CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARD
Chapter 1:

THE ACCOUNTANCY PROFESSION
Definition of Accounting
Historical cost- most common measure in the financial
transaction.

Accounting Standards Council (ASC):
Current cost- includes fair value, value in use,
fulfillment value and current cost.

Accounting is a service activity.

The accounting function is to provide quantitative
Communicating- process of preparing and distributing
information, primarily financial in nature, about
accounting reports to potential users of accounting information.
economic entities, that is intended to be useful in
making economic decision.
American Accounting Association (AAA):

Implicit in the communication process:

Accounting is the process of identifying, measuring
and communicating economic information to permit
business transaction.

informed judgment and decision by users of the
information.
Recording- systematically maintaining a record of all
Classifying- sorting or grouping of similar and
interrelated economic transaction.

Summarizing- preparation of accounting reports, such
as; financial statement etc.
Important points
1.
Accounting is about quantitative information.
Accounting is an information system that measures business
2.
The information is likely to be financial in nature.
activities, processes information into reports and
3.
The information should be useful in decision making.
communicates the reports to decision makers.
Identifying- recognition or non-recognition of business activities
Objective of Accounting:
as “accountable” events.
To provide quantitative financial information about a business
that is useful to statement users.
Not all business activities are accountable.
Ex. Hiring employees
The Accounting Profession
Philippine Accountancy Act of 2004 or Republic Act No. 9298
Transactions are classified into 2:

External transaction- economic events involving one
is the law regulating the practice of accounting in the
Philippines.
entity to another entity.

Internal transaction- economic events that mainly
In order to qualify to practice the accountancy profession, a
happen only within an entity. Example of these are:
person must finish a degree of Bachelor of Science in
o
o
Production-process by which resources are
Accountancy and pass a very difficult government examination
transformed into a product.
given by Board of Accountancy.
Casualty- unanticipated loss (from fire,
earthquake, flood etc.)
Board of Accountancy- the body authorized by law to
promulgate rules and regulations affecting the practice of the
Measuring- assigning of peso amounts to the accountable
accountancy profession in the Philippines.
economic transactions and events.
Limitations:
2 measurement bases:


Single practitioners and partnerships for the practice
Private Accounting- includes maintaining the records,
of public accountancy.
producing the financial reports, preparing the budgets and
The board of accountancy and approved by the
controlling and allocating the resources of the entity.
Professional Regulation Commission that such
registrant has acquired a minimum of 3 years of
The major objective of the private accountant is to assist
meaningful experience in any of the areas of public
management in planning and controlling the entity’s
practice including taxation.
operations.
Government Accounting-encompasses the process of
Certified Public Accountant practice their profession in 3 main
analyzing, classifying, summarizing and communicating all
areas:
transactions involving the receipt and disposition of

Public Accounting
government funds and property and interpreting the result

Private Accounting
thereof.

Government Accounting
Public Accounting: composed of individual practitioners, small
Continuing Profession Development (CPD)
accounting firms and large multinational organizations that
Republic Act No. 10912 is the law mandating and
render independent and expert financial services to public.
strengthening the continuing professional development
program for all regulated professions, including the
Auditing or external auditing- the examination of financial
accountancy profession.
statements by independent CPA for the purpose of expressing
an opinion as to the fairness with which the financial
CPD refers to the inculcation and acquisition of advanced
statements are prepared.
knowledge, skill, proficiency, and ethical and moral values after
initial registration of the CPA for assimilation into professional
Taxation services- the preparation of annual income tax
practice and lifelong learning.
returns and determination of tax consequences of certain
proposed business endeavors.
CPD Units- refers to the CPD credit units required for the
renewal of CPA license and accreditation of a CPA to practice
Management Advisory Services- refers to services to clients on
the accountancy profession every 3 years.
matters of accounting, finance, business policies, organization
procedures, product costs, distribution and many other phases
120 CPD credit units in compliance period of 3 years.
of business conduct operations. It includes the ff:

Advice on installation of computer system
2017-80 credit units

Quality control
2018- 100 credit units

Installation and modification of accounting system
2019- 120 credit units

Budgeting

Forward planning and forecasting
The CPD is required for the renewal of CPA license and

Design and modification of retirement plans
accreditation of a CPA to practice the accountancy profession.

Advice on mergers and consolidations.
A CPA shall be permanently exempted from CPD requirements
upon reaching the age of 65 years.
Generally Accepted Accounting Principles (GAAP)- represents
the rules, procedures, practices, and standards followed in the
The role of PIC to prepare interpretations of PFRS for approval
presentation of financial statements.
by the FRSC and to provide timely guidance on financial

A political process which incorporates political actions
reporting issues not specifically addressed in current PFRS.
of various interested user groups as well as
professional judgment, logic and research.
International Accounting Standards Committee
Is an independent private sector body, with the objectives of
Purposes of accounting standards
achieving uniformity in the accounting principles which are
To identify proper accounting practices for the preparation and
used by business and other organizations for financial
presentation of financial statements.
reporting around the world.
Financial Reporting Standards Council
Objectives of IASC:
The financial reporting standard is now replaces into The

