ACCOUNTING ASSUMTIONS AND STANDARDS

• Accounting is the process of identifying, measuring, and communicating economic information to permit
informed judgment and decisions by users of information.

Accounting Assumptions

1. Going concern assumption – entity is assumed to carry on its operations for an indefinite period of
time

2. Separate entity – entity is treated separately from its owners

3. Stable monetary unit – items should be stated in terms of a unit of measure (pesos in the Philippines)
and its purchasing power is regarded as stable or constant

4. Time Period – life of the business is divided into series of reporting periods

5. Materiality concept – information is material if its omission or misstatement could influence economic
decisions, a matter of professional judgment based on information’s size and nature

6. Cost-benefit – cost of processing and communicating information should not exceed the benefits to be
derived from it

7. Accrual basis of accounting – effects of transactions and events are recognized when they occur

8. Matching – costs are recognized as expenses when the related revenue is recognized

Practice of Accountancy in the Philippines

Republic Act No. 9298, also known as the "Philippine Accountancy Act of 2004," is a law in the
Philippines that regulates the practice of accountancy in the country. It was enacted on May 13, 2004. The
key objectives and provisions of RA 9298 include:

1.Regulation and Supervision: It establishes the Professional Regulatory Board of Accountancy (BOA)
under the Professional Regulation Commission (PRC) to regulate and supervise the practice of accountancy in
the Philippines.

2.Licensure and Examination: It provides guidelines for the licensure and examination of accountants.
This includes the requirements for taking the Certified Public Accountant (CPA) examination, the
administration of the exam, and the issuance of CPA licenses.

3.Continuing Professional Development (CPD): It mandates continuing professional education for

accountants to ensure they remain updated on developments and standards in the field.

•Board of Accountancy (BOA)

- professional regulatory board created under RA 9298 to supervise the registration, licensure and practice of
accountancy in the Philippines
- composed of a chairperson and 6 members appointed by the President of the Philippines.
  PICPA, or the Philippine Institute of Certified Public Accountants, is the national professional
organization of Certified Public Accountants (CPAs) in the Philippines. Established in 1929, PICPA is
recognized by the Professional Regulation Commission (PRC) as the accredited professional
organization for CPAs in the country.

4 major areas in accountancy profession

1. Academe
2. Commerce and Industry
3. Public Practice
4. Government

CPA LICENSURE EXAM (LECPA) SUBJECTS

1. FAR
2. AFAR
3. MANAGEMENT SERVICES
4. AUDITING
5. RFBT OR BUSINESS LAW
6. TAX

CPA LICENSURE EXAM (LECPA) - PROPOSED

1. FAR AND AFAR
2. MANAGEMENT SERVICES
3. AUDITING
4. RFBT OR BUSINESS LAW
5. TAX
6. INFORMATION SYSTEM AND CONTROL

Accounting Standards

PFRS
 The Generally Accepted Accounting Principles (GAAP) in the Philippines are represented by
the Philippine Financial Reporting Standards (PFRSs). PFRSs are Standards and Interpretations
adopted by the Financial and Sustainability Reporting Standards Council (FSRSC).

They comprise:
a. Philippine Financial Reporting Standards
b. Philippine Accounting Standards
c. Interpretations
  The FRSC shall be composed of fifteen (15) members with a Chairman who had been or presently a
senior accounting practitioner in any of the scope of accounting practice, and fourteen (14)
representatives from the following:

[OLD]

* Major Organization of preparers and users of FS is assigned to Financial Executives of the Philippines (FINEX)

[UPDATED (FSRSC)]

+ 1 member from Insurance Commission

+ 1 member from Cooperative Development Authority of the Philippines

= New total number of members is 16

International Standard Creation

International Accounting Standards Board (IASB)

- Established in April 2001 as part of the International Accounting Standards Committee (IASC)
Foundation with the responsibility of approving IFRSs and related documents, such as the Conceptual
Framework, exposure drafts and other discussion documents. The financial reporting standards in the
Philippines are adopted from the IASB standards.

