FINANCIAL ACCOUNTING & REPORTING

CONCEPTUAL FRAMEWORK
 Chapter 1: Objective of Financial
 Basic Concept Reporting
 Chapter 2: Qualitative Characteristics of
Useful Information
 Purpose of Conceptual Framework  Chapter 3: The Financial Statements and
The Reporting Entity
 Chapter 4: Elements of Financial
 Authoritative Status Statements
 Chapter 5: Recognition and
Derecognition
 Chapter 6: Measurement
 Underlying Assumption
 Chapter 7: Presentation and Disclosure
 Chapter 8: Concepts of Capital and
 Scope of Conceptual Framework
Capital Maintenance
 FINANCIAL ACCOUNTING & REPORTING
CONCEPTUAL FRAMEWORK
 Basic Concept  The Conceptual Framework is a summary of the terms and concepts
that underlie the preparation and presentation of financial statements.
 The Conceptual Framework is concerned with general purpose financial
Mother Standard statements, including consolidated financial statements. Special purpose
reports are outside the scope of the framework.
The underlying theme of the framework is decision usefulness or
Usefulness of information in making economic decision.
Purpose of Conceptual  Basic purpose: To serve as a guide in developing future PFRSs and as a guide
Framework in resolving accounting issues not directly addressed by existing PFRS.
(Hierarchy-Specific std, Related std, Conceptual Framework, Other GAAP,
 Specific
a) Accounting
in developingLiterature)
PFRSs and reviewing existing PFRSs.
 To assist FRSC
purpose:
b) In promoting harmonization of regulations, accounting standards and procedures
relating to the presentation of FS
 To assist FS Preparers In applying PFRSs
 To assist FS Users In Interpreting the information in FS
 To assist Auditors In forming an opinion as to whether the FS conforms with PFRS
 To provide information to those who are interested with the work of
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CONCEPTUAL FRAMEWORK
 Authoritative Status
 The Conceptual Framework is not a Philippine Financial Reporting Standard (PFRS) and hence
does not define standard for any particular measurement or disclosure issue. Thus, nothing
in the Conceptual Framework overrides any specific Philippine Financial Reporting Standard.
 In case where there is a conflict, the requirements of the Philippine Financial Reporting
Standards shall prevail over the Conceptual Framework.
 In the absence of a standard or an interpretation that specifically applies to a transaction,
management shall consider the applicability of the Conceptual Framework in developing and
applying an accounting policy that results in information that is relevant and reliable.
 FINANCIAL ACCOUNTING & REPORTING
CONCEPTUAL FRAMEWORK
 Basic Concept ✔

 Purpose of Conceptual Framework ✔

 Authoritative Status ✔

 Underlying Assumption

 Scope of Conceptual Framework

 FINANCIAL ACCOUNTING & REPORTING
CONCEPTUAL FRAMEWORK
 Underlying Assumption Accounting assumptions or accounting postulates are the basic notions or
fundamental premises on which the accounting process is based.

a) Going Concern Principle

b) Accrual Principle
c) Accounting / Economic Entity Concept
d) Time Period Principle
e) Monetary Unit Principle
 FINANCIAL ACCOUNTING & REPORTING
CONCEPTUAL FRAMEWORK
 Underlying Assumption Accounting assumptions or accounting postulates are the basic notions or
fundamental premises on which the accounting process is based.

a. Going Concern Principle-the only recognized assumption by CF

 the accounting entity is viewed as continuing in operation indefinitely in the absence of

evidence to the contrary.
 Going concern is the foundation of cost principle.

Examples of application of going concern principle

 The current and non-current classification of assets and liabilities
 The accrual of income and expenses and prepayments and unearned income.
 Depreciation of PPE, amortization of intangible assets and etc.
b. Accrual Principle
 Accrual principle addresses the recognition of income and expenses as against the
cash basis principle. Under this principle, income is recognized when earned rather
than when received and expense is recognized when incurred rather than when paid.
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CONCEPTUAL FRAMEWORK
 Underlying Assumption Accounting assumptions or accounting postulates are the basic notions or
fundamental premises on which the accounting process is based.

c. Accounting Entity Concept

 Under this concept, the entity is viewed separately from its owners. Accordingly, the
personal transactions of the owners among themselves or with other entities are not
recorded in the entity’s accounting records.

d. Time Period Principle

 According to the going concern principle, the operation of the business is viewed indefinitely. That was the
foundation of the time period principle. Under this principle, the life of the entity is divided into series of
reporting periods. An accounting period is usually 12 months and may either be a calendar year or a fiscal year.

