 In case of conflict, the requirements of the

IFRS shall prevail over Conceptual

Framework.

THE OBJECTIVE OF GENERAL 1. Primary Users – includes the existing and

PURPOSE FINANCIAL REPORTING potential investors, lenders and other
creditors.
2. Other Users – include the employees,
customers, governments and their agencies,
 A complete, comprehensive and single document
and the public.
promulgated by the International Accounting
Standards Board (IASB) to describe the concepts for
general purpose financial reporting.
a. Objective of financial reporting
 An attempt to provide an overall theoretical
b. Qualitative characteristics of useful financial
foundation for accounting.
information
 Intended to guide standard-setters, preparers and
c. Financial statements and reporting entity
users of financial information in the preparation and
d. Elements of financial statements
presentation of statements.
e. Recognition and de-recognition
 The underlying theory for the development of
f. Measurement
accounting standards and revision of previously
g. Presentation and Disclosure
issued accounting standards.
h. Concepts of capital and capital maintenance

The objective of financial reporting forms the

a. Contribute to transparency by enhancing
foundation of the Conceptual Framework.
international comparability and quality of
 The overall objective of financial reporting is to
financial information.
provide financial information about the
b. Strengthen accountability by reducing
reporting entity that is useful to existing and
information gap between the providers of capital
potential investors, lenders and other creditors
and the people to whom they have entrusted
in making decisions about providing resources
their money.
to the entity.
c. Contribute to economic efficiency by helping
 The objective of financial reporting is the “why”,
investors to identify opportunities and risk across
purpose or goal of accounting.
the world.

 The financial reporting is directed primarily

a. To assist the international Accounting Standards
to the existing and potential investors,
Board to develop IFRS Standards based on
lenders and other creditors which
consistent concepts.
composed the primary user group. Primary
b. To assist preparers of financial statements to
users of financial information are the
develop consistent accounting policy when no
parties that provide resources to the entity.
Standard applies to a particular transaction or
 The management of a reporting entity is also
other event or where an issue is not yet
interested in financial information about the
addressed by an IFRS.
entity however, they need not rely on
c. To assist preparers of financial statements to
general purpose financial reports it is able to
develop accounting policy when a Standard
obtain or access additional financial
allows a choice of an accounting policy.
information internally.
d. To assist all parties to understand and interpret
the IFRS Standards.

The Conceptual Framework places more

emphasis on the importance of providing information
 If there is a standard or an interpretation
needed to assess the management stewardship of
that specifically applies to a transaction, the
the entity’s economic resources. Accordingly, the
standard or interpretation overrides the
specific objectives of financial reporting are:
Conceptual Framework.
a. To provide information useful in making
 In the absence of standard or an
decisions about providing resources to
interpretation that specifically applies to a
the entity.
transaction, management shall consider the
b. To provide information useful in
applicability of the Conceptual Framework.
assessing the cash flow prospects of the
However, Conceptual Framework is not an
entity.
International Financial Reporting Standard.
c. To provide information about entity
 Nothing in the Conceptual Framework
resources, claims and changes in
overrides any specific International Financial
resources and claims.
Reporting Standard.
 known as results of operation and is
Existing and potential investors need general portrayed in the income statement and
purpose financial reports in order to enable them in statement of comprehensive income.
making decisions about:
a. buying, selling or holding equity and
debt instrument;  Information about a reporting entity’s
b. providing or settling loans and other financial performance helps users to
forms of credit; or understand the return that the entity
c. exercising rights to vote on, or has produced on its economic
otherwise influence, management’s resources.
actions that affect the use of the  Information about the return the entity
entity’s economic resources. has produced can help users to assess
management’s stewardship of the
entity’s economic resources.
 Decisions by existing and potential  Information about the variability and
investors about buying, selling or holding components of that return is also
equity instruments depend on the returns important, especially in assessing the
they expected from investment (ex. uncertainty of future cash flows.
Dividends).  Information about the reporting entity’s
 Decisions by existing and potential lenders past financial performance and how its
and other creditors about providing or management discharged its stewardship
settling loans and other forms of credit responsibilities is usually helpful in
depend on the principal and interest predicting the entity’s future returns
payments or other returns they expect. on its economic resources.
 Consequently, financial reporting should
provide information useful in assessing the
amount, timing and uncertainty of prospect  The effects of transactions and other
for future net cash inflows to the entity. events are recognized when they occur
and not as cash is received or paid. In
other words, income is recognized
General purpose financial reports provide when they earned regardless of when
information about the financial position of a received and expenses are recognized
reporting entity. when incurred regardless of when paid.
 Financial Position is information about the
entity’s economic resources and the claims
against the reporting entity. It comprises the a. General purpose financial reports do
assets, liabilities and equity at a particular not and cannot provide all the
moment in time. information that the primary users
 Information about the nature and amounts need. They need to consider pertinent
of an entity’s economic resources and claims information from other sources (ex.
can help users identify the entity’s financial General economic conditions, political
strength and weakness. Otherwise stated, it events and industry outlook).
can also help users to assess the entity’s: b. General purpose financial reports are
 Liquidity – the availability of cash in not designed to show the value of an
the near future to cover currently entity but the reports provide
maturing obligations. information to help the primary users
 Solvency – the availability of cash estimate the value of the entity.
over a long term to meet financial c. General purpose financial reports are
commitments when they fall due. intended to provide common
 The need for additional financing information to users and cannot
 Information about priorities and payment accommodate every request for
requirements of existing claims can help information.
users to predict how future cash flows will d. To a large extent, general purpose
be distributed among those with a claim financial reports are based on estimate
against the reporting entity. and judgment rather than exact
depiction.

