CONCEPTUAL FRAMEWORKS & ACCOUNTING STANDARDS

- A coherent system of interrelated objectives ad fundamentals that is expected to lead to consistent standards and that Form
Enhancing Quali. Characteristics
prescribes the nature, function and limits of financial accounting and reporting

THE ROLE OF CONCEPTUAL FRAMEWORK

- Benefits: Comparability – Timeliness – Understandability

Verifiability – users can
• Consistent, logical reporting requirements
helps users reach a general available to users – presented in
• Greater compliance
identify agreement as to what in time clear and concise
• Enhanced accountability
similarities and the information manner
• Fewer specific standards
• Enhanced understanding of reporting requirements differences purports to represent
• More economical standard setting

PURPOSE OF CONCEPTUAL FRAMEWORK

ASSET RIGHTS INCLUDES:
Assists the IASB in Assists the preparers Assists all parties in
in developing understanding and
developing standards 1. Right that • Right to receive cash, goods and resources
consistent accounting
interpreting standards corresponds to an
policies • Right to exchange on favorable terms
obligation of another • Right to benefit from an obligation of another party
OBJECTIVES OF FINANCIAL REPORTING party

- The objective of general purpose financial reporting is to provide financial information about the reporting entity that is
useful to its primary users
2. Rights that do not • Right to use intellectual property
Limitation of Financial Reporting
corresponds t an • Right over physical object
1. Caters to the common needs of primary users not of all users obligation of another
2. It is not designed to show the value of the reporting entity but the estimates of the value of the entity party
3. Cost constraint
• Liquidity – ability to pay short term obligation
– availability of cash in the near future to cover currently maturing obligations
• Solvency – ability to pay long term obligation
– availability of cash over long term to meet financial commitments when they fail out
• Needs for additional financing
• Management Stewardship – how the company utilized its economic resources

QUALITATIVE CHARACTERISTICS
Content/ Substance
Fundamental Quali. Characteristics

Relevance make a Faithful Representation-

difference true, correct and complete

Predictive Confirmatory Completenes Neutrality – Free from error

value – value – s – all without bias – no error from
making feedback information description and
predictions value is provided process
 CHAPTER 1: THE ACCOUNTANCY PROFESSION COMMUNICATING
ACCOUNTING
- Is the process of preparing and distributing accounting reports to potential users of accounting information
Is a service activity, its function is to provide quantitative information, - Reason why Accounting is the “Universal Language of Business”
Accounting Standards primarily financial in nature, about economic entities, that is intended - Communicating is the business language of the accounting
Council to be useful in making economic decision.
Communication Process:
Is the art of recording, it is classifying and summarizing in a significant
a. Recording
Committee on Accounting manner and in terms of money, transaction and events which are in
b. Classifying
Terminology part at least of a financial character and interpreting the results thereof.
c. Summarizing
It is the process of identifying , measuring and communicating OVERALL OBJECTIVE OF ACOUNTING
American Accounting economic information to permit/ informed judgement and decision by
Association users of the information - Is to provide quantitative financial information about a business useful to statement users particularly owners and
creditors in making economic decisions
- Accounting is an information system that measures business activities, processes information into financial reports and
communicates the reports to decision makers
IMPORTANT POINTS
An Accountant’s Primary Task:
- This 3 important points should be present in accounting
1. Accounting is about Quantitative Information - To supply financial information so that the statement users could make informed judgement and better decision
2. The information is likely to be Financial in nature
3. The information should be Useful in Decision Making THE ACCOUNTANCY PROFESSION

IDENTIFYING - Is attaining a status equivalent to that of law and medicine

- Is the accounting process whether you recognized or not recognized of a certain transaction or events REPUBLIC ACT No. 9298 (Philippine Accountancy Act of 2004)
- Not all certain transactions or events are recorded in the book only those who has an effect and accountability
- Is the law regulating the practice of accountancy in the Philippines
EXTERNAL (Exchange) TRANSACTIONS
THE BOARD OF ACCOUNTANCY
- Economic activities involving one entity and another
- Is the body authorized by law to promulgate rules and regulations affecting the practice of the accountancy profession in
INTERNAL TRANSACTIONS the Philippines
- Is responsible for preparing and grading the Philippine CPA examination
- Economic activities within the entity only
- Production LIMITATION OF THE PRACTICE OF PUBLIC ACCOUNTANCY
- Casualty
- single practitioners and partnerships for the practice of public accountancy shall be registered certified public
ACCOUNTABLE OR QUANTIFIABLE accountants in the Philippines

- When a transaction has an effect on assets, liabilities, and equity REGISTERED CERTIFIED PUBLIC ACCOUNTANTS (CPA) IN THE PHILIPPINES

