Conceptual Framework of Accounting Standards

PRELIM b. Casualty Loss – any sudden and

Chapter 1 unanticipated loss from fortuitous
Definition of Accounting events
 Accounting is a service activity with the function to
provide quantitative information, primarily financial
in nature, about economic entities, that is intended Measuring
to be useful in decision making – Accounting - assigning of peso amounts to the accountable
Standards Council economic transactions and/or events
 Accounting is the art of recording, classifying, and Measurement Basis:
summarizing in a significant manner in terms of 1. Historical Cost - information derived from the price
money, transactions and events which are in part of of the transaction or other event that gave rise to
a financial character interpreting the results thereof the item being measured.
– Committee on Accounting terminology of the - Recording at its original cost when acquired by the
American Institute of CPAs company.
 Accounting is the process of identifying, measuring -most common measure of financial transactions
and communicating economic information to 2. Current Value - is the concept that assets and
permit informed judgement and decision by users. – liabilities be measured at the current value at which
American Accounting Association they could be sold or settled as of the current date
a. Fair Value - the prices that would be received to
 Accounting is about quantitative information sell an asset, or paid to transfer a liability, in an
 It is financial in nature orderly transaction between market
 Information should be useful in decision making participants.
b. Value in Use - present value of the cash flows
Accounting as a Process that an entity expects to derive from the use of
Purpose of Accounting an asset and from its ultimate disposal,
a.) Identify analytical component including transaction costs on disposal.
b.) Measure technical component c. Fulfilment Value - present value of the cash
c.) Communicate formal component flows that an entity expects to be obliged to
Identifying transfer as it fulfils an obligation.
- Recognition or non-recognition of business activities as d. Current Cost - reflects the current amount that
“accountable” events would be paid to acquire an equivalent asset
*an event is accountable when it has effects on assets, and received to take on an equivalent liability
liability and equity*
Economic Activities – subject matter of accounting, Communicating
referred as transactions - Preparing and distributing accounting reports to the
Types of Transactions: potential users
1. External Transactions- involving one entity and - Reason why accounting is the universal language of
another entity business
a. Purchase of goods from supplier
b. Loan from Bank Parts of Communicating
c. Sale of Goods or services 1. Recording – systematically maintaining a record of
d. Payment of salaries all economic activities, journalizing
e. Payment of taxes 2. Classifying – grouping of similar transaction,
2. Internal Transactions – involving the entity only posting to ledger
a. Production – resources turned into 3. Summarizing – preparation of financial statements
products
Users of Financial Statements
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Conceptual Framework of Accounting Standards
1. External Decision-makers – those who lack direct i. Auditing – primary service offered,
access to the information generated by the internal examination of financial statement as to
operations and relies on the general purpose of the fairness with which it is prepared
financial statements to make their investments ii. Taxation – preparation of annual
Ex: Investors, employees, lenders, suppliers, customers, income tax returns and determination
governments and their agencies, and Public of tax consequences of certain
2. Internal Decision Makers – managers of an entity proposed business endeavours
responsible for managing efficiently and effectively iii. Management Advisory Services –
and who have the authority to obtain economic services to clients on matters of
information they need [Process of providing accounting finance, business policies,
accounting info to internal decision makers is called organization procedures, product costs
Management Accounting] and distribution
b. Private Accounting – assists management in
Accounting as an Information System planning and controlling entity’s operations ,
Financial Statements – key products of accounting controller is the highest accounting officer of an
Decision Usefulness – essence of accounting entity
c. Government Accounting – analyses, classifies
OBJECTIVE OF ACCOUNTING: summarizes and communicates all transaction
To provide quantitative information about a business involving the receipt and disposition of
that is useful to statement users particularly to owners government funds and property, focus is the
and creditors in making economic decisions. custody and administration of public funds

ACCOUNTANTS’ PRIMARY TASK: Continuing Professional Development:

Supply financial information so that the statement users CPD Unit – credit hours required for the renewal of CPA
could make informed judgement and better decisions License, 120 CPD Units in three years
A CPA shall permanently be exempted from the CPD
The Accounting Profession: requirement at age 65
Republic Act 9298 – law regulating it in the Philippines,
Philippine Accountancy Act of 2004 Financial Accounting – recording of business
Board of Accountancy – body authorized to make rules transactions ad the eventual preparation of financial
affecting the practice of accountancy, prepares and statements, for internal and external users
grades CPAL Managerial Accounting – accumulation and preparation
Republic Act No. 10912 – law strengthening the of financial reports for internal users only, developing
continuing professional development program for all accounting within the entity
regulated professions
Generally Accepted Accounting Principles (GAAP)
Limitations of the Practice of Public Accountancy: - rules, procedure and practices for presentation of
Certificate of Accreditation – issued to CPAs by BOA financial statements
approved by the PRC when CPA has acquired a - Establishing GAAP is a political process
minimum of three years of meaningful experience
Professional Regulations Commission - issues the PURPOSE OF ACCOUNTING STANDARDS:
certificate of registration to practice in public To identify proper accounting practices for the
accountancy which is valid for three years preparation and presentation of financial statements