IMPORTANT NOTE: IFRSs are standards issued by the IASB while IASs are standards issued by the IASC which
were adopted by the IASB.

IFRS Interpretations Committee

- Formerly called International Financial Reporting Interpretations Committee (IFRIC).
- A committee that prepares interpretations of how specific issues should be accounted for under the
application of IFRS where:
(1) the standards do not include specific authoritative guidance and
(2) here is a risk of divergent and unacceptable accounting practices. In 2002, IFRIC replaced the former
Standing Interpretations Committee (SIC) which had been created by the IASC.

International Federation of Accountants (IFAC)

- A non-profit, non-governmental, non-political organization of accountancy bodies that represents the
worldwide accountancy profession.
CONCEPTUAL FRAMEWORK
• The Conceptual Framework for Financial Reporting (Conceptual Framework) describes the objective of, and
the concepts for, general purpose financial reporting.
The purpose of the Conceptual Framework is to:
(a) assist the International Accounting Standards Board (Board) to develop IFRS Standards (Standards) that are
based on consistent concepts;
(b) assist preparers to develop consistent accounting policies when no Standard applies to a particular
transaction or other event, or when a Standard allows a choice of accounting policy; and assist all parties to
understand and interpret the Standards.
( c ) assist all parties to understand and interpret the Standards.

Authoritative status:
1. The Conceptual Framework is not a PFRS and hence does not define standards for any particular
measurement or disclosure issue.
2. In the Conceptual Framework, nothing overrides any specific PFRS.
3. If there is a conflict between a requirement of a PFRS and a provision of the Conceptual Framework, the
requirement of the PFRS will prevail.
4. Hierarchy of guidance:
 PFRSs
 Similar and related PFRSs
 Conceptual Framework
 Most recent pronouncements of other standard-setting bodies

Other accounting literature and accepted industry practices

CHAPTER 1—THE OBJECTIVE OF GENERAL PURPOSE FINANCIAL REPORTING

CHAPTER 2—QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL INFORMATION
CHAPTER 3—FINANCIAL STATEMENTS AND THE REPORTING ENTITY
CHAPTER 4—THE ELEMENTS OF FINANCIAL STATEMENTS
CHAPTER 5—RECOGNITION AND DERECOGNITION
CHAPTER 6—MEASUREMENT
CHAPTER 7—PRESENTATION AND DISCLOSURE
CHAPTER 8—CONCEPTS OF CAPITAL AND CAPITAL MAINTENANCE

CHAPTER 1—THE OBJECTIVE OF GENERAL PURPOSE FINANCIAL REPORTING

• The objective of general-purpose financial reporting is to provide financial information about the reporting
entity that is useful to existing and potential investors, lenders and other creditors in making decisions relating
to providing resources to the entity.
CHAPTER 2— QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL INFORMATION
Qualitative characteristics of useful information
- These identify the types of information that are likely to be most useful to the primary users for making
decisions about the reporting entity on the basis of information in its financial report.
a. Fundamental (Relevance, Faithful representation)
b. Enhancing (Comparability, Verifiability, Timeliness, Understandability)

a.) FUNDAMENTAL

RELEVANCE
• Relevant financial information is capable of making a difference in the decisions made by users.
• Financial information is capable of making a difference in decisions if it has predictive value, confirmatory
value or both

Components of Relevance
• Financial information has predictive value if it can be used as an input to processes employed by users to
predict future outcomes.
• Financial information has confirmatory value if it provides feedback about (confirms or changes) previous
evaluations.

FAITHFUL REPRESENTATION
• Financial reports represent economic phenomena in words and numbers. To be useful, financial information
must not only represent relevant phenomena, but it must also faithfully represent the substance of the
phenomena that it purports to represent.
• To be a perfectly faithful representation, a depiction would have three characteristics. It would be complete,
neutral and free from error.
 COMPLETE A complete depiction includes all information necessary for a user to understand the
phenomenon being depicted, including all necessary descriptions and explanations.

