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CONCEPTUAL FRAMEWORKS AND ACCOUNTING STANDARDS
Course Code: ACC 108
Course Description: Conceptual Frameworks and Accounting Standards
Course: BS Accountancy
Faculty Name: ELVIRA C. BATERINA
Course Description: Conceptual framework is a system of ideas and objectives
that lead to the creation of a consistent set of rules and standards. In accounting
the rule and standards set the nature, function and limits of financial accounting
and financial statements. This may also assist prepares of financial statements in
developing accounting policies for transaction or events not covered by existing
standards.
ENVIRONMENTAL AND CONCEPTUAL FRAMEWORK FOR FINANCIAL
ACCOUNTING AND REPORTING
MODULE 1
The Environment of Financial Accounting and Reporting
Learning Objectives
1. Explain the impact of accounting on the decisions of various users of
financial information at all levels of the economy.
2. Understand the basic objective of financial reporting.
3. Distinguish between external and internal users of accounting information.
4. Explain the need to develop accounting standards.
5. Explain the development and sources of financial reporting standards.
6. Appreciate the need to harmonize global accounting standards
7. Identify sources of accounting standards and other organizations the
influences PFRS.
8. Describe the major challenges in financial reporting environment.
9. Know the measures to enhance the existing system of financial reporting.
10.Explain the issues related to ethics.
11.Describe the role that external auditor play in the financial reporting
environment.
Accounting is an information system designed to identify, collect, measure, and
communicate economic information about a business entity (firm) to those having
interest in the financial affairs of the entity.
Business is conducted by investor-owned enterprises, managed and controlled by
professional managers, who are held responsible for providing reports to absentee
owners, creditors and other external interested parties. The process of developing
general purpose financial statements and reporting general purpose accounting
information to various external users is called financial accounting. In this
environment, financial accounting and reporting communicate information about
the economic effects of accounting transactions and other events on a business
entity to these external user groups.
Accountants are communicators; Accountancy is the art of communicating financial
information about a business entity to users such as shareholders, creditors and
managers. The communication is generally in the form of financial statements
that show in money terms the economic resources under the control of the
management.
Most accounting systems are designed to generate information for both internal and
external reporting. The external information is much more highly summarized than
the information reported internally. A company does not want to disclose every
detail of its internal financial dealings to outsiders. For this reason, external
financial reporting is governed by an established body of standards or principles
that are designed to carefully define what information a firm must disclose to
outsiders. Financial accounting standards also establish a uniform method of
presenting information so that financial reports for different companies can be more
easily compared.
The International Accounting Standards Board (IASB), the International StandardSetting body is committed to narrowing these difference by seeking to harmonize
regulations, accounting standards and relating to the preparation and presentation
of financial statements. It believes that further harmonization can best be pursued
by focusing on financial statements that are prepared for the purpose of providing
information that is useful in making decisions.
This module is divided into:






OBJECTIVE OF FINANCIAL REPORTING
ACCOUNTING INFORMATION USERS AND THEIR NEEDS
THE NEED TO DEVELOP STANDARDS
DEVELOPMENT AND SOURCES OF FINANCIAL REPORTING STANDARDS
SOURCES OF ACCOUNTING STANDARDS
FINANCIAL REPORTING FRAMEWORK