Practice of CPAs: Accounting Standards

a. Public Accounting – render independent and - Creates common understanding between preparers
expert financial services to the public and users
2
Conceptual Framework of Accounting Standards
- Necessary to ensure comparability and uniformity Main Objective:
of financial statements To achieve uniformity in the accounting principles
which are used by business and other organizations
GAAP in the Philippines for financial reporting around the world
- Formalized initially through the creation of Other objectives:
Accounting Standards Council (ASC) 1. To formulate and publish in the public interest
- Financial Reporting Standards Council (FRSC) accounting standards to be observed in the
replaced the ASC presentation of financial statements and to
promote worldwide acceptance and observance
Financial Reporting Standards Council (FRSC) 2. To work generally for the improvement and
- Accounting standard setting body created by the harmonization of regulations, accounting
PRC and recommended by the BOA standards and procedures relating to the
- Main function is to establish and improve presentation of Financial Statements
accounting standards that will be generally
accepted in the Philippines International Accounting Standards Board (IASB)
- Accounting standard promulgated is the highest - Replaced the IASC
hierarchy of GAAP in the country - Published International Financial Reporting
- Approve statement of FRSC are Philippine Standards (IFRS)
Accounting Standards (PAS) and Philippine - Adopted standards issued by IASC
Financial Reporting Standards (PFRS)
- Composed of 15 members (1 chairman, 14 Chapter 2
representative) Elements that Guide the Preparation of Financial
- Adopted all the IAS AND IFRS Statements:
1. Conceptual Framework
Philippine Interpretations Committee 2. International Financial Reporting Standards
- Formed by the FRSC in August 2006 (IFRS) / Philippine Financial Reporting Standards
- Replaced the Interpretations Committee formed by (PFRS)
ASC Conceptual Framework for Financial Reporting
- Prepares interpretations of PFRS for approval by the o general guideline in the preparation and
FRSC presentation of financial statements in the
- Provides timely guidance on financial reporting absence of specific PFRS
issues not specifically addressed in PFRS o summary of the terms and concepts that
- Intended to give authoritative guidance underlie the preparation and presentation of FS
- International Financial Reporting Interpretations for external users
Committee (IFRIC) is its counterpart in the UK o concepts for general purpose of accounting
[IFRIC replaced the SIC] o overall theoretical foundation
International Accounting Standards Committee o It does not carry an inherent power to overrule
- Created in 1973 or be superior to the PFRSs/IFRSs.
- Accounting standards issued by IASC are named as
International Accounting Standards (IAS) Provided Standard from Conceptual Framework
- IASC formed a committee known as the Standing o contributes to transparency
Interpretation Committee (SIC) which was o Strengthen accountability
responsible for providing interpretations and o Contribute to Economic Efficiency
guidance to the accounting issuances.
- Replaced by the International Accounting Purpose of Conceptual Framework
Standards Board (IASB)

3
Conceptual Framework of Accounting Standards
o assist FRSC/IASB in developing future PFRS/IFRS o Provide information that is useful in decision
and reviewing existing PFRS/IFRS; making about providing resources to the entity
o help FRSC/IASB in promoting harmonization of o Provide info useful in assessing the cash flow
regulations, accounting standards, and prospects of entity
procedures relating to the presentation of o Provide info about entity’s resources, claims and
financial statements by providing a basis for changes in resources and claims
reducing a number of alternative accounting
treatments permitted by FRSC/IASB; Financial Reporting – Provision of financial information
o support the national standard setting bodies in about an entity to external and primary users <- target
the development of national standards; users
o aid preparers of financial statements in applying Also includes the Following:
PFRS/IFRS and dealing with topics that have yet  Financial highlights
to form the subject of PFRS/IFRS;  Summary of important financial figure
 Analysis of financial statements
Purpose of Revised Conceptual Framework  Significant ratios
o assist the IASB to develop IFRS Standards based  Description of major products
on consistent concepts  Listing of corporate officers and directors
o Assist preparers of FS to develop consistent Annual Financial Statements – principal way of
accounting policies when no standard applies to providing information to external users
a particular transaction or event
o Assist preparers of FS to develop accounting Limitations of Financial Reporting
policies when a standard allows a choice of an 1. Cannot provide all of the information needed
accounting policy 2. Not designed to how the value of the entity,
o Assist all parties to understand and interprets only the estimate
the IFRS 3. Intended to provide common information
4. Based on estimate and judgement rather than
Users of Financial Information exact depiction
1. Primary Users – whom the general purpose of
financial reporting are directed to Management Stewardship
o Have the most critical need for the o Information about how efficient and effective
information management has discharged it responsibilities to
o Provides resources of the entity use the entity’s economic resources
Ex: existing and potential investors, lenders and other
creditors Investors – decision depends on the returns expected
2. Other Users – fins the general purpose of Creditors – decision depends on the principal and
financial reports useful but the reports are not interest payment
directed to them primarily
Financial Position – claims and resources of an entity
OBJECTIVE OF FINANCIAL REPORTING (the ‘why’ of ( ALE)
accounting) Financial Performance aka Results of Operations –
To provide financial information about the reporting level of income earned by an entity
entity that is useful to existing and potential investors,
lenders and other creditors in making decision about Liquidity – availability of cash in the near future
providing resources to the entity Solvency – availability of cash over a long term

