Iii. Conceptual Framework

Ateneo de Zamboanga University
ACCOUNTANCY ACADEMIC ORGANIZATION

A School of Management and Accountancy Student Government
The Conceptual Framework for Financial Reporting
The Conceptual Framework Acronyms:

FRSC – Financial Reporting Standard Council
The Conceptual Framework sets out the IASB – International Accounting Standards Board
concepts that underlie the preparation and GAAP – generally accepted accounting principles
presentation of financial statements for IFRS – International Financial Reporting Standards
external users. PFRS – Philippine Financial Reporting Standards
The FRSC’s Conceptual Framework is based

on the IASB’s Conceptual Framework.
The Conceptual Framework has been developed so that it is applicable to a range of accounting
models. Financial statements are most commonly prepared in accordance with an accounting
model based on recoverable historical cost and the nominal financial capital maintenance
concept. Other appropriate models may be used.
Purpose
1. Assist the FRSC in developing accounting standards that represent GAAP in the Philippines
2. Assist the FRSC in its review and adoption of existing IFRS
3. Assist preparers of financial statements in applying Financial Reporting Standards and in
dealing with future accounting issues not addressed by existing standards
4. Assist auditors in determining whether financial statements conform with Philippine GAAP
5. Assist users in interpreting the information contained in financial statements
6. Provide those interested in the work of FRSC with information about its approach to the
formulation of Financial Reporting Standards.
Hierarchy of Reporting Standards
Limitations
I. PFRS
 The Conceptual Framework is not a II. Judgment. When making judgement,
PFRS/standard.  Management shall (or must)
 It does not define standards for any particular consider the following:
measurement or disclosure issue o Requirements in other PFRSs
 Nothing in the Conceptual Framework dealing with similar transactions
overrides any specific PFRS o Conceptual Framework
 If there is a conflict between a provision of the  Management may (or may not)
Conceptual Framework and a requirement of consider the following:
PFRS, the latter prevails. refer to the hierarchy –>
o Pronouncements issued by other
standard-setting bodies
Scope o Other accounting literatures and
The framework deals with: industry practices
1. The objective of financial reporting
2. The qualitative characteristics of useful information
3. The definition, recognition, and measurement of the elements of financial statements
4. Concepts of capital and capital maintenance
The objective of general purpose financial reporting
The objective of general purpose financial reporting forms the foundation of the Conceptual
Framework. It is to provide financial information about the reporting entity that is useful to
primary users (existing and potential investors, lenders and other creditors) in making decisions.
General purpose financial reports are those intended to serve users who do not have authority to
demand financial reports tailored for their own need. Special purpose financial reports (i.e. those
made for tax purposes, prospectuses, etc.) are outside the scope of the Conceptual Framework.
Accountancy Academic Organization Tutorials 2019 1
General purpose financial reports do not and cannot provide all of the information the primary
users need. Only their common needs are addressed. The general purpose financial reports are
not designed to show the value of a reporting entity. They provide information on the entity’s
financial position and changes in economic resources and claims.
a. Financial position – information on economic resources (i.e. assets) and claims against
the reporting entity (i.e. liabilities and equity)
b. Changes in economic resources and claims – information on financial performance and
other transactions and events that lead to changes in financial position
Qualitative characteristics of useful information
1. Fundamental qualitative characteristics: Qualitative
a. Relevance – the capability of making Characteristics
a difference in the decision making of
users.
Enhancing Fundamental
• Predictive value – financial
information can be used as input
in predicting or forecasting future Comparability
Faithful
Relevance
representation
outcomes
• Confirmatory value – financial
information provides feedback, Timeliness Completeness Predictive value
confirms or changes previous
evaluations.
• Materiality – omitting or
Verifiability Neutrality Confirming value
misstating financial information
could influence users’ decision-
making. Freedom from
Understandability
material error
b. Faithful representation – financial
information must not only represent
relevant phenomena, but it must also faithfully represent the phenomena that it purports
to represent.
• Completeness - all necessary information necessary for the understanding of the
phenomenon being depicted shall be provided.
• Neutrality – financial information are selected or presented without bias.
• Free from error – no errors in the process of financial reporting.
2. Enhancing qualitative characteristics:
a. Comparability – information about a reporting entity is more useful if it can be compared
with similar information about other entities and with similar information about the same
entity.
b. Verifiability – different knowledgeable and independent observers could reach
consensus, although not necessarily complete agreement, that a particular depiction is
faithful representation.
c. Timeliness – having information available to decision-makers in time to be capable of
influencing their decisions.
d. Understandability – classifying, characterizing, and presenting information clearly and
concisely to make it understandable.

