Conceptual Framework and Accounting Standards Conceptual Framework (Qualitative Characteristics)

CHAPTERS 2-7 SCOPE OF REVISED CONCEPTUAL FRAMEWORK

CHAPTER 2 II. Qualitative Characteristics of useful financial info - these are the qualities and
Conceptual Framework (Objective of Financial Reporting) attributes that make info useful

Application of Qualitative Characteristics

CONCEPTUAL FRAMEWORK
1st, Identify a phenomena that has the potential to be useful
- is a complete, comprehensive, and single document promulgated by the IASB
2nd, Identify the type of info about phenomenon that could be relevant and
- summary of terms used in making general FS; this is an attempt to provide overall
faithfully represented
theoretical foundation for accounting
3rd, Identify if info is available
- underlying theory for development of accounting standards and revisions of previously
issued
A. Fundamental Qualitative Characteristics - content or substance of info
It provides foundation for Standards that:
1. Relevance - capacity of info to influence an economic decision; walang kwenta
1. Contribute to transparency
pag hindi naman economic decision yung nag-iba; affected by nature and
2. Strengthen accountability
materiality
3. Contribute to economic efficiency
 Ingredients of Relevance
a. Predictive Value - info could be used to forecast. Previous info on the financial
Purposes of Revised Conceptual Framework:
reports could be used to predict future profitability.
1. Assist IASB to create IFRS
b. Confirmatory Value - used to check and confirm earlier predictions para ma
2. Assist preparers of FS to create policies for events that has no existing standards
adjust if needed
3. Assist preparers of FS to create policies whenever standards allow choice of policy
4. Assist parties to understand and interpret IFRS
 Materiality (Doctrine of Convenience) - this shows that if an event does not
affect the entity and the decisions of the users, it is not required to follow
Authoritative Status of Conceptual Framework
strictly with the standards; entity-specific
- kung may naka set naman sa policy sa standards, yun ang susundin. THE IFRS
- depends on RELATIVE SIZE rather than ACTUAL SIZE, because an event
PREVAILS OVER CONCEPTUAL FRAMEWORK
material to one entity may not be material to the other.
 Factors of Materiality:
USERS OF FINANCIAL INFORMATION
a. Size - size of an item as compared to the whole
1. Primary Users - sa kanila naka direct ang mga general FS
b. Nature - may times na kahit hindi naman malaki yung amount or yung
a. Existing and Potential Investors - concern sila sa risk ng investments nila
size, yung mismong event is note worthy at hindi pwedeng palampasin.
b. Shareholders - concern sila kung mabibigyan ba sila ng dividends
c. Lenders and Other Creditors - concern sila kung nababayaran ba ang mga utang ng
2. Faithful Representation - should be written both in words and in numbers.
entity at kung mababalik ba sa kanila yung pinautang nila
Meaning, amounts and accounts should match and show what really happened.
 Ingredients for Faithful Representation
2. Other Users - magagamit nila yung mga FS pero hindi sa kanila directed for them
a. Completeness - adequate or full disclosure of necessary info para hindi maging
primarily
erroneous yung mga info
a. Employees - concern sila sa stability and profitability of the entity para malaman kung
 Standard of Adequate Disclosure - declaring essential information in the
mapapasweldo pa ba sila
creation of the financial reports deemed to be relevant to the possible
b. Customers - concern kung magtutuloy pa operations ni entity since dun sila bumibili
decisions of the outside entities. Para hindi maging misleading yung mga
ng needs nila
FS; for better understanding
c. Governments and their agencies - concern sila sa TAX
 Notes to FS - provide the necessary disclosures by the PFRS
d. Public - may mga activities ang entity that indirectly affects outside entities
- nakalagay din dito yung mga description kung bakit hindi nirecognized
yung ibang accounts, also includes breakdown of line items
SCOPE OF REVISED CONCEPTUAL FRAMEWORK
b. Neutrality - info is free from biases and fair, pantay pantay for all users
I. Objective of Financial Reporting (encompasses FS, pwede siyang mag-include ng
 Prudence - asset are not overstated and liabilities are not understated (Cost-
mga non financial information for example products nila and BOD)
benefit Constraint - Cost shall not exceed the benefit)
- why, purpose, goal of accounting
 Conservatism - in case of doubt, do not record any loss and gain
- pag may dalawang possible values, choose the lower amount
Target Users - Para talaga sa PRIMARY USER GROUP dahil sila yung may
* Contingent Loss - if loss is PROBABLE and amount CAN BE
pinakamalaking interest sa info about the entity. Plus, they are the ones who provides the
MEASURED, record the loss and liability; if POSSIBLE, journal entry not
RESOURCES of the entity.
written but is disclosed in the notes; if REMOTE, walang irerecord
- For the management of the entity, they rely on different financial reports dahil may
* Contingent Gain - not recognized but disclosed
access sila internally
c. Free from Error - no errors and no omissions on the transactions pero hindi
naman required na lahat ng info accurate
Specific Objectives of Financial Reporting
 Fraud - intentional
1. Provide info useful in making economic decisions about providing resources
 Mistakes - not intentional
- need nila ng general financial reports para malaman kung bibili, magbebenta, or i-
hohold pa nila mga equity investments nila
 Measurement Uncertainty - nangyayari kung hindi malaman yung exact
2. Provide info useful in assessing cash flow prospects
amount ng isang transaction. Kapag yung estimate is clear and accurately
- when investors, creditors, or lenders give their resources to an entity, they measure the
described and explained, di naman nila maaapektuhan yung usefulness of
return of it. For example dividends and interests. Iniisip nila kung ano ang mabebenefit
financial info
nila don.
 Substance Over Form - reality over what should be
- info also includes amount, timing, and prospects for future cash inflow
