CONCEPTUAL FRAMEWORK AND ACCOUNTING
STANDARDS (CHAPTER 1-5)
2.MEASURING – technical, assigning of peso
amounts (Philippine Peso)
CHAPTER 1: Accountancy Profession
Historical Cost – original acquisition cost, most
common measure
DEFINITION
1. ASC “Accounting is a service activity, useful in
making economic decision”
2. AICPA “ - is the art of recording, classifying,
and summarizing in a significant manner and in
terms of money, transactions and events which
are in part at least of a financial character and
interpreting the results thereof”
3. AAA “...is the process of identifying,
measuring and communicating economic
information to permit informed judgment and
decision by the users of the information”
Purpose – provide quantitative info to be useful
in making an economic decision
IMPORTANT POINTS
1.Quantitative information
2.Financial in nature
3.Useful in decision making
COMPONENTS
1.IDENTIFYING – analytical
-Recognition – accountable/quantifiable
-Effect on A,L,E
-Non-recognition – hiring, death, contract,
meeting
-External transactions – involving one entity and
another
Current Value – fair value, value in use, current
cost, fulfillment val
3.COMMUNICATING – formal,
preparing/distributing accounting reports to
potential users.
-Accounting is the universal language of
business
-Recording/Journalizing – record business
transactions
-Classifying – sorting/grouping similar
interrelated transactions
-Ledger – group of accounts
-Summarizing – preparation of financial
statements
-Financial Statements – key product of the info
system
-Financial reports “how well an entity is
performing in terms of profit and loss and
where it stands in financial terms”
-Overall Objective: provide quantitative about a
business useful to statement users
(owners/creditors) in making economic
decisions
Primary Task: supply financial info to help users
make informed judgment and better decision
Essence: decision-usefulness
-Internal transactions – involving the entity only
ACCOUNTANCY PROFESSION
-Production – resources transformed into
products
RA No. 9298: Philippine Accountancy Act of
2004– law regulating the practice of
accountancy
-Casualty – unanticipated loss from a disaster
(act of God)
Board of Accountancy (BOA) – body authorized
by law to promulgate rules affecting practice of
accountancy profession in PH,
preparing/grading the PH CPA Exam
Certificate of Accreditation – issued to CPA in
public practice, min of 3 years of experience in
taxation/auditing
Securities and Exchange Commission – not
register any corporation for practice of public
accountancy
Certificate of Registration – valid for 3 years,
renewable every 3years
Custody and Administration of Public Funds
BIR, COA, DOBM, SEC, BSP
CONTINUING PROFESSIONAL DEVELOPMENT
(CPD)
Inculcation and acquisition of advanced
knowledge skill, and moral values after the
initial registration of the CPA for assimilation
into professional practice and lifelong learning
Technical skill and competence of CPA
RA No. 10912 – mandating and strengthen the
CPD program for all regulated professions.
MAIN AREAS (Profession)
1. PUBLIC ACCOUNTING
CPD Credit Units/Hours
1. Auditing – primary service
-120 CPD credit unit’s accreditation
External Auditing – attest function
-15 CPD credit units for renewal
2. Taxation – preparation of annual income tax
returns and
- CPA -Permanently exempted from renewal 65
y/o
determination of tax consequences
ACCOUNTING VS. AUDITING
3. Management Advisory Services – services to
clients on
Broad sense, accounting embraces auditing.
Phases of business conduct and operations
2. PRIVATE ACCOUNTING
Acctg staff, chief accnt, internal auditor,
controller (highest)
Major Objective(private accountant): assist
management in planning/controlling the
entity’s operations
Private Acctng : Maintaining records, producing
financial reports, preparing budgets,
controlling/allocating resources of entity,
determination of taxes
3. GOVERNMENT ACCOUNTING – involving
receipt, disposition of gov’t funds and property
Focus of Govt Acctng:
Auditing is one of the areas of accounting
specialization.
Limited sense- accounting is essentially
constructive in nature.
Auditing is analytical, the work of an auditor
begins when the work of the accountant ends.
Works after the financial statements are
prepared.
ACCOUNTING VS. BOOKEEPING
Bookkeeping is procedural and largely
concerned with development and maintenance
of accounting records.
-the “how of accounting”
Accounting is conceptual and is concerned with
the why, reason or justification for any action
adopted.
Bookkeeping -element of accounting as
arithmetic.