SPECIFIC OBJECTIVES OF FINANCIAL REPORTING

4
Conceptual Framework of Accounting Standards
Accrual Accounting – depicts the effects of transactions b. Neutrality – Without biased in the
and other event and circumstances even if the cash preparation of financial statements, to be
receipt or payment will occur on a different period fair
 Prudence – is the exercise of care and
Accrual Basis – effects of transactions are recorded caution when dealing with uncertainties,
when they occur supports neutrality
 Conservatism - when alternatives exists the
Chapter 3 alternative with the least effect on equity
Qualitative Characteristics – qualities or attributes that should be chosen
make financial information useful to the users c. Free from Error – there are no errors or
omissions the description of the phenomenon
Fundament Qualitative Characteristics (content or or transaction
substance)  Measurement Uncertainty – when monetary
1. Relevance - capacity of information to amount in financial reports cannot be observed
influence decision directly and must instead be estimated
Ingredients of Relevance  Substance over form – economic substance of
a. Predictive Value – helps increase the transactions are emphasized when economic
likelihood of accurately predicting substance differ from legal form
outcome of events
b. Confirmatory Value – provides feedback Enhancing Qualitative Characteristics (presentation or
about previous evaluations form)
Factors Affecting Relevance 1. Comparability – ability to bring together for the
a. Nature purpose of noting points and likeness and
b. Materiality (Doctrine of Convenience) - difference, enables users to identify and
quantitative threshold , sub quality of understand similarities and differences
relevance Uniform application of accounting method
o Depends on the relative size of the item between and across entities in the same
o Dependent on good judgement, industry
professional expertise and common a. Horizontal Comparability or
sense Intracomparability – within an entity
o If its omission r misstatement could b. Dimensional Comparability or
affect economic decisions Intercomparability – across entities
o Factors of Materiality : size and nature  Principle of Consistency – use of same method for
of item the same item, either from period to period within
2. Faithful Representation – financial reports an entity or in a single period across entities
match economic phenomena in words and Uniform application of accounting method from
numbers, effects of transactions are properly period to period
accounted for 2. Understandability – information must be
Ingredients of Relevance comprehensible or intelligible if it is to be useful
a. Completeness – presented in a way that Readily understandable to users
facilitates understanding and avoids Characteristics of Understandability: Clear and
erroneous implication , result of principal of Concise
full disclosure 3. Verifiability – different knowledgeable and
 Standard of Adequate disclosure – disclosure of any independent observers could reach a consensus
financial facts significant enough to influence that a particular depiction is a faithful
judgement of informed users representation, supported by evidence
Types of Verification
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Conceptual Framework of Accounting Standards
a. Direct – through direct observation bedrock of accounting in order to avoid
b. Indirect – checking inputs to a model, misunderstanding
formula or other technique, Going Concern is the only mentioned
recalculating the inputs using the same assumption in the Conceptual Framework
methodology Going Concern (Continuity Assumption) – in absence of
4. Timeliness – available or communicated early evidence to contrary the accounting entity is viewed as
enough when a decision is to be made continuing in operation indefinitely
o Foundation of cost principle
Constraints Accounting Entity – entity is separate from the owners,
Cost Constraint manager and employees who constitute the entity
 Consideration of cost incurred in generating Time Period – indefinite life of an entity is subdivided
financial information against the benefit to be into accounting periods which are usually of equal
obtained from having the information length for financial reporting
 benefits of reporting financial information should  Fiscal year- any 12 consecutive months
justify and be greater than the costs imposed on  Natural Business year- 12 months cycle that
supplying it ends at lowest level of annual cycle
Material Constraint  Interim Year- period less than a year
 threshold used to determine whether business  Calendar Year- 12 month period ending on Dec
transactions are important to the financial 31
results of a business Monetary Unit – has two aspects: quantifiability and
 is material enough to exceed the constraint stability of peso
threshold, then it is recorded in the financial  Quantifiability is the recording of account in
records, and therefore appears in the financial a unit of measure which is the Philippine
statements peso
 Stability of Peso is the assumption that
Chapter 4 purchasing power of peso is stable and
Types of Financial Statements constant
1. Consolidated Financial Statements – prepared
when reporting entity compromise both parent Chapter 5
and its subsidiaries Elements of the Financial Statements
2. Unconsolidated Financial Statements – – Quantitative information reported in the statement of
prepared when the reporting entity is the financial position and performance
parent alone – Building blocks of financial statements
3. Combined Financial Statements – when the
reporting entity compromises two or more Elements of Statement of Financial Position
entity that are not linked by a parent and 1. Asset – present economic resource controlled by
subsidiary relationship the entity as a result of past events
Economic Resource – is a right that has the potential
Reporting Entity – required to prepare financial to produce economic benefits
statements, can be a single entity a portion of an entity Control – an entity has control if it can direct the
or more than one entity, not necessarily a legal entity use of the asset and obtain the economic benefit
Reporting Period – period when financial statements that flow from it, also include ability to prevent
are prepared others from using asset or obtaining the economic
benefits
Accounting Assumptions (Postulates) – basic notions or Essential characteristics of asset:
fundamental premises, serve as the foundation or a. The asset is a present economic resource.

6
Conceptual Framework of Accounting Standards
b. The economic resource is a right that has o Legal title of the goods passes to the
the potential to produce economic benefits. buyer at the point of sale
c. The economic resource is controlled by the o Income may be recognized at the point
entity as a result of past events. of production, during production and at
2. Liability - present obligation of an entity to transfer the point of collection
an economic resource as a result of past events b.) Expense Recognition – expenses are recognized
Obligation – is a duty or responsibility that an entity when incurred, application of the matching
has no practical ability to avoid, can be legal or principle
constructive Three Applications of Matching Principle:
Essential characteristics of asset: 1. Cause and Effect Association (strict
a. The entity has an obligation. matching concept) – expense is recognized
b. The obligation is to transfer an economic when revenues is recognized
resource. 2. Systematic and Rational Allocation – cost
c. The obligation is a present obligation that are expensed by allocation over the period
exists as a result of past event. benefited
3. Equity – residual interest in the assets of the entity 3. Immediate Recognition – costs are
after deducting all the liabilities expensed outright because of uncertainty
Elements of Financial Performance of future economic benefits
1. Income – increases in assets or decreases in liability
that result in increase of equity other than those Chapter 7
relating to equity contributions from equity holders Presentation and disclosure – effective tools of
o Revenue – from normal course of operations, communications
the essence of revenue is regularity
o Gains – other items that meet the definition of Statement of financial Performance – collective term
income and do not arise in the course of for profit or loss statement and statement of other
ordinary activities comprehensive income
2. Expense – decrease in asset or increase in liability
that result to a decrease in equity other than those Statement of Profit and Loss – primary source of
relating to distributions of equity holders information about entity’s financial performance
o Expenses - arise from ordinary/ regular
activities Aggregation – adding together of assets, liabilities,
o Losses - do not arise in the course of the equities, income and expenses that have similar
ordinary regular activities characteristics and are included in the same
classification
Chapter 6 o Makes information more useful but may conceal
Recognition – process of capturing for inclusion in the some detail
financial statements an item that meets the definition
of one of the elements Ways to Determine Financial Performance
 Recognized at carrying amount 1. Transaction Approach - traditional preparation
Derecognition – removal of all or part of a recognized of an income statement
asset or liability from statement of financial position 2. Capital Maintenance Approach (well-offness) –
net income incurs only after the capital used
Types of Recognition from the beginning of the period is maintained
a.) Point of sale income recognition – income
recognized when earned Return on Capital - amount in excess of their original
investment