e. Monetary Unit Principle

 Under this principle, accounting information should be stated in a common
measurement basis to be useful, which is in the Philippines it is peso. Also, this
concept assumes that the purchasing power of the peso is regarded as constant.
 FINANCIAL ACCOUNTING & REPORTING
CONCEPTUAL FRAMEWORK
 Basic Concept ✔

 Purpose of Conceptual Framework ✔

 Authoritative Status ✔


✔
Underlying Assumption

 Scope of Conceptual Framework

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CONCEPTUAL FRAMEWORK
Scope of Conceptual Framework

 Chapter 1: Objective of Financial Reporting: The foundation of CW

Users of financial information is classified into primary and other users.
Primary-primarily address the FS CONCERS
  Risk and return of investment
Inventors
  Liquidity and solvency
Lenders & Other Creditors
Other users
  Stability and profitability
Employees
 Customers  Continuity
 Government  Regulatory
 Public  Various
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CONCEPTUAL FRAMEWORK
Scope of Conceptual Framework

 Chapter 1: Objective of Financial Reporting: The foundation of CW

Overall objective: To provide financial information about the reporting entity
that is useful to existing and potential investors, lenders and other creditors in
making decisions about providing resources to the entity"
Specific objectives:
a) To provide information useful in making decisions about providing resources to the entity.
b) To provide information useful in assessing the prospects of future net cash flows to the entity
and management stewardship of the entity’s economic resources.
c) To provide information about entity resources, claims and changes in resources and claims.
Limitations of Financial Reporting:
a) General purpose financial reports do not and cannot provide all of the information that existing and potential investors,
lenders and other creditors need.
b) General purpose financial reports are not designed to show the value of an entity but they provide information to help the
primary users estimate the value of the entity.
c) General purpose financial reports are intended to provide common information to users and cannot accommodate every
request for information.
d) To a large extent, general purpose financial reports are based on estimate and judgment rather than exact depiction.
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CONCEPTUAL FRAMEWORK
Scope of Conceptual Framework
 Chapter 2: Qualitative Characteristics of Useful Information
 Qualitative characteristics are the qualities or attributes that make financial
accounting information useful to the users.
 Under the Conceptual Framework for Financial Reporting, qualitative characteristics are classified
into fundamental qualitative characteristics and enhancing qualitative characteristics.
 Fundamental Qualitative Characteristics-
 are the qualities that make the information useful to the users in making economic decisions.
 These characteristics address the content or substance of information.
 The fundamental qualitative characteristics are relevance and faithful representation
 1. Relevance means the capacity of information to make a difference in a decision
made by users. Relevant information has the following ingredients:
a) Predictive Value – the information can help users increase the likelihood of correctly
predicting or forecasting outcome of events.
b) Confirmatory Value – the information enables users confirm or correct earlier
expectations.
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CONCEPTUAL FRAMEWORK
Scope of Conceptual Framework
 Chapter 2: Qualitative Characteristics of Useful Information
 Materiality
 Information is material if omitting, misstating or obscuring it could reasonably be expected to
influence the economic decisions of the users
 Materiality is NOT an ingredient of relevance but rather an specific aspect of relevance. Meaning,
all material items are relevant but not all relevant items are material.
 In the exercise of judgment in determining materiality, the following factors may be considered:
 (a) Relative size of the item in relation to the total of the group to which the item belongs;
 (b) Nature of the item.

 2. Faithful representation (Reliability-old term)

 the information provides a true, correct and complete depiction of the
economic phenomena that it purports to represent. To be a perfectly faithful
representation, a depiction should have three ingredients, namely:
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CONCEPTUAL FRAMEWORK
Scope of Conceptual Framework
 Chapter 2: Qualitative Characteristics of Useful Information
 2. Faithful representation (Reliability-old term)

 To be a perfectly faithful representation, a depiction should have three ingredients,

namely:
o Completeness
o Neutrality
o Free from error
TAKE NOTE:
1. Substance over form and conservatism are not ingredients of faithful representation and are
specific aspect only.
2. Measurement uncertainty does not prevent information from being useful. However, in some
cases, the most relevant information may have such a high level of measurement uncertainty
that the most useful information is information that is slightly less relevant but is subject to lower
measurement uncertainty
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CONCEPTUAL FRAMEWORK
Scope of Conceptual Framework
 Chapter 2: Qualitative Characteristics of Useful Information
 Enhancing Qualitative Characteristics
o are the qualities of information that enhances its usefulness.
o These characteristics address the form or presentation of information.
o The enhancing qualitative characteristics are verifiability, comparability,
understandability and timeliness.
1. Verifiability means that different knowledgeable and independent observers could reach
consensus, although not necessarily complete agreement, that a particular depiction is a
faithful representation.
2. Information is comparable if it helps users identify similarities and differences between
different sets of information that are provided by:
a) a single entity but different periods (intra-comparability-focus); or
b) different entities in a single period (inter-comparability).