3. Provide info entity resources (assets), claims (liability), and changes in resources and
Enhancing Qualitative Characteristics - increase the usefulness of financial info
claims
- hindi dapat SAPILITAN na gawing magkamukha o magkaiba yung mga items
 Financial Position - comprises the ALE at a particular moment in time that could
1. Comparability - identifies the similarities and differences among items
show an entity’s strength and weaknesses and can assess liquidity (short term liab
a. Comparability within an entity (Horizontal Comparability or Intracomparability)
settlement) and solvency (long term liab settlement). It helps so that outside
- compares info from one period to another
parties would know the payment priorities of the entity.
b. Comparability between and across entities (Dimensional Comparability or
 Changes in Resources and Claims - results from change in financial performance
Intercomparability) - between two or more entities of THE SAME INDUSTRY
(revenue, expense and net income/loss. Called ‘results of operations’ and is
 Consistency - use of the SAME METHOD on the SAME ITEMS between
shown in the IS and SCI)
DIFFERENT PERIODS or DIFFERENT ENTITIES
“COMPARABILITY is the GOAL, CONSISTENCY HELPS to ACHIEVE the goal.”
Usefulness of financial performance - financial performance of an entity shows how it
- Hindi naman ibig sabihin hindi pwedeng baguhin yung mga past methods, kung
can have a return out of its economic resources. Nagiging basis siya ng future returns of
meron naman mas better alternatives, magbigay lang ng full disclosure and effects
the entity, hence it could show the entity’s ability of generating cash inflows.
2. Understandability - presenting info should be “clearly and concisely”
Mapapakita sa mga outside entity kung kaya magbayad.
- it should be readily understandable to the users, pero hindi naman lahat ng tao
maiintindihan yun. Financial Reports are intended for those users who has the basic
Accrual Accounting - revenue is recognized once earned, expenses are recognized once
knowledge of terminologies
incurred regardless of not receiving or giving cash
3. Verifiability - implies CONCENSUS
Limitations of Financial Reporting (General Purpose Financial Reports…)
- kapag ang information ay chineck ng iba’t-ibang mga users, they may not
1. Do not and cannot provide all the needed info. Kailangan maghanap ng ibang sources.
completely agree, users who evaluates the information with the basis of evidences
2. Not designed to show the value of the entity, rather only an estimate.
could come up with the same conclusion
3. Provides common information
- OBJECTIVITY
4. Based on estimate and judgement rather than exact depiction
 Types of Verification
a. Direct Verification - verifies through direct observation, may evidence that could
Management Stewardship - it is a responsibility of the management to provide
be seen. Ex., counting cash.
information on how they efficiently and effectively used economic resources by
b. Indirect Verification - verifies through formulas, methods, mode
financial reporting
c. ls, techniques
4. Timeliness - dapat magrelease ng info before decisions are to be made, wala
CHAPTER 3 nang halaga ang info kung nakapag decide na
Padayon, Future CPA! In God’s perfect time
Reviewer prepared by: Cael, Michelle Karen Joy
- the older the info, the less useful  Control of an economic resource - an entity has the present ability to direct
- pero may mga past info na malaki ang effect sa pagpredict/forecast ng mga future the asset and pwede sila makakuha ng benefit out of it. They can also
events. “What happened in the past would be the basis of what would happen in the prevent others from benefiting.
future.”
2. Liability - 1) present obligation to 2) transfer economic resource as a result of
3)
Cost Constraint on Useful Information past events
- benefit should exceed the cost
- the problem is that cost is easy to compute, the benefit on the other hand is more of  Obligation - duty or responsibility na hindi pwedeng iwasan
professional judgement a. Legal - out of contract, from normal operating activities
b. Constructive - out of conduct, from regular business practices
CHAPTER 4
3. Equity - residual interest of asset less that liability
Conceptual Framework (Financial Statements and Reporting Entity)
B. Financial Performance
III. FINANCIAL STATEMENTS AND REPORTING ENTITY - STATEMENT OF FINANCIAL PERFORMANCE (Includes SPL and SOCI)
 Statement of Profit and Loss - generally dapat nandito lahat ng income and
GENERAL OBJECTIVE OF FINANCIAL STATEMENTS expense, main source of info about financial performance
Financial Statements shows the resources, claims, and changes in claims and resources  Statement of Other Comprehensive Income - may mga items na nandito at
of the entity. It also shows the ALEREx useful for assessing CASH FLOWS and wala sa P/L. May mga amount dito na pwedeng irecycle for the next
MANAGEMENT STEWARDSHIP periods.
1. Income - increase sa asset or decrease sa liab na nagreresult sa increase in
Types of Financial Statements equity, other than outside contributions (investments)
1. Consolidated FS - considers parent (has the control) and subsidiaries as a SINGLE a. Revenue - ordinary course of business; essence is REGULARITY
REPORTING ENTITY b. Gains - hindi siya from ordinary business activities
- it is useful for the parent’s existing and potential investors, lenders, and creditors for 2. Expense - decrease sa asset or increase sa liab pero hindi kasama yung mga
them to figure the parents’ future cash inflows dahil included dun ang contributions ng distributions to owners/shareholders/withdrawals
mga subsidiaries a. Expenses - ordinary course of business
2. Unconsolidated FS - info about the PARENT ONLY hindi kasama ang mga b. Losses - hindi siya from regular business acts, mostly disasters
subsidiaries
- it is useful for parent’s existing and potential investors, lenders, and creditors dahil ang
claims ni parent ay kay parent lang, hindi siya damay kay subsidiary CHAPTER 6
3. Combined FS - may relationship pero hindi parent subsidiary, for example joint
ventures
Conceptual Framework (Recognition and Measurement)