The cost constraint on useful information

Reporting financial information imposes costs, and it is important that those costs are justified by
the benefits of reporting that information. Assessments of the relationship between cost and
benefits in reporting financial information should be made which in most cases are based on a
combination of quantitative and qualitative information.
Underlying assumption – going concern
The financial statements are normally prepared on the assumption that an entity is a going
concern and will continue in operation for the foreseeable future. It is assumed that the entity has
neither the intention nor the need to liquidate or curtail materially the scale of its operations.
The elements of financial statements
I. Elements directly related to financial position (balance sheet):
a. Asset – present economic resource controlled by the entity as a result of past events, it
is a right that has the potential to produce economic benefits.
b. Liability – a present obligation of the entity to transfer an economic resource as a result
of past events.
c. Equity – the residual interest in the assets of the entity after deducting all its liabilities.
II. Elements directly related to performance (income statement):
a. Income – increases in assets or decreases in liabilities that result in increases in equity,
other than those relating to contributions from holders of equity claims.
b. Revenue – arises in the course of the ordinary activities of an entity and is referred to
by a variety of different names including sales, fees, interest, dividends, royalties and
rent.
c. Gain – other items that meet the definition of income and may, or may not, arise in the
course of the ordinary activities of an entity.
d. Expense – decreases in assets or increases in liabilities that result in decreases in equity,
other than those relating to distributions to holders of equity claims.
o Expense – arise in the course of the ordinary activities of the entity include, for
example, cost of sales, wages and depreciation.
o Loss – other items that meet the definition of expenses and may, or may not, arise
in the course of the ordinary activities of the entity.
Recognition of the elements of financial statements
Recognition is the process of incorporating in the balance sheet or income statement an item that
meets the definition of an element and satisfies the recognition criteria. An item is recognized if
all of the following are present:
a. It meets the definition of an element. However, their recognition depends on two criteria:
(1) relevant information about the asset or the liability and about any income, expenses or
changes in equity; and
(2) a faithful representation of the asset or the liability and of any income, expenses or
changes in equity.
An asset is recognized in the balance sheet when it has the potential to produce economic
benefits and when the entity has the right to control these economic benefits.
A liability is recognized in the balance sheet when it is a present obligation of the entity to
transfer economic resource as a result of past events,
Income is recognized in the income statement when an increase in future economic benefit
related to an increase in asset or a decrease of liability has arisen that can be measured reliably.
Expenses are recognized when a decrease in future economic benefit related to a decrease in an
asset or an increase of a liability has arisen that can be measured reliably.

• Direct association – costs are recognized as expenses when the related revenue is recognized
• Systematic and rational allocation – applied when economic benefits are expected to arise
over several accounting periods
• Immediate recognition
Derecognition of the elements of financial statements
Derecognition is the process of removing a recognised asset or liability from an entity’s
statement of financial position. It normally occurs when:
(1) an entity loses control of all part of the recognized asset.
(2) the entity no longer has a present obligation for all or part of the recognized liability.
Derecognition aims to faithfully represent:
(1) any assets and liabilities retained after the transaction that led to the derecognition; and
(2) the change in the entity’s assets and liabilities as a result of that transaction.
Measurement bases
Measurement involves assigning monetary amounts at which the elements of the financial
statements are to be recognized and reported.
a. Historical cost – assets are recorded at the amount paid or at fair value at the time of
acquisition; liabilities are recorded at the amount of proceeds received
b. Current cost – assets are carried at the amount that would have to be paid if the same was
acquired currently; liabilities are carried at the amount required to be settled currently
c. Realizable (settlement) value - assets are carried at the amount that could currently be
obtained if sold; liabilities are carried at their settlement values
d. Present value - assets are carried at the present discounted value of the future net cash
inflows related to the asset; liabilities are carried at the present discounted value of the
future net cash outflows to settle the liability
Concepts of capital and capital maintenance
I. Concept of capital – based on the needs of the users of its financial statements
a. Financial concept of capital (i.e. invested money or invested purchasing power) – capital
is synonymous with the net assets or equity of the entity. It is adopted by most entities.
b. Physical concept of capital (i.e. operating capability) – capital is regarded as the
productive capacity of the entity based on, for example, units of output per day
II. Concept of capital maintenance – concerned with how an entity defines the capital it maintains
a. Financial capital maintenance – a profit is earned only if the financial amount of the net
assets at the end of the period exceeds the financial amount of net assets at the beginning.
It requires the adoption of the current cost basis of measurement.
b. Physical capital maintenance – a profit is earned only if the physical productive capacity
of the entity exceeds the physical productive capacity of the entity at the beginning. It does
not require the use of a particular basis of measurement.

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Ateneo de Zamboanga University

ACCOUNTANCY ACADEMIC ORGANIZATION

The Conceptual Framework for Financial Reporting

The Conceptual Framework Acronyms:

The FRSC’s Conceptual Framework is based

Accountancy Academic Organization Tutorials 2019 2

The cost constraint on useful information

Accountancy Academic Organization Tutorials 2019 3

Accountancy Academic Organization Tutorials 2019 4

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