Uploaded by Tarcena, Pearl Arianne A.

REVIEWER-CFAS

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Conceptual Framework for Financial Reporting
Purpose
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assist the International Financial Reporting
Standards Council (FRSC) developing
Standards that are based on consistent
concepts
assist preparers in developing consistent
accounting policies when no Standard
applies to a particular transaction or when a
Standard allows a choice of accounting
policy
assist all parties in understanding and
interpreting the Standards.
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Status
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Conceptual Framework (CF) is not
Philippine Financial Reporting Standards
(PFRS)
PFRS will prevail
Absence of a Standard, management shall
consider CF in making decisions
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The objective of financial reporting
Qualitative characteristics of useful financial
information
Financial statements and the reporting
entity
The elements of financial statements
Recognition and derecognition
Measurement
Presentation and disclosure
Concepts of capital and capital maintenance
Objective
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(a) Completeness- necessary for users to
understand the phenomenon being depicted is
provided
(b) Neutrality- selected or presented
without bias
(c) Free from error- no errors in the
description and in the process by which the
information is selected and applied.
II. Enhancing- enhance the usefulness of
information
(1) Comparability- helps users in identifying
similarities and differences between different sets
of information
(2) Verifiability- different users could reach
consensus as to what the information purports to
represent.
(3) Timeliness- available to users in time to be
able to influence their decisions.
Scope
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(2) Faithful representation- the information
provides a true, correct and complete depiction of
what it purports to represent.
(4) Understandability- users are expected to
have:
a. the entity’s ability to generate future net
cash inflows; and
b. management’s stewardship over economic
resources.
Financial statements and the Reporting entity
Reporting period
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The objective of general-purpose
financial reporting (GPFR) is to provide
financial information about the reporting
entity that is useful to primary users in
making decisions about providing resources
to the entity.
forms the foundation
Going concern
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Primary Users
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those who cannot demand information
directly from reporting entities.
o (a) Existing and potential investors
o (b) Lenders and other creditors.
Only the common needs of primary users
are met by the financial statements.
Qualitative Characteristics
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Financial statements are prepared for a
specific period of time (i.e., the reporting
period) and include comparative information
for at least one preceding reporting period.
Financial statements are normally prepared
on the assumption that the reporting entity
is a going concern, meaning the entity has
neither the intention nor the need to end its
operations in the foreseeable future.
Reporting entity
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A reporting entity is one that is required, or
chooses, to prepare financial statements,
and is not necessarily a legal entity. It can
be a single entity or a group or combination
of two or more entities.
I.
Fundamental- that makes information
useful to users.
(1) Relevance- if it can affect the decisions of
users
(a) Predictive value- – the information can
be used in making predictions
(b) Feedback value- the information can
be used in confirming past predictions
➢
Materiality – entity-specific aspect
of relevance
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.”
➢ If the other party performs first, the
entity’s combined right and
obligation changes to a liability.
Three aspects in the definition of an asset
1.
Right – asset refers to a right, and not
necessarily to a physical object, e.g., the
right to use, sell, lease or transfer a
building.
2. Potential to produce economic benefits –
the right has a potential to produce economic
benefits for the entity that are beyond the
benefits available to all others. Such potential
need not be certain or even likely – what is
important is that the right already exists and
that, in at least one circumstance, it would
produce economic benefits for the entity.
3. Control – means the entity has the exclusive
right over the benefits of an asset and the
ability to prevent others from accessing those
benefits.
Liability is “a present obligation of the entity to
transfer an economic resource as a result of past
events.”
Three aspects in the definition of a liability
1. Obligation – An obligation is “a duty or
responsibility that an entity has no practical
ability to avoid.” (CF 4.29) An obligation can
be either legal obligation or constructive
obligation.
2. Transfer of an economic resource – the
obligation has the potential to require the
transfer of an economic resource to another
party. Such potential need not be certain or
even likely – what is important is that the
obligation already exists and that, in at least
one circumstance, it would require the
transfer of an economic resource.
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“Equity is the residual interest in the assets
of the entity after deducting all its liabilities.”
(Conceptual Framework 4.63)
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Equity equals Assets minus Liabilities
Income
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.” (Conceptual Framework 4.68)
Expenses
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.”
Recognition & Derecognition
The recognition process
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Recognition criteria
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2. as a consequence, the entity will or
may have to transfer an economic
resource that it would not otherwise
have had to transfer.
b. recognizing it would provide useful
information, i.e., relevant and
faithfully represented information.