 NEUTRAL A neutral depiction is without bias in the selection or presentation of financial information. A
neutral depiction is not slanted, weighted, emphasised, de-emphasised or otherwise manipulated to
increase the probability that financial information will be received favourably or unfavourably by users.
Neutrality is supported by the exercise of prudence.
Prudence is the exercise of caution when making judgements under conditions of uncertainty.
The exercise of prudence means thatassets and income are not overstated and liabilities and
expenses are not understated.

 FREE FROM ERROR means there are no errors or omissions in the description of the phenomenon, and
the process used to produce the reported information has been selected and applied with no errors in
the process.
 b.) ENHANCING QUALITATIVE CHARACTERISTICS

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 for another period or another date.
• Consistency, although related to comparability, is not the same. Consistency refers to the use of the same
methods for the same items, either from period to period within a reporting entity or in a single period across
entities. Comparability is the goal; consistency helps to achieve that goal.

VERIFICATION
• Verifiability means that different knowledgeable and independent observers could reach consensus,
although not necessarily complete agreement, that a particular depiction is a faithful representation.
• Direct verification means verifying an amount or other representation through direct observation, for
example, by counting cash.
• Indirect verification means checking the inputs to a model, formula or other technique and recalculating the
outputs using the same methodology.

TIMELINESS
Timeliness means having information available to decisionmakers in time to be capable of influencing their
decisions.

UNDERSTANDABILITY
• Classifying, characterizing, and presenting information clearly and concisely makes it understandable.
• Financial reports are prepared for users who have a reasonable knowledge of business and economic
activities and who review and analyse the information diligently.

CHAPTER 3— FINANCIAL STATEMENTS AND THE REPORTING ENTITY

• The objective of financial statements is to provide financial information about the reporting entity’s assets,
liabilities, equity, income and expenses that is useful to users of financial statements in assessing the prospects
for future net cash inflows to the reporting entity and in assessing management’s stewardship of the entity’s
economic resources
• A reporting entity is an entity that is required, or chooses, to prepare financial statements. A reporting entity
can be a single entity or a portion of an entity or can comprise more than one entity. A reporting entity is not
necessarily a legal entity.

Combined Financial Statements

• Financial statements of a reporting entity that comprises two or more entities that are not all linked by a
parent-subsidiary relationship.
- applies in the context of branches. If the company has branches and he wants to combine the
accounting books, Combined Financial Statements ang tawag.
Consolidated Financial Statements
• Financial statements of a reporting entity that comprises both the parent and its subsidiaries.

Unconsolidated Financial Statement

• Financial statements of a reporting entity that is the parent alone.

CHAPTER 4—THE ELEMENTS OF FINANCIAL STATEMENTS

a reporting entity is not necessarily a legal entity.

 An asset is a present economic resource controlled by the entity as a result of past events.
 An economic resource is a right that has the potential to produce economic benefits.

Is possession an important criteria for control?

- No. Possession does not necessarily mean control. It is possible that you possess something but you do not
control it. [Example Scenario: You have a money but it is deposited in a bank. Technically, the money is not in
your possession but you still have control over what to do with it, even though it is in the bank.]
What can be assets?
1. Cash
2. Right to receive goods or services
3. Right over physical assets
4. Right over intellectual property
5. Investments

• A liability is a present obligation of the entity to transfer an economic resource as a result of past events.
For a liability to exist, three criteria must all be satisfied:
(a) the entity has an obligation;
(b) the obligation is to transfer an economic resource
( c ) the obligation is a present obligation that exists as a result of past events

 The first criterion for a liability is that the entity has an obligation.

 An obligation is a duty or responsibility that an entity has no practical ability to avoid. [Example
Scenario: You cannot escape your debt from the BDO Bank]

 * IMPORTANT ‼️In accounting context, many obligations are established by contract, legislation or
similar means and are legally enforceable by the party (or parties) to whom they are owed. Obligations
can also arise, however, from an entity's customary practices, published policies or specific statements
if the entity has no practical ability to act in a manner inconsistent with those practices, policies or
statements.