 Changes in a reporting entity’s economic

resources and claims result from the entity’s  Information about how efficiently and
financial performance (comprises of effectively management has discharged
revenue, expenses and net income/loss for a its responsibilities to use the entity’s
period of time) and other events or economic resources help users to assess
transactions such as issuing debt or equity management stewardship of those
instruments. resources. Such information is useful for
 Financial performance is the level of income predicting how they will use the entity’s
earned by the entity through the efficient economic resources in future periods.
and effective use of its resources. It is also
 principle of full disclosure – means that
all significant and relevant information
leading to the preparation of financial
statements shall be clearly reported.
QUALITATIVE CHARACTERISTICS OF (2) a neutral depiction is
without bias in the selection or
USEFUL FINANCIAL INFORMATION presentation of financial information. It
is not slanted, weighted,
are the qualities or attributes de/emphasized or otherwise
that make financial accounting information useful to the manipulated to increase the probability
users. Under the Conceptual Framework for Financial that financial information will be
Reporting, qualitative characteristics are classified into: received un/favorably by users. It is free
from bias. Neutrality is supported by the
1. Fundamental Qualitative Characteristics exercise of prudence – is the exercise of
– relate to the content or substance of financial care and caution when dealing with the
information. uncertainties. And prudence is
synonymous with conservatism –
A. Relevance – the capacity of the information to means that when alternatives exist, the
influence a decision. To be relevant, the financial alternative which has the least effect on
information must be capable of making a equity should be chosen, or “in case of
difference in the decision made by users and if it doubt, record any loss and do not
has: record any gain.”
(1) Predictive Value – if it can be used as an (3) means there are no
input to processes employed by users to errors or omissions in the description of
predict future outcomes or when it can the phenomenon or transaction, and the
help users increase the likelihood of process used to produce the reported
correctly, or accurately predicting or information has been selected and
forecasting outcome of events. applied with no errors in the process.
(2) Confirmatory Value – if it provides However, free from error does not
feedback about (confirms or changes) mean perfectly accurate in all respects.
previous evaluations, or when it enables For instance, an estimate of an
users confirm or correct earlier unobservable price or value cannot be
expectations. determined to be in/accurate thus,
 The predictive value and confirmatory measurement uncertainty arises when
value of financial information are monetary amounts in financial reports
interrelated. Information that has cannot be observed directly and must
predictive value often also has instead be estimated. If the level of
confirmatory value. uncertainty in providing an estimate is
(3) Materiality – information is material if high, faithful representation can be
omitting, misstating or obscuring it affected but as long as an estimate is
could reasonably affect or influence the clearly and accurately described and
economic decision of the primary users. explained, then it does not affect the
Materiality is an entity-specific aspect of usefulness of financial information even
relevance based on nature or with the high level of measurement
magnitude, or both to which the uncertainty.
information relates. It is also known as
doctrine of convenience. It is really a
“threshold” linked very closely to the
quantitative characteristic of relevance.  Information must be both relevant and
The board cannot specify a uniform faithfully represented if it is to be useful.
quantitative threshold for materiality or  Faithful Representation inherently
predetermine what could be material in represents the substance of an
a particular situation. economic phenomenon or transaction
rather than merely representing the
B. Faithful Representation – means that financial legal form, or the economic substance
reports represent economic phenomena or of transaction and events are usually
transactions in words and numbers, or the emphasized when the economic
descriptions and figures must match what really substance differs from legal form –