7
Conceptual Framework of Accounting Standards
Return of Capital – an erosion of the capital invested in
the entity OBJECTIVE OF FINANCIAL STATEMENTS
To provide information about the financial position,
Concepts of Capital Maintenance financial performance and cash flows of an entity that is
1. Financial Capital (Net assets approach) – useful to a wide ranges of users in making economic
monetary amount of the net assets contributed decisions
by shareholders and the amount increase in the
net assets resulting from earnings retained by Frequency of Reporting: at least annually
the entity When an entity’s reporting period changes it shall
o Based on historical cost disclose:
Jan 1 Dec 31 a. the period covered by the financial
Total Assets 1500 2500 statements
Total Liabilities 1000 1200 b. reason for using a longer or shorter period
Additional Investments of the 400 c. fact that amounts presented in the financial
Year statements are not entirely comparable
Dividends Paid 300 Statement of financial Position
o a formal statement showing the three elements of
Computation of Net Income
financial positions
Net Assets – Dec 31 (2500-1300) 1300
Add: Dividends Paid 300 Classification of an Asset
Total 1600 a. Current Asset
Less: Net Assets - Jan 1 (1500- b. Non-Current Asset
1000) 500 Classification of Liability
Additional Investments 400 (900) a. Current Liability
Net Income 700 b. Non-Current Liability

Refinance – roll over an obligation for at least twelve

2. Physical Capital – quantitative measure of the months after the reporting period
physical productive capacity to produce goods With discretion – Non-current liabilities
and services Without discretion – Current Liabilities
o based on current cost Covenants - deal with financial promises. A company
enters into a covenant as part of an agreement with an
Assume in the previous illustration that net assets of investor or lenders. It agrees that its financial ratios will
500 on Jan 1 had a current cost of 800 by reason of remain at specified levels
inflation o If broken liability becomes payable on demand

Computation of Net Income Equity = Net Assets

Net Assets – Dec 31 (2500-1300) 1300 Terms used in Reporting the equity of an entity:
Add: Dividends Paid 300 a. Owner’s Equity
Total 1600
b. Partners’ Equity
Less: Net Assets at Current Cost, 800
c. Stockholders’ Equity or Shareholders’ Equity
Jan 1
Additional Investment 400 (1200)
Net Income 400 Notes to Financial Statements – provides narrative
description or disaggregation of items in FS and
information about items that do not qualify for
Chapter 8
recognition
General purpose financial statement are directed to
common users
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Conceptual Framework of Accounting Standards
Forms of Statement of Financial Position  Unrealized gain or loss on equity investment
a. Report Form – sets forth the three major Upon disposal of investment
sections (ALE)  Revaluation surplus during the year
b. Account Form – Assets are shown on the left  Remeasurements of defined benefit plan
side and the liabilities and equity on the right Permanently excluded from profit and loss
side statement
 Change in the fair value attributable to credit risk of
Chapter 9 a financial liability
Income Statement - formal statement showing the May be transferred within equity or retained
financial performance of an entity for a given period of earnings
time Presentation of Comprehensive income
Level of Income Earned (results of operations) - how 1. Two Statements
financial performance is measured a. An income statement
Comprehensive Income – change in equity during a b. A statement of comprehensive income,
period resulting from transactions and other events, beginning with profit or loss as shown
other than changes resulting from transactions with in the income statement plus or minus
owners in their capacity as owners the components of OCI
Inclusions of Comprehensive Income: 2. Single Statement
o Components of Profit and Loss Combined statement showing the components
o Components of other Comprehensive of profits or loss and components of OCI in a
income single statement
Profit or Loss Sources of Income
- Total income less expenses excluding components a. Sales of Merchandise to Customers - PoL
of other comprehensive income b. Rendering of Services - PoL
Other Comprehensive Income c. Use of Entity Resources - PoL
- Items of income and expenses including d. Disposal of Resources other than Product - OCI
reclassification adjustments that are not recognized Components of Expense
in PFRS a. Cost of Goods sold
Inclusions b. Distribution costs or selling expense
 Unrealized gain or loss on equity investment c. Administrative Cost
 Unrealized gain or loss on debt investment d. Other Expenses
 Gains or loss from transaction of the financial e. Income Tax Expense
statement of a foreign operation
 Revaluation surplus during the year Classifications of Expenses
 Unrealized gain or loss derived from contracts o Distribution costs – directly related to selling
designated as cash flow hedge Salesmen’s Salaries
 Remeasurements of defined benefit plan Salesmen’s Commissions
 Change in the fair value attributable to credit risk of Travelling and Marketing Expenses
a financial liability Advertising and Publicity
OCI that will be reclassified to Profit or Loss Freight Out
 Unrealized gain or loss on debt investment Depreciation of Delivery equipment and Store
 Gains or loss from transaction of the financial Equipment
statement of a foreign operation o Administrative Expenses – cost of
 Unrealized gain or loss derived from contracts administering the business
designated as cash flow hedge Doubtful Accounts
OCI that will be reclassified to Retained Earnings Office Salaries