MAJOR CHALLENGES IN FINANCIAL REPORTING ENVIRONMENT
ENHANCING THE EXISTING SYSTEM OF FINANCIAL REPORTING
ETHICS IN THE ACCOUNTING ENVIRONMENT
THE ROLE OF EXTERNAL AUDITORS
OBJECTIVE OF FINANCIAL REPORTING
The objective of general purpose financial reporting is to provide financial
information that is useful to users in making decisions relating to providing
resources to the entity.
User’s decisions involve decisions about
 buying selling or holding equity or debt instruments
 providing or settling loans and other forms of credit
 voting , or otherwise influencing management’s actions
To make these decisions, users assess
 prospects for future net cash to the entity
 management’s
stewardship of the entity’s economic
resources
To make both these assessments, users need information about both
 the entity’s economic resources, claims against the entity and
changes in those
resources and claims
 how efficiently and effectively management has discharged its
responsibilities to use the entity’s economic resources.
ACCOUNTING INFORMATION USERS AND THEIR NEEDS
The basic role of accountants is to provide useful economic information to external
decision makers (users) as explained below:
a.
External decision makers include present and potential stockholders, investors,
creditors, suppliers, customers, legislators, trade associations and others, who lack
direct access to the informations generated by the internal operations of the
business and must rely on general purpose financial statements to make their
investment, credit and public policy decisions.
1) Investors. The providers of risk capital and their advisers are concerned
with the risk
inherent in and return provided by their investments. Shareholders
require periodic
information that the managers are accounting properly for the resources
under their
control. This information helps the shareholders to evaluate the
performance of the
manager. Shareholders are also interested in information such as the
enterprise’s ability to
generate cash and the timing and certainty of its generation. They also
need information to
help them control the business and make investment decision.
2) Employees. Employees and their respective groups are interested in
information about the
stability and profitability of their employers. They are also interested in
information which
enables them to assess the ability of the enterprise to provide
remuneration, retirement
benefits and employment opportunities.
3) Lenders. Lenders are interested in information that enables them to
determine whether
their loans, and the interest attaching to them will be paid when due.
4) Suppliers and other trade creditors. Suppliers and other creditors are
interested in information that enable them to determine whether amounts owing to
them will be paid when due. Trade creditors are likely to be interested in an
enterprise over a shorter period than lenders unless they dependent upon the
continuation of the enterprise as a major customer.
5) Customers. Customers have an interest in information about the
continuance of an enterprise, especially when they have a long-term involvement
with, or are dependent, on the enterprise.
6) Governments and their agencies. Governments and their agencies are
interested in the allocation of resources and, therefore, the activities of
enterprises. They also require information in order to regulate the activities of
enterprises, determine taxation policies and as the basis for national income and
similar statistics.
7) Public. Enterprises affect members of the public in a variety of ways. For
example, enterprises may make a substantial contribution to the local economy in
many ways, including the number of people they employ and their patronage of
local suppliers. Financial statements may assist the public by providing information
about the trends and recent developments in the prosperity of the enterprise and
the range of its activities
b.
Internal decision makers are the managers of a business entity, responsible
for managing efficiently and effectively, and who have the power and authority to
obtain whatever economic information they need. The process of providing
accounting information to internal decision makers is called managerial accounting.
THE NEED TO DEVELOP STANDARDS
Users of financial accounting statements have both coinciding and conflicting needs
for information of various type. To meet these needs, and to satisfy the
stewardship reporting responsibility of management, companies prepare a single
set of general-purpose financial statements.
The accounting profession ha attempted to develop a set of standard s that are
generally accepted and universally practiced. Otherwise, each company would have
to develop it own standards.
Accounting standards help accountants meet the information demands of users by
providing guidelines and limits for financial reporting. Accounting standards also
improve the comparability of financial reports among different companies.
DEVELOPMENT AND SOURCES OF FINANCIAL REPORTING STANDARDS
Business is increasingly conducted across national borders, companies must be able
to use their financial statements to communicate with external users all over the
world. As a result divergent national accounting practices are now converging to an
overall global standard.
Investors and creditors are demanding that similar accounting methods be used
around the world so that investment options can be compared.