FRSC – Financial Reporting Standards Council
-Replaced the Accounting Standards Council
-Accounting standard setting body created by
PRC
ACCOUNTING VS. ACCOUNTANCY
-To assist the Board of Accountancy in its power
and functions
Accountancy- refers to profession of accounting
practice
-Highest hierarchy of GAAP
Accounting- is used in reference only to a
particular field of accountancy such as PA, PA,
GA.
-Approved statements:
PAS – Philippine Accounting Standards
PFRS – Philippine Financial Reporting
Standards
Composition of FRSC
1 Chairman and 14 Representatives
PIC – Philippine Interpretations Committee
-By FRSC and replaced the Interpretations
Committee
-Prepare interpretations of PFRS for approval of
FRSC
-Authoritative guidance
GAAP – generally accepted accounting
principles
-Like laws that must be followed in financial
reporting
-Political process incorporates political actions
IFRIC – International Financial Reporting
Interpretations Committee
-United Kingdom and replaced the Standing
Interpretations Committee
IASC – International Accounting Standards
Committee
-Independent private sector body
Accounting Standards
-Identify proper accounting practices for FS
-Create common understanding
-Ensure comparability and uniformity
-Achieve uniformity around the world
Objectives: IASC
-Formulate and publish in the public interest
accounting standards
-Promote worldwide acceptance and
observance
-Improvement and harmonization relating to FS.
IN THE RNATIONAL ACCOUNTING STANDARDS
BOARD
IASB – International Accounting Standards
Board
-Replaces IASC
-Publishes standards in series of
pronouncements (IFRS)
-Continue to be designated as
International Accounting Standard
CHAPTER 2: OBJECTIVE OF FINANCIAL
REPORTING
CONCEPTUAL FRAMEWORK FOR FINANCIAL
REPORTING
-Complete, comprehensive, single document
promulgated by IASB
-Summary of terms and concepts that underlie
the preparation/presentation of FS for external
users
-For general purpose financial reporting and
overall theoretical foundation for accounting
FOUNDATION FOR STANDARDS
1. Contribute to transparency – Enhancing
international comparability and quality of
financial information
Standard-setting process
-Research
Discussion paper
-Exposure draft
2. Strengthen accountability- reducing
information gap
3. Contribute to economic efficiency- helping
investors to identify opportunities and risk
across the world.
-Accounting standard
PURPOSES OF REVISED CONCEPTUAL
FRAMEWORK
IFRS – International Financial Reporting
Standard
a) Assist IASB: develop IFRS Standards
-Uniform and globally accepted FR Standards
b) Assist preparers of FS: develop consistent
accounting policy (when no Standard applies)
-Factors deciding to move to IAS
-Common language and removal of free choices
of accounting treatments
PFRS – Philippine Financial Reporting Standards
-Corresponds to IFRS
-PAS numbered same as their counterpart IAS
-Philippines Interpretations which correspond
to Interpretations of IFRIC, SIC, PIC
c) Assist preparers of FS: develop accounting
policy (when allows a choice)
d) Assist all parties: understand/interpret IFRS
Standards
AUTHORITATIVE STATUS OF CONCEPTUAL
FRAMEWORK
1st – Standard/Interpretation (overrides CF)
2nd – Conceptual Framework (not an IFRS, not
overrides Standard)
USERS OF FINANCIAL INFORMATION
-Provide resources to the entity
-Primary Users – general purpose financial
reports are primarily directed (must rely)
SPECIFIC OBJECTIVES OF FINANCIAL
REPORTING (to provide information)
-Existing and Potential Investors – risk/return
a) Economic Decisions – investors to buy, sell,
hold equity/creditors to provide or settle loans
provided by investment
-Lenders and Other Creditors – if amounts
owing to them will be paid
b) Assessing Cash Flow Prospects – principal and
interest payments, future net cash inflows to
entity
Other Users – reports are not directed to them
primarily
c) Economic Resources and Claims
Employees – stability/profitability of entity and
their benefits
Customers – continuance of entity
Governments and their Agencies – allocation of
resources and activities, determine taxation
policies
Public – trend and the range of its activities
OBJECTIVE OF FINANCIAL REPORTING
-Forms the foundations of the CF
-Overall objective of Financial Reporting:
provide financial info about the reporting entity
useful to primary users in making decisions
about providing resources to the entity
-Why, purpose, goal of accounting
-Financial Reporting – provision of financial info
about an entity to external users useful for
economic decisions and effectiveness of entity’s
management
-Annual financial statements – way of providing
FS to external users
-Nonfinancial information – description of