existed or happened. To be faithfully substance over form.
represented, a depiction should have:
(1) Completeness – a complete depiction 2.
includes all information necessary for a – relate to the presentation or form of the financial
user to understand the phenomenon information. It is intended to increase the usefulness
being depicted, including all necessary of the financial information that is relevant and
descriptions and explanations. faithfully represented.
Completeness is a result of the
adequate disclosure standard or the
 A. enables users to identify and the benefit to be obtained from having the
understand similarities in, and differences information.
among, items.  The benefit derived from the information should
(1) Comparability within an entity – allows exceed the cost incurred in obtaining the
comparisons within a single entity through information.
time or from one accounting period to the  The evaluation of the cost constraint is substantially a
next. It is also known as horizontal judgmental process.
comparability or intracomparability.
(2) Comparability between and across entities
– allows comparisons between two or more
entities engaged in the same industry. It is
also known as dimensional comparability or
intercomparability.
 Implicit in comparability is the principle of
consistency – the use of the same methods
for the same items, either from period to FINANCIAL STATEMENTS AND THE
period within a reporting entity or in a single
period across entities. Consistency is not the
REPORTING ENTITY
same as comparability. Comparability is the UNDERLYING A SSUMPTIONS
goal; consistency helps to achieve that goal.
provide financial information about
B. means that different an entity’s assets, liabilities, equity, income and expenses
knowledgeable and independent observers could useful to users of financial statements in:
reach consensus, although not necessarily  Assessing future cash flows to the reporting
complete agreement, that a particular depiction entity.
is a faithful representation.  Assessing management stewardship of the
(1) Direct Verification – verifying an amount or entity’s economic resources.
other representation through direct
observation, for example, by counting cash. The financial information provided the following:
(2) Indirect Verification – checking inputs to a 1. Statement of financial position, by recognizing
model, formula or other technique and assets, liabilities and equity.
recalculating the outputs using the same 2. Statement of financial performance, by
methodology. recognizing income and expenses.
3. Other statements and notes by presenting and
C. means that financial information disclosing information about:
must be available or communicated early enough a. Recognized assets, liabilities, equity, income
when a decision is to be made. The older the and expenses
information, the less useful. However, some b. Unrecognized assets and liabilities
information may continue to be timely long after c. Cash flows
the end of a reporting period because, for d. Contribution from equity holders and
example, some users may need to identify and distribution to equity holders
assess trends. e. Method, assumption and judgment in
estimating amount presented
D. requires that financial
information must be comprehensible or
intelligible if it is to be most useful. Classifying, 1. Consolidated Financial Statements
characterizing and presenting information  These are financial statements that provide
“clearly and concisely” makes it understandable. information about the assets, liabilities,
equity, income and expenses of both parent
and its subsidiaries as a single reporting
 Enhancing qualitative characteristics cannot entity. The parent exercises control over the
make information useful if that information subsidiaries.
is irrelevant or does not provide a faithful  This type of financial statement is useful for
representation of what it purports to the primary users of the parent in their
represent. assessment of future net cash inflows to the
 Applying the enhancing qualitative parent.
characteristics is an iterative process that  Consolidated financial statements are not
does not follow a prescribed order. designed to provide separate information
Sometimes, one enhancing qualitative about the assets, liabilities, equity, income
characteristic may have to be diminished to and expense of a particular subsidiary. A
maximize another qualitative characteristic. subsidiary’s own financial statements are
designed to provide such information.