To formulate and publish in the public interest
Accounting Standard Council. The FRSC is the accounting
accounting standards to be observed in the
standard setting body created by Professional Regulation
presentation of financial statements and to promote
Commission upon recommendation of the Board of
their worldwide acceptance and observance.
Accountancy to assist the BOA in carrying out its powers and

function provided under RA no. 9298
To work generally for the improvement and
harmonization of regulations, accounting standards
and procedures relating to the presentation of
The main function is to establish and improve accounting
financial statements.
standards that will be generally accepted in the Philippines.
International Accounting Standards Board
Compositions of FRSC:
The international accounting standards board now
Composed of 15 members (1 chairman and 14 members)
replaces the International Accounting Standards
Board of Accountancy
1
Committee or IASC
Securities and Exchange Commission
1
BangkoSentralngPilipinas
1
Bureau of Internal Audit
The IASB standard-setting process includes in the correct;
1

Order research
Major organization of preparers and users of financial

Discussion paper
statement (Financial Executives Institute of the Philippines or

Exposure d6raft
FINEX)

Accounting standard
1
Accredited national professional organization of CPAs:
Public Practice
2
Chapter 2:
Commerce and Industry
2
CONCEPTUAL FRAMEWORK (OBJECTIVE OF FINANCIAL
Academe or Education
2
REPORTING)
Government
2
14
Conceptual Framework
-
Is a complete, comprehensive and single document
promulgated by the International Accounting
Philippine Interpretations Committee
Was formed by the FRSC in August 2006 and has replaced the
Standards Board.
-
Is a summary of the terms and concepts that underlie
Interpretations Committee or IC formed by accounting
the preparation and presentation of financial
standards council in May 2002.
statement for external users.
-
Is an attempt to provide an overall theoretical

foundation for accounting.
-
Qualitative characteristics of useful financial
information
Is intended to guide standards-setter, prepares and

Financial statements and reporting entity
users of financial information in the preparation of

Elements of financial statements
statements.

Recognition and derecognition

Measurement

Presentation and disclosure

Concepts of capital and capital maintenance
The Foundation for Standards that:

Contribute to transparency

Strengthen accountability

Contribute to economic efficiency
Objective of Financial Reporting
To provide financial information about the reporting entity that
Purpose of Conceptual Framework:




is useful to existing and potential investors, lenders and other
To assist the IASB, to develop IFRS standards based
creditors in making decisions about providing resources to the
on consistent on concepts.
entity.
To assist preparers of financial information to develop
consistent accounting policy when no standards
Financial Reporting- the provision of financial information about
applies
an entity to external users that is useful to them in making
To assist preparers of financial statements, to develop
economic decisions and for assessing the effectiveness of the
accounting policy
entity’s management.
To assist all parties to understand and interpret the
IFRS standards.
Specific objectives of financial reporting:

Users of financial information

Primary users- the parties to whom general purpose
making.

financial reports are primarily directed.
o
Existing and potential investors- concerned
with the risk inherent in and return provided
To provide information that is useful for decision
To provide information useful in assessing the cash
flow prospects of the entity.

To provide information about entity, resources,
claims, and changes in resources and claims.
by their investments.
o
Lenders and other creditors- determine
Accrual Accounting- depicts the effects of transactions and
whether their loans, interest thereon and
other events and circumstances on entity’s economic
other amounts owing to them will be paid
resources and claims in the period
when due.


Means that income is recognized when earned
Other users- users of financial information other than
regardless of when received and expense is
the existing and potential investors, lenders and other
recognized when incurred regardless of when
creditors.
paid.
o
Employees- assess their ability of the entity
o
Customers
o
Governments and their agencies
o
Public
Limitations of financial reporting

Cannot provide all of the information that existing
and potential investors, lenders, and other
creditors need.
Scope of Revised Conceptual Framework

Objectives of financial reporting

Not designed to show the value of an entity


Cannot accommodate every request for
information
The relevance of information is affected by its nature and
Based on judgment rather than exact depiction.
materiality.
Chapter 3:
Factors of materiality:
CONCEPTUAL FRAMEWORK (QUALITATIVE

Size of an item
CHARACTERISTICS)

Nature of an item
Qualitative Characteristics- the qualities or attributes that make
Faithful Representation- means that the actual effects of the
financial accounting information useful to the users.
transactions shall be properly accounted for and reported in
the financial information.
Fundamental Qualitative Characteristics

Relevance

Faithful representation
-
Means that financial reports represent economic
phenomena or transactions in words and numbers.
Ingredients:

Application of Qualitative Characteristic
Completeness-requires that the financial reports
facilitates understanding and avoids erroneous
1.
Identify an economic phenomenon
implication.
2.
Identify the information of the phenomenon

Neutrality- is without bias in the presentation.
3.
Determine whether the information is available.

Free from errors- means there are no errors.
Standard of adequate disclosure- means that all significant and
Relevance
-
is the capacity of the information to influence a
relevant information leading to the preparation of financial
statements shall clearly reported.
decision.
-
requires the financial information should be related or
Prudence- the exercise of care and caution when dealing with
pertinent to the economic decision.
uncertainties in the measurement process such that assets or
Ingredients:

Predictive value-if it can be used as an output to
income are not overstated and liabilities or expenses are not
understated.
processes employed by users to predict future
outcome; financial information has a predictive value
Conservatism- means alternative exist, the alternative which
when it can help the users increase the likelihood of
has the least effect on equity should be chosen. “in case of
correctly or accurately predicting or forecasting
doubts, record any loss and do not record any gain.”
outcome of events.

