is simple and economical. However, the accounting
record will be incomplete and the double entry automatic check (debit is equal to credit) is
missing. Below are some other characteristics of single-entry system:
❖ Accounting equation is disregarded
❖ Usually one effect of each transaction is recognized
❖ Typically, only cash is recording, and personal accounts are maintained
❖ Trial balance cannot be prepared
❖ Data needed for preparation of financial statement is incomplete
❖ Net income is determined by reconstructing revenue and expenses or comparing
beginning and ending capital.

2. Double-entry bookkeeping – a system of bookkeeping which views a transaction as

having two-fold effect on accounting values that provides automatic check on certain
bookkeeping errors. This system uses the concept of accounting equation (Assets=
Liabilities +Equity).

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Summary of Distinction between Double Entry and Single Entry
Double Entry Single Entry
Principles Involved 1. Duality Recognizes only one phase of
2. Equality transactions.
Transactions and events Records every type of accountable Records only transactions
recorded events involving cash and personal
accounts.
Accounts recognized Assets, liabilities, equity, revenues Cash, accounts receivable,
and expenses accounts payable, equity
Books used Journal and ledger Cash book, subsidiary ledger
Financial statement Financial statements are prepared Income (loss) and statement of
preparation in a systematic processing data; assets and liabilities are
known as the accounting process, prepared using the analysis or
income (loss) is computed using indirect approach.
the matching principle.

Financial Capital Maintenance Approach

Under this concept a profit is earned only if the financial (or money) amount of the net
assets at the end of the period exceeds the financial (or money) amount of net assets at the
beginning of the period, after excluding any distributions to, and contributions from, owners during
the period.
Increase in assets XX
Decrease in assets (XX)
Increase in liabilities (XX)
Decrease in liabilities XX XX/ (XX)
Issuance of share capital (XX)
Other items that increase SHE but no profit or loss * (XX)
Other items that decrease SHE but no profit or loss * XX
Dividends XX
Net profit (loss) XX (XX)
* Items may include:
➢ Changes in the revaluation surplus related to property, plant and equipment (in line with
IAS 16)
➢ Actuarial gains and losses (in line with IAS 19)
➢ Gains and losses arising from translating the financial statements in foreign operations.
➢ The effective portion of gains and losses on hedging instruments in a cash flow hedge
➢ Gains and losses on remeasuring FVTOCI (in line with IFRS 9)

Assessment Activities:
Compute for the following and show your solutions on a separate paper.

1. 2Moons Company reported the following balances at the end of each year:
2020 2019
Inventory P2,600,000 P2,900,000
Accounts Payable 750,000 500,000
The entity paid suppliers P4,900,000 during the year ended December 31, 2020. What should
be the amount to be reported for cost of goods sold in 2020?

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2. For the year ended Dec. 31, 2020, Pha Company paid interest totaling P100,000. The prepaid
interest expense is P23,500 and P18,000, respectively, on December 31, 2019 and 2020. The
interest payable is P45,000 and P53,500, respectively, on December 31, 2019 and 2020. What
amount of interest expense should be reported on December 31, 2020?

3. During 2020, Wayo Corp. received P8,000,000 from tenants. The balance sheet contained the
following data:
2019 2020
Rentals receivable P 960,000 P1,240,000
Unearned rentals 3,200,000 2,400,000
What amount of rental revenue should be reported for 2020?

4. Forth owned a 20% royalty interest in an oil well. Forth received royalty payments on January
31 for the oil sold between the previous June 1 and November 30, an on July 31 for oil between
December 31 and May 31. Production revealed the following sales:
June 1, 2019 - November 30, 2019 3,000,000
December 1, 2019 - December 31, 2019 500,000
December 1, 2019 - May 31, 2020 4,000,000
June 1, 2020 - November 30, 2020 3,250,000
December 1, 2020 - December 31, 2020 700,000
What amount should be reported as royalty revenue for 2020?

5. Beam Company provided the following data for the current year:
Cash sales P2,500,000 Inventory - Jan 1 P 500,000
Sales on account 850,000 Inventory - Dec 31 600,000
Cash purchases 1,700,000 Accrued expenses - Dec 31 20,000
Credit purchases 400,000 Prepaid expense - Dec 31 30,000
Expenses paid 750,000 Equipment- Dec 31 1,000,000
Accounts receivable- Jan 1 250,000 Interest received 40,000
Accounts receivable- Dec 31 300,000 Interest receivable - Jan 1 10,000
Account payable - Jan 1 150,000 Interest receivable - Dec 31 20,000
Account payable - Dec 31 200,000
On July 1 of the current year, an equipment was acquired for P200,000. The terms are P50,000
down and the balance to be paid after one year. The useful life is 10 years with no residual value.
What is the net income under cash & accrual basis?

6. Tee Company reported the following changes in all the account balances for 2016, except for
retained earnings:
Increase (Decrease) Increase (Decrease)
Cash P 790,000 Accounts payable P (380,000)
Accounts receivable, net 2,400,000 Bonds payable 820,000
Inventory 1,270,000 Share capital 1,250,000
Investments (470,000) Share premium 130,000
There were no entries in retained earning account except for the net income and a divided
declaration of P190,000 which was paid in the current year. What is the net income in the
current year?

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REFERENCES/ READING MATERIALS

• Robles, Nenita S. and Empleo, Patricia M. The Intermediate Accounting Series, Volume 3 (2017
Edition). Millennium Books Inc.

• Robles, Nenita S. and Empleo, Patricia M., The Philippine Financial Reporting (2019 Edition).
Millennium Books Inc.

• Conceptual Framework for Financial Reporting (2018 version),

https://www.ifrs.org/projects/2018/conceptual-framework/

• IAS 1: Presentation of Financial Statements, https://www.ifrs.org/issued-standards/list-of-

standards/ias-1-presentation-of-financial-statements/

• IAS 7: Statement of Cash Flows, https://www.ifrs.org/issued-standards/list-of-standards/ias-7-

statement-of-cash-flows/

• IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors,

https://www.ifrs.org/issued-standards/list-of-standards/ias-8-accounting-policies-changes-in-
accounting-estimates-and-errors/

• IAS 24: Related Party Disclosures, https://www.ifrs.org/issued-standards/list-of-standards/ias-

24-related-party-disclosures/

• IAS 34: Interim Financial Reporting, https://www.ifrs.org/issued-standards/list-of-standards/ias-

34-interim-financial-reporting/

• IFRS 8: Operating Segments, https://www.ifrs.org/issued-standards/list-of-standards/ifrs-8-

operating-segments/

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