MEASURING - Minimum of 3 years of meaningful experience in any of the areas of public practice including taxation
- The Securities and Exchange Commission (SEC) shall not register any corporation organized for the practice of public
- Assigning of Peso amounts to the accountable economic transactions and events accountancy.
- For accounting information to be useful, it must be expressed in terms of a Common Financial Denominator
- The measuring as a component of accounting is the process of assigning of peso amounts to the accountable economic ACCREDITATIONS TO PRACTICE PUBLIC ACCOUNTANCY
transactions and events.
- Registered in the Board of Accountancy and Professional Regulation Commission.
Measurement Bases: - Certificate of Registration – valid for 3 years; renewable every 3 years
- The PRC upon favorable recommendations of the BOA shall issue the Certificate of Registration to practice public
1. Historical Cost – original acquisition and most common measure accountancy which shall be valid for 3 years and renewable every 3 years upon payment of required fees
2. Current Value – includes fair value, value in use, fulfillment value, and current cost
3 MAIN AREAS IN THE PRACTICE OF THE ACCOUNTANCY PROFESSON

1. Public Accounting
2. Private Accounting
 3. Government Accounting CPD of CPA’s

PUBLIC ACCOUNTING Republic Act No. 10912

- Accounting service offered to the general public. - the law mandating and strengthening the continuing professional development program for all regulated professions,
- Composed of individual practitioners, small accounting firms and large multinational organizations that render including the accountancy profession.
independent and expert financial services to the public - 120 CPD Units: Accreditation
- 15 CPD Units: Renewal
CPA (Certified Public Accountants) - Upon reaching 65, CPA is exempted from renewal
- Licensed professionals engage in providing accounting services CPD Credit Units

- Usually offer 3 kinds of services these are: - CPD stand for Continuing Professional Development
1. Auditing - It refers to the CPD credit hours required for the renewal of CPA license and accreditation of a CPA to practice the
2. Taxation accountancy profession every 3 years
3. Management Advisory Services - 120 CPD credit units are required for accreditation of a CPA to practice the accountancy profession
- Is required for the renewal of CPA license and accreditation of CPA to practice the accountancy profession
AUDITING or EXTERNAL AUDITING
EXEMPTION FROM CPD
- Examination of financial statements by independent certified public accountant for the purpose of expressing an opinion
as to the fairness with which the financial statements are prepared - A CPA shall be permanently exempted from CPD requirements upon reaching the age of 65 years.
- Attest the accuracy and fairness of presentation of the accounting data
ACCOUNTING AND AUDITING
TAXATION
- ACCOPUNTING is done with the purpose of reflecting the actual position, performance and profitability of the business or
- Includes the preparation of annual income tax returns and determination of tax consequences of certain proposed organization.
business endeavors - AUDITING is done to verify the accuracy of records and statements presented by accounting.
- Offers advice on tax, its liabilities, and returns
- To determine the profit and loss or the financial position of an organization for a period.
MANAGEMENT ADVISORY SERVICES
ACCOUNTING AND BOOKKEEPING
- Examining and providing cost information to the internal management to facilitate the planning, controlling, and decision
making - BOOKKEEPING is procedural and largely concerned with development and maintenance of accounting records
- It has no precise coverage but is used generally to refer to services to clients on the following matter: ➢ Is the “how “ of accounting
1. Advice on installation of computer system - ACCOUNTING is conceptual and is concerned with the why, reason or justification for any action adopted
2. Quality control
ACCOUNTING AND ACCOUNTANCY
3. Installation and modification of accounting system
4. Budgeting - ACCOUNTANCY refers to the profession of accounting practice
5. Forward planning and forecasting - ACCOUNTING is used in reference only to a particular field of accountancy such as public accounting, private accounting
and government accounting
PRIVATE ACCOUNTING
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)
- Accounting done by a person who may or may not a certified accountant, such as general or financial accounting,
budgetary, cost, internal auditing, and etc. - Accounting rules, procedures and practices
- Compose of employees in business entities such as a accounting staffs, chief accountant, controller, etc. - Represents the rules, procedures, practice and standards followed in the preparation and presentation of financial
- Controller – highest accounting officer in an entity statements.
1. Maintaining records - Develop on the basis of experience, reason, custom, usage, and practical necessity.
2. Producing financial reports - They create common understanding. Ensures comparability and uniformity
3. Preparing the budgets
4. Allocating sources of entity PURPOSE of ACCOUNTING STANDARDS

GOVERNMENT ACCOUNTING - To identify proper accounting practices for the preparation and presentation of financial statements