Reporting Entity - entity required or chooses to prepare FS, does not necessarily need to
be a legal entity. It can be:
1. Individual corporation, partnership or sole proprietorship V. RECOGNITION AND MEASUREMENT
2. Parent alone RECOGNITION - pag iidentify sa mga items na nakameet ng definition of the
3. Parent and subsidiary as a single reporting entity elements and including them in the SFP (they are recorded at CARRYING
4. 2 or more entities that does not have the parent-subsidiary relationship AMOUNT)
5. Reportable business segment of an entity - sa recognition, nililink niya yung Fin Perf saka Fin Position. Kasi pag
nagrecognize ka ng Income sa Perf, may increase sa asset or decrease sa liab; pag
Reporting Period - it is when FS are prepared to provide info about the A,L,E, Income nagrecognize ng Expenses sa Perf, may decrease sa asset or increase sa liab
and Expense - it is recognized if the info would give the users reports that are relevant and
- FS are REQUIRED to be prepared ANNUALLY, however pwede din magpresent ng faithfully represented
mga Interim FS that are prepared on the 3rd, 6th, or 9th month na hindi naman required.
- FS also include comparative info for at least one preceding reporting year para makita Point of Sale Income Recognition - income is recognized when earned, when sold
yung changes in the trends - pero pwede rin point of production, during production, or point of collection
- Pwede rin mag include ng info that happened AFTER the reporting period kung
significant siya sa outstanding info Expense Recognition - recognized when incurred, following the MATCHING
PRINCIPLE (3 application):
UNDERLYING ASSUMPTIONS (Also called postulates) 1. Cause and Effect Association “Strict Matching Concept”- pag nirecognize si
- basic notions or fundamental premises on where accounting is based; serves as a revenue, recognize na si expense; simultaneous
foundation for better understanding of FS 2. Systematic and Rational Allocation - divides the expense over periods that
1. Going Concern (Continuity Assumption) - assumes a business of continuing would benefit from the asset
operations indefinitely 3. Immediate Recognition - outright expensed dahil hindi naman sigurado kung
- assets are measured at COST may makukuhang benefit in the future; karamihan ng mga administrative, selling
2. Accounting Entity - the business is an entity separate from its owners, managers and and advertising expenses saka losses
employees
- kailangan to for fair presentation of the fs dahil may mga personal transactions ang DERECOGNITION - for asset, entity doesn’t have control of a part or the entire
mga owner unrelated to the business asset; for liab, the entity has no obligation for a part or the entire liab. Pag
3. Time Period - dahil may assumption of going concern, an entity’s financial position nagdederecognize, isama lahat ng related accounts (ex. Depreciation)
and performance needs to be evaluated regularly kaya naman hinahati ang indefinite life
of the entity into several accounting periods MEASUREMENT - quantifying in monetary terms the elements of FS
 Natural Business Year (Fiscal Year) - 12 month period that ends upon the entity’s 1. Historical Cost - recorded at original transaction price (book value; entry price
decision, normally it is when business is at its lowest or entry value
 Calendar Year - January 1 to December 31  Historical Cost Updated
4. Monetary Unit a. Historical cost of an asset is updated because of:
a. Quantifiability Aspect - all amounts should be stated in a common unit of measure, in - Depreciation and amortization
this cash, Philippine Peso. - Payment received because of disposing asset
b. Stability of the Peso - purchasing power of peso is stable or constant and its instability - Impairment
is insignificant - Accrual of interest
b. Historical cost of liability is updated because of:
- Payment made or satisfying an obligation
CHAPTER 5 - Increase in value
Conceptual Framework (Elements of Financial Statements) - Accrual of interest
- Amortized cost
IV. ELEMENTS OF FINANCIAL STATEMENTS
- this refers to the quantitative info reported in the SFP and IS 2. Current Value
- ginagamit ang mga elements to group events according to their economic a. Fair Value
characteristics that serves as a building block in creating the FS  Asset - seller willing to sell an asset in an orderly transaction at
measurement date
A. Financial Position  Liability - price to be paid to transfer a liability in an orderly transaction at a
1. Asset - 1) present economic resource as a 2) result of a past event that is a right that has measurement date
the 3) potential to produce economic benefits - It is the exit price or exit value na hindi gawa ng adjustment to the historical cost.
Ibang value kasi siya. Out of transaction; the market price.
 Right - has the potential to produce economic benefits b. Value in Use - net present value of an asset’s cash flow while it is being used or
a. Rights that correspond to an obligation of another entity when disposed (Exit price/value)
b. Rights that do not correspond to an obligation of another entity c. Fulfillment Value - present value of cash that the entity expects to transfer to pay
c. Rights established by contract or legislation liab (Exit price/value)
d. Current cost - based on HISTORICAL COST and on the market conditions on
current times
 Potential to produce economic benefits - the right has the potential, hindi naman  Asset - transaction cost + considerations paid
required na may makukuha talagang economic benefits in the future  Liability - transaction cost
Padayon, Future CPA! In God’s perfect time
Reviewer prepared by: Cael, Michelle Karen Joy
Selecting a Measurement Basis - walang specific na minamandate ang standards sa
kung ano ang pipiliin or ano ang gagamitin. Basta relevant and faithfully represented and
results.