9
Conceptual Framework of Accounting Standards
Expense of General Executives Statement of Changes in Equity – shows the
Expense of General Accounting and credit movements in the elements or components of the
department shareholders’ equity
Office supplies used Statement of Cash Flows – summarizes the operating
Certain Taxes investing and financing activities of an entity
Contribution
Professional Fees
Depreciation of Building and Office Equipment MIDTERM = WALA KO KABALO ANO GN TUN AN TA
Amortization of Intangible Assets SNG MIDTERM TULOG KO GURO
o Other Expenses – expenses which are not
directly related to the selling and admin
functions ENDTERM
Loss on Sale of Trading Investments Property Plant and Equipment (PPE)
Loss on Disposal of PPE - Tangible assets that are held for use in production
Loss on Sale of Non-current Investment or supply of good or services, for rental to others, or
Casualty Loss (fortuitous events) for administrative purposes, and are expected to be
used for more than one period
Disclosed on the face of the Income Statement and
Statement of Comprehensive Income Characteristics of PPE
a. Profit or Loss for the period attributable to a. It is a tangible asset
noncontrolling interest and owners of the b. Used in business
parent c. Useful for more than one year
b. Total Comprehensive income for the period PPEs are Recognized as an Asset when
attributable to noncontrolling interest and a. Future economic benefits related with it is
owners of the parents probable
b. Its cost can be measured reliably
Forms of Income Statement
1. Functional (Cost of Goods Sold Method) – Property, Plant and Equipment that is recognized as an
classifies expense according to their function as asset is measure at COST
part of COGS, distribution costs, administrative
costs and other expenses
 Cost of Property Plant and Equipment =
2. Natural (Nature of Expense Method) – Cash Price Equivalent at Recognition Date
aggregated according to their nature, expenses
with the same nature are grouped and  Cost of Property Plant and Equipment
Acquired on Cash Basis = Cash Paid, Directly
presented as one item
Attributable Cost
 Cost of Property Plant and Equipment
Comprehensive Income - includes net income or loss
Acquired on Account = Invoice Price Minus
for the period plus or minus the components of other Discount
comprehensive income  Cost of Property Plant and Equipment
Acquired on Installment Basis = Cash Price
Statement of Retained Earnings – shows the changes Equivalent
affecting directly the retained earnings of an entity and  Cost of Property Plant and Equipment
relates the income statement to the statement of Acquired through Issuance of Share Capital =
financial position Fair Value of Property Received, Fair Value
of Share Capital, Par Value/ Stated Value of
Share Capital
 Cost of Property Plant and Equipment
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Conceptual Framework of Accounting Standards
Acquired through Issuance of Bonds Payable  Employee Benefit arising directly from the
= Fair Value of Bonds Payable, Fair Value of acquisition and/or construction of PPE
Asset Received, Fare amount of Bonds  Cost of Site Preparation
Payable  Initial Delivery and Handling Cost
 Cost of Property Plant and Equipment  Installation and Assembly Cost
Acquired through Exchange for a  Professional Fee
Nonmonetary Asset = Fair Value and Any  Cost of Testing Asset
Cash Payment
(Exchange is Recognized at carrying amount
Costs that are Expensed Right Away:
if it lacks Commercial Substance)
 Cost of Opening a New Facility
 Cost of Introducing a New Product or Service
Measurement after Recognition:
o Cost of Advertising and Promoting
 Cost Model
Cost XX  Cost of Conducting Business in a New Location/
Accumulated Depreciation (XX) New Class of Customer
Accumulated Impairment Loss (XX) o Cost of Staff Training
New Measurement XX  Administration and Other General Overhead
Cost
 Revaluation Model  Cost Incurred when an Item is not working as it
Fair Value @ Date of Revaluation XX should be yet
Accumulated Depreciation (XX)  Initial Operating Loss
Accumulated Impairment Loss (XX)  Cost of Relocating or Reorganizing part or all of
New Measurement XX Entity’s Organization

Construction - cost of construction is determined using

Cash Discount – Reduction of Costs the same principles as for an acquired asset
Commercial Substance – a new motion and is defined It Includes:
as the event or transaction causing the cash flows of the  Direct Cost of Materials
entity to change significantly by reason of the exchange  Direct Cost of Labor
Cost – is the amount of cash or cash equivalent paid and  Indirect Cost and Incremental Overhead
the fair value of the other consideration given to Identifiable to the construction
acquire an asset at the time of acquisition or Derecognition – Cost of the PPE together with the
construction related accumulated depreciation shall be removed
from the statement of financial position
Characteristics of Cost  Carrying amount of an item in the PPE shall be
a. Purchase price derecognize on disposal or when no future
o Import duties economic benefits is expected
o Non-refundable purchase taxes  Gain or Loss from the disposal is recognize in
o Less: trade discounts and rebates the statement of profit or loss
b. Direct Cost of bringing the asset to the location  Gain = other income
and condition  Gain or loss = difference between the net
c. Estimate of Cost of Dismantling and Removing disposal proceeds and the carrying amount of
the item and restoring the site on which it is the item
located (Installation cost)
Fully Depreciated Property = When Carrying Amount is
Direct Attributable Costs: equal to 0 or its Residual Value

11
Conceptual Framework of Accounting Standards
Entities are encouraged but not required to disclose fully o Double Declining Method
depreciated properties
Straight Line Method
 Depreciation is a function of time not of usage
Purchase Cost XX  Allocation of depreciable amount equally over
Accumulated Depreciation (XX) the number of years of useful life
Accumulated Impairment (XX)  Constant charge over the useful life of the asset
Carrying Amount XX  Adopted when principal cause of depreciation is
passage of time