- Focuses in the custody and administration of public funds FINANCIAL REPORTING STANDARDS COUNCIL (FRSC)
- Analyzing, classifying, summarizing and communicating transactions involving the receipt and disposition of government
funds and property - GAAP is formalized initially through the creation of the ASC or Accounting Standards Council
- Accounting services provided to government offices such as BSP (Bangko Sentral ng Pil.), BIR (Bureau of Internal - FRSC replaces ASC now
Revenue), BOC (Bureau of Customs) and etc.
 - Is the accounting standard setting body created by the Professional Regulation Commission upon recommendation of the CHAPTER 2: CONCEPTUAL FRAMEWORKS
Board of Accountancy to assist the Board of Accountancy in carrying out of its powers and functions provided under R.A. “Is a complete, comprehensive, and single document promulgated by the International Accounting Standard Board (IASB)”
Act No. 9298
- The main function is to establish and improve accounting standards that will be generally accepted in the Philippines - Is a summary of the terms and concepts that underlie the preparation and presentation of financial statements for
external users.
- Highest hierarchy of GAAP in the Philippines - Describes the concepts for General Purpose Financial Reporting
- An attempt to provide an overall theoretical foundation for accounting
COMPOSITION of FRSC - Intended to guide standard setters, preparers, and user of financial information
- Underlying theory for the development of accounting standards and revisions
- FRSC is composed of 15 members with a Chairman who had been a senior accounting practitioner and 14 - Will be used in the future standard setting decision but no changes are made to the current IFRS
representatives from the following: - Provides the foundation for standards that:
Board of Accountancy (BOA) 1 • Contribute to transparency
Securities and Exchange Commissions (SEC) 1 • Strengthen Accountability
Bangko Sentral ng Pilipinas (BSP) 1 • Contribute to Economic Efficiency
Bureau of Internal Revenue (BIR) 1
Commission on Audit (COA) 1 PURPOSES OF REVISED CONCEPTUAL FRAMEWORK
Major organization of preparers and users of financial
statements – Financial Executives Institutes of the 1 a. To assist the IASB to develop IFRS Standards bases on consistent concepts
Philippines (FINEX) b. To assist preparers of FS to develop consistent accounting policy when no Standard applies to a particular transaction
Accredited national professional organization of CPA’s: c. To assist preparers of financial statements to develop accounting policy when a standard allows a choice of an
Public Practice 2 accounting policy
Commerce and Industry 2 d. To assist all parties to understand and interpret the IFRS Standards
Academe or Education 2 AUTHORITATIVE STATUS OF CONCEPTUAL FRAMEWORK
Government 2
Total 14 - A standard or interpretation overrides the Conceptual Framework if such standard specifically applies to a transaction
- But in 2023 there already 20 members of FRSC (Nothing the Conceptual Framework overrides the IFRS)
- In the absence of a standard management shall consider the applicability of the Conceptual Framework.
PAS (Philippine Accounting Standards) - Conceptual Framework is not an International Financial Reporting Standards.
PHILIPPINE FINANCIAL REPORTING STANDARDS (PFRS) USER OF FINANCIAL INFORMATION
- Approved statements of the FRSC i. Primary users
- 3 collectively included these are: • Existing and Potential investors
1. Philippine Financial Reporting Standards which correspond to International Financial Standards • Lenders and other Creditors
2. Philippine Accounting Standards which correspond to International Accounting Standards ii. Other Users
3. Philippine Interpretations which correspond to Interpretations of the IFRIC and Interpretations developed by • Employees
the Philippine Interpretations Committee
• Customers
• Government and their agencies
• Public

SCOPE OF REVISED CONCEPTUAL FRAMEWORK

1. Objective of Financial Reporting

2. Qualitative Characteristics of useful financial information
3. Financial statements and reporting entity
4. Elements of financial statements
5. Recognition and Derecognition
6. Measurement
7. Presentation and disclosure
8. Concepts of capital and capital maintenance

TARGET USERS

- Financial Reporting is directed primarily to the existing and potential investors, lenders and other creditors which
compose the primary user group
OVERALL OBJECTIVES MANAGEMENT STEWARDSHIP

- is to provide information useful for decision making - Information about how effectively and efficiently management has discharged its responsibility to use the entity’s
economic resources
SPECIFIC OBJECTIVES OF FINANCIAL REPORTING - Useful in predicting how management will use the entity’s economic resources in future periods.
To provide information:
CHAPTER 3: CONCEPTUAL FRAMEWORKS – QUALITATIVE CHARACTERISTICS
a. Useful in making decisions about providing resources to the entity
QUALITATIVE CHARACTERISTICS
b. Useful in assessing the cash flow prospects of the entity
c. About entity resources, claims and changes in resources and claims “Are the qualities or attributes that make financial accounting information useful to the users”
FINANCIAL POSITION “The objectives is to ensure that the information is useful to the users in making economic decisions”
a. Information about the entity’s economic resources and the claims against the reporting Entity. - Under the Conceptual Framework for Financial Reporting, qualitative characteristics are classified into fundamental
b. Comprises of assets, liabilities, and equity of an entity qualitative characteristics and enhancing qualitative characteristics
c. Help users assess the entity’s liquidity, solvency in the need of additional financing.
FUNDAMENTAL QUALITATIVE CHARACTERISTICS
FINANCIAL PERFORMANCE
- The fundamental qualitative characteristics relate to the content or substance of financial Information.
a. Cause the changes in economic resources and claims - Two Fundamental qualitative characteristics:
b. Comprises of revenue, expenses, and net income/ loss for a period of time. • Information must be both relevant and faithfully represented if it is to be useful
c. Level of income earned by the entity through the efficient and effective use of its resources.
d. Aka Results of Operations APPLICATION OF QUALITATIVE CHARACTERISTICS
e. Portrayed in the income statement and statement of comprehensive income
- The most efficient and effective process of applying the fundamental qualitative characteristics would usually be:
USEFULNESS OF FINANCIAL PERFORMANCE • First, identify a transaction that has the potential to be useful
• Second, identify the type of information about the phenomenon that would be most relevant and can be
- Helps users understand the return that the entity has produced (which indicates the performance of the management
faithfully represented
responsibilities)
• Third, determine whether the information is available
- Helpful in predicting the future returns on the entity’s economic resources.
- Useful in assessing the entity’s ability to generate future cash inflows from operations RELEVANCE
ACCRUAL ACCOUNTING - Is the capacity of the information to influence a decision. Information that does no bear on an economic decision is
useless
- Financial performance of the entity must be measured to accrual basis of accounting.
- Must be capable of making a difference in the decisions made by users
- The financial information should be related or pertinent to the economic decision
1. Income is recognized when earned
2. Expenses are recognized when incurred INGREDIENTS OF RELEVANCE