The International Accounting Standards Board (IASB) was formed in 1973 to
develop worldwide accounting standards in an attempt to harmonize conflicting
national standards. The IASB now has a formal working relationship with the
national accounting standards setters from a number of countries, including the
FASB in the United States. For non-U.S. companies that have listed their shares
on U.S. stock eschanges, the SEC accepts financial statements prepared using IASB
standard.
Accounting Variations Among Countries
Despite some similarities, there are at least as many accounting systems as there
are countries, and no two systems are exactly alike.
While accounting practices evolved, there were for example, differences is the
amount of private ownership, the degree of industrialization, the rate of inflation,
and the level of economic growth. Just as the accounting needs of a small
proprietorship and different from those of a multinational corporation, so as the
accounting needs of an underdeveloped, agrarian country different from those of a
highly developed industrial country.
Economic factors, however, are not the only influences. Educational systems, legal
systems, political systems, and sociocultural characteristics also influence the need
for accounting and the direction and speed of its development.
Implications of Differences in Accounting Among Nations
At the present time, the most important reason for understanding different national
accounting systems lies in the increasingly internationalized world of business in
which people buy and sell, invest and disinvest, from one country to another.
When foreign company offers a balance sheet and income statement for analysis,
several things become immediately evident. First, the language and the currency
are different. Second the terminology is different, certain terms (accounts) have no
counterparts in the other language or accounting system. Third, the types and
amount of information disclosed are likely to be different.
National accounting standards made sense when companies raised money, and
investors and lenders looked for investment opportunities, in their home country.
The world capital markets began to globalize over 30 years ago, and the investment
community and the accounting profession quickly recognized the need for a
cooperative international effort in the development of accounting standards and the
benefits of a common global accounting language.
Calls for Global Harmonization of Accounting Standards
As the world’s capital markets globalized in the last quarter of the 20th century,
investors and creditors became increasingly frustrated when trying to compare the
financial statements of companies in different countries. They urged that
accounting standards around the world be harmonized. The International
Accounting Standards Committee was formed in 1973, and it developed a body of
accounting standards suitable for use around the world. In 2001, the IASC was
reorganized into the International Accounting Standards Board.
The IASB’s objective is to raise the quality and consistency of financial reporting
and to have a platform of high quality and improved standards. It aims to bring
about greater transparency and a higher degree of comparability in financial
reporting, both of which benefit the investors and are essential in achieving the
goal of one uniform and globally accepted financial reporting standards.
In 2002, the European Union adopted an accounting regulation requiring all
publicly traded EU companies to use International Financial Reporting Standards
(IFRSs) developed by the IASB, rather than their home-country standards starting
2005. Some non-European countries have also replaced their national standards
with IFRSs, while other countries such as United States, Japan, Thailand, Taiwan
and others have adopted programs that retain their national standards but
converge them as closely as possible with IFRSs. As of 2006, there were already
102 countries including the Philippines which have fully adopted the IFRSs
Accounting Standards-Setting in the Philippines
In 1981, the Philippine Institute of Certified Public Accountants (PICPA) created the
Accounting Standards Council (ASC) to formalize the accounting standard-setting
function in the Philippines. Its main function was to establish and improve
accounting standards that would be generally accepted in the Philippines. The
approved statements of the ASC were called, “Statement of Financial Accounting
Standards (SFAS) which were still principally based on accounting standards issued
by the US—based Financial Accounting Standard Board (FASB).
Between 1997 and 2004, the Philippines started adopting the International Financial
Accounting and Reporting Standards promulgated by the International Accounting
Standards Committee (IASC). The IASC was reorganized in 2001 and is now
known as the International Accounting Standard Board (IASB). The decision to
move totally to International Accounting Standards was prompted by the
(a) Support of the Philippine Regulatory Agencies such as the Board of
Accountancy, Securities and Exchange Commission, Bangko Sentral ng
Pilipinas and the Philippine Institute of CPAs (PICPA).
(b)Increasing internationalization of business which heightened the interest
in a common language of financial reporting.
(c) Increasing recognition of International Accounting Standards by the World
