CONCEPTUAL FRAMEWORK AND ACCOUNTING 2.

Interpretations made by the International

STANDARDS: OUTLINE Financial Reporting Interpretations
© ag Committee (IFRIC – interprets the work of
IASB)
CHAPTER 1 3. International Accounting Standards
Nature of Accounting 4. Interpretations made by the Standing
• General purpose financial statements Interpretations Committee (SIC – interprets
works of the IASC)
External and Internal Users
1. Internal Users Objective
- Active owners 1. Transparency
- “ready access” 2. Accountability
2. External Users 3. (Economic) Efficiency
- Inactive owners
- Creditors and Lenders Standard Setting Process by IASB
- Suppliers 1. Setting the Agenda
- Potential Investors 2. Planning the Project
- Taxing Authorities 3. Developing and Publishing the Discussion
- Regulatory Bodies Paper
- Employees and Employee Unions 4. Developing and Publishing the Exposure
- Financial Analysts Draft
- Financial Advisers and Consultants 5. Developing and Publishing the Standard
- General Public 6. Standard is issued

Direct and Indirect Users Standard Setting Process in the Philippines

1. Direct Users • Philippine Institute of Certified Public
- Directly affected Accountants (1981) à Accounting
- Protect their own interest in the Standards Council
enterprise • Accounting Standards Council à
2. Indirect Users Statements of Financial Accounting
- Provide advice/protect interest of a Standards (SFAS)
direct user • ASC (8 members) – PICPA, Securities and
Exchange Commission, Bangko Sentral ng
Branches of Accounting Pilipinas, Board of Accountancy, Financial
1. Financial Accounting Executives of the Philippines
2. Management Accounting • 1997 – fully move to International
3. Cost Accounting Accounting Standards
4. Tax Accounting • 2006 – Financial Reporting Standards
5. Government Accounting Council (Replace ASC)
6. Bookkeeping • Philippine Accountancy Act of 2004 (RA
7. Auditing 9298)
• FRSC formed Philippine Interpretations
Financial Reporting and Standard Setting Process Committee
• International Accounting Standards
Committee (1973) à International Composition of PFRS
Accounting Standards 1. Specific Philippine Financial Reporting
• Reconstituted in 2001 – International Standards (PFRS), which are adopted from
Accounting Standards Board under the IFRSs
umbrella of the International Financial 2. Philippine Accounting Standards (PAS),
Reporting Standards (IFRS) Foundation à which are adopted from the IASs
International Financial Reporting Standards 3. Philippine Interpretations, which are
International Financial Reporting Standards adopted from the interpretations of the
(originated from works of IASB) IFRIC and the SIC and the interpretations of
1. Specific International Financial Reporting the PIC
Standards
 PFRS Ø Predictive Value
1. Recognition Ø Materiality: nature, magnitude,
2. Measurement error
3. Presentation b. Faithful Representation
4. Disclosure Ø Complete
Ø Neutral
Development of PFRS Ø Free from Error
1. Consideration of pronouncement of IASB - Enhancing
2. Formation of a task force, when deemed a. Comparability
necessary, to give advice to the FRSC Ø Intracomparability
3. Issuing for comment an exposure draft by Ø Intercomparability
a majority of FRSC members; comment b. Verifiability
period will be at least 60 days, unless a Ø Direct verification
shorter period (not less than 30 days) is Ø Indirect verification
considered appropriate by the FRSC c. Timeliness
4. Consideration of comments received d. Understandability
within the comment period and, when - Cost constraint on useful financial
appropriate, preparing a comment letter reporting
to the IASB
5. Approval of a standard/interpretation by a 3. Financial Statements and the Reporting
majority of the FRSC members Entity
- Information presented on FS:
CHAPTER 2 a. Financial Position
Purpose and Status of Conceptual Framework b. Financial Performance
1. Assist IASB to develop IFRS that are based c. Information about:
on consistent concepts Ø Recognized assets, liabilities,
2. Assist preparers to develop consistent income, and expenses,
accounting policies when no standard including nature and risks arising
applies to a particular transaction or other from recognized assets and
event, or when a standard allows a choice liabilities
of accounting policy Ø Assets and Liabilities that have
3. Assist all parties to understand and not been recognized (including
interpret the standards information about their nature
and risks arising therefrom)
Scope of Conceptual Framework1 Ø Cash flows
1. Objective of General-Purpose Financial Ø Contributions from and
Reporting distributions to enterprise owners
- Provide financial information about an Ø The methods, assumptions, and
entity that is useful to existing and judgments in estimating
potential investors, lenders, and other amounts presented or
creditors in making decisions about disclosed, and changes in those
providing resources to the entity methods, assumptions, and
- Liquidity judgments
- Solvency - Going concern assumption
- Profitability
- Information about an entity’s The Reporting Entity
economic resources and claims n Single entity
- Information on changes in Economic n Portion of an entity
Resources and Claims n More than one entity
à Consolidated Financial Statements
2. Qualitative Characteristics of Useful à Unconsolidated Financial
Financial Information Statements
- Fundamental à Combined Financial Statements
a. Relevance
Ø Confirmatory Value 4. The Elements of Financial Statements
 - Elements relating to financial position à Concept of offsetting
a. Asset (right, potential to receive - Aggregation
economic benefits, control)
b. Liability (obligation of an entity, 8. Concepts of Capital and Capital
obligation is to transfer an Maintenance
economic resource, present - Financial Concept of Capital
obligation rises from a past event) - Physical Concept of Capital
c. Equity - Financial Capital Maintenance
- Elements relating to financial Concept
performance - Physical Capital Maintenance
a. Income Concept
b. Expenses
CHAPTER 3
5. Recognition and Derecognition Financial Statements
- Recognition: • IAS 1 Presentation of Financial Statements
a. Meets the definition of an asset, • Responsibility of company’s management
liability, equity, income, or expenses
b. Provides useful information that is Components of Financial Statements
relevant and faithfully represented 1. Statement of Financial Position as at the
c. The benefits of the information end of the period
provided to the users justify the 2. Statement of Comprehensive Income for
costs of obtaining, providing, and the period
using the information 3. Statement of Changes in Equity for the
d. Measurable period
- Derecognition 4. Statement of Cash Flows for the period
a. Asset is derecognized when it loses 5. Notes, comprising a summary of significant
control over the asset (or part of it) accounting policies and other explanatory
b. Liability is derecognized when an information
entity has no more present Requirement for an Additional Statement of
obligation for all (or part) of the Financial Position
liability 1. Retrospective application of a change in
accounting policy
6. Measurement 2. Restatement of financial statements
- Historical Cost (Entry) because of prior period errors discovered
- Current Value 3. Reclassification of an element in financial
a. Fair Value (Exit) statements
b. Value in Use and Fulfillment Value
(Exit) Accounting Policies
c. Current Cost (Entry) • IAS 8 Accounting Policies, Changes in
- Initial Measurement and Subsequent Accounting Policies and Principles
Measurement • Management can apply judgment to form
part of its accounting policies,
7. Presentation and Disclosure management can use the following
- Presentation and Disclosure objectives: sources in DESCENDING ORDER
a. Flexibility to provide relevant and a. Requirements in PFRS and IFRS in