products/listing officers and directors
TARGET USERS/PRIMARY USERS
-Have the most critical and immediate need for
financial information
-Economic Resources – assets
-Claims – liabilities and equity
-Liquidity – availability of cash in near future to
cover currently maturing obligation
-Solvency – availability of cash over a long term
to meet financial commitment
-Financial Position – financial strength and
weakness
d) Changes in Economic Resources and Claims
-Financial Performance – results of operations,
assess ability to generate future cash inflows
from operations
ACCRUAL ACCOUNTING
-Financial Performance must be measured in
ACCRUAL BASIS ACCOUNTING
-No money involved
-Only recognized when they occur
-Income when earned and Expense when
incurred
LIMITATIONS OF FINANCIAL REPORTING
a) Don’t provide all information needed by
primary users
b) Not designed to show value of entity,
estimate value of entity
c) Provide common information, can’t
accommodate every request for info
d) Based on estimate and judgment rather than
exact depiction
MANAGEMENT STEWARDSHIP – predicting
how management will use entity’s economic
resources in future periods
Your peso today is worth more than
tomorrow.” TIME VALUE MONEY
CHAPTER 3: QUALITATIVE CHARACTERISTICS
QUALITATIVE CHARACTERISTICS
Qualities/attributes that make info useful to
users
1. FUNDAMENTAL QUALITATIVE
CHARACTERISTICS
Application:
-Identify if economic phenomenon is useful
-Identify type of information (relevant and
faithfully represented)
-Determine if information is available
1. RELEVANCE – capacity of information to
influence a decision
- known as “Doctrine of Convenience”
-Subquality of relevance based on
nature/magnitude
- depends on Relative size rather than absolute
size, may be immaterial for another
4. ITEM MATERIAL - if it could reasonably
affect economic decision of the primary users of
FS.
5. Rounding off amounts
IMPORTANT ASPECTS
a) Could Reasonably be Expected to Influence
-Expected to influence threshold insures
that information is capable of
influencing economic decision.
b) Obscuring Information – omitting or
misstating the information
- FS is not readily understood/not clearly
expressed
c) Primary Users – primarily affected by general
purpose FS are primarily directed
1. FACTORS OF MATERIALITY
1. Size of the Item
-Information that does not bear on an economic
decision is useless.
2. Size of the Entity
INGREDIENTS:
3. Nature of the Item
1. Predictive Value – forecast/predict future
outcome
2. Confirmatory Value – if it provides feedback
about previous evaluations
2. FAITHFUL REPRESENTATION –represented in
words and numbers, description/figures must
match what really existed, properly accounted
INGREDIENTS
MATERIALITY – practical rule that strict
adherence to
a) Completeness – facilitates understanding
and avoids erroneous disclosure, all
necessary description/explanation
GAAP is not required when items are not
significant enough to affect the FS.
Standard of Adequate Disclosure –
principle of full disclosure, clearly reported
Notes to FS – narrative
description/disaggregation
b) Neutrality – without/free from bias,
principle of fairness
c) Prudence – exercise of care and caution,
deal with uncertainties
d) Conservatism – alternative that has
least effect on equity
•Contingent Loss – as a “provision” if the
loss is profitable and amount can be reliably
measured
•Contingent Gain – not recognized,
disclosed only
Horizontal Comparability
(Intracomparability) – within an entity, one
accounting period to another
Comparability between entities – 2 or more
entities engaged in same industry
-Dimensional Comparability
(Intercomparability) – across entities
-Consistency – uniform application from
period to period within entity, helps to
achieve comparability
Comparability- the goal
Consistency- helps to achieve that goal
•Full disclosure of the change
It is to emphasized that conservatism is not
license to deliberately understate net
income and net assets.
b) Understandability –
comprehensible/intelligible,
clearly/concisely, for users who have
reasonably knowledge of business
c) Free from Error – no errors/omissions,
accurately as an estimate
c) Verifiability – implies consensus that is
supported by evidence to assure users
Measurement Uncertainty – monetary
amount can’t be observed, estimated
-Direct Verification – direct observation
-Can affect level of faithful representation if
the level of uncertainty in providing an
estimate is high.
-Indirect Verification – uses formula,
technique, recalculating
Substance Over Form – substance prevails
d) Timeliness – financial info must be
available and communicated early enough
when decisions are to be made.