Relevance
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An executory contract “is a contract that is
equally unperformed – neither party has
fulfilled any of its obligations, or both parties
have partially fulfilled their obligations to an
equal extent.” (CF 4.56)
An executory contract establishes a
combined right and obligation to exchange
economic resources.
The contract ceases to be executory when
one party performs its obligation.
➢ If the entity performs first, the entity’s
combined right and obligation
changes to an asset.
The recognition of an item may not provide
relevant information if, for example:
a. it is uncertain whether an asset or
liability exists; or
Executory contracts
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An item is recognized if:
a. it meets the definition of an asset,
liability, equity, income or expense;
and
3. Present obligation as a result of past
events – A present obligation exists as a
result of past events if:
1. the entity has already obtained
economic benefits or taken an
action; and
Recognition is the process of including in
the statement of financial position or the
statement(s) of financial performance an
item that meets the definition of one of the
financial statement elements (i.e., asset,
liability, equity, income or expense). This
involves recording the item in words and in
monetary amount and including that amount
in the totals of either of those statements.
b. an asset or liability exists, but the
probability of an inflow or outflow of
economic benefits is low.
(Conceptual Framework 5.12)
However, the presence of one or both of the
foregoing does not automatically lead to the nonrecognition of an item. Other factors should also be
considered.
Faithful representation
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The level of measurement uncertainty and
other factors can affect an item’s faithful
representation, but not necessarily its
relevance.
Measurement uncertainty
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Measurement uncertainty exists if the asset
or liability needs to be estimated. A high
level of measurement uncertainty does not
necessarily lead to the non-recognition of an
asset or liability if the estimate provides
relevant information and is clearly and
accurately described and explained.
However, measurement uncertainty can
lead to the non-recognition of an asset or a
liability if making an estimate is
exceptionally difficult or exceptionally
subjective.
Derecognition
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Derecognition is the removal of a previously
recognized asset or liability from the entity’s
statement of financial position.
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Derecognition occurs when the item ceases
to meet the definition of an asset or liability.
Unit of account is “the right or the group of
rights, the obligation or the group of obligations,
or the group of rights and obligations, to which
recognition criteria and measurement concepts
are applied.”
Measurement bases
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.”
Entry values vs. Exit values
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Current cost
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a. Fair value
b. Value in use and fulfilment value
c. Current cost
3. The historical cost of:
a. an asset is the consideration paid
to acquire the asset plus
transaction costs.
b. a liability is the consideration
received to incur the liability minus
transaction costs.
4. Historical cost is updated over time to depict
the following:
a. Depreciation, amortization, or
impairment of assets
b. a liability is “the consideration that would
be received for an equivalent liability at the
measurement date minus the transaction
costs that would be incurred at that date.”
Considerations when selecting a measurement
basis
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b. The qualitative characteristics, the costconstraint, and other factors (e.g., a
particular measurement basis may be more
verifiable or more costly to apply than the
other measurement bases).
Measurement of Equity
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Total equity is not measured directly. It is
simply equal to difference between the total
assets and total liabilities.
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Because different measurement bases are
used for different assets and liabilities, total
equity cannot be expected to be equal to
the entity’s market value nor the amount
that can be raised from either selling or
liquidating the entity.
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Equity is generally positive, although some
of its components can be negative. In some
cases, even total equity can be negative
such as when total liabilities exceed total
assets.
Fair value 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.”
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Value in use 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.”
(Conceptual Framework 6.17)
When selecting a measurement basis, it is
important to consider the following:
a. The nature of information provided by a
particular measurement basis (e.g.,
measuring an asset at historical cost may
lead to the subsequent recognition of
depreciation or impairment, while measuring
that asset at fair value would lead to the
subsequent recognition of gain or loss from
changes in fair value).
b. Collections or payments that
extinguish part or all of the asset or
liability
c. Unwinding of discount or premium
when the asset or liability is
measured at amortized cost
The current cost of:
a. 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.”
1. Historical cost
2. Current value
Current cost and historical cost are entry
values (i.e., they reflect prices in acquiring
an asset or incurring a liability), whereas fair
value, value in use and fulfilment value are
exit values (i.e., they reflect prices in selling
or using an asset or transferring or fulfilling
a liability).
Presentation and Disclosure
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Information is communicated through
presentation and disclosure in the financial
statements.