 is a pervasive constraint on the information 2. Unconsolidated Financial Statements

that can be provided by financial reporting.  These are financial statements that provide
 is a consideration of the cost information about the parent’s (alone)
incurred in generating financial information against assets, liabilities, equity, income and
 expenses and not about those of the assumptions of accounting entity, time period and
subsidiaries. monetary unit.
 This type of financial statement is useful for
the primary users of the parent because a a.
claim against the parent typically does not  Also known as continuity assumption which
give a holder of that claim against means that in the absence of evidence to
subsidiaries. the contrary, the accounting entity is viewed
 Information provided in unconsolidated as continuing in operation indefinitely or
financial statements is typically not that the entity will continue in operations
sufficient to meet the requirement needs of for the foreseeable future.
primary users.  This is the very foundation of the cost
 When consolidated financial statements are principle – assets are normally recorded at
required, unconsolidated financial cost, ignoring the market values but some
statements cannot serve as substitute to the standards require measurement of certain
former. assets at fair value.

3. Combined Financial Statements b.

 These are financial statements that provide  Accounting entity is the specific business
information about the assets, liabilities, organization, which may be proprietorship,
equity, income and expenses of two or more partnership or corporation.
entities not linked with parent and  Under this assumption, the entity is
subsidiary relationship. separate from the owners, managers, and
employees who constitute the entity. The
reason for this entity assumption is to have
is an entity that is required or chooses to prepare fair presentation of financial statements.
financial statements. It can be a single entity or a
portion of an entity or can comprise more than one c.
entity. Reporting entity is not necessarily a legal  Requires that the indefinite life of an entity
entity. The following can be considered a reporting is subdivided into accounting periods which
entity: are usually of equal length for the purpose
a. Individual corporation, partnership or of preparing financial reports on financial
proprietorship position, performance and cash flows.
b. The parent alone  By convention, the accounting period or
c. The parent and its subsidiaries as single fiscal period is one year or a period of
reporting entity twelve months.
d. Two or more entities without parent and  The “one-year period” is traditionally the
subsidiary relationship on a single reporting accounting period because usually it is after
entity one year that government reports are
e. A reportable business segment of an entity required.
 The accounting period may be:
 Calendar year – is a twelve-month
 Is the period when financial statements are prepared period that ends on Dec. 31.
for general purpose financial reporting.  Natural business year – is a twelve-
 Financial statements may be prepared on an interim month period that ends on any
basis (ex. three months, six months, or nine months). month when the business is at the
 Interim financial statements are not required but lowest or experiencing slack season.
optional.
 Financial statements must be prepared on an annual d.
basis or a period of twelve months. It is prepared for  Monetary unit assumption has two aspects:
a specified period of time and provide information a. Quantifiability Aspect – means that the
about: assets, liabilities, equity, income and
a. Assets, liabilities and equity at the end expense should be stated in terms of a
of the reporting period. unit of measure which is the peso in the
b. Income and expenses during the Philippines.
reporting period. b. Stability of the peso – means that the
purchasing power of the peso is stable
or constant and that its instability is
 Accounting assumptions are the basic notions or insignificant and therefore ignored.
fundamental premises on which the accounting Stable peso postulate is actually an
process is based. It is also known as postulates. It amplification of the going concern
serves as the foundation or bedrock of accounting to assumption so much so that
enhance understanding and usefulness of the adjustments are unnecessary to reflect
financial statements. any changes in purchasing power.
 Conceptual Framework for Financial Reporting
mentions only one assumption, going concern.
However, implicit in accounting are the basic
 b. To exchange economic resources
with another party on favorable
terms
c. To produce cash inflows or avoid
THE ELEMENTS OF FINANCIAL cash outflows
d. To receive cash by selling the
STATEMENTS economic resource
e. To extinguish a liability by
transferring an economic resource
(1) The elements of financial statements are assets,
liabilities and equity.
(2) The elements of financial performance are income
 An entity controls an asset if it has the
and expense.
present ability to direct the use of the
asset and obtain the economic benefits
that flow from it.
 Economic resource
 Control also includes the ability to
 A present economic resource controlled by the entity
prevent others from using such asset
as a result of the past events. An economic resource
and therefore preventing others from
is a right that has the potential to produce economic
obtaining the economic benefits from
benefits.
the asset.
 Control may arise if an entity enforces
legal rights.
a. The asset is a present economic resource.
 If there are no legal rights, control can
b. The economic resource is a right that has the
still exist if an entity has the other
potential to produce economic benefits.
means of ensuring that no other party
c. The economic resource is controlled by the
can benefit from an asset.
entity as a result of past events.