faithfully represented FS elements dealing with similar related issues
b. Comparability within an enterprise b. Definitions, recognition criteria, and
for 2 different reporting periods and measurement concepts for assets,
comparability across enterprises for liabilities, income, and expenses in the
a single reporting period conceptual framework
- Classifying Information – Shared c. Most recent pronouncements of other
characteristics standard setting bodies that use a
a. Nature similar conceptual framework to
b. Function develop accounting standards
c. How it is measured
 d. Other accounting literature and that it conflicts with the objective of
accepted industry practices the financial statements
b. Adjustments in each item for each
General Features for Presentation of Financial period presented
Statements
1. Fair Presentation and Compliance with 2. Going Concern
IFRS/PFRS - FS should be prepared on a going
- Fair presentation requires an entity to: concern basis
a. Select accounting policies based - If FS are not prepared on a going
on PAS/IAS 8 concern basis:
b. Present information, including a. Fact that the FS are not prepared
accounting policies in a manner on a going concern basis
that provides relevant, reliable, b. Basis on which FS are prepared
comparable, and understandable c. Reason why enterprise is not
information considered to be a going concern
c. Provide additional disclosures when - Management should assess the ability
compliance with specific of the enterprise to continue operation
requirements of the IFRS is of at least, but not limited to, 12 months.
insufficient to enable the users to
understand the impact of a 3. Accrual Basis of Accounting
particular transaction - Expense and revenue recognition
- If management departs from a principles
standard, the following disclosures shall - Income = direct matching
be made (Regulatory Framework - Cost of asset acquired to periods of
requires, or otherwise does not prohibit benefit = systematic and rational
such a departure): allocation
a. Management has concluded that
the financial statements present 4. Materiality and Aggregation
fairly the entity’s financial position, - Each material item = presented
financial performance, and cash separately in the FS
flows - Immaterial items of similar nature =
b. That it has complied with aggregated and presented as one-line
applicable IFRSs, except that it has item in the face of FS
departed from a particular - Non-disclosure of item = if it would not
requirement to achieve a fair affect the decision/evaluation of the
presentation user (materiality depends on size and
c. Title of IFRS from which the entity has nature of item)
departed, nature of departure, - Aggregation & Classification =
treatment that IFRS would require, presentation of condensed and
reason why the treatment would be classified information
misleading, and treatment
adopted 5. Offsetting
d. For each period presented, the - Deducting one item from another item
financial impact of the departure of different nature and presenting only
on each item in the financial the net on the face of the FS
statements that would have been - Generally not allowed but is allowed
reported in complying with the and applied when presenting on the
requirement net basis reflects the substance of the
- Departure from Standard (Standard transaction or other event.
prohibits departure):
a. Title of standard/interpretation in 6. Frequency of Reporting
question, nature, reason why - At least annually
management has concluded that - Interim FS = covers a period shorter than
complying with the requirement is 1 yr
so misleading in the circumstances
 7. Comparative Information comprehensive income and are
- In presenting financial information for transferred to the equity component of
the current year, TWO SETS OF ALL cumulative other comprehensive income
COMPONENTS of financial statements in the statement of changes in equity.
are presented. • Other changes in equity not arising from
- When enterprise makes retrospective financial performance, such as
adjustment for a change in accounting contributions and distributions to owners of
policy, correction of prior period error, the entity are also presented in the
and reclassification/amendment of statement of changes in equity.
items in FS, THREE statements of • Information on cash flows, which is defined
financial position shall be presented: as inflows and outflows of cash and cash
a. End of the current period equivalents, is presented in the Statement
b. End of immediate prior period of Cash Flows. (Operating, Investing,
c. Beginning of the preceding period Financing)
à Done to ensure COMPARABILITY • Net cash inflow/outflow of cash and cash
equivalents represents the net change of
8. Consistency of Presentation cash and cash equivalents during the
- Presentation is same from period to reporting period. The net change brings
period, unless: the beginning balance to the ending
a. Another presentation/classification balance – the ending balance being the
would be more appropriate final figure presented as cash and cash
b. An IFRS requires a change in equivalents in the Statement of Financial
presentation Position.
- When entity reclassifies comparative • The activities related to a reporting entity’s
amounts, it shall disclose: financial performance, cash flow activities,
a. Nature of reclassification and other activities that involve equity
b. Amount of each item/class of items accounts, affect the elements presented
that is reclassified in the Statement of Financial Position. In
c. Reason for reclassification addition, the assets, liabilities, and equity at
the end of the reporting period that result
Identification of Financial Statements (Displayed from all the enterprise’s activities are
prominently and repeated) presented in the SFP as well.
1. Name of reporting entity and other means
of identification, and any change in that Limitations of Financial Statements
information from the preceding financial 1. Real worth of business is not reflected in the
statement date FS because of the use of different
2. Whether the FS cover the individual entity measurement bases
or a group of entities 2. FS presents different levels of purchasing
3. Statement of Financial Position date or the power
Period Covered by the financial 3. Measurement uncertainties cause some
statements; whichever is appropriate to elements to not be recognized (only those
that component of the FS capable of financial measurement and
4. Presentation of currency have met the recognition criteria in the
5. Level of rounding used framework can be reflected)
4. The moral and efficiency of company
Fundamentally Related Financial Statements personnel, strategic location of company’s
• FS are fundamentally related because production facilities and markets,
they relate to the effects of the same sets enterprise’s contribution to the
of transactions completed by the development and deterioration of the
enterprise during the reporting period. environment are not reported in the FS.
• First FS completed: Statement of à FS can still be used to estimate the value of the
Comprehensive Income. firm.
• Profit is transferred to Statement of
Changes in Equity. Other comprehensive
income are presented as other
Securities and Exchange Commission - Not required to file FS under Part II of
• National government regulatory agency Rule 68
charged with supervision of corporate - Not in the process of filing their FS for the
sector purpose of issuing any class of
• Republic Act 8799 – Securities Regulation instruments in a public market
Code (SRC) - Not holders of secondary licenses issue
• SRC Rule 68 – general guides to FS by regulatory agencies
preparation, responsibility to FS, - INCOME TAX BASIS or PFRS for SMALL
qualifications and reports of independent ENTERPRISE
auditors and review of their quality
assurance processes.