- 2 Ingredients of Relevance:
LIMITATIONS OF FINANCIAL REPORTING • Predictive value
➢ It can be used as an input to processes employed by users to predict future outcome
a. General purpose financial reports do not and cannot provide all the Information that existing and potential investors,
➢ Helps users correctly or accurately predict or forecast outcome of events
lenders, and other creditors need.
• Confirmatory value
Primary users need to consider pertinent information from other sources ➢ It provides feedback about previous evaluation.
➢ Is the financial Information that has confirmatory volume when it enables for the users to confirm or
b. Not designed to show the value of the entity but the reports provide Information to help the primary users estimate the correct early expectations
value of the entity.
- Financial information is capable of making a difference in a decision if it has predictive value and confirmatory value
c. Intended to provide common Information to users and cannot accommodate every request of Information. - Financial information has predictive value if it can be used as an input to processes employed by users to predict future
outcome
- Financial information has confirmatory value if it provides feedback about previous evaluations
d. Based on estimate and judgement rather than exact depiction
- Often, information has both predictive and confirmatory value. The predictive and confirmatory roles of information ae
interrelated
MATERIALITY STANDARD OF ADEQUATE DISCLOSURE

- The materiality concept is also known as the Doctrine of Convenience. - Means that all significant and relevant information leading to the preparation of financial statement shall be clearly
- Materiality is really a quantitative “threshold” linked very closely to the qualitative characteristics of relevance reported
- Is a sub quality of relevance based on the nature and magnitude or both of the items to which the information relates - This is best described by disclosure of any financial facts significant enough to influence the judgment of informed users.
- Materiality depends on the relative size, not the absolute size
- Materiality depends on the good judgement, professional expertise, and common sense NOTES TO FINANCIAL STATEMENTS

WHEN IS AN ITEM MATERIAL? - The purpose of the notes is to provide the necessary disclosure required by PFRS.
- Notes to financial statements provide narrative description or disaggregation of the items presented in the financial
- When there is no strict or uniform rule for determining whether an item is material or not. statements and information about items that do not qualify for recognition.
- An item is material if knowledge of it could reasonably affect or influence the economic decision of the primary users of
the financial statements NEUTRALITY

- A neutral depiction is without bias in the operation or presentation of financial Information. It is not slanted, weighted,
NEW DEFINITION OF MATERIALITY emphasized, de-emphasized or otherwise manipulated to increase probability that financial Information will be received
favorably or unfavorably by users.
IASB DEFINITION OF MATERIALITY - Neutrality is synonymous with the all-encompassing principle of fairness. To be neutral is to be fair

“ Information is material if omitting, misstating, or obscuring it could reasonably be expected to influence the economic decisions PRUDENCE
that primary of general purpose financial statements make on the basis of the statements which provide financial information about
a specific reporting entity “ - The revised conceptual framework has reintroduced the concept of prudence
- Is the exercise of care and caution when dealing with the uncertainties in the measurement process such that assets or
- The revised definition of materiality highlights three important aspects: income are not overstated and liabilities or expenses are not understand.
1. Could reasonably be expected influence
2. Obscuring information CONSERVATISM
3. Primary users
- Conservatism means that when alternatives exist, the alternative which has the least effect on equity should be chosen.
FACTORS THAT CONSIDERED IN DETERMINING MATERIALITY In the simplest words, conservatism means "in case of doubt, record any loss and do not record any gain".
- Not license to deliberately understate net income and net assets
- Materiality depends on the magnitude and nature of the financial information. I. Contingent Loss – recognized as a provision if the loss is probable and the amount can be reliably measured.
- In the exercise of judgement in determining materiality, the relative size and nature of an item are considered II. Contingent Gain – not recognized but disclosed only

FACTORS OF MATERIALITY FREE FROM ERROR

- The SIZE of the item in relation to the total of the group to which the item belongs is taken into account - Free from error means there are no errors or omissions in the description of the phenomenon or transaction.
- The NATURE of the item may be inherently material because by its very nature it affects economic decision - Does not completely mean perfectly accurate in all respects.