Although related, consistency and comparability are not the same. Comparability is the goal
while consistency is the means of achieving the goal.
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CONCEPTUAL FRAMEWORK
Scope of Conceptual Framework
 Chapter 2: Qualitative Characteristics of Useful Information
3. Understandability requires that financial information must be comprehensible or
intelligible if it is to be useful.

Note: complex matters cannot be eliminated. Because of this, the framework requires
the users to have a reasonable knowledge of business and economic activities and must
review and analyze the information diligently.

4. Timeliness means having information available to decision makers in time to influence

their decisions. In other words, timeliness requires that financial information must be
available or communicated early enough when a decision is to be made. Relevant information
may lose its relevance if there is undue delay in its reporting.
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CONCEPTUAL FRAMEWORK
Scope of Conceptual Framework
 Chapter 2: Qualitative Characteristics of Useful Information

The cost constraint

 Cost is a pervasive constraint on the information that can be provided by financial
reporting.

 In other words, the cost constraint is a consideration of the cost incurred in generating
financial information against the benefit to be obtained from having the information.

 The benefit derived from the information should exceed the cost incurred in obtaining the
information.
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CONCEPTUAL FRAMEWORK
Scope of Conceptual Framework
 Chapter 3: The Financial Statements and The Reporting Entity
Objective and Scope of Financial Statements
Financial Statements
The objective of general purpose financial statements is to provide financial information about
the reporting entity’s assets, liabilities, equity, income and expenses contained in the
following:
1. Statement of Financial Position (for recognized assets, liabilities and equity)
2. Statement(s) of Financial Performance (for income and expenses)
3. Other Statements and Notes
Financial statements are prepared for a specified period of time or the reporting period.
Financial statements also provide comparative information for at least ONE PRECEDING
REPORTING PERIOD.
Reporting Entity is an entity who must or chooses to prepare the financial statements and is
NOT necessarily a legal entity.
As a result, we have a few types of financial statements:
a) Consolidated – a parent and subsidiaries report as a single reporting entity.
b) Unconsolidated or Individual – a parent alone provides reports.
c) Combined – reporting entity comprises two or more entities not linked by parent-subsidiary relationship
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CONCEPTUAL FRAMEWORK
Scope of Conceptual Framework
 Chapter 4: Elements of Financial Statements
The elements of financial statements refer to the quantitative information shown in the
statement of financial position and statement of comprehensive income, namely:
 Assets
 Liabilities Financial Position
 Equity
 Income
 Expense Financial Performance

Assets–a present economic resource controlled by the entity as a result of a past event. An
economic resource is a right that has the potential to produce economic benefits.
The essential characteristics of an asset are:
a) The asset is controlled by the entity.
b) The asset is the result of a past transaction or event.
c) The asset has potential to produce economic benefits.
d) The economic resource is a right.
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CONCEPTUAL FRAMEWORK
Scope of Conceptual Framework
 Chapter 4: Elements of Financial Statements
Assets–a present economic resource controlled by the entity as a result of a past event. An
economic resource is a right that has the potential to produce economic benefits.
The essential characteristics of an asset are:
a) The asset is controlled by the entity.
b) The asset is the result of a past transaction or event.
c) The asset has potential to produce economic benefits.
NOTE: Tangibility and ownership are not essential characteristics of assets. Also, the presence
or absence of expenditure is not necessary in determining the existence of assets.
Liability – is a present obligation of an entity arising from past transaction or event, the
settlement of which is expected to result in an outflow from the entity of resources embodying
economic benets.
The essential characteristics of a liability are:
a) The liability is the present obligation of a particular entity.
b) The liability arises from past transaction or event.
c) The settlement of the liability requires an outflow of resources embodying economic benefits
NOTE: Identification of payee and certainty of timing of settlement and amount of liability are not
essential characteristics of liabilities.
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CONCEPTUAL FRAMEWORK
Scope of Conceptual Framework
 Chapter 4: Elements of Financial Statements
Equity - is the residual interest in the assets of the entity after deducting all of its liabilities

Income – is the increase in economic benefit during the accounting period in the form of an
inflow or increase of asset or decrease of liability that results in increase in equity, other than
contribution from equity participants.