Confirmatory value- provides feedback about previous
Measurement Uncertainty- arises when monetary amounts in
information; financial information has confirmatory
financial reports cannot be observed directly and must be
value when it enables users confirm or correct earlier
estimated.
expectations.
Materiality
Substance over Form- is not considered a separate component
-
A practical rule in accounting which dictates that strict
of faithful representation because it would be redundant. It is
adherence to GAAP is not required when the items
necessary that the transaction and events are accounted in
are not significant enough to affect the evaluation,
accordance.
decision and fairness of the financial statements.
-
Also known as doctrine of convenience
Enhancing Qualitative Characteristics- intended to increase the
usefulness of the financial information that is relevant and
Underlying Assumptions
faithfully represented.
Going concern- means that in the absence of evidence to the


Comparability- enables the users to identify and
contrary, the accounting entity is viewed as continuing in
understand similarities and dissimilarities among
operation indefinitely.
items.
Accounting entity-is the specific business organization.
Consistency- refers to the use of the same method for
the same item.

Time period- accounting cycle
Understandability- requires that financial information
must be comprehensible or intelligible if it is to be
most useful.

Monetary unit

Verifiability- implies concensus
o
Direct verification- verifying an amount or
Quantifiable aspects- stated in terms of a unit of
measurement which is peso in the Ph.

other presentation through direct
Stability of the peso- purchasing power of peso is
stable or constant
observation. Ex. counting cash.
o
Indirect verification- checking the inputs to a
model, formula or other techniques.

Chapter 5:
CONCEPTUAL FRAMEWORK (ELEMENTS OF FINANCIAL
Timeliness- financial information should be updated.
STATEMENT)
Elements directly related to the measurement of financial
Chapter 4:
position are:
CONCEPTUAL FRAMEWORK (UNDERLYING
a.
Asset- economic resources
ASSUMPTIONS)
b.
Liability- present obligation
c.
Equity- residual interest in the assets
Financial statement- provides information about economic
resources of reporting entity.
Elements directly related to the measurement of financial
performance are:
Types:

Consolidated financial statements- assets, liabilities,
a.
Income- increase in asset
b.
Expense-decrease in asset
equity, income and expenses of both parents and its
subsidiaries.

Unconsolidated financial statements- parent’s asset,
liabilities, equity, income and expenses.

Combined financial statements- assets, liabilities,
equity, income and expenses of two or more entities
and not linked with parent and subsidiary relationship.
Chapter 6:
CONCEPTUAL FRAMEWORK (RECOGNITION AND
MEASUREMENT)
Reporting entity- an entity that is required or chooses to
prepare financial statements.
The revised Conceptual Framework defines recognition as the
process of capturing for inclusion in the financial statements an
Reporting period- period when financial statement are
item that meets the definition of an asset, liability, equity,
prepared.
income or expense.
The amount at which an asset, a liability or equity is
Classification- sorting of asset, liabilities, equity, income and
recognized in the statement of financial position is reported as
expenses on the basis of shared or similar characteristic.
carrying amount.
The statement of profit and loss is the primary source of
Derecognition- the removal of all or part of a recognized asset
information about an entity’s financial performance for the
or liability from the statement of financial position. It normally
reporting period.
occurs when an items doesn’t meets the definition of an asset
or a liability.
Aggregation- the adding together of asset, liabilities, equity,
income and expenses that have similar or shared
MEASUREMENT-defined as quantifying in monetary terms in
characteristics.
the elements in the financial statement.
a)
Historical Cost-first amount to be included in the FS.
Capital maintenance approach- means that net income occurs
b)
Current Value- includes fair value, value in use for
only after the capital used from the beginning of the period is
asset, Fulfillment value for liability, current cost.
maintained.

Fair Value-exit price

Value in use-is the present value of the cash
flow that an entity expects to derive from the

Return on capital- shareholder’s investment in the
entity.

Return of capital- erosion of capital invested.
use of an asset and from the ultimate


disposal.
Financial Capital- the monetary amount of the net assets
Fulfillment value-is the present value of cash
contributed by shareholders and the amount of the increase in
that an entity expects to transfer in paying or
net assets resulting from earning retained by the entity.
settling a liability.
(Historical Cost)
Current Cost-entry price but reflects market
conditions on measurement date.
Chapter 7:
CONCEPTUAL FRAMEWORK (PRESENTATION AND
DISCLOSURE)
Illustration:
Jan. 1
Dec. 31
Total asset
1,500,000
2,500,000
Total liabilities
1,000,000
1,200,000
Additional investments during the year
400,000
The presentation and disclosure can be effective
Dividends paid during the year
communication tool about the information in financial
300,000
statements. Effective communication tool of information in
financial statements:
-
-
-
COMPUTATION OF NET INCOME
Makes the information more relevant and contributes
1. Net assets – Jan. 1
to a faithful representation of an entity’s asset,
Add: dividends paid
liabilities, income and expenses.
Total
Also enhances the understandability and
Less: Net asset- Jan.1500,000
comparability of information in the financial
additional investments 400,000
statements.
NET INCOME
1,300,000
300,000
1,600,000
900,000
700,000
Is supported by not duplicating information in different
parts of the financial statements.
2. Total Asset- Dec 31
2,500,000
Total Liabilities- Dec 31
(1,200.000)
Net asset- Dec. 31
6.
Notes
1,300,000
Net asset- Jan.1
(500,000)
Frequency of reporting
Total
800,000
Additional investments
(400,000)
Total
400,000
Statement of financial position- a formal statement showing the
Dividend paid
300,000
3 elements comprising financial position, namely assets,
NET INCOME
Financial statement should be prepare at least annually.
700,000
liabilities and equity.
PhysicalCapital- quantitative measure of the physical
Assets- economic resources controlled by an entity.
productive capacity to produce goods and services.