FAITHFUL REPRESENTATION MEASUREMENT UNCERTAINTY

- Means that financial reports represent economic phenomena or transactions in words and numbers. It also means that - Arises when monetary amounts in financial reports cannot be observed directly and must instead be estimated.
the actual effects of the transaction shall be properly accounted for and reported in the financial statements - As long as the estimate is clearly and accurately described and explained, even a high level of measurement uncertainty
- Description and figure must match what really existed or happened does not affect the usefulness of the financial information.

THREE (3) INGREDIENTS OF FAITHFUL REPRESENTATION SUBSTANCE OVER FORM

• Completeness - The economic substance of transactions and events are usually emphasized when economic substance differs from legal
• Neutrality form.
• Free from error
ENHANCING QUALITATIVE CHARACTERISTICS
COMPLETENESS
- It relate to the presentation or form of the financial information
- Requires that relevant Information should be presented in a way that facilitates understanding and avoids erroneous - The enhancing qualitative characteristics are intended to increase the usefulness of the financial information that is
implication. It is the result of adequate disclosure standards or the principle of full disclosure. relevant and faithfully represented. It includes comparability, understandability, verifiability and timeliness.
- FS should be accompanied by Notes to FS
FOUR (4) ENHANCING QUALITATIVE CHARACTERISTICS

• Comparability Verifiability
• Understandability Timeliness
COMPARABILITY TIMELINESS

- Comparability means the ability to bring together for the purpose of noting points of likeness and difference. - Timeliness means that financial information must be available or communicated early enough when a decision is to be
- Enables users to identify and understand similarities and dissimilarities among items. made.
- Uniform application of accounting method between and across entities in the same industry - Generally, the older the information, the less useful.
• Intra-comparability - Timeliness enhances the truism that without knowledge of the past, the basis for prediction will usually be lacking and
(Horizontal Comparability) without interest in the future, knowledge of the past is sterile.
• Inter-comparability
(Dimensional Comparability) COST CONSTRAINT ON USEFUL INFORMATION

COMPARABILITY WITHIN A SINGLE ENTITY - Causes a pervasive constraint on the Information that can be provided by financial reporting.
- Reporting financial information imposes cost and it is important that such cost is justified by the benefit derived from the
- Is the quality of Information that allows comparisons within a single entity through time or form one accounting period to financial information.
the next - The benefit derived from the information should exceed the cost incurred in obtaining the information.
- Also known as horizontal comparability or intra-comparability. - Assessing whether the cost of reporting outweighs or falls short of the benefit is difficult to measure and becomes a
matter of professional judgment.
COMPARABILITY BETWEEN AND ACROSS ENTITIES
RULE ON COST CONSTRAINT
- Is the quality of Information that allows comparisons between 2 or more entities engaged in the same industry
- Is a GAAP constraint which stimulate that the benefits of reporting financial Information should justify and b greater than
CONSISTENCY the cost imposed on supplying it