 Economic claims/obligations
 Rights that have the potential to produce
 A present obligation of the entity to transfer an
economic benefits may take the following
economic resource as a result of past events.
forms:
1. Rights that correspond to an obligation of
another entity
a. The entity has an obligation.
a. Right to receive cash
b. The obligation is to transfer an economic
b. Right to receive goods or services
resource.
c. Right to exchange economic resources
c. The obligation is a present obligation that exists
with another party on favorable terms
as a result of past events. This means that a
d. Right to benefit from an obligation of
liability is not recognized until it is incurred.
another party if a specified uncertain
future event occurs
2. Rights that do not correspond to an
 An obligation is a duty or responsibility that
obligation of another entity
an entity has no practical ability to avoid. It
a. Right over physical objects, such as
can be either be:
property, plant and equipment or
a. Legally enforceable as a
inventories.
consequence of a binding
b. Right to intellectual property
contract or statutory
3. Rights established by contract or legislation
requirement.
such as owning a debt instrument or an
b. Constructive obligations arise
equity instrument or owning a registered
from normal business practice,
patent.
custom and desire to maintain
good business relations or act
in an equitable manner.
 An economic resource is a right that has the
potential to produce economic benefits. For
the potential to exist, it does not need to be
 Obligations to transfer an economic
certain or even likely that the right will
resource include:
produce economic benefits. It is only
a. Obligation to pay cash
necessary that the right already exist.
b. Obligation to deliver goods or
 The economic resource is the present right
non-cash resources
that contains the potential and not the
c. Obligation to provide services
future economic benefits that the right may
at some future time
produce.
d. Obligation to exchange
 An economic resource could produce
economic resources with
economic benefits if an entity is entitled:
another party on unfavorable
a. To receive contractual cash flows
terms
 e. Obligation to transfer an 1. In the statement of financial position at the
economic resource if specified beginning and end of the reporting period,
uncertain future event occurs. total assets minus total liabilities equal
total equity.
2. Recognized changes in equity during the
 An obligation exists as a result of past event reporting period comprise:
if both of the following conditions are a. Income minus expenses recognized in
satisfied: the statement/s of financial
a. An entity has already obtained performance; plus
economic benefits. b. Contributions from holders of equity
b. An entity must transfer an claims, minus distributions of holders of
economic resource equity claims.

 The statements are linked because the

 is a residual interest in the assets of the entity after recognition of one item requires the recognition
deducting all its liabilities. or derecognition of one or more other items:
1. The recognition of income occurs at the
same time as:
 Defined as increases in assets or decreases in a. The initial recognition of an asset, or an
liabilities that result in increase in equity, other than increase in the carrying amount of an
those relating to contributions from equity holders. asset
 Income encompasses both revenue and gains: b. The derecognition of a liability, or a
 Revenue arises in the course of the ordinary decrease in the carrying amount of a
regular activities and is referred to by variety of liability
different names including sales, fees, dividends, 2. The recognition of expenses occurs at the
royalties and rent. The essence of revenue is same time as:
regularity. a. The initial recognition of a liability, or an
 Gains represent other items that meet the increase in the carrying amount of a
definition of income and do not arise in the liability
course of the ordinary regular activities. b. The derecognition of an asset, or a
decrease in the carrying amount of an
asset.
 Defined as decreases in assets or increases in
liabilities that result in decreases in equity, other
than those relating to distributions to equity holders.  Only items that meet the definition of an asset,
 Expense encompasses losses as well as those a liability or equity are recognized in the
expenses that arise in the course of the ordinary statement of financial position.
regular activities:  Similarly, only items that meet the definition of
 Expenses that arise in the course of ordinary income or expense are recognized in the
regular activities include COGS, wages and statement of financial performance.
depreciation.  In addition, items are recognized only when
 Losses do not arise in the course or the their recognition provides users of financial
ordinary regular activities and include losses statements with information that is both
resulting from disasters. relevant and faithfully represented.
 Recognition does not focus anymore on how
probable economic benefits will flow to or from
the entity and that the cost can be measured
reliably; an asset or liability and any
corresponding income or expense can exist even
if the probability of inflow or outflow of the
benefits is low.