• Equity is the residual interest in the assets of the entity after deducting all its liabilities.

Why are drawings not categorized in the income or outcome?

- Because owner’s drawings (money or capital that is withdrawn by the owner) are personal to the
owner kaya hindi siya tinatawag na expense.

 Income is increases in assets, or decreases in liabilities, that result in increases in equity, other than
those relating to contributions from holders of equity claims.
 Expenses are decreases in assets, or increases in liabilities, that result in decreases in equity, other than
those relating to distributions to holders of equity claims.

CHAPTER 5— RECOGNITION AND DERECOGNITION

• Recognition is the process of capturing for inclusion in the statement of financial position or the
statement(s) of financial performance an item that meets the definition of one of the elements of financial
statements—an asset, a liability, equity, income or expenses.
“An asset or liability is recognized only if recognition of that asset or liability and of any resulting income,
expenses or changes in equity provides users of financial statements with information that is useful“
Useful means relevance and faithful representation

• Derecognition is the removal of all or part of a recognized asset or liability from an entity’s statement of
financial position. Derecognition normally occurs when that item no longer meets the definition of an asset or
of a liability:
(a) for an asset, derecognition normally occurs when the entity loses control of all or part of the recognized
asset; and for a
(b) liability, derecognition normally occurs when the entity no longer has a present obligation for all or part of
the recognized liability.

CHAPTER 6— MEASUREMENT
Historical cost measures provide monetary information about assets, liabilities and related income and
expenses, using information derived, at least in part, from the price of the transaction or other event that gave
rise to them.

Current value measures provide monetary information about assets, liabilities and related income and
expenses, using information updated to reflect conditions at the measurement date.
Current value measurement bases include:
(a) fair value
(b) value in use for assets and fulfilment value for liabilities
(c) current cost

Fair value (external) is the price that would be received to sell an asset, or paid to transfer a liability, in an
orderly transaction between market participants at the measurement date.

Value in use (entity specific) is the present value of the cash flows, or other economic benefits, that an entity
expects to derive from the use of an asset and from its ultimate disposal.

Fulfilment value is the present value of the cash, or other economic resources, that an entity expects to be
obliged to transfer as it fulfils a liability.
Value in Use for assets
Fulfillment Value for liabilities.

The current cost of an asset is the cost of an equivalent asset at the measurement date, comprising the
consideration that would be paid at the measurement date plus the transaction costs that would be incurred
at that date.
CONCEPTS OF CAPITAL AND CAPITAL MAINTENANCE
Concepts of capital
a. Financial concept of capital – capital is synonymous with the net assets or equity of the entity.
b. Physical concept of capital – capital is regarded as the productive capacity of the entity based on, for
example, units of output per day.

Financial capital maintenance – a profit is earned only if the financial (or money) amount of the net
assets at the end of the period exceeds the financial (or money) amount of the net assets at the beginning of
the period, after excluding any distributions to, and contributions from, owners during the period. DOES NOT
REQUIRE the use of a particular basis of measurement.

Physical capital maintenance – a profit is earned only if the physical productive capacity (or operating
capability) of the entity (or the resources or funds needed to achieve that capacity) at the end of the period
exceeds the physical productive capacity at the beginning of the period, after excluding any distributions to,
and contributions from, owners during the period. REQUIRES the adoption of the current cost basis of
measurement.

Measurement Uncertainty
• Uncertainty that arises when monetary amounts in financial reports cannot be observed directly and must
instead be estimated. (konti lang lalabas)
• Measurement uncertainty is different from both outcome uncertainty and existence uncertainty:
(a) outcome uncertainty arises when there is uncertainty about the amount or timing of any inflow or outflow
of economic benefits that will result from an asset or liability
(b) existence uncertainty arises when it is uncertain whether an asset or a liability exists

Cost Constraint
• Cost is a pervasive constraint on the information that can be provided by financial reporting. Reporting
financial information imposes costs, and it is important that those costs are justified by the benefits of
reporting that information.