- Implicit in the qualitative characteristic of comparability is the principle of consistency. It refers to the use of the same OBSCURING INFORMATION
method for the same item, either from period to period within an entity or in a single period across entities.
- Information is obscured if presenting or communicating it would have a similar effect as omitting or misstating the
COULD REASONABLY BE EXPECTED TO INFLUENCE information. Obscuring information may be characterized by deliberate vagueness, ambiguity and obtuseness
- Examples of obscured material information are:
- In a broad sense consistency refers to the use of the same method for the same item either from period to period within a) The language is vague or unclear
an Entity or in a single period across entities. b) The information is scattered throughout the financial statements
- By including the term could reasonably be expected to influence in the new definition, material information shall be c) Dissimilar items are aggregated inappropriately
limited to the economic decision of primary users rather than to all users which is too broad in scope d) Similar items are disaggregated inappropriately
CONSISTENCY FROM COMPARABILITY PRIMARY USERS
- Compatibility is the goal and the consistency helps to achieve that goal. - Only primary users of financial statements are considered because these groups are the users to whom general purpose
- Consistency is the uniform application of accounting method from period to period within an entity. financial statements are primarily directed
- Comparability is the uniform application of accounting method between and across entities in the same industry.
NOTES TO FINANCIAL STATEMENTS
UNDERSTANDABILITY
- The purpose of the notes is to provide the necessary disclosure required by PFRS.
- Understandability requires that financial information must be comprehensible or intelligible if it is to be most useful. - Notes to financial statements provide narrative description or disaggregation of the items presented in the financial
- Financial reports are prepared for users who have a reasonable knowledge of business and economic activities and who statements and information about items that do not qualify for recognition.
review and analyze the information diligently.
EXAMPLE OF SUBSTANCE OVER FORM
VERIFIABILITY
- An example is when the lessee leased property from the lessor.
- Means that different knowledgeable and independent observers could reach consensus, although not necessarily - The terms of the lease provide that the lease transfers ownership of the asset to the lessee by the end of the lease term.
complete agreement, that a particular depiction is a faithful representation. - In form, the contract is a lease as popularly understood,
- But in substance, in reality, if the "transfer of ownership provision" is to be considered, the real intent of the parties is an
TYPES OF VERIFICATION
installment purchase of an asset by the lessee from the lessor. Accordingly, the lessee shall record an acquisition of right
- Verification can be direct or indirect. of use as an asset and set up a liability to the lessor.
- The periodic rental is conceived as an installment payment representing Interest and principal.
• Direct verification means verifying an amount or other representation through direct observation.
• Indirect verification means checking the inputs to a model, formula or other technique and
recalculating the inputs using the same methodology.
 CHAPTER 4: CONCEPTUAL FRAMEWOKR – FINANCIAL STATEMENTS AND REPORTING ENTITY UNDERLYING ASSUMPTIONS 1) Interim basis
• Ex. Three months, six months, or nine months
“ Interim Financial Statements are not required but optional “
GENERAL OBJECTIVE OF FINANCIAL STATEMENTS
2) Annual basis
- Provide Information about economic resource of the reporting Entity claims against the changes in the economic • Natural
resource and claims. • Fiscal
- Provide financial Information about an Entity assets, liabilities, equity, income, and expenses useful to users of financial • Calendar
statements in:
UNDERLYING ASSUMPTIONS
• Assessing future cash flows
• Assessing management stewardship of the entity’s economic resources - Also known Accounting Postulates
- Are the basic notions or fundamental premises on which the accounting process is based
Financial Information is provided in the following:

1. Statement of financial position (Balance Sheet) - Foundation or bedrock of accounting in order to avoid misunderstanding but rather enhance the understanding and
2. Income Statement usefulness of financial information
3. Statement of Cash flows
Conceptual Framework Assumptions
4. Statement of Changes in Equity
5. Notes to Financial Statements 1. Going Concern (Continuity Assumption)
• Accounting entity is viewed as continuing in operation indefinitely
TYPES OF FINANCIAL STATEMENTS
• Foundation of the cost principle
1. Consolidated Financial Statement
Implicit Basic Assumptions
- Reporting entity comprises of both parent and subsidiaries and provide information about the assets, liabilities, equity,
income, and expenses 1. Accounting Entity
- Not designed to provide separate information about the accounting elements of a particular subsidiary • The entity is separate from the owners, managers, and employees who constitute the entity
• To have a fair presentation of financial statements
2. Unconsolidated Financial Statement 2. Time Period
- Reporting entity comprises of parent alone
• Requires that the indefinite life of an entity is subdivided into accounting periods which are usually of equal
- Designed to provide information about the accounting elements to parent and not about subsidiaries
length for the purpose of preparing financial reports on financial position, performance, and cash flows
- Not sufficient to meet the requirements needs of primary users
3. Monetary Unit
• Quantifiability
3. Combined Financial Statements
➢ Assets, Liabilities, Equity, Income, and Expenses should be stated in terms of Peso
- Reporting entity comprises of two or more entities that aren’t linked by a parent and subsidiary relationship
• Stability of the Peso
REPORTING ENTITY ➢ The purchasing power of the peso is stable and constant and instability is insignificant (not
necessarily valid in today’s world)
- Entity that is required or chooses to prepare financial statements • Stable Peso Postulate
- Not necessarily a legal entity ➢ An amplification of the going concern assumption so much so that adjustments are unnecessary to
reflect any changes in purchasing power
Can be considered a reporting entity:
“ The accounting function is to account for nominal peso only and not for constant peso or changes in purchasing power. “
a. Individual corporation, partnership, or proprietorship
b. Parent alone
c. Parent and its subsidiaries (Single entity)
d. Two or more entities w/o link (Single entity)
e. A reportable business segment of an entity

REPORTING PERIOD

- Period when financial statements are prepared for general purpose financial information
 CHAPTER 5: CONCEPTUAL FRAMEWORKS – ELEMENTS OF FINANCIAL STATEMENTS ESSENTIAL CHRACTERISTICS OF LIABILITY
- It refers to the quantitative Information provided in the statement of financial position and income statement. This
includes assets, liabilities, income and expenses. They serve as the foundation which financial statements are created. • The entity has an obligation
- Building blocks from which financial statements are constructed • The obligation is to transfer an economic resources
• The obligation is a present obligation that exists as a result of past event.
ELEMENTS DIRECTLY RELATED TO THE MEASUREMENT OF FINANCIAL POSITION
OBLIGATION
- Assets - Equity
- Liability - Is a duty or responsibility that an entity has no practical ability to avoid
- It can be legal or constructive
ELEMENTS DIRECTLY RELATED TO THE MEASUREMENT OF FINANCIAL PERFORMANCE
Legal
- Income
- Expenses - It may be legally enforceable as a consequence of a binding contract or statutory requirement