RECOGNITION AND DERECOGNITION  The basic principle of income recognition is that

income shall be recognized when earned.
 With respect to sale of goods in the ordinary
 is the process of capturing for inclusion in the course of business, the point of sale is
financial statements an item that meets the unquestionably the point of income recognition.
definition of an asset, liability, equity, income or The reason is that it is the point of sale that the
expense. entity has transferred to the buyer the significant
 The amount at which an asset, a liability or equity is risks and rewards of ownership of the goods.
recognized in the statement of financial position is Stated differently, legal title to the goods passes
reported as carrying amount. to the buyer at the point of sale. However, under
 Recognition links the elements, the statement of certain conditions, income may be recognized at
financial position and statement/s of financial the point of production, during production and
performance as follows: at the point of collection.
 The basic expense recognition means that expenses  Is the removal of all or part of a recognized asset or
are recognized when incurred. liability from an entity’s statement of financial
 Expense recognition principle is the application of the position. Derecognition normally occurs when that
matching principle – requires that those costs and item no longer meets the definition of an asset or a
expenses incurred in earning a revenue shall be liability:
reported in the same period. It has three applications: a. For an asset, it occurs when the entity
loses control of all or part of the
(1) recognized asset.
 Under this principle, the expense is b. For a liability, it occurs when the entity
recognized when the revenue is already no longer has a present obligation for all
recognized. The reason is that the or part of the recognized liability.
presumed direct association of the
expense with specific items of income.
This is actually the “strict matching
concept”.
 This process, commonly referred to as
the matching of cost with revenue,
involves the simultaneous or combined
recognition of revenue and expenses
that result directly and jointly from the
same transactions or event.
 Example: cost of merchandise
MEASUREMENT
inventory, doubtful accounts, warranty
expense and sales commission. is defined as quantifying in monetary
terms the elements in the financial statements. The
Conceptual Framework mentions two categories:
 Under this principle, some costs are
expensed by simply allocating them 1.
over the periods benefited. The reason  Historical cost or original acquisition cost of
is that the cost incurred will benefit an asset is the cost incurred in acquiring or
future periods and that there is an creating the asset comprising the
absence of a direct or clear association consideration paid plus transaction cost.
of the expense with specific revenue.  Historical cost of a liability is he
 When economic benefits are expected consideration received to incur the liability
to arise over several accounting periods minus transaction cost.
and the association with income can  Simply stated, historical cost is the entry
only be broadly or indirectly determined, price or entry value to acquire an asset or
expenses are recognized on the basis of to incur a liability.
systematic and allocation procedures.  The amortized cost reflects the estimate of
 Example: depreciation of property, future cash flows discounted at a rate
plant and equipment, allocation of determined at initial recognition.
prepaid rent, insurance and other
prepayments.
(1) Historical cost of an asset is updated
because of:
 Under this principle, the cost incurred is a. Depreciation and amortization
expensed outright because of b. Payment received as a result of
uncertainty of future economic benefits disposing part or all of the asset
or difficulty of reliably associating c. Impairment
certain costs with future revenue. d. Accrual of interest to reflect any
 An expense is recognized immediately: financing component of the asset
a. When expenditure produces e. Amortized cost measurement of
no future economic benefit. financial asset
b. When cost incurred does not (2) Historical Cost of a liability is updated
qualify or ceases to qualify for because of:
recognition as an asset. a. Payment made or satisfying an
 Example: officers’ salaries and most obligation to deliver goods.
administrative expenses, etc. b. Increase in value of the obligation
 Many losses such as loss from disposal to transfer economic resources
of building, from sale of investments, such that the liability becomes
and casualty loss are immediately onerous.
recognized because they are not c. Accrual of interest to reflect any
directly related to specific revenue. financing component of the liability
d. Amortized cost measurement of
financial liability
 that the measurement basis will
2. produce.
 Current value measures provide monetary  In most cases, no single factor will
information about assets, liabilities and determine which measurement basis
related income and expenses, using should be selected. The relative
information updated to reflect conditions at importance of each factor will depend
the measurement date. on facts and circumstances.
 Current value measurement bases include:  The information produced by the
measurement basis must be useful to
(1) the users of financial statements. To
 Fair value of an asset is the price that achieve this, the information must be
would be received to sell an asset in an both relevant and faithfully represented.
orderly transaction between market  Historical cost is the measurement basis
participants at the measurement date. most commonly adopted in preparing
 Fair value of liability is the price that financial statements.
would be paid to transfer a liability in an  The IASB did not mandate a single
orderly transaction between market measurement basis because the
participants at the measurement date. different measurement bases could
 Fair value is an exit price or exit value. produce useful information under
 Fair value can be observed directly using different circumstances.
market price of the asset or liability in
an active market. In cases FV cannot be
directly measured, an entity can use
present value of cash flows.