Current Asset- short term assets
(CURRENT COST)

Non-current asset- long term assets
Illustration:
Net assets – Jan. 1
1,300,000
Add: dividends paid
300,000
Total
Property, plant and equipment- tangible assets which are held
by an entity for use in production or supply in goods.
1,600,000
Less: Net asset- Jan.1 800,000
additional investments 400,000
Long term investment- an asset held by an entity for the
1,200,000
NET INCOME
accretion of wealth through capital distribution.
400,000
Intangible asset- asset without physical substance. Ex.
Total Asset- Dec 31
2,500,000
Total Liabilities- Dec 31
Goodwill
(1,200.000)
Net asset- Dec. 31
1,300,000
Net asset- Jan.1
(800,000)
Total
Other non-current asset- are those assets that do not fit into
the definition of the previously mentioned noncurrent assets
500,000
Additional investments
(400,000)
Total
Liabilities- present obligation of an entity
100,000
Dividend paid
300,000
NET INCOME
400,000

Current liabilities- obligation within a year

Non-Current liabilities- obligation more than 1 year.
Covenants- restriction of borrower.
Chapter 8:
PAS 1(STATEMENT OF FINANCIAL POSITIONS)
Equity- residual interest in the assets.
Financial statements- means by which the information
accumulated and processed in financial accounting is
Shareholder’s equity- is the residual interest of owner in the net
periodically communicated to the users.
asset of a corporation
Components:
Forms of financial position
1.
Statement of financial position

Report form
2.
Income statement

Account form
3.
Statement of comprehensive income
4.
Statement of changes in equity
5.
Statement of cash flows
Non-controlling asset- not 100% owned by an entity.
Chapter 9
b.
PAS 1(STATEMENT OF COMPREHENSIVE INCOME)
Income statement- a formal statement showing the financial
Distribution costs or selling expenses- selling,
advertising, and delivery of goods.
c.
Administrative expenses- all operating expense.
d.
Other expense- not related to selling and
performance of an entity for a given period of time.
administrative expenses.
e.
Income tax expense
Comprehensive income- the change in equity during a period
resulting from transactions and other events, other than
changes resulting from transactions with owners in their
Forms of income statement
a.
capacity as owners. Comprehensive income includes:

Components of profit and loss

Component of other comprehensive income
Functional presentation- classifies expenses
according to their function.
b.
Natural presentation-classifies expense according to
their nature.
Other Comprehensive Income- comprises items of income and
Statement of comprehensive income- provides more
expenses including reclassification adjustment that are not
comprehensive information on the financial performance.
recognized in profit or loss as required or permitted by PFRS.
Statement of retained earnings- shows the changes affecting
Components
directly the retained earnings of an entity.
OIC that will reclassified to profit or loss
o
Unrealized gain or loss on debt investment
Statement of changes in equity- a basic statement that shows
o
Gain or loss from translation of the FS
the movements of the shareholder’s equity.
o
Unrealized gain or loss from derivate contracts
OIC that will reclassified to retained earnings
o
Unrealized gain or loss on equity investment
o
Revaluation surplus during the year
o
Re-measurements of defined benefit plan
Formula:
o
Change in fair value attributable to credit risk
Beginning Raw Materials
Presentation of comprehensive income
1.
2.
Statement of cash flows- summarize the operating, investing,
and financing activities of an entity.
Add:
Purchases
Less:
Freight in
Two statements (income statement and statement of
Purchases Returns & Allowances
comprehensive income)
NET RAW MATERIALS PURCHASES
Single statement of Comprehensive income
Less:
Raw Materials Ending
RAW MATERIALS USED
Sources of income
Add: Direct Labor
a.
Sales of merchandise to customers
b.
Rendering services

Indirect Labor
c.
Use of entity resources

Utilities 60%
d.
Disposal of resources other than products

Indirect Materials

Depreciation- Factory Building

Factory Salary
Components of expense
a.
Cost of goods sold or cost of sales
Manufacturing Overhead:
COST OF GOODS MANUFACTURED
Add:
WIP Beginning
Finished goods- Beginning
Less:
WIP Ending
Net Realizable Value- agreed price
Finished Goods- Ending
COSTS OF GOOD SOLD
Allowance and loss method- inventories is recorded at cost.
CHAPTER 11
CHAPTER 10
PAS 7(STATEMENT OF CASH FLOW)
PAS 2(INVENTORIES)
Statement of Cash Flows- provides information about the cash
Inventories- assets held for sale; comprises of finished goods,
processed goods, and raw materials.
and cash payments.
-
Cash
-
Cash Equivalent (not cash but convertible to cash)
Classes of Inventories:


Trading concern- buy and sell (merchandise
Classification of cash flow
inventory)
-
Operating Activities- included in the income statement
Manufacturing concern- buys goods to transform it to
-
Investing Activities- Noncurrent asset
new product.
-
Financing Activities- Equity or noncurrent liability
-
Finished goods
-
Goods in process
Noncash transactions- are transaction that do not requires use
-
Raw materials
of cash and cash equivalent shall be excluded.
-
Factory or manufacturing support
Cost of Inventories:
CHAPTER 12
a.
Cost of purchase
Accounting Policies- are the specific principles, bases,
b.
Cost of conversion
conventions, rules and practices applied by an entity in
c.
-
Fixed production overhead
-
Variable production overhead
Other cost
preparing and presenting financial statements.
Change in accounting policy occurs when:
-
Abnormal amount of wastes
1.
Required in the standard
-
Storage Costs
2.
When the changes will result in more relevant and
-
Administration Costs
-
Distribution or selling costs
faithfully represented information
Example of change in accounting policy:
Cost of inventories of a service provider- consist of labor and
1.
Change in method in inventory pricing (cost formula)
other costs of a personnel directly engaged in providing
2.
Change in the method of accounting for long term use
services.
3.
Initial adaptation of policy to carry assets
4.
Change to a new policy
Costs Formula

FIFO
Retrosperspective- adjustment to the opening balance of

Weighted Average
retained earnings.