ASSETS Constructive

- Is a present economic resources that a company controls as a result of a previous/ past events and has the potential to - It arises from a normal business practice, custom and a desire to maintain good business relation.
provide economic benefits to the company
TRANSFER OF AN ECONOMIC RESOURCE
New definition of ASSETS
- It embodies the economic benefits that will be required to settle the obligation, resulting in an outflow from the reporting
- Is an economic resource and that the potential economic benefits no longer need to be expected to flow to the entity. entity to a third party

ESSENTIAL CHARACTERISTICS OF ASSET INCOME

• The asset is a present economic resource. - It increases in asset or decrease in liabilities that result in increase in equity, other that those relating to contribution from
• The economic resources is a right that has the potential to produce economic benefits. equity holders
• The economic resource is controlled by the entity as a result of past events - Encompasses both revenue and gains

ECONOMICRESOURCE REVENUE

- Can produce economic benefits - It arises in the course of the ordinary regular activities and is referred to as the variety of different names including sales,
fees, interest, dividends, royalties, and rent.
RIGHT TO PRODUCE ECONOMIC BENEFIT - The essence of revenue is REGULARITY
- From normal operations
- A right that has the potential produce economic benefits is referred to us an economic resource. It means that the
economic benefits no longer need to be certain or even possible. It is only necessary that economic resource already GAINS
exists and that there is at least one event in which it will yield economic benefits.
- Is an economic resource even if the probability that it will produce economic benefit is low. - Represent other items that meet the definition of income and do not arise in the course of the ordinary regular activities.
- The economic resources the present right that contains the potential and not the future economic benefits that the right - Include:
may produce. • Gain from disposal of noncurrent assets.
• Unrealized gain on trading investment
CONTROL OF AN ECONOMIC RESOURCE • Gain from expropriation

- An Entity control the asset if it has the present ability to direct the use of the asset and obtain the economic benefits that EXPENSE
flow from it.
- Ability to prevent others from using asset - It decreases in asset or increase in liabilities that result in decrease in equity, other that those relating to contribution to
- May arise if an entity enforces legal rights equity holders

LIABILITY EXPENSE FROM LOSS

- It's a present obligation of an Entity to transfer an economic resource as a result of past events. - Encompass losses as well as those expenses that arise in the course of ordinary regular activities.
- Entity present obligation emerging from past events the settlement of which is expected to result in an outflow from the - It arise in the course of ordinary regular activities include cost of goods sold, wages, and depreciation.
Entity of resources embodying economic benefits. - Losses do not arise in the course of ordinary regular activities and include losses resulting from disaster
- Ex. (Fire, Flood, Storm surge, Tsunami, and Hurricane) (as well as those arising from disposal on noncurrent asset)
New definition of LIABILITY