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Effective communication makes information
more useful. Effective communication
requires:
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a. focusing on presentation and
disclosure objectives and principles
rather than on rules.
b. classifying information by grouping
similar items and separating
dissimilar items.
c. aggregating information in a manner
that it is not obscured either by
excessive detail or by excessive
summarization.
Presentation and disclosure objectives and
principles
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The objectives are specified in the
Standards.
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The principles include:
a. the use of entity-specific information
is more useful that standardized
descriptions, and
b. duplication of information is usually
unnecessary.
Classification
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Classifying means combining similar items
and separating dissimilar items.
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Offsetting of assets and liabilities is
generally not appropriate.
Classification of income and expenses
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Income and expenses are classified as
recognized either in:
General purpose financial statements are
those intended to serve users who do not
have the authority to demand financial
reports tailored for their own needs. General
purpose financial statements cater to most
of the common needs of a wide range of
external users. General purpose financial
statements are the subject matter of the
Conceptual Framework and the PFRSs.
Complete set of financial statements
1. Statement of financial position
2. Statement of profit or loss and other
comprehensive income
3. Statement of changes in equity
4. Statement of cash flows
5. Notes
(5a) comparative information in respect of the
preceding period; and
6. Additional statement of financial position
(required only when certain instances occur)
General features
1. Fair Presentation and Compliance with
PFRSs - The application of PFRSs, with additional
disclosure when necessary, is presumed to result in
financial statements that achieve a fair
presentation.
2. Going concern - An entity is not a going
concern if, as of the financial reporting date or prior
to the date of authorization of the financial
statements for issue, management either:
a. Intends to liquidate the entity or to cease
trading, or
a. profit or loss; or
b. Has no realistic alternative but to do so.
b. other comprehensive income.
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Aggregation is “the adding together of assets,
liabilities, equity, income or expenses that have
shared characteristics and are included in the same
classification.”
The assessment of going concern is at
least 12 months.
3. Accrual Basis of Accounting - An entity shall
prepare its financial statements, except for cash
flow information, using the accrual basis of
accounting.
Concepts of Capital and Capital Maintenance
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Financial concept of capital – capital is
regarded as the invested money or invested
purchasing power. Capital is synonymous
with equity, net assets, and net worth.
Physical concept of capital – capital is
regarded as the entity’s productive capacity,
e.g., units of output per day.
4. Materiality & Aggregation - Each material class
of similar items must be presented separately in the
financial statements.
5. Offsetting - Assets and liabilities, and income
and expenses, shall not be offset unless required
or permitted by a PFRS.
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PAS 1 Presentation of Financial Statements
Objective of PAS 1
PAS 1 prescribes the basis for presentation of
general purpose financial statements to improve
comparability both with the entity's financial
statements of previous periods (intra-comparability)
and with the financial statements of other entities
(inter-comparability).
General purpose financial statements
Measuring assets net of valuation
allowances, for example, obsolescence
allowances on inventories, allowances for
doubtful accounts on receivables, and
accumulated depreciation on property,
plant, and equipment are not offsetting.
6. Frequency of reporting – An entity shall
present a complete set of financial statements
(including comparative information) at least
annually.
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When an entity changes the end of its
reporting period and presents financial
statements for a period longer or shorter
than one year, an entity shall disclose the
following:
1. it expects to realize the asset or intends
to sell or consume it, in its normal
operating cycle;
1. The period covered by the financial
statements,
2. it holds the asset primarily for the
purpose of trading;
2. The reason for using a longer or
shorter period, and
3. it expects to realize the asset within
twelve months after the reporting period;
or
3. The fact that amounts presented in
the financial statements are not
entirely comparable.
4.
the asset is cash or a cash equivalent
unless the asset is restricted from being
exchanged or used to settle a liability for at
least twelve months after the reporting
period.
7. Comparative Information
An entity shall present comparative information in
respect of the preceding period for all amounts
reported in the current period’s financial
statements, unless other standards permit or
require otherwise.
Current Liabilities
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8. Consistency of presentation - An entity shall
retain the presentation and classification of items in
the financial statements from one period to the next
unless:
1. it expects to settle the liability in its
normal operating cycle;
2. it holds the liability primarily for the
purpose of trading;
a. it is apparent that another
presentation or classification would
be more appropriate following a
significant change in the nature of
the entity’s operations or a review of
its financial statements; or
3. the liability is due to be settled within
twelve months after the reporting
period; or
4. the entity does not have an
unconditional right to defer
settlement of the liability for at least
twelve months after the reporting
period.
b. a PFRS requires a change in
presentation.