Bank, Asian Development Bank and World Trade Organization.
In 2004, the Accounting Standard Council (ASC) was replaced by the Financial
Reporting Standards Council (FRSC). The FRSC is now the accounting standard
setting body in the Philippines created by the Professional Regulation Commission
upon the recommendation of the Board of Accountancy (BOA) to assist BOA in
carrying out its powers and functions provided under Republic Act No 9298, known
as the Philippine Accountancy Act of 2004.
In the same year, the FRSC approved the issuance of the new and revised
Philippine Accounting Standards (PAS) and the new Philippine Financial Reporting
Standards (PFRS) which directly correspond to IASB’s IAS and IFRS. All of the
issued standards took effect on January 1, 2005 which was the date set by FRSC for
Philippines’ full adaptation of th IFRSs.
SOURCES OF ACCOUNTING STANDARDS
Businesses, trade and consumer association, courts, public accounting firms,
individual users, and government can and do influence reporting practice. The
following provides the authoritative support for these accounting standards:
a. International Accounting Standards Board (IASB) (Formerly
International Accounting Standards Council (IASC).
In an attempt to harmonize conflicting standards, the Accounting Standard
Council was formed in 1973 to develop worldwide accounting standards.
The accounting standards produced by the IASB are referred to as
International Financial Reporting Standards (IFRSs) and International
Accounting Standards (IASs).
b. Financial Reporting Standards Council (FRSC)
Standards Council (ASC)
(Formerly Accounting
THE FRSC actively participates in the evaluation and deliberation of proposed
IFRSs forwarded by the IASB to the country’s standard setting body and
submits to the Board of Accountancy its recommendation for the adoption of
the proposed IFRS. Once approved, the IFRS is designated as Philippine
Financial Reporting Standard (PFRS)
Other Organizations Influencing Financial and Reporting Accounting
Standards
c. Securities ad Exchange Commission (SEC). The Securities and
Exchange Commission has the legal authority to prescribe accounting
principles and practices for usually all companies issuing publicly traded
securities.
d. Philippine Institute of Certified Public Accountants (PICPA). The
Philippine Institute of
Certified Public Accountants, the PRC accredited professional organization is
in the forefront in
the standard setting activities in the country.
e. Other professional associations also influence the development of
accounting standards. The Financial Executive Institute (FINEX) is composed
mainly of high level financial executives. The Institute of Management
Accountants (IMA) emphasizes managerial and cost accountancy Each of
these organizations provide input to the Philippine Financial Reporting
Standards (PFRS) through representation in the FRSC. Technical papers and
publications of accounting educators are included as source of accounting
standards.
f. Bureau of Internal Revenue (BIR). The Bureau f Internal Revenue
administers the provisions of
the Internal Revenue Code. They at time influence the choice of accounting
methods and procedures.
FINANCIAL REPORTING FRAMEWORK
A financial reporting framework is vital to financial governance of entities. This is a
set of accounting principles, standards, interpretation and pronouncements that
must be adopted in the preparation and submission of the annual financial
statements of a particular class of entities. It includes, but not limited to the
Philippine Financial Reporting Standards.
MAJOR CHALLENGES IN FINANCIAL REPORTING ENVIRONMENT
While our reporting model has worked well in capturing and organizing financial
information in a useful and reliable fashion, much still needs to be done. For
example, if we move to the year 2030 and look back at financial reporting today,
we might read the following
A. IFRS/PRFS in a Political Environment
The implementation of Financial Accounting and Reporting Standards
affects the interest of many user groups. User groups are possibly the
most influential group in the development of accounting standards. They
consist of those most interested in or affected by accounting rules and
may want particular economic events accounted for an d reported in a
particular way. User groups that may influence the formulation of
accounting standards include:
1.
2.
3.
4.
5.
6.
7.
8.
9.
Business entities
Financial community
Preparers
Government
Industry accounts
CPAs and Accounting firms
Professional organizations (e.g. PICPA, ACPAPP)
Industry public
Academicians
These user groups often target the IASB to pressure it to influence
changes in the existing rules and the development of new ones.
B. The Expectation Gap
The expectation gap – what the public think accountant should do and
what accountant think then can do, is difficult to eliminate. Inspite of the
SEC’s increase in its policy efforts, approving new auditor independence
rules and materiality guidelines for financial reporting, accounting
scandals, poor reporting practices still occur.
Due to the number of fraudulent reporting cases, some sectors question
whether the profession is doing enough. The profession on the other
hand can argue rightfully that accounting cannot be responsible for every
financial catastrophe and it must continue to meet the needs of the
society.
C. Financial Reporting Issues