Simply stated, income is an inflow of future economic benefit that increases equity, other
than contribution by owners. Note: Income encompasses both revenue and gains

Comprehensive income is classified into two: Profit or Loss (P/L) or Other Comprehensive
Income (OCI). General rule is, an income is part of profit or loss unless it will be classified as
OCI which are as follows:
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CONCEPTUAL FRAMEWORK
Scope of Conceptual Framework
 Chapter 4: Elements of Financial Statements
Comprehensive income is classified into two: Profit or Loss (P/L) or Other Comprehensive
Income (OCI).
General rule is, an income is part of profit or loss unless it will be classified as OCI which are
as follows:
1. Unrealized (not realized) gain or loss on financial asset measured at fair value through
other comprehensive income
2. Gain or loss from translating the financial statements of a foreign operation (Translation
not transaction)
3. Revaluation surplus during the year
4. Unrealized gain or loss from derivative contracts designated as cash flow hedge (Not
fair value hedge)
5. Remeasurements of defined benefit plan including actuarial gain or loss on defined
benefit (Not defined contribution) obligation
Expense – is the decrease in economic benefit during the accounting period in the form of
outflow or decrease in asset and increase in liability that results in decrease in equity, other
than distribution to equity participants. Note: Expense encompasses both expense and losses.
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CONCEPTUAL FRAMEWORK
Scope of Conceptual Framework
Chapter 5: Recognition and Derecognition

Recognition is a term which means the process of reporting an asset, liability, income or
expense on the face of the financial statements of an entity

Recognition criteria: (Before, probable and measurable)

a) It meets the definition of an asset, liability, equity, income or expense and
b) Recognizing it would provide useful information
The recognition of an item may not provide useful information if:
a) It is uncertain (not probable) whether an asset or liability exists
b) An asset or liability exists but the probability of an inflow or outflow of economic
benefits is low
Recognition is a term which means the process of reporting an asset, liability, income or
expense on the face of the financial statements of an entity
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CONCEPTUAL FRAMEWORK
Scope of Conceptual Framework
Chapter 5: Recognition and Derecognition
Reminders on Recognition
a) The recognition criteria above apply to assets, liabilities, income and expense. There is no
Equity Recognition Principle / Criteria because it is a residual interest.
b) The expense recognition principle is the application of the matching principle.
c) Expenses are incurred in conformity with the three applications of the matching principle,
namely:
 Cause and effect
 Systematic and rational allocation
 Immediate recognition
Derecognition is the OPPOSITE of recognition. It is the removal of a previously recognized
asset or liability from the entity’s statement of financial position.
Derecognition occurs when the item no longer meet the definition of an asset or liability.
On derecognition, the entity:
a) derecognizes the assets or liabilities that have expired or have been consumed, collected, fulfilled or transferred and
recognized any resulting income and expenses.
b) continues to recognize any assets or liabilities retained after the derecognition.
NOTE: Derecognition is NOT appropriate if the entity retains substantial control of a transferred asset.
 FINANCIAL ACCOUNTING & REPORTING
CONCEPTUAL FRAMEWORK
Scope of Conceptual Framework
Chapter 6: Measurement
Measurement is the process of determining the monetary amounts at which the elements of
the financial statements are to be recognized and carried in the statement of financial
position and income statement.
The Framework acknowledges that a variety of measurement bases are used today to
different degrees and in varying combinations in financial statements including:
Historical cost – This measurement is based on the transaction price at the time of
recognition of the element. The historical cost of an asset is the consideration paid to acquire
the asset plus transaction costs. The historical cost of a liability is the consideration received
to incur the liability minus transaction costs.
Current value – It measures the element updated to reflect the conditions at the
measurement date. Current value measurement bases include the following:
1. Fair Value – is the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants. Fair value is not an entity specific measurement.
2. Value in use (for asset) is the present value of the cash flows or other economic benefits, that an
entity expects to derive from the use of an asset and from its ultimate disposal. Fulfilment value
(for liability) is the present value of the cash or other economic resources that an entity expects to
be obliged to transfer as it fulfils a liability. (Entity Specific measurement)
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CONCEPTUAL FRAMEWORK
Scope of Conceptual Framework
Chapter 6: Measurement
NOTE: Value in use and fulfilment value DO NOT include transaction costs in acquiring an
asset or incurring the liability but include transactions costs expected to be incurred on
the ultimate disposal of the asset or fulfilment of the liability.
Current cost of an asset is the cost of an equivalent asset at the measurement date,
comprising the consideration that would be paid at the measurement date plus transaction
costs that would be incurred on that date. Current cost of liability is the consideration that
would be received for an equivalent liability at the measurement date minus transaction costs
that would be incurred on that date.
NOTE: Current cost and historical cost are ENTRY VALUES while value in use, fulfilment value
and fair value are EXIT VALUES.
The framework points out that it can be appropriate to measure some components of equity
directly but it is not possible to measure total equity directly.
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CONCEPTUAL FRAMEWORK
Scope of Conceptual Framework
Chapter 7: Presentation and Disclosure
Information about assets, liabilities, equity, income and expenses is communicated through
presentation and disclosure in the financial statements.
Effective communication makes information more useful. Effective communication requires:
1. Focusing on presentation and disclosure objectives and principles rather than on rules.
2. Classifying information by grouping similar items and separating dissimilar items.
3. Aggregating information in a manner that it is not obscured either by excessive detail or
by excessive summarization.
NOTE: Classification refers to the sorting of assets liabilities, equity, income or expenses with
similar nature, function and measurement basis for presentation and disclosure purposes.
Aggregation is the adding together of assets, liabilities, equity, income or expenses that have
shared characteristics and are included in the same classification.
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CONCEPTUAL FRAMEWORK
Scope of Conceptual Framework
Chapter 8: Concepts of Capital and Capital Maintenance
CONCEPTS OF
CAPITAL PHYSICAL CAPITAL
FINANCIAL CAPITAL
Invested money or invested Productive capacity of the
Concepts of Capital purchasing power entity
Adopted by most ✔ X
entities?
Measurement Historical cost Current cost

