CHAPTER 1: THE ACCOUNTANCY PROFESSION

Accounting, considered a service activity, is dedicated to furnishing quantitative financial

information about economic entities to facilitate well-informed decision-making. This process
involves the identification, measurement, and communication of economic information through
recognizing or not recognizing accountable events, assigning peso amounts to transactions, and
preparing accounting reports. The overarching objective is to provide valuable financial
information to stakeholders, particularly owners and creditors. In the Philippines, the practice of
accountancy is regulated by Republic Act No. 9298, known as the Philippine Accountancy Act of
2004, with the Board of Accountancy authorized to establish rules governing the profession.
Certified Public Accountants (CPAs) engage in public, private, and government accounting, with
Republic Act No. 10912 mandating a continuing professional development (CPD) program for
regulated professions, including accountancy. A recent resolution by the Board of Accountancy
requires all CPAs, regardless of practice area, to comply with 120 CPD credit units, though only 15 are
necessary for license renewal. CPAs are permanently exempted from CPD requirements at the age
of 65. The preparation and presentation of financial statements are guided by generally accepted
accounting principles (GAAP), encompassing rules, procedures, practices, and standards.

CHAPTER 2: CONCEPTUAL FRAMEWORK – OBJECTIVE OF FINANCIAL REPORTING

The International Accounting Standards Board (IASB) plays a pivotal role in issuing the conceptual
framework for financial reporting, a comprehensive document aimed at guiding standards to
enhance transparency, accountability, and economic efficiency in financial reporting. When
specific standards are lacking, management turns to this conceptual framework to formulate
relevant and reliable accounting policies. Financial reporting primarily serves existing and potential
investors, lenders, and creditors, with the broader aim of providing useful information for decision-
making regarding resource allocation. The focus on financial performance information aids in
comprehending the entity's return on economic resources. The application of accrual accounting
principles, recognizing income when earned and expenses when incurred regardless of payment
timing, is a fundamental aspect of this framework, establishing a robust foundation for consistent
and meaningful financial reporting.

CHAPTER 3: CONCEPTUAL FRAMEWORK – QUALITATIVE CHARACTERISTICS

In financial accounting, qualitative characteristics are pivotal in rendering information valuable to

users. The fundamental traits, relevance, and faithful representation, underscore the influence on
decisions and accurate depiction of economic phenomena. Materiality permits flexibility in
adhering to Generally Accepted Accounting Principles (GAAP) for insignificant items, while faithful
representation encompasses completeness, neutrality, and freedom from error. Completeness
ensures clarity in presenting relevant information to avoid misinterpretation, neutrality demands
unbiased financial statement preparation, and freedom from error underscores accurate and
complete descriptions. Conservatism advises opting for alternatives with minimal impact on equity.
Comparability notes similarities and differences, consistency calls for uniform accounting methods
within entities, and understandability requires information to be comprehensible. Verifiability
implies consensus among independent observers on faithful representation. Timeliness stresses
the importance of financial information availability when decisions are made, completing the set
of qualitative characteristics that enhance the usefulness of financial accounting information.

CHAPTER 4: CONCEPTUAL FRAMEWORK – FINANCIAL STATEMENTS AND REPORTING ENTITY

Financial statements play a crucial role in conveying information about the economic resources,
claims, and changes within an entity. The revised conceptual framework recognizes three main
types of financial statements: consolidated, unconsolidated, and combined. The reporting entity,
which is the entity preparing financial statements, adheres to accounting assumptions or
postulates, including the going concern assumption that assumes the entity will continue operating
indefinitely unless evidence suggests otherwise. The time period assumption divides the entity's
indefinite life into accounting periods for financial reporting. Additionally, financial figures are
quantified in a unit of measure, like the peso in the Philippines, adhering to the stability of peso
assumption, which assumes that the purchasing power of the peso remains stable, and any
instability is negligible and can be disregarded.

CHAPTER 5: CONCEPTUAL FRAMEWORK- ELEMENTS OF FINANCIAL STATEMENTS

The elements of financial statements, as reported in the statement of financial position and income
statement, encompass assets, liabilities, equity, income, and expenses. Assets, liabilities, and equity
directly contribute to the measurement of financial position, while income and expenses are directly
tied to the measurement of financial performance. According to the revised conceptual framework,
an asset is a present economic resource controlled by the entity due to past events, and potential
economic benefits may manifest in various forms. Liabilities are