NOTE: RESIDUAL VALUE IS THE SAME AS SALVAGE Production Method

VALUE  Depreciation is a function of use not of time
 Useful life of an asset is considered in terms of
Depreciation – systematic allocation of the depreciable output it produces or the number of hours it
amount of an asset over the useful life works
- A matter of cost allocation in recognition of the  Depreciation is related to the estimated
exhaustion of the useful life of an item of PPE production capability of the asset and is
- It is an Expense, may be part of cost of expressed in a rate per unit of output or per
manufacturing or Operating Expense hour of use
- Begins when asset is available for use, ceases when  Adopted when principal cause of depreciation is
asset is derecognized usage

Factors of Depreciation Diminishing Balance or Accelerated Method

 Depreciable Amount – cost of an asset or the  Provides higher depreciation in earlier years
substituted cost less the residual value and lower depreciation in later years
 Residual Value – estimated net amount obtainable  Results in decreasing depreciation charge over
when asset is at the end of its useful life the useful life
 Useful Life – period over which an asset is expected  “new assets are generally capable of producing
to be available for use of an entity more revenue in the earlier years than in the
o Expected Usage of Asset later years”
o Expected Physical Wear and Tear
o Technical and Commercial Absolescence Government Grant
o Legal Limits o Assistance by government in the form of transfer of
resources to an entity in return for part or future
Depreciation Method – reflects the pattern in which compliance with certain conditions relating to the
the future economic benefits from the asset are operating activities of the entity
expected to be consumed by the entity o Recognized when there is reasonable assurance
- Reviewed at least every year-end that the company will
- Can be Changed when there is a significant change a. comply with the conditions attaching to the
in the expected pattern grant
b. grant will be received
Types of Depreciation Method
1. Straight Line Method Classifications of Grants
2. Production Method  Grant related to an Asset
3. Diminishing Balance or Accelerated Method  Grant related to Income
o Sum of Years’ Digit Method

12
Conceptual Framework of Accounting Standards
The grant is taken to income over one or more periods  Can be presented monthly, quarterly or
in which the related cost is incurred semiannually (quarterly are most common)
 Publicly Traded Entities are encouraged to
Presentation of Government Grant provided interim financial reports at least
1. Grant Related to an Asset: semiannually and such reports are to be made
a. Setting grant as deferred income available not later than 60 days after the end of
b. Deducting the grant in arriving at the the interim period
carrying amount of the asset  SEC and Ph Stock Exchange require entities
2. Grant Related to Income: covered by reportorial requirements of Revised
a. In the income statement separately or Securities Act to file quarterly interim financial
under the general heading of “other reports within 45 days after end of the interim
income” period
b. Grant is deducted from the related  SEC requires entities covered by Rules on
expense Commercial Paper and Financing Act to file
quarterly interim financial reports within 45
Government Assistance – action by government days after end of the interim period
designed to provide an economic benefit specific to an
entity or range of entities under certain criteria Components of Interim Financial Reports:
- no value can reasonably be placed upon it o Condensed Statement of Financial Position
o Condensed Statement of Comprehensive
Government Assistance DOES NOT include the Income
following: o Condensed Statement of Changes in Equity
 improvement to general transportation and o Condensed statement of Cash Flows
communication network
 imposition of trading constraints on NOTE: Condensed financial statements are a summary
competitors form of a company's earnings statement, balance sheet,
 improved facilities and cash flow statement. These statements are created
to provide a quick overview of the company's financial
Disclosure about Government Grant: status
 accounting policy and method of presentation
adopted in FS Items of profit or loss can be presented in a separate
 Nature and extent of government grant and condensed income statement
indication of other forms of government
assistance which company has benefitted from Disclosure in Compliance with PFRS:
 Unfulfilled conditions and other contingencies  If entity’s interim financial reporting is in
attaching to gov’t assistance that was compliance with PFRS such fact must be
recognized disclosed
 Must comply with all requirements of PFRS to
It is not required to disclose the name of the gov’t say it Complies with the PFRS
agency which gave the grant along with the date of
sanction. Selected Explanatory Notes – designed to provide
explanation of significant events and transactions
Interim Financial Reporting arising since the last annual FS
 Preparation and presentation of financial
statements for a period less than one year

13
Conceptual Framework of Accounting Standards
Disclosure in Condensed Financial Statements:
 Write-down of inventories and reversal of Indication for Impairment
write-downs - Entity shall assess at each reporting date whether
 Recognition of loss from impairment of PPE and any indication that an asset may be impaired exists
its reversal - If it exists, entity shall estimate recoverable amount
 Reversal of any provision of restructuring - Test will be done to an intangible asset with
 Acquisition and disposal of items in PPE indefinite useful life or intangible asset not yet
 Commitments for the Purchase of PPE available for impairment annually
 Litigation settlements - Causes of impairment may be external or internal
 Connections of prior period errors in previously External Causes:
reported financial data a. Decrease in market value due to time or a new
 Changes in the economic circumstances that competitor
affect fair value of financial assets and liabilities b. Change in technological, legal, or economic market
 Any debt to defraud or any breach of a debt c. Increase in Interest rate of return on investment
covenant that has not been corrected which affects the discount rate
subsequently d. Carrying amount is more fair value of net assets
 Related party transactions
 Changes in classifications of financial assets Internal Sources
 Contingent liabilities and contingents assets a. Evidence of obsolescence of an asset
b. Change in the manner which an asset is used with
Impairment of Assets adverse effect on the entity
 a fall in the market value of an asset so that the c. Evidence that economic performance of an asset
recoverable amount is now less than the will be worse than expected
carrying amount in the statement of financial
position Measurement of Recoverable Amount
Carrying Amount- amount at which an asset is
recognized in the financial statement after deducting Fair Value XX
accumulated depreciation and accumulated impairment Cost of Disposal or Value in Use (XX)
Recoverable Amount XX
loss