Additional Statement of financial position
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An additional statement of financial position
is presented as at the beginning of the
preceding period when an entity:
1. Applies an accounting policy
retrospectively, or
Currently maturing long-term liabilities
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General rule: Currently maturing long term
liabilities are presented as current liabilities.
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Exceptions:
1. Refinancing agreement is fully
completed on or before the balance
sheet date – non-current liability
2. Makes a retrospective restatement
of items in its financial statements,
or
2. Refinancing agreement after the
balance sheet date but before the
financial statements are authorized
for issue – noncurrent liability if the
entity expects, and has the
discretion, to refinance it on a longterm basis under an existing loan
facility.
3. reclassifies items in its financial
statements.
..and the effect of the event to the statement of
financial position as at the beginning of the
preceding period is material.
Statement of financial position
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A statement of financial position may be
presented as either
1. Classified – showing distinctions
between current and noncurrent
assets and liabilities, or
Breach of loan agreement
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General rule: A liability that is payable on
demand is a current liability.
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Exception: It is presented as non-current
liability if the lender provides the entity, on
or before the balance sheet date, a grace
period ending at least 12 months after the
balance sheet date to rectify a breach of
loan covenant.
2. Unclassified (based on liquidity) –
showing no distinction between
current and noncurrent items
Current Assets
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An entity shall classify an asset as current
when:
An entity shall classify a liability as current
when:
Presentation of Deferred taxes
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Deferred tax liabilities (assets) are
presented as noncurrent items in a
classified statement of financial position,
irrespective of their expected dates of
reversal.
Minimum line items in the statement of financial
position
a. Property, plant and equipment;
b. Investment property;
c. Intangible assets;
d. Financial assets (excluding amounts shown
under (e), (h) and (i));
e. Investments accounted for using the equity
method;
f.
Biological assets;
g. Inventories;
presenting profit or loss and other
comprehensive income or in the notes.
Other comprehensive income for the period
a. Changes in revaluation surplus
b. Unrealized gains and losses on investments
in FVOCI securities
c. Remeasurements of the net defined benefit
liability (asset)
d. Gains and losses arising from translating
the financial statements of a foreign
operation
e. Effective portion of gains and losses on
hedging instruments in a cash flow hedge
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h. Trade and other receivables;
i.
Cash and cash equivalents;
j.
Assets (or disposal groups) classified as
held for sale in accordance with PFRS 5;
OCI may be presented either (a) net of tax
or (b) gross of tax.
Reclassification adjustments are amounts
reclassified to profit or loss in the current
period that were recognized in other
comprehensive income in the current or
k. Trade and other payables;
l.
Provisions;
m. Financial liabilities (excluding amounts
shown under (k) and (l));
n. Liabilities and assets for current tax, as
defined in PAS 12 Income Taxes;
o. Deferred tax liabilities and deferred tax
assets, as defined in PAS 12;
p. Liabilities included in disposal groups
classified as held for sale in accordance
with PFRS 5;
q. Non-controlling interests, presented within
equity; and
r.
Total comprehensive income
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PAS 1 does not prescribe the order or
format in which an entity presents items.
Total comprehensive income comprises all
components of
1. Profit or loss; and
Issued capital and reserves attributable to
owners of the parent
Order/ Format of Presentation
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previous periods.
2. Other comprehensive income.
Presentation of Expenses
1. Nature of expense method
2. Function of expense method
Statement of profit or loss and other
comprehensive income
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An entity shall present all items of income
and expense recognized in a period:
If an entity classifies expenses by function,
it shall disclose additional information on
the nature of expense
Disclosure of dividends
1. in a single statement of profit or loss
and other comprehensive income; or
2. in two statements: (1) a statement
displaying the profit or loss section only
(separate ‘statement of profit or loss’ or
‘income statement’) and (2) a second
statement beginning with profit or loss and
displaying components of other
comprehensive income.
Extraordinary items
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PAS 1 prohibits the presentation of any
items of income or expense as
extraordinary items in the statement(s)
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Dividends declared by an entity are
disclosed either in the (a) notes or (b)
statement of changes in equity.
Order of presentation of disclosures in the
Notes
1. Statement of compliance with PFRSs;
2. Summary of significant accounting policies
applied;
3. Supporting information for items presented
in the other financial statements; and
4. Other disclosures.
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