LIFO
Retroactive- changing previous years to be comparable.

Specific identification (Ex. Second Hand Car)
Measurement of inventories- provides that inventories shall be
measured at the lowest of cost and net realizable value.
CHAPTER 13
1.
2.
Adjusting Events- provide evidence of conditions that
exist at the end of reporting period.
Commercial Substance- a new notion and is defined as the
Non adjusting Events-provide indicative of conditions
event or transaction causing the cash flows of the entity to
that arise after the end of the period.
change significantly by reason of the exchange.
CHAPTER 14
Residual Value or Salvage Value- the estimated net amount
PAS 16(PROPERTY, PLANT AND EQUIPMENT OR PPE)
currently obtainable if the asset is at the end of the useful life.
Property, plant and equipment are tangible asset that are used
in production or supply of goods and services, for rental
Useful life-is the period an asset is expected to available for
purposes and for administrative purposes.
use by the entity.
a.
Expected usage of the asset
b.
Expected physical wear and tear
It is probable that future economic benefits associated
c.
Technical or commercial obsolescence
with the asset will flow to the entity.
d.
Legal limits for the use of the asset (Ex. Expiry date)\
Recognition of PPE
a.
b.
The cost of the asset can be measured reliably.
Depreciation Method- shall be reflect the pattern in which the
Measurement at recognition
future economic benefits from the asset are expected to be
An item of PPE that qualifies for recognition as an asset shall
consumed by the entity.
measured at cost.
Straight line Method- the annual depreciation charge is
Elements of cost
a.
calculate by allocating the depreciable amount equally
Purchases price (including import duties and
nonrefundable purchase taxes, after deducting trade
Production Method- assumes that the depreciation is more a
discounts and rebates.)
function of use rather than passage of time,
b.
Cost directly bringing the asset to the location
c.
Initial estimate of the cost of dismantling and
Diminishing balance or accelerated methods- provide higher
removing the item and restoring the site.
depreciation in the earlier years and lower depreciation in the
Directly Attributable Costs
later years of useful life of an asset.
a.
Cost of employee benefits
b.
Cost of site preparation
c.
Initial delivery and handling cost
d.
Installation and assembly cost
e.
Professional fees
Government Grant- defines as a assistance by government in
f.
Cost of testing the asset whether if it is functioning
the form of transfer of resources to an entity in return for the
properly.
part or future compliance with certain conditions relating to the
CHAPTER 15
PAS 20 (GOVERNMENT GRANT)
operating activities of the entity.
Cost Model- the PPE are carried at cost
Classification of Government Grant
Revaluation Model- carried at carried at revalued carrying
a.
Grant related to asset
amount.
b.
Grant related to income
Exchange(swap)- measured at fair value plus cash
Government Grant shall be recognized as income on a
-
May gained by share ownership of 20% or more.
systematic basis over the periods in which an entity recognizes
as expenses the related costs for which the grant is intended to
Joint control- the contractually agreed sharing of control over
compensate.
an economic activity.
Government Assistance- is a action by the government
Example of related parties
designed to provide an economic benefit specific to an entity or
1.
range of entities qualifying under the criteria.
Affiliates-the parent, the subsidiary and fellow
subsidiaries.
2.
Associates-one party exercise significant influence.
3.
Venture
4.
Key management personnel
CHAPTER 16
5.
Close family members of an individual
PAS 23(BORROWING COSTS)
6.
Individuals
Borrowing Costs are defined as interest and other costs that an
7.
Postemployment benefit plan
entity incurs in connection with borrowing of funds.
a.
Interest expense calculated using the effective
interest method.
b.
Finance charge
c.
Exchange difference arising from foreign currency
Qualifying Asset- is an asset that necessarily takes a
substantial period of time to get ready for the intended use or
sale.
CHAPTTER 18
PAS 28 (INVESTMENT ASSOCIATES)
CHAPTER 17
PAS 24 (RELATED PARTY DISCLOSURES)
Associates- simply defined as an entity over which the investor
has significant influence.
Related party- parties are considered to be related if one party
has:
Significance Influence- the power to participate in the financial
a.
The ability to control the other party
and operating policy decision of an entity, but not control of
b.
The ability to exercise significant influence over the
those policies.
other party.
c.
-
May gained by share ownership of 20% or more.
Joint control over the reporting entity.
a substantial or majority ownership by another investor does
Control- is the power over the investee or the power to govern
not necessarily preclude an investor from having significant
the financial and operating policies of an entity so as to obtain
influence.
benefits.
Measurement of investment in associate
-
Is ownership directly or indirectly through subsidiaries
The investment in associate is measured using the equity
of more than half of the voting power of an entity.
method of accounting.
Significance Influence- the power to participate in the financial
The equity method is based on the economic relationship
and operating policy decision of an entity, but not control of
between the investor and the investee. The equity method is
those policies.
applicable when the investor has a significant influence over
Value in use-the present value of the estimated future cash
the investee.
flows expected to arise from continuing use of an asset and
from the ultimate disposal.
Accounting Procedures- equity method
a.
The investment is initially recognized at cost.
b.
The carrying amount is increased by the investor’s
CHAPTER 19
share of the profit of the investee and decreased by
PAS 34 (INTERIM FINANCIAL REPORTING)
c.
d.
the investor’s share of the loss of the investee.
Interim financial reporting means the preparation and
Dividends received from an equity investee reduce
presentation of financial statements for a period of less than
the carrying amount of the investment.
one year.
Note that the investment must be in ordinary share.
(voting power)
e.
It may be presented monthly, quarterly or semiannually.
Technically, if the investors has significant influence
over the investee, the investee is said to be an
Quarterly interim reports are the most common.
associate.
f.
The investment in associate accounted for using the
CHAPTER 20
equity method shall be reported as noncurrent asset.
PAS 36 (IMPAIRMENT OF ASSETS)
Impairment is a fall in the market value of an asset so that the
If the investor pays more than the carrying amount of the net
recoverable amount is now less than the carrying amount in
assets acquired, the difference is commonly known as “excess
the statement of financial position.
of cost over carrying amount” and may be attributed to the
following:
The carrying amount is the amount in which an asset is
a.
Undervaluation of the investee’s assets
recognized in the statement of financial position after deducting
b.
Goodwill
accumulated depreciation and accumulated impairment loss.
If the assets of the investee are fairly valued, the excess of
Cash generating unit is the smallest identifiable group of
cost over carrying amount of the underlying net assets is
assets that generate cash inflows from continuing use that are
attributable to goodwill.
largely independent of the cash inflows from other assets or
group of assets.
If there is an indication that an investment in associate may be
impaired, an impairment loss shall be recognized whenever the
When an impairment loss is recognized for a cash generating
carrying amount of the investment in associates exceeds
unit, this loss shall be allocated to the assets of the unit in the
recoverable amount.
following order:
The recoverable amount is measured as the higher between
1.
First, to the goodwill
2.
Second, to the noncash assets
fair value less cost of disposal and value in use.
Fair value- the price that would be received to sell asset in an
orderly transaction between market participants at the
measurement date.
CHAPTER 21
PAS 38 (INTANGIBLE ASSETS)
Intangible asset- simply defined as identifiable nonmonetary
asset without physical substance.
-
Must be controlled by the entity as a result of past
c.
Administration and other overhead cost
events and from which future economic benefits are
d.
Cost incurred while an asset capable of
expected to flow to the entity.
-
operating
Ex. Goodwill, software, patent, copyrights
e.
Initial operating loss
There are 3 essential criteria in the definition of an intangible
Internally generated intangible asset-comprise all directly
asset, namely:
attributable costs necessary to create, produce, and prepare
a.
Identifiable- requires that an intangible asset must be
the asset to be capable of operating it in the manner intended
identifiable in order to distinguish it clearly from
by management.
goodwill.
o
An asset is identifiable when:

It is separable.

It arises from contractual or other
legal rights.
b.
c.
Examples of directly attributable costs are:
a.
Costs of materials and services used or consumed in
generating intangible asset.
b.
Control- is the power of the entity to obtain the future
Cost of employee benefits arising from the generation
of the intangible asset
economic benefits flowing from the intangible asset
c.
Fee to register a legal right
and restrict the access of the others to benefits.
d.
Amortization of patent used to generate the intangible
Future Economic benefit-may include revenue from
asset.
the sale of the products or services.
However, the following expenditures are not component if the
Recognition of an intangible asset
a.
b.
cost of an internally generated intangible asset:
It is probable (likely to happen) that future economic
a.
Selling, administrative and other overhead
benefits attributable to the asset will flow to the entity.
b.
Inefficiency and initial operating loss
The cost of the intangible asset can be measured
c.
Expenditure on training staff to operate the asset
reliably.
Recognition as an expense
Initial Measurement of intangible asset
1.
Intangible asset shall be measured initially at cost.
An expenditure on an intangible item that does not
meet the recognition criteria for an intangible asset
shall be expensed when incur.
The cost of a separately acquired intangible asset comprises:
2.
Examples of expenditure that are expensed when
a.
Purchase price
incurred includes
b.
Import duties
a.
Startup costs(launching new item)
c.
Directly attributable costs if preparing the asset
b.
Training costs
o
Cost of employee benefit
c.
Advertising and promotional costs
o
Professional fee
d.
Business relocation or reorganization costs.
o
Cost of testing whether the asset is
Subsequent expenditure
functioning properly.
Subsequent expenditure in intangible asset shall be
recognized as expense.
Cost which are not capitalizable
a.
Cost of introducing new product or services
The reason is that the most subsequent expenditures are likely
b.
Cost of conducting business in a new
to maintain only the expected future economic benefits
location
embodied in the intangible asset.
Measurement after recognition
1.
Cost model
2.
Revaluation model
Agricultural produce- is the harvested product of an entity’s
biological assets
Harvests- detachment of produce from a biological asset or the
Amortization- is the systematic allocation of the amortizable
cessation (killing) of a biological assets’ life processes.
amount of an intangible asset over the useful life
Agricultural activity- is the management by an entity of the
Research and Development- intended for internally generated
biological transformation and harvest of biological assets for
intangible asset
sale or for conversion into agricultural produce or into
additional biological assets.
Research- is original and planned investigation undertaken
with the prospect of gaining scientific or technical knowledge
Agricultural transformation- comprises the processes of
and understanding.
growth, degeneration, production and procreation that cause
qualitative or quantitative changes in a biological asset.
Development- is the application of research findings or other
1.
Asset changes through:
knowledge to plan or design for the production of new product.
a.
Growth- increase in quantity or improvement
in quality
CHAPTER 22
b.
Degeneration- decrease in quantity
PAS 40 (INVESTMENT PROPERTY)
c.
Procreation- creation of additional living
Investment property-identified as property (land or building)
held by an owner or by a lessee under a finance lease to earn
animals and living plants.
2.
Production of agricultural produce
rentals or for capital appreciation or both.
-
Examples of investment property:
Recognition
o
land held for long-term capital appreciation,
1.
An entity has its controls on its asset
o
land held for a currently undetermined use,
2.
It is probable
o
building owned by the reporting entity leased
3.
Can be measured reliably.
out
o
o
building that is vacant but is held to be
Measurement
leased out
Biological asset and Agricultural produce shall be measured at
property that is being constructed or
fair value less cost of disposal.
developed for future use
Agricultural produce harvested shall be measured at fair value
Any movable property cannot qualify as investment property.
less cost of disposal at harvested period.
An investment property is not held:
Agricultural land-is not deemed a biological asset. Agricultural
a.
For production
land is under the PAS 16 property, plant and equipment.
b.
For sale of ordinary course of business.
Bearer plants- are solely to grow agricultural produce over
CHAPTER 23
PAS 41 (AGRICULTURE)
Biological asset- are living animals and living plants.
several period.
-
Shall be accounted to PAS 16 property, plant and
-
equipment because of its operation is similar to
manufacturing.
-
Also known as purchasing power or price level
accounting.
-
The objective of the constant peso accounting is to
Examples of bearer plants; trees that produce fruits,
report elements of the financial statements in terms of
the grape vines
pesos that have the same purchasing power.
Not considered as bearer plants are; trees grown for
logs and lumber, and annual crops.