- Not considered a separate component of
faithful representation because it would be
redundant
-Cost – is a pervasive constraint on
information that can be provided by
financial reporting.
2. ENAHNCING QUALITATIVE
CHARACTERISTICS – increase the usefulness
of the financial Information
-Cost Constraint – consideration of the cost
incurred, judgment process
-enhance qualitative characteristics to
presentation of FS.
a) Comparability – ability to bring together,
likeness and difference
•Benefit should exceed cost incurred
-Judgemental Process- Evaluation of Cost
constraint
-Cost Benefit Principle, financial information
is not free
CHAPTER 4: FS AND REPORTING ENTITY,
UNDERLYING
-asset recorded at cost, As a rule market
value are ignored
ASSUMPTIONS
-abandoned when there’s persistent losses
and operations terminated
FINANCIAL STATEMENTS – info about
economic resources, claims against entity,
changes in economic resources and claims
-Statement of Financial Position - ALE
-Statement of Financial Performance - IE
-Other Statements and Notes
TYPES OF FS
1. Consolidated FS – Provide information
about ALE IE to both parent and its
2. ACCOUNTING Entity
–specific business org. Sole, Part, Corpo.
- entity is separate from the owner to have
fair presentation, each business is
independent, single economic entity
3. TIME PERIOD – completely accurate
report and can’t be obtained until entity is
dissolved/liquidated, one year period
subsidiaries
Calendar Year – 12month ends on Dec. 31
2. Unconsolidated FS – parent alone
Natural Business Year – 12month ends on
any month
3. Combined FS – comprises 2 or more
entities not linked by a parent and
subsidiary relationship
REPORTING ENTITY – entity required to
prepare financial statements, not
necessarily a legal entity
REPORTING PERIOD – period when FS are
prepared
ALE – end of reporting period
IE – during reporting period
-
Provide Comparative Information for at
least one preceding reporting period
ACCOUNTING ASSUMPTIONS (POSTULATES)
– basic notions or fundamental premises,
accounting process is based,
bedrock/foundation of accounting inorder
to avoid understanding
1. GOING CONCERN – continuing in
operation indefinitely/ foreseeable future
-very foundation of cost principle
(slack season)
4. MONETARY UNIT
-Quantifiability – stated in peso (PH)
-Stability of the Peso – purchasing power of
the peso is stable/constant
•Stable Peso Postulate – adjustments are
unnecessary to reflect any changes in
purchasing power, not necessarily valid
CHAPTER 5: ELEMENTS OF FS
ELEMENTS OF FS – quantitative information
reported in the statement of financial
position and income statement, building
blocks
Equity – residual interest in the assets after
deducting liabilities
ASSET – present economic resource by
entity as a result of past events
Economic Resource – produce economic
benefits
Economic Benefits – no longer need to be
expected to flow to the entity
ESSENTIAL CHARACTERISTICS
-Present economic resources
-Right to produce economic benefits
-Controlled by entity as a result of past
events
1. Right
a. Correspond to an obligation of another
entity (favorable terms)
-Present obligation as a result of past event
-Liability is not recognized if not
incurred.
1. Obligation – duty or responsibility that
can’t be avoided
Legally enforceable – as a consequence of
binding contract/statutory requirement
Constructive obligations – maintain good
business relations and equitable manner
2. Transfer of an Economic Resource –
unfavorable terms and uncertain future
event
3. Past Event
b. Don’t correspond to an obligation of
another entity
-exists as a result of past events
c. Established by contract/legislation
– has already obtained economic benefits
and must transfer economic resource
2. Potential to Produce Economic Benefits
-Don’t need to be certain that the right will
produce
-Right already exist
3. Control of an Economic Resource
-Ability to prevent others from using such
asset
-If an entity enforces legal rights
-No legal rights, no other party can benefit
from asset
LIABILITY – present obligation to transfer
economic resource, IAS 37
ESSENTIAL CHARACTERISTICS
A) Entity has an obligation
-entity liable must be identified
B) Obligation to transfer an economic
resource
INCOME – increase in AE, decrease in L
Revenue – ordinary regular activities,
regularity
Gains – don’t arise ordinary regular
activities, disposal, expropriation
EXPENSE – decreases in AE, increases in L
Losses – ordinary regular activities
Losses – don’t arise if resulting from
disasters
STATEMENT OF FINANCIAL PERFORMANCE
Profit or loss and presenting other
comprehensive income
Recycling – permitted as long as it would
result to relevant and faithfully represented
information about financial performance