CONCEPTUAL FRAMEWORK OF ACCOUNTING 2010 Conceptual Framework

(2018) 1. C oncept of capital and capital maintenance

2. O bjective of Financial Reporting
Effectivity Date - effective for annual periods beginning on 3. Q ualitative Characteristics
or after 1 January 2020, with earlier application permitted 4. E lements of Financial Statements
5. R eporting Entity
I. Nature and Authoritative Status
2018 Conceptual Framework
It deals with the concepts used in the preparation and
1. The objective of general-purpose financial
presentation of financial statements. These are guidelines
reporting
to set the rules / standards. The Conceptual Framework is
2. Qualitative characteristics of useful information
not a PFRS1. It does not define standards for any particular
3. Financial statements and the reporting entity
measurement or disclosure issue. However, when
4. The elements of financial statements
developing an accounting policy in the absence of a
5. Recognition and derecognition
standard or an Interpretation that specifically applies to an
6. Measurement
item, an entity’s management is required to refer to, and
7. Presentation and disclosure
consider the applicability of, the concepts in the
8. Concepts of capital and capital maintenance
Framework. Nothing in the Framework overrides any
specific PFRS. In case of conflict, PFRS prevails over the
A. Objective of General-Purpose Financial Reporting
Framework.
- underlying theory for the development and revision of - The “why” of accounting (first level: purpose of
accounting standards accounting)
- document that contains concepts for general purpose
financial reporting and underlie in the preparation and Overall Objective: to provide information that is useful for
presentation of financial statements decision-making

II. Purpose .. to provide financial information about the reporting entity

The 2018 purpose of the Framework is to: that is useful to existing and potential investors, lenders and
other creditors in making decisions relating to providing
1. To assist the Board in the development of existing resources to the entity..
and future accounting standards based on
consistent concepts, resulting in information that In order to achieve, users need information about:
is useful to investors, lenders and other creditors.
- entity’s economic resources, claims against the entity
and changes in those resources and claims
2. To assist preparers of financial reports to develop
- how efficiently and effectively management has used
consistent accounting policies for transactions or
the entity’s economic resources (STEWARDSHIP).
other events when no Standard applies or a
Standard allows a choice of accounting policies. Users of Financial Information

1. Primary users
3. To assist all parties to understand and interpret
Standards. - Existing and potential investors
- Lenders and other creditors
The 2010 purpose of the Framework is to:
2. Other users
1. Assist FRSC in developing GAAP and its review and
- Employees
adoption of existing International Financial
- Customers
Reporting Standards (IFRS).
- Government
2. Assist preparers of financial statements in
- Suppliers
application of PFRS
- Public
3. Assist auditors in forming an opinion as to whether
FS conforms to GAAP
4. Assist users in interpreting the FS B. Qualitative Characteristics
5. Provide interested parties with information about R elevance: capacity to influence
PFRS formulation by FRSC. decision-maker
FUNDAMENTAL
III. Scope of Conceptual Framework
(content)
F aithful Representation: actual

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FAR 001: Conceptual Framework of Accounting FINANCIAL ACCOUNTING AND REPORTING
Aljon J. Roque, CPA, MBA
 effects of the - objective of financial statements
transactions shall be - sets out the going concern assumption
properly accounted for - FS are prepared for a specific period of time
and reported in the - provide comparative information and under
financial statements. certain circumstances forward-looking
information
Ingredients of relevance: predictive value (forecasting); - definition of reporting entity and boundary
confirmatory value (feedback)
Objective of Financial Statements: to provide information
about a reporting entity’s assets, liabilities, equity, income
Ingredients of faithful representation: completeness;
and expenses.
neutrality; free from error
- Statement of financial position
V erifiability (consensus) - Statement of financial performance
- Other statements and notes

C omparability REPORTING ENTITY: an entity that is required or chooses to

(intracomparability) prepare financial statements
ENHANCING (intercomparability)
1. Consolidated FS – parent and and subsidiary
(presentation)
2. Combined FS – 2 or more affiliated entities other
U nderstandability
than parent and subsidiary
(comprehensible)
3. Unconsolidated FS – parent only (otherwise
known as separate FS)
T imeliness (communicated early
enough to users) D. Elements of Financial Statements

Financial Position [Assets, Liabilities and Equity]

(a) Materiality-a practical rule stating that strict adherence Financial Performance [Income (includes revenue
to GAAP is not required when the items are not significant and gains) and Expenses (includes losses)]
enough to affect the evaluation, decision and fairness of
financial statements. This is the entity-specific aspect of 2010 Conceptual Framework
relevance. Asset – resource controlled by the entity as a result of past
events and from which future economic benefits are
FACTORS OF MATERIALITY: relative size and nature of the expected to flow to the entity
item. Liability - present obligation of the entity arising from past
events, the settlement of which is expected to result in an
(b) Substance over Form – inherent characteristic of faithful outflow from the entity of resources embodying economic
representation wherein substance of a transaction is being benefits
presented rather than its legal form.
2018 Conceptual Framework
(c) Conservatism/Prudence- desire to exercise care and Asset - a present economic resource controlled by the
caution when dealing with uncertainties entity as a result of past event. An economic resource is a
right that has the potential to produce economic benefit.
ASSETS & INCOME – not overstated;
LIABILITIES & EXPENSE – not understated Liability - a present obligation of the entity to transfer
economic resource as a result of past events.
(d) Consistency – implicit in comparability. Comparability is
the goal, consistency is the key to achieve the goal. Equity – the residual interest in the assets of the entity
after deducting all of its liabilities
(e) Cost constraint on financial information. The benefit
derived from the information should exceed the cost Income – Increases in assets or decreases in liabilities that
incurred in obtaining the information. result in increases in equity, other than those relating to
contributions from holders of equity claims
C. Financial Statements and the Reporting Entity

This chapter states the following:

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FAR 001: Conceptual Framework of Accounting FINANCIAL ACCOUNTING AND REPORTING
Aljon J. Roque, CPA, MBA
Expenses - Decreases in assets or increases in liabilities that (b) if a duty or responsibility is conditional on a
result in decreases in equity, other than those relating to particular future action that the entity itself may
contributions from holders of equity claims take—the entity has an obligation if it has no
practical ability to avoid taking that action.

