Framework for Preparation and Presentation of Financial Statements
Introduction
✓ The Philippine Financial Reporting Standards (PFRSs) are based on the Framework for the Presentation of
Financial Statements (Framework) which addresses the concepts underlying the information presented in
general purpose financial statements.
✓ The purpose of the Framework is to facilitate the consistent and logical formulation of PFRSs and to provide a
basis for the use of judgement in resolving accounting issues.
Objective of Financial Statements
✓ To provide information on the reporting enterprise's financial position, performance and changes in financial
position.
Components of Financial Statements
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✓
✓
✓
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Statement of Financial Position
Statement of Comprehensive income
Statement of Changes in Equity
Statement of cash flows
Notes comprising a summary of significant accounting policies and other explanatory notes
Underlying Assumptions in the Framework
✓ Accrual Basis - Recognizes the effects of the transactions when the transactions occur, rather than when cash is
received or paid. Revenues are recorded when earned (when goods are sold or when services are performed)
while expenses are recorded when incurred and not necessarily when cash is paid.
✓ Going concern - Presumes that entities will continue operation in the future unless there are indications to the
contrary.
Qualitative Characteristics of Accounting Information
✓ Understandability - the ability of financial information to be comprehended by financial statement users who
have reasonable knowledge of business and economic activities.
✓ Relevance - The quality of information that exists when the information influences economics decisions made by
users. This is also the quality of information that makes it needed and worthy for the purpose it was prepared.
Three qualities of Relevant
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o
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Confirmatory/feedback value - the quality of information that confirms earlier expectation;
Predictive value - enables users to make forecasts and plan their future actions; and
Materiality - provides threshold or cutoff point for recognition and information is regarded as material if the
information is significant enough to influence the economic decisions of users.
✓ Reliability - The quality of information to be free from material error and bias and that can be depended on by
users to represent faithfully what it purports to represent or could reasonably be expected to represent.
5 ingredients of Reliable financial information
o Faithful representation - the information must represent faithfully the transactions and other events it
either purports to represent or could reasonably represent.
o
Substance over form - the actual intentions of the parties to a transaction prevails over the legal aspect or
the legal document evidencing the transactions.
o Neutrality - information that is impartial and is not biased towards the particular needs or desires of specific
users.
o Prudence - the inclusion of greater degree of caution in the exercise of judgements needed in making
estimates so as not to encourage the user's undue optimism. Generally, prudence recognized anticipated
losses and expenses but would only recognize gains when actual earned. Prudence conventionally terms as
conservatism.
o Completeness - the information in financial statements must be complete within the bounds of materiality
and cost because omission of relevant information may mislead the users and could cause the information
to be unreliable.
✓ Comparability - the quality of information that enables users to identify similarities and differences between at
least two sets of economic circumstances.
o Incomparability refers to the comparison of financial statements of an enterprise for at least two
reporting period. This is usually achieved by adhering to the principle of consistency.
o Intercomparability refers to the comparison between enterprises, usually belonging to the same
industry.
Elements of Financial Statements
✓ Assets - Resources controlled by the enterprise as a result of past events and from which future economic
benefits are expected to flow to the enterprise.
✓ Liabilities - Present obligations of the enterprise arising from past events, the settlement of which is expected to
result in an outflow from the enterprise of resources embodying economic benefits.
✓ Equity - The residual interest in the assets of the enterprise after deducting all its liabilities.
✓ Income - Increases in economic benefits during the accounting period in the form of inflows or enhancements of
assets or decreases of liabilities that result in increase in equity other than those relating to contributions from
equity participants.
o Revenue - arises from major or central revenue producing activities of the enterprise termed as sales
revenue, professional fees earned interest revenue, dividends, revenue, royalties and rent revenue.
o Gains - Arise from peripheral or incidental transactions of the enterprise such as gain on disposal of property,
plant and equipment and unrealized gain on trading securities.
✓ Expenses - Decreases in economic benefits during the accounting period in the form of outflows or depletions of
assets or incurrence of liabilities that result in decreases in equity, other than those relating to distributions to
equity participants.
o Expenses - Arise in the ordinary course of business and are incurred in the conduct of the enterprise's
central revenue producing activities such as cost of sales, wages, and depreciation.
o Losses - arise from incidental or peripheral transactions and include items as losses from fire and flood,
losses from disposal of non-current assets and unrealized losses from trading securities.
Measurement Bases
Measurement Base
Historical Cost
Assets
Liabilities
Recorded at the amount paid or
the fair value of the
consideration given at the time
of acquisition
Recorded at the amount of the
proceeds received in exchange
for the obligation or the amount
expected to be paid to satisfy
the liability
Current Cost
Carried at the amount that
would have to be paid if the
same or an equivalent asset was
acquired currently
Carried at the undiscounted
amount that would be required
to settle the obligation currently
Realizable Value
Carried at the amount that could
be obtained by selling the asset
in an orderly disposal
Carried at their settlement value
which are the undiscounted
amount expected to be paid to
satisfy the liabilities
Present Value
Carried at the present
discounted value of the future
net cash inflows that the item is
expected to generate
Carried at the present
discounted value of the future
net cash outflows that are
expected to be required to settle
the liabilities
Concepts of Capital
✓ Financial Concept - Capital is synonymous with the net assets or equity of the enterprise. Users are primarily
concerned with the maintenance of nominal invested capital of the purchasing power of invested capital.
✓ Physical Concept - Capital is viewed as the operating capacity of the enterprise. This requires the use of current
cost as the measurement basis. Users are more concerned with the operating capability of the enterprise.
Concepts of Capital Maintenance
✓ Financial Capital Maintenance Concept - Profit is measured as the excess of the financial amount of the net
assets at the beginning of the period, after excluding the effects of the contributions from and distributions to
the owners of the enterprise. This does not require specific basis of measurement.
✓ Physical Capital Maintenance Concept - There is profit only if the physical productive capacity of the enterprise
at the end of the period exceeds the physical productive capacity at the beginning of same period after
excluding the effects of transactions with owners. This requires the use of current costs as the measurement
basis.