The traditional concept of preparing financial statements based
Agricultural produce from bearer plants remains to
on historical cost is known nominal peso accounting.
PAS 41.
Monetary items- as money held and assets and liabilities to be
Plants that has dual use are considered as biological asset.
received or paid in fixed or determinable amount of money.
-
Bearer animals- may held solely for the produce that they bear.
-
Monetary items are not restated because they are
automatically stated in terms of current purchasing
Bearer animal remains to PAS 41 or still recorded as
power of the peso.
biological asset.
Nonmonetary items-is the absence of a right to receive or an
CHAPTER 24
PAS 29 (HYPER INFLATION)
obligation to deliver a fixed or determinable amount of money.
-
Hyper Inflation- is a matter of judgment.
Nonmonetary items are those assets that are affected
in hyper inflations.
Hyperinflation is indicated by characteristics of the economic
Nonmonetary items are restated in preparing constant
peso financial statements.
environment of a county which include but are not limited to the
following:
a.
The general population prefers to keep its
wealth in nonmonetary assets or in relatively
stable foreign currency.
b.
The general population regards monetary
amounts in terms of local currency but in
terms of relatively stable foreign currency.
c.
Sales and purchases on credit take places at
Formula for restatement
𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑎𝑡 𝑡ℎ𝑒 𝑒𝑛𝑑 𝑜𝑓 𝑡ℎ𝑒 𝑝𝑒𝑟𝑖𝑜𝑑
𝑥 ℎ𝑖𝑠𝑡𝑜𝑟𝑖𝑐𝑎𝑙 𝑐𝑜𝑠𝑡
𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑛 𝑎𝑐𝑞𝑢𝑖𝑠𝑖𝑡𝑖𝑜𝑛 𝑑𝑎𝑡𝑒
General Price Index- the index number used for restatement is
known as general price index constructed by government.
-
prices in the economy has changed over time.
prices that compensate for the expected loss
of purchasing power during the credit period
even if the period is short.
d.
Interest rates, wages and prices are linked to
a price index.
e.
The cumulative rate over 3 years is
approaching or exceeds 100%.
Constant Peso Accounting- the restatement of conventional or
historical financial statements in terms of the current
purchasing power of the peso through the use of index
number.
Designed to show how much the overall level of
Inflation-an increase in the general price index means that the
purchasing power of money has decreased.
Deflation-adecrease in the general price index means that the
purchasing power of money has increased.
Purchasing power- means the goods and services that money
can buy.
CHAPTER 25
PAS 37 (PROVISION, CONTIGENT LIABILITY AND ASSET)
Provision-is an existing liability of uncertain timing or uncertain
Onerous contract- a contract in which the unavoidable costs of
amount.
meeting the obligation under the contract exceed the economic
-
The essence of a provision is that there is uncertainty
benefits expected to be received under it.
about the timing or amount of the future expenditure.
-
Shall be reviewed at every end of the reporting period
Contingent liability- is a possible obligation that arises from the
and adjusted to reflect the current best estimate.
past event and whose existence will be confirmed only by the
Shall be used for expenditures for which the provision
occurrence or nonoccurrence of one or more uncertain future
was originally recognized.
events not wholly within the control of the entity.
Provision shall not be recognized for future operating
-
losses.
events but is not recognized because it is not
Examples: Warranties, environmental contamination,
probable that an outflow of resources embodying
decommissioning or abandonment costs, court cases
economic benefits will be required to settle obligation
and guarantee.
or the amount of the obligation cannot be measured
Recognition
a.
The entity has a present obligation, legal or
reliably.
-
constructive, as a result of past events.
b.
Is a present obligation that arises from the past
It is probable that an outflow of resources embodying
A contingent liability shall not be recognized in the
financial statements but shall be disclose only.
-
economic benefits would be required to settle the
If a contingent liability is remote, no disclosure is
necessary.
obligation.
c.
The amount of the obligation can be measured
Contingent Asset- as a possible asset arises from past events
reliably.
and whose existence will be confirmed only by the occurrence
or nonoccurrence of one or more uncertain future events not
Present obligation
Legal obligation- is an obligation arising from a contract,
wholly within the control of the entity.
-
legislation or other operation of law.
Constructive obligation-exists when the entity from an
Shall not be recognized because this may result to
recognition of income that may never be realized.
-
Only disclosed when it is probable.
-
Only if possible or remote no disclosure is necessary.
established pattern of practice or stated policy has created a
valid expectation that will accept certain responsibilities.
CHAPTER 26
PAS 32 (FINANCIAL INSTRUMENT- PRESENTATION)
Past events that leads to a present obligation is called an
Financial instrument- defines a financial instrument as any
obligating event.
contract that gives rise to both a financial asset of one entity
and a financial liability or equity instrument of another entity.
An obligating events is an event that creates legal or