(2.1)
 is the present value of the cash flows
that an entity expects to derive from
the use of an asset and from the
ultimate disposal.
PRESENTATION AND DISCLOSURE
 Value in use does not include
transaction cost on acquiring the asset
but includes transaction cost on the
disposal of the asset.  A reporting entity communicates information about
 Value in use is an exit price or exit its assets, liabilities, equity, income and expenses by
value. presenting and disclosing information in its financial
(2.2) statements.
 Is the present value of cash that an  Effective communication of information in financial
entity expects to transfer in paying or statements makes the information more relevant
settling a liability. and contributes to a faithful representation of an
 Fulfillment value does not include entity’s assets, liabilities, income and expenses. It
transaction cost on incurring a liability also enhances the understandability and
but includes transaction cost on the comparability of information in financial statements.
fulfillment of a liability.  Effective communication of information in financial
 Fulfillment Value is an exit price or exit statements requires:
value. a. Focusing on presentation and disclosure
objectives and principles rather than
(3) focusing on rules.
 Current cost of an asset is the cost of an b. Classifying information in a manner that
equivalent asset at the measurement groups similar items and separate
date comprising the consideration paid dissimilar items
and transaction cost. c. Aggregating information in such a way
 Current cost of liability is the that it is not obscured either by
consideration that would be received unnecessary detail or by excessive
less any transaction cost at aggregation.
measurement date.  There is also cost constrains in the presentation
 Similar to historical cost, current cost is and disclosing of information to users. Hence, in
also based on the entry price or entry making decisions about presentation and
value but reflects market conditions on disclosure, it is important to consider whether
measurement date. the benefits of presenting or disclosing
particular information are likely to justify the
costs of providing and using that information.
 In selecting a measurement basis for an
asset or a liability and for the related
income and expense, it is necessary to  Classification is the sorting of assets, liabilities,
consider the nature of the information equity, income and expenses on the basis of
shared or similar characteristics.
  Classifying dissimilar assets, liabilities, equity,  In other words, net income is the amount an entity
income and expenses can obscure relevant can distribute to its owners and be “well-off” at the
information, reduce understandability and end of the year as at the beginning.
comparability and may not provide a faithful  The distinction between return of capital and return
representation of financial information. on capital is important to the understanding of net
 It may be necessary to classify components of income;
equity separately if such components are subject a. Return of Capital – is an erosion of the
to legal, regulatory and other requirements. capital invested in the entity.
Thus, ordinary share capital, preference share b. Return on Capital – shareholders
capital, share premium and retained earnings invests to earn return of capital or an
should be disclosed separately. amount in excess of their original
investment.