CAPITAL MAINTENANCE
The "capital maintenance approach" or APPROACH
net assets approach means that net income occurs
only after the capital used from the beginning of the period is maintained.
Comprehensive income XXX
Net changes in equity XXX Less: Other comprehensive income (XXX
Less: Additional investment by (XXX
owners Add: Other comprehensive loss ) XXX
Add: Withdrawals and distributions to ) XXX
owners Profit or Loss / Net XXX
Comprehensive income XXX
Income
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CONCEPTUAL FRAMEWORK
STRAIGHT
PROBLEMS
Net changes in equity:
Increase in assets = Increase in 8,900,000
Equity
Increase in Liabilities = Decrease in (2,700,000)
Equity 6,200,000
Less: Increase in SC & SP (6,600,000)
Add: Dividends declared 1,300,000
Comprehensive Income = Net Income 900,000
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CONCEPTUAL FRAMEWORK
STRAIGHT Net changes in equity: 3,094,000
PROBLEMS
Cash 2 260,000 Less: Increase in SC & SP (2,600,000
Accounts receivable (2,288,000) Add: Dividends declared ) 260,000
Allowance for bad debts 312,000
Increase in TS 208,000
Inventory 2,080,000
1,820,000 Comprehensive Income 962,000
Investment in associate
property, plant and equipment 2,860,000 Revaluation Surplus (2,340,000
Accumulated depreciation (1,040,000) )
Profit or Loss/ Net (1,378,000
Accounts payable (2,340,000)
Income or (Loss) )
Bonds payable 1,820,000
Discount on bonds payable (390,000)

Net changes in equity: 3,094,000

 FINANCIAL ACCOUNTING & REPORTING
CONCEPTUAL FRAMEWORK
STRAIGHT Net changes in equity: 3,094,000
PROBLEMS
Cash 2 260,000 Less: Increase in SC & SP (2,600,000
Accounts receivable (2,288,000) Add: Dividends declared ) 260,000
Allowance for bad debts 312,000
Increase in TS 208,000
Inventory 2,080,000
1,820,000 Comprehensive Income 962,000
Investment in associate
property, plant and equipment 2,860,000 Revaluation Surplus (2,340,000
Accumulated depreciation (1,040,000) )
Profit or Loss/ Net (1,378,000
Accounts payable (2,340,000)
Income or (Loss) )
Bonds payable 1,820,000
Discount on bonds payable (390,000)

Net changes in equity: 3,094,000

 FINANCIAL ACCOUNTING & REPORTING
CONCEPTUAL FRAMEWORK
Multiple Choice

1. C 16.D
2. A 17.C
3. C 18.E
4. D 19.C
5. D 20.C
6. A 21.D
7. B 22.D
8. D 23.C
9. D 24.E
10.B 25.C
11.C
12.B
13.E
14.B
15.D
THE END