ASSETS
E. RECOGNITION AND DERECOGNITION
2010 Conceptual 2018 Conceptual
Framework Framework Recognition - The process of capturing for inclusion in the
resource present economic resource statement of financial position or the statement of financial
controlled by entity -same- performance an item that meets the definition of an asset,
from past event -same- a liability, equity, income or expenses
future economic benefit -none-
flow to the company -none-  Relevance
- probability of economic benefits
 separate definition of an economic resource – to - uncertainty of existence
clarify that an asset is the economic resource, not
the ultimate inflow of economic benefits.  Faithful representation
 stresses that asset is not physical objects but as - Measurement uncertainty
sets of rights - Recognition inconsistency (acctg mismatch)
 deletion of ‘expected’ flow – it does not need to be - Presentation and Disclosure
certain, or even likely, that the economic benefit
Derecognition - The removal of all or part of a recognised
will arise.
asset or liability from an entity’s statement of financial
 A low probability of economic benefits might
position
affect recognition decisions and the measurement
of the asset - Asset – when an entity loses control
- Liability – when an entity has no longer the
LIABILITIES
present obligation
2010 Conceptual 2018 Conceptual
Framework Framework
F. MEASUREMENT – process of quantifying the elements
present obligation present obligation recognised in the financial statements
from past event -same-
future settlement to transfer economic
(a) Historical Cost – the price (value) to acquire an asset or
outflow of eco benefit resources
incur a liability

 separate definition of an economic resource – to - Asset (depreciation/amortisation, settlement,

clarify that a liability is the obligation to transfer impairment and accrual of interest)
the economic resource, not the ultimate outflow - Liability (satisfying an obligation to pay/to deliver
of economic benefit goods, inflation, accrual of interest)
 deletion of ‘expected’ flow – with the same
(b) Current Value – provides information updated to reflect
implications as set out above for an asset
conditions at the measurement date
 introduction of the ‘no practical ability’ to avoid’
1. Fair Value - the price that would be received to sell an
criterion to the definition of obligation
asset, or paid to transfer a liability, in an orderly transaction
NO PRACTICAL ABILITY TO AVOID between market participants at the measurement date
Obligation – a duty or responsibility that an entity has no 2. Value in Use (for asset) – present value of cash flows
practical ability to avoid. that an entity expects to derive from the use of an asset and
from its ultimate disposal
3. Fulfilment value (for liabilities) - present value of cash
(a) if a duty or responsibility arises from the entity’s flows that an entity expects to be obliged to transfer as it
customary practices, published policies or specific fulfils its liability
statements—the entity has an obligation if it has
4. Current Cost - reflects the current amount that would be:
no practical ability to act in a manner inconsistent - paid to acquire an equivalent asset
with those practices, policies or statements. - received to take on an equivalent liability

 Relevance
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FAR 001: Conceptual Framework of Accounting FINANCIAL ACCOUNTING AND REPORTING
Aljon J. Roque, CPA, MBA
 - characteristics of the asset or liability (i.e. (a) Financial Concept (most common)- a profit is earned
variability of cash flows, sensitivity of the value to only if the financial aemount of ending net assets exceeds
mkt factors) beginning net assets, excluding any contributions from and
- contribution to future cash flows (i.e. whether distributions to owners during the period. This concept is
cash flow is direct or indirect; nature of business based on HISTORICAL COST concept.
activities)

 Faithful representation (b) Physical Concept- a profit is earned only if the physical
- Measurement inconsistency (acctg mismatch) productive capacity (operating capability) at the end of
- Measurement uncertainty period exceeds the physical productive capacity at
the beginning of the period, excluding any contributions
G. PRESENTATION AND DISCLOSURE from and distributions to owners during the period. This
- The framework discusses concepts that determine concept requires the adoption of CURRENT CONCEPT as the
what information is included in the financial basis of measurement.
statements and how that information should be
presented and disclosed.

- The statement of statement of comprehensive

income is newly described as "statement of
financial performance", however, the framework
does not specify whether this statement should
consist of a single statement or two statements, it
only requires that a total or subtotal for profit or
loss must be provided.

- The statement of profit or loss is the primary

source of information about an entity’s financial
performance for the reporting period

- In principle, all income and expenses are classified

and included in the statement of profit or loss

- In exceptional circumstances, the Board may

decide to exclude from the statement of profit or
loss income or expenses arising from a change in
current value of an asset or liability and include
those income and expenses in OCI
The Board may make such a decision when doing
so would result in the statement of profit or loss
providing more relevant information or a more
faithful representation

H. Concepts of Capital and Capital maintenance

Financial Performance Determinants

a. transaction approach : traditional preparation of
an income statement
b. capital maintenance: the concept of capital
maintenance provides the linkage between the concepts of
capital and concepts of profit since it provides the point of
reference by which profit is measured.

TWO CAPITAL MAINTENANCE CONCEPTS:

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FAR 001: Conceptual Framework of Accounting FINANCIAL ACCOUNTING AND REPORTING
Aljon J. Roque, CPA, MBA