Classification of Reporting Entities based on the

Applicable Philippine Financial Reporting
Frameworks (SRC Rule 68, Section 2)
1. Large/Publicly Accountable Entities (ANY
of the following criteria)
- Assets > 350M; Liabilities >250M
- Required to file FS under Part II of SRC
Rule 68
- In the process of filing their FS for the
purpose of issuing any class of
instruments in a public market
- Holders of secondary licenses issue by
regulatory agencies
- FULL PFRS ADOPTION

2. Medium-Sized Entities (ALL of the following

criteria)
- 100M < Assets < 350M; 100M < Liabilities
< 250M
- Not required to file FS under Part II of
Rule 68
- Not in the process of filing their FS for the
purpose of issuing any class of
instruments in a public market
- Not holders of secondary licenses issue
by regulatory agencies
- PFRS for SME’s (Can adopt Full PFRS)

3. Small Entities
- 3M ≤ Assets ≤ 100M; 3M ≤ Liabilities ≤
100M
- Not required to file FS under Part II of
Rule 68
- Not in the process of filing their FS for the
purpose of issuing any class of
instruments in a public market
- Not holders of secondary licenses issue
by regulatory agencies
- PFRS for SMALL ENTITIES (Can adopt
either Full PFRS or PFRS for SME’s)

4. Micro Entities
- Total Assets and Total Liabilities < 3M