- The obligation to transfer an economic resource and not the ultimate outflow of economic benefits.
 CHAPTER 6: CONCEPTUAL FRAMEWORK – RECOGNITION AND MEASUREMENT IMMEDIATE RECOGNITION
RECOGNITION
- The cost incurred is expensed outright because of uncertainty of future economic benefits or difficulty of reliably
- Is the process of capturing for inclusion in the financial statements an item that meets the definition of an assets, liability, associating certain costs with future revenue
equity, income or expenses - Expensed is recognized immediately:
• When expenditures produces no future economic benefit
RECOGNITION CRITERIA • When cost incurred does not qualify for recognition as an asset
- It does not focus anymore on how people probable economic benefit will flow to or from the entity and that the cost can MASUREMENT
be measured reliably
- Only items that meet the definition of an asset liability or activity are recognized in the statement of financial position. - Quantifying in monetary terms the elements in the financial statements
Items are recognized only when their recognition provides users of financial statement with Information that is Relevant - The revised conceptual framework mentions two categories:
and faithfully represented. • Historical cost
• Current value
DERECOGNITION
HISTORICAL COST
- It is defined as the removal of all or part of a recognized asset or liability from the statement of financial position
- An application of the historical cost measurement is to measure financial asset and financial liability at amortized cost.
Derecognition of Asset The amortized cost reflects the estimate of future cash flows discounted at a rate determined at initial recognition
• The historical cost or original acquisition cost of an ASSET is the cost incurred in acquiring or creating the asset
- When entity loses control of all or part of an asset
comprising the consideration paid plus transaction cost.
Derecognition of Liability • The historical cost of a LIABILITY is the consideration received to incur the liability minus transaction cost.
Simply stated, historical cost is the entry price or entry value to acquire an asset or to incur a liability.
- When entity no longer has a present obligation for all or part of the liability
CURRENT VALUE
EXPENSE RECOGNITION
FAIR VALUE
- Expenses are recognized when incurred
- FV of an asset is the price that would be received to sell an asset in an orderly transaction between market participants at
POINT OF SALE INCOME RECOGNITION measurement date
- FV of liability is the price that would paid to transfer a liability in an orderly transaction between market participants at the
- The income shall be recognized when earned with respect to sale of goods in the ordinary course of business, the point of measurement date
sale that the entity has transferred to the buyer the significant risks and rewards of ownership of the goods. Stated - Is an exit price or exit value
differently. Legal title to the goods passes to the buyer at the point of sale. Moreover, it is the point of sale that the entity - It can be observed directly using market price of the asset or liability in an active market
has transferred control of the goods to the customer • In case where fair value cannot be directly measured, an entity can use present value of cash flows
- FV is not adjusted for transaction cost. The reason is that such cost is a characteristic of the transaction and not of the
3 APPLICATION OF MATCHING PRINCIPLE asset or liability
• Cause and effect association VALUE IN USE FOR ASSET
• Systematic and rational allocation
• Immediate recognition - 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.
CAUSE AND EFFECT ASSOCIATION - Does not include transaction cost on acquiring the asset but includes transaction cost on the disposal of the asset. Value
in use is an exit price or exit value
- 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 FULFILLMENT VALUE FOR LIABILITY
transactions or events
- Is the present value of cash that an entity expects to transfer in paying or settling a liability
SYSTEMATIC AND RATIONAL ALLOCATION - Does not include transaction cost incurring a liability but includes transaction cost on fulfilment of a liability.
- Is an exit price or exit value
- The reason for this principle is that the cost incurred will benefit future periods and that there is an absence of a direct or
clear association of the expense with specific revenue CURRENT COST
- When economic benefits are expected to arise over several accounting periods and the association with income can only
be broadly or indirectly determined, expense are recognized on the basis of systematic and allocation procedures - Current Cost of an asset is the cost of an equivalent asset at the measurement date comprising the consideration paid
and transaction cost
- Current cot of liability is the consideration that would be received less any transaction cost at measurement date.
- Its similar to the historical cost
 - Is also based on the entry price or entry value but reflects market conditions on measurement date CAPITAL MAINTENANCE APPROACH

SELECTING A MEASUREMENT BASIS - Net income occurs only after the capital used from the beginning of the period is maintained

- An asset or a liability and for the related income and expense, it is necessary to consider the nature of the information that FINANCIAL CAPITAL
the measurement basis procedure will.
- Capital is synonymous with net assets or equity of the entity
- In most cases, no single factor will determine which measurement basis should be selected
- Monetary amount of the net assets contributed by shareholders and the amount of the increase in net assets resulting
- The IASB did not mandate a single measurement basis because the different measurement bases could produce useful from earnings retained by the entity
information under different circumstances
- Traditional concept based on historical cost and adopted by most entities

CHAPTER 7: CONCEPTUAL FRAMEWORK – PRESENTATION & DISCLOSURE CONCEPTS OF CAPITAL NET INCOME UNDER FINANCIAL CAPITAL

- Occurs when the nominal amount of the net assets at the end of the year exceeds the nominal amount of the assets at
PRESENTATION AND DISCLOSURE the beginning of the period, after excluding distributions to and contributions by owners during the period

“ Can be an effective communication tool about the Information in financial statements “ PHYSICAL CAPITAL
- Effective communication of Information in financial statements make the Information more relevant and contributes to a - Is the quantitative measure of the physical productive capacity to produce goods and services
faithful representation of an entity’s asset, liabilities, income, and expenses.
- This concept required that productive assets be measured at current cost, rather than historical costs
- Effective communication in financial statement is supported by not duplicating Information in different parts of the FS;
Duplication is unnecessary
- Net income occurs when the physical productive capital of the entity at the end of the year exceeds the physical
CLASSIFICATION productive capital at the beginning of the period, also after excluding distributions to and contributions from owners
during the period
- Is the sorting of assets, liabilities, equity, income, and expenses on the basis of shared or similar characteristics
- Classifying dissimilar items can obscure relevant information, reduce understandability, comparability, and faithful
representation.

CLASSIFICATION OF INCOME AND EXPENSES

- Income and expenses are classified as component of profit loss and components of other comprehensive income.

STATEMENT OF FINANCIAL PERFORMANCE

- The income statement together with the statement presenting other comprehensive income

INCOME STATEMENT

- Aka “Statement of Profit or Loss”

- The primary source of Information about an entity’s financial performance for the reporting period.

AGGREGATION

- Is the adding together of elements that have a similar or shared characteristic and are included in the same classification
- Makes Information more useful by summarizing a large volume of detail. However, it may also conceal some details

CAPITAL MAINTENANCE

- Determined using 2 approaches, namely:

TRANSACTION APPROACH

- Traditional preparation of an income statement