 Income and expenses are classified as

components of profit or loss and 1. Financial Capital
components of other comprehensive  Under a financial capital concept, such
income. as invested money or invested
 All income and expenses should be purchasing power, capital is
appropriately classified and included in synonymous with net assets or equity
the statement of profit or loss however, of the entity.
there are certain items of income and  It is the monetary amount of the net
expenses that are presented outside of assets contributed by shareholders and
profit or loss but included in other the amount of the increase in net assets
comprehensive income. resulting from earnings retained by the
 The components of other entity.
comprehensive income are  It is the traditional concept based on
subsequently recycled or reclassified to historical cost and adopted by most
profit or loss or retained earnings. entities.
 Under the financial capital concept, net
income occurs “when the nominal
 Is the adding together of assets, liabilities, amount of the net assets at the end of
equity, income and expenses that have shared the year exceeds the nominal amount
characteristics and are included in the same of net assets at the beginning of the
classification. period, either excluding distributions to
 It makes information more useful by or contributions by owners during the
summarizing a large volume of detail. However, period.”
aggregation conceals some of that detail. Hence,
a balance needs to be found so that relevant 2. Physical Capital
information is not obscured either by a large  is the quantitative measure of the
amount of insignificant detail or by excessive physical productive capacity to produce
aggregation. goods and services
 Typically, the statement of financial position and  This concept requires that productive
the statement of financial performance provide assets be measured at current cost,
summarized condensed information. rather than historical cost. Productive
assets are inventories and property,
plant and equipment and their current
cost must be maintained in order that
physical capital is also maintained.
 Physical capital is equal to the net
assets of the entity expressed in terms
of current cost.
 Under this concept, net income occurs
“when the physical productive capital
of the entity at the end of the year
CONCEPTS OF CAPITAL AND exceeds the physical productive capital
at the beginning of the period, also
CAPITAL MAINTENANCE after excluding distributions to and
contributions from owners during the
period.”
The financial performance of an entity is determined
using two approaches:
1. Transaction Approach – is the traditional
preparation of income statement.
2. Capital Maintenance Approach – means that net
income occurs only after the capital used from
the beginning of the period is maintained.
BASIC ILLUSTRATIVE SUMMARY:

CHAPTER 2

Quantitative Characteristics

Fundamental Qualitative Enhancing Qualitative

Characteristics Characteristics

RELEVANCE COMPARABILITY

Predictive Value VERIFIABILITY

Confirmatory Value
UNDERSTANDABILITY

Materiality
TIMELINESS

FAITHFUL
REPRESENTATION

Completeness

Neutrality

Free from error

COST CONSTRAINT

CHAPTER 3

Types of Financial Statements

Consolidated Financial
Statements Combined Financial
Unconsolidated Financial
Statements
Statements

Reporting Period – the period when financial statements are prepared for general purpose financial
reporting.

Basic Underlying Assumptions

Going Concern Monetary Unit

Accounting Entity Time Period

 CHAPTER 4

Elements of Financial Statements

Asset Income

Liability Expense

Equity

Financial Position Income Statement

It is prepared at one point in It is prepared over a
time. period of time.

CHAPTER 5

RECOGNITION DERECOGNITION

The process of capturing for The removal of all or part of a

inclusion in the financial statements recognized asset or liability from an
an item that meets the definition of entity’s statement of financial
an asset, liability, equity, income or position when no longer meets the
expense. Only recognized if the definition them.
information is both relevant and
faithfully represented.
o For an asset, it occurs when the
entity loses control of all or part
o Only items that meet the of the recognized asset.
definition of an asset, a liability
or equity are recognized in the
statement of financial position. o For a liability, it occurs when the
entity no longer has a present
Accrual Accounting obligation for all or part of the
recognized liability.
o Income is recognized when it is o
earned;
o Expenses are recognized when it
is incurred.
CHAPTER 6

MEASUREMENTS

Historical Cost Current Value

Historical cost is the entry

Fair Value
price or entry value to
acquire an asset or to incur
a liability. Value In Use (for asset)

This measurement basis most Fulfillment Value (for liability)

commonly adopted in preparing
financial statements.
Current Cost

Measurement Basis must be both

relevant and faithfully represented.

CHAPTER 7

PRESENTATION AND DISCLOSURE

Makes information more relevant

Communicates information about its
and faithfully represented.
assets, liabilities, equity, income and
expenses by presenting and
disclosing information in its financial Enhance understandability and
statements. comparability

COST CONSTRAINT
CHAPTER 8

CAPITAL MAINTENANCE

Financial Capital Physical Capital

Under a financial capital concept, such The quantitative measure of the

as invested money or invested physical productive capacity to produce
purchasing power, capital is synonymous goods and services
with net assets or equity of the entity.

Net income occurs “when the nominal Net income occurs “when the physical
amount of the net assets at the end of productive capital of the entity at the
the year exceeds the nominal amount end of the year exceeds the physical
of net assets at the beginning of the productive capital at the beginning of
period, either excluding distributions to the period, also after excluding
or contributions by owners during the distributions to and contributions from
period.” owners during the period.”