-
Characteristics: must be a contract, are at least two
constructive obligation because the entity has no realistic
parties to the contract, shall give rise to a financial
alternative but to settle the obligation created by the events.
asset of one party and financial liability or equity
instrument of another party.
The best estimate is the amount that an entity would rationally
-
Examples: cash in the form of notes and coins, cash
pay to settle the obligation at the end of reporting period or to
in form of checks, cash in banks, trade discounts,
transfer it to a third party at the same time.
note and loan, debt security, equity security
Cash or currency- a financial asset because it represents the
medium of exchange and is therefore the basis on which all
transactions are measured and recognized in financial
statements.
Share warrants-attached to a bond may be detachable (can be
separate) or non-detachable (cannot separate).
Deposit of cash- is a financial asset because it represents the
contractual right of the depositors to obtain cash from the bank
Convertible bonds- give the holders the right to convert their
or to draw a check against the balance in favor of a creditor in
bondholding into share capital of the issuing entity within a
payment of a financial liability.
specific period of time.
-
Includes: trade account receivable, notes receivable,
loans receivable, and bonds receivable.
CHAPTER 27
PAS 12 (INCOME TAX)
Nonfinancial assets
a.
Physical assets (such as inventory, and PPE)
b.
Intangible assets (such as patent and trademark)
c.
Prepaid expense
d.
Right of use asset or leased asset
Deferred tax accounting is applicable to all entities, whether
public or nonpublic entities.
A public entity is an entity:
a.
Whose equity and debt securities are traded in a
stock exchange or over-the-counter market.
Financial liability- any liability that is a contractual obligation:
a.
b.
To deliver cash or other financial asset to another
Whose equity or debt securities are registered with
SEC in preparation for sale of the securities.
entity.
b.
-
To exchange financial instruments with another entity
Accounting income-is the net income for the period before
under conditions that are potentially unfavorable.
deducting income tax expense.
Examples: trade account payable, notes payable,
loans payable, and bonds payable
Taxable income-the income for the period determined in
accordance with the rules established by taxation. (BIR)
Nonfinancial liabilities
a.
Deferred revenue and warranty obligations(outflow)
Permanent differences-are items of revenue and expense
b.
Income tax payable (imposed by law and non-
which are included in either accounting income or taxable but
contractual)
will never be included in the other.
c.
Constructive obligations(do not arise from contract)
-
Pertains to nontaxable revenue and nondeductible
expenses.
Equity instrument-is a very brief succinct (few words to state or
-
They have no future tax consequence.
express new idea). It reflects the basic accounting equation
-
Examples: interest income on deposits, dividends
that an equity equals asset minus liability.
-
-
receivable, life insurance premium, and tax penalties.
Is any contract that evidences a residual interest in
the assets of an entity after deducting all of the
Temporary differences-are items of income and expenses
liability.
which are included in both accounting income and taxable
Includes: ordinary share capital, preference share
income but at different time periods.
capital and warrant or option.
-
Give rise either to a deferred tax liability or deferred
tax asset.
Common examples of compound financial instrument are:
a.
Bonds payable issued with share warrants
Deferred tax liability-shall be recognized for all taxable
b.
Convertible bonds payable
temporary differences.
-
Is the amount of income tax payable in future periods
with respect to a taxable temporary differences.
-
Arises when accounting income is higher than taxable
income because of future taxable amount.
Accounting income higher than taxable income
1.
Revenues and gains are included in accounting
income of the current period are taxable in future
periods.
2.
Expenses and losses are deductible for tax purposes
in the current period but deductible for accounting
purposes in future periods.
Deferred tax asset-shall be recognized for all deductible
temporary differences and operating loss carryforward when it
is probable that taxable income will be available against the
deferred taxable asset can be used.
-
An excess of tax deductions over gross income in a
year that may be carried forward to reduce taxable
income in a future year.
-
Arises when taxable income is higher than accounting
income because of the future deductible amount.
Taxable income higher than taxable income
1.
Revenues and gains are included in taxable income
of the current period are accounting income in future
periods.
2.
Expenses and losses are deductible accounting
income in the current period but deductible for tax
purposes in future periods.
Current tax liability- is the current tax expense or the amount of
income tax actually payable. This is classified as current
liability.
-
Shall be measured using the tax rate that has been
enacted and effective at the end of the reporting
period.