Nonfinancial measurements. Financial reports fail to provide some
key performance measures widely used by management, such as
customer satisfaction indexes, backlog information, rejection rates on
goods purchased, as well as the results of companies’ sustainability
efforts.

Forward-looking information. Financial Reports fail to provide
forward-looking information needed by present and potential investors
and creditors. One individual noted that financial statements in 2017
should have started with the phrase, “Once upon a time,” to signify
their use of historical cost and accumulation of past events.

Soft assets. Financial reports focus on hard assets (inventory, plant
assets (intangibles). The best assets are often intangible. Consider
Jollibee’s know-how and market dominance, Puregold’s expertise in
supply chain management, and Rustans brand image.

Timeliness. Companies only prepares financial statement quarterly
and provide audited financial annually. Little to no real-time financial
statement information is available.
D. The Constraints on Useful Financial Reporting
Economic decision maker’s must recognize that the information they
receive from accountants constitutes only a part of the information they
need to make sound economic decisions. The financial statements also
have limitations and imperfections which the users should keep in mind .
Some of the constraints are:
Cost - Benefit Balancing
The costs of providing financial information fall initially on the preparer
(the company) and then are passed on to consumers (external users).
These costs include the cost of collecting, processing, auditing, and
communicating the information as well as those associated with losing a
competitive advantage by disclosing the information. The benefits are
enjoyed by diverse group of investors and creditors, by customers
(because they are assured a steady supply of goods and services), and by
the preparer itself (for use in internal decision making). To be reported,
accounting information not only must be relevant and reliable bit it also
must satisfy the benefit/cost constraint. That is, the IASB must have
reasonable assurance that the costs of implementing a standard will not
exceed the benefits.
Balance between Qualitative Characteristics
In practice, a balancing, or trade-off, between qualitative characteristics is
often necessary. Generally, the aim is to achieve an appropriate balance
among the characteristics in order to meet the objective of financial
statements. The relative importance of the characteristics in different
cases is a matter of professional judgment.
True and Fair View Presentation
Financial statements are frequently described as presenting fairly the
financial position, performance and changes in financial position of an
enterprise. Although this framework does not deal directly with such
concepts, the application of the principal qualitative characteristics and of
appropriate accounting standards normally results in financial statements
that convey what is generally understood as presenting fairly such
information.
ENHANCING THE EXISTING SYSTEM OF FINANCIAL REPORTING

Investors have expressed concerns that one-size-fits-all financial reports
do not meet the needs of the spectrum of investors who rely on those
reports. While many individual investors are more interested in summarized,
plain-English reports, market analysts and other investment professionals may
desire information more detailed level than is currently provided.

Companies also express concerns with the complexity of the financial reporting
system. Companies assert that when preparing financial reports, it is
difficult to ensure compliance with the voluminous and complex
requirements contained in SEC reporting rules.

We also need to consider the broader array
ETHICS IN THE ACCOUNTING ENVIRONMENT
Ethics is a term that refers to a code or moral system that provides criteria for
evaluating right and wrong. Because of the importance role of accounting in
society, accountant must maintain high ethical standards and should always be
alert about ethical behavior. The Code of Ethics promulgated by the Board of
Accountancy provides guidelines for practicing accountants.
THE ROLE OF EXTERNAL AUDITORS
An audit consists of examining enough of the company’s records to determine
whether the financial statements are prepared in the applicable financial reporting
standards.
An external auditor, a CPA is an independent professional who conducts the audit
in accordance with the Standards on Auditing.
What he tries to achieve is reasonable assurance that there are no material
misstatements in those financial statements.
References:
Balatbat Cabrera Ma. E. , Royo Ocampo Reynaldo, B. Cabrera Gilbert Anthony, (2018-2019 Edidtion)
Conceptual Framework and Accounting Standards.
https://courses.lumenlearning.com/boundless-accounting/chapter/the-accountingconcept/#:~:text=A%20conceptual%20framework%20can%20be,financial%20accounting%20and%20fin
ancial%20statements.
https://www.iasplus.com/en/standards/other/framework
https://www.ifrs.org/-/media/project/conceptual-framework/fact-sheet-project-summary-andfeedback-statement/conceptual-framework-project-summary.pdf
https://www.fasb.org/jsp/FASB/Page/BridgePage&cid=1176168367774
https://www.charterededucation.com/ifrs/understanding-the-purpose-of-conceptual-framework-forifrs/
https://www.cebookshop.com/index.php?route=product/product&product_id=8030045
http://www.differencebetween.net/business/finance-business-2/difference-between-conceptualframeworks-and-accounting-standards/