CHAPTER 7
Conceptual Framework
(Presentation and Disclosure and Concepts of Capital)

VI. PRESENTATION AND DISCLOSURE

- It is an effective communication tool since financial info is nonsense if not
communicated through the FS
- Effective Communication makes the info more relevant and faithfully represented and
enhances comparability and understandability
- wag paulit-ulit ang info sa FS, once lang i-state

Classification - grouping of SIMILAR elements

Classification of Income and Expense

Statement of Financial Performance = Statement of Profit or Loss + Statement of OCI

Aggregation (Concealing Method) - pwede pagsama-samahin sa iisang line item ang iba
ibang mga accounts
- The FS more often gives condensed or summarized info, the full disclosure are made in
the notes para maging concise yung mga FS

VII. CAPITAL MAINTENANCE

- The financial performance could be determined using:
1. Transaction Approach - traditional way in presenting the IS
2. Capital Maintenance Approach (Well-Offness) - magkaka net income lang kapag nag
exceed na yung end capital sa beg capital
 Return on Capital - makukuha ni investor dahil sa investment niya
 Return of Capital - makukuha ni investor yung mismong investment

Two Concepts of Capital Maintenance

1. Financial Capital - income is recognized when net assets at the end of the year
exceeds net assets at the beg of the year. Net assets = capital.
Profit = End, Net Assets - Beg, Net Assets + Distributions during the year - Inv during
the year
2. Physical Capital - parang financial capital lang din, but amounts used are those in
current cost and not historical
- used kung ang goal ay malaman ang operational capability ng entity

Padayon, Future CPA! In God’s perfect time

Reviewer prepared by: Cael, Michelle Karen Joy