Amount in FS XX
NOTE: Whichever of the two (Cost of Disposal or Value
Accumulated Depreciation (XX)
Accumulated Impairment (XX) in Use) is Higher will be the one used
Carrying Amount XX
Fair Value less Cost of Disposal = Exit Price or Selling
Price of an Asset less cost of Disposal
An asset shall not be carried at above the recoverable
amount Fair Value – Price to be r3eceived to sell an asset in an
If carrying amount is higher than recoverable amount orderly transaction between market participants at
the asset is judged to have suffered an impairment loss measurement date

Accounting for Impairment, Three main Accounting Cost of Disposal – incremental cost directly attributable
Issues to the disposal of an asset excluding finance cost and
o Indication of Possible Impairment income taxes
o Measurement of the recoverable amount
o Recognition of Impairment Loss

14
Conceptual Framework of Accounting Standards
Value in Use – present value or discounted value of Criteria of Intangible Asset:
future net cash flows expected to be derived from an  Identifiability – if it can be sold, transferred,
asset licensed or rented separately (separable, arises
from contractual or legal rights)
NOTE: Cash flows are pretax cash flows and pretax  Control – power of an entity to have access over
discount rate is applied in determining present value the benefits of an asset and prevent others to
enjoy such benefits
Calculation of Value in Use  Future Economic Benefit- may be revenue of
 Cash flow projections shall be based on sale or cost savings
reasonable and supportable assumptions
 Based on the most recent budgets on financial Recognition of Intangible Assets:
forecast, usually max 5 years  Future economic benefits is probable
 Discount rate used is current pretax rate  Cost can be measured reliably

Compositions of Estimates of Future Cash Flows Intangible assets are measured initially at cost
 Projection of cash inflows related to continuing
 Projection of cash outflows necessary for cash Cost of Intangible Assets Includes:
inflows o Purchase Price
 Net cash flows received or paid on disposal of o Import Duties and nonrefundable purchase tax
asset o Directly Attributable cost of preparing the asset
 Employee benefit
Recognition of Impairment Loss  Professional Fee
 Cost of Testing
 Cost of Materials and Services
Amount in FS XX  Fee to register a legal right
Accumulated Depreciation (XX)  Amortization Patent
Carrying Amount XX
Internally generated goodwill shall not be recognized as
Carrying Amount XX
an asset
Recoverable Amount (XX)
Impairment Loss XX
Expensed:
Start-up Costs
Training Costs
Cash Generating Unit - smallest Identifiable group of
Advertising and Promotional Costs
assets that generate cash inflows, tested for impairment
Business Relocation and Reorganization Costs
at least annually including goodwill
General Rule: Subsequent Expenditure on an intangible
Goodwill- does not generate cash flows independently
asset shall be recognized as expense
from other assets or group of assets, recoverable
Exception:
amount of goodwill cannot be determined
 When future economic benefits is probable
- Recoverable amount of a goodwill is determined for
 Cost can be measured reliably
the cash generating unit to which it belongs
Subsequent Measurement of Intangible Assets:
Intangible Assets
 Cost Model
 Identifiable nonmonetary asset without physical
substance

15
Conceptual Framework of Accounting Standards
Cost XX Residual Value of an asset shall be presumed to be zero
Accumulated Depreciation (XX) except:
Accumulated Impairment Loss (XX) a. When a 3rd party is committed on buying the
New Measurement XX asset at the end of its life
b. When there is an active market and its residual
 Revaluation Model value can be measure reliably
Fair Value @ Date of Revaluation XX
Accumulated Depreciation (XX) Derecognize Intangible Asset:
Accumulated Impairment Loss (XX) o On disposal of Asset
New Measurement XX o When no future economic benefits are
expected

Note: Intangible asset can only be carried at revalued

Difference between net disposal proceeds and carrying
amount if there is an active market for the asset
amount is either the gain or loss from derecognition

Amortization of Intangible Assets

To assess whether an internally generated intangible
a. Intangible Assets with Limited or Finite Life are
asset meets the criteria for recognition it is classified
amortized over their useful life
into research phase and development phase
Tested for impairment when there is an
Research Phase – to discover new knowledge useful for
indication of impairment at the end of reporting
product development
period
Development Phase – application of research findings
to develop new product
b. Intangible Assets with Indefinite Life are not
If phase cannot be determined it is assumed to be it is
amortized but tested at least annually for
treated as an expenditure incurred during research
impairment and whenever there is an indication
phase
of impairment
Amortization – is the systematic allocation of the
Capitalizable Expenditures - research and
amortizable amount of an intangible asset over the
developmental cost which have alternative future use.
useful life (Amortization period, useful life)
Investment Property – property held by an owner or by
- Begins when asset is available for use
the lessee under a finance lease to earn rentals or for
- Amortized on a systematic basis over the useful life
long-term capital appreciation (LAND and BUILDING)
of an intangible asset
or when its use is undetermined yet
- Ceased when intangible asset is derecognized
- Building owned and leased out
- Useful life may be finite or indefinite
- Building Vacant but held to be leased out
- If finite: useful life is expressed in terms of years or
- Building constructed for future use as an
number of units produced
Investment Property
- Indefinite: when there is no foreseeable limit to the
- Not held for use in production or supply of goods
period over which an asset is expected to generate
and services (These are known as Owner-occupied
net cash flows
property)
- Not held for sale
Amortization Method – pattern in which the future
economic benefits from assets are expected to be
Investment Properties are measured initially at cost
consumed by the entity
Cost include:
If pattern cannot be deemed reliable the straight-line
 Purchase Price
method of amortization is used
 Directly Attributable Expenditure

16
Conceptual Framework of Accounting Standards
o Professional Fee - Objective: report elements of financial statements
o Property Transfer Taxes in in terms of pesos that have the same purchasing
o Other Transactions Costs power
AKA Purchasing power or Price Level Accounting
Subsequent Measurement of Investment Property: Nominal Peso Accounting - Preparation of financial
 Cost Model statements based on historical cost
Cost XX Monetary Items – money held and assets and liabilities
Accumulated Depreciation (XX) to be received or paid in a fixed determinable amount
Accumulated Impairment Loss (XX) of money
New Measurement XX - Right to receive or obligation to deliver a fixed
amount of money
 Fair Value Model - Investment Property is - Not restated because they are automatically
carried at fair value, any changes over the reported in terms of current purchasing power
period is recorded as gain or loss Nonmonetary Items - items which cannot be classified
as monetary
Note: If an office is leased on a furnished basis its fair - Their peso amount reported in financial statements
value includes the fair value of the furniture differ from the amounts that are ultimately
Residual Value of Investment Property is realizable or payable
assumed to be - Restated
Purchasing Power – goods and services that money can
Derecognize Investment Property: buy
o On disposal General Price Index – index number used for
o Investment property is permanently withdrawn restatement constructed by the Government
o When no future economic benefits are
expected Change Effect Term
Increase in
Purchasing Power
Disclosures Related to Investment Property general Price Inflation
Decreased
 If entity uses cost model or Fair value model in Index
measuring it Decrease in
Purchasing Power
 Amount of rental income and related expense general Price Deflation
Increased
Index
 Restrictions of Investment Property through
rental or sale proceeds
 Contractual obligations to Purchase or construct Restatement Formula
Investment Property
Index Number at end
of Reporting Period
Hyperinflation X Historical Cost
- It is a matter of judgment Index Number on
- Indicated by characteristics of the economic Date of Acquisition
environment of a country

Constant Peso Accounting – restatement of

conventional or historical financial statements in terms Noncurrent Assets Held for Sale
of the current purchasing power of the peso through - Asset that does not meet the definition of a current
the use of index number asset
o Available for immediate sale in present
condition
o Sale must be highly probable
17
Conceptual Framework of Accounting Standards
Disposal Group – group of assets to be disposed of by o Segment Revenue is 10% or more of the
sale in a single transaction combined revenue
- Carrying amount can be recovered through sale o Profit or Loss is 10% or more of the combined
rather than continuing use Profit
o Profit or Loss is 10% or more of the combined
Noncurrent asset held for sale must be measured at Loss
the lower carrying amount or fair value less cost of o Asset is 10% or more of the combined assets
disposal o When below 10% of any of the aforementioned
conditions but management believes that it
Note: Noncurrent assets held for sale are not would be useful to users of financial statements
depreciated
If fair value less cost of disposal is lower than Overall Size Test – 75% Threshold
carrying amount the writedown is treated as an - If total revenue of reportable operating segments
impairment loss constitutes less than 75%, additional operating
segments shall be identified as reportable until at
Abandoned noncurrent assets are not classified as 75% of external revenue is reached
noncurrent assets or disposal group
Disclosure for Each Segment
Operating Segment  General Information
 Component of an entity o Factors used to identify reportable
o May earn revenue and incur expenses segments
o Results are regularly reviewed by the o Types of products and services from
entity’s chief operating decision maker which each reportable segment derives
o Discrete financial information is revenue
available  Info about profit or loss
Segment Reporting o Measure of profit or loss
 Disclosure of certain financial information about  Info about segment assets, liabilities and basis
the products and services an entity produces of measurement
and the geographical areas in which an entity o Measure of total assets and total
operates liabilities
 Purpose: to enable investors and users make  Reconciliations of the total segment revenue,
better assessment of each business activity segment profit or loss, segment assets and
which leads to the understanding of the segment liabilities
performance of the entity as a whole Entity Wide Disclosure
 Additional information that is required to be
Chief operating Decision Maker – identifies a function, disclosed by all entities if such info is not part of
not necessarily a manager reportable segment information
Function : allocate resources to the segments and o About products and Services
assess their performance  Revenue from external customers for
each product/service
Management Approach – used in identifying operating o About Geographical Area
segments on the basis of internal reports about  Revenue from external customers in
components of an entity that are regularly reviewed by the entity’s country of domicile
the chief operating decision maker  Separate disclosure of material
revenue from external customers in an
Reportable if any of the following criteria are met: individual foreign country

18
Conceptual Framework of Accounting Standards
o About major customers*  Market Approach – identical and comparable
 Fact or reliance on major customers asset and liability
 Total amount of revenue from major  Income Approach – future amounts into
customers discounted cash flows
 Identity of the segments reporting the  Cost Approach – current replacement cost to
revenue replace the asset with a comparable asset
*a single external customer providing revenue which
amounts to 10% or more of entity’s external revenue Fair Value Hierarchy
1. Level 1 Input – Quoted Price in an active market
Fair Value Measurement for identical asset/liability
Fair Value - the prices that would be received to sell an 2. Level 2 Input – Not observable either directly or
asset, or paid to transfer a liability, in an orderly indirectly
transaction between market participants. 3. Level 3 – Unobservable inputs for the asset or
- Directly observable and readily available liability
- Can be estimated by valuation method
- Shall not be adjusted for transaction cost
- Shall be adjusted for transport cost
o Exit Price
o Price in an orderly transaction
o Price agreed upon by market participants

Market Participants – buyers and sellers in the market

 Independent and unrelated parties
 Knowledgeable or with understanding of the
transaction
 Willing or motivated to enter transaction

Active Market – Transactions has sufficient regularity

and volume to provide pricing info

Principal Market – greatest volume and level of activity

for the asset, most advantageous market

Most Advantageous Market – maximizes the amount

that would be received to sell the asset or minimizes
amount to be paid to transfer liability

Highest and Best Use of Asset Possess the following:

(Provide maximum value either on a stand-alone basis
or a group combination)
Physically Possible
Legally Permissible
Financially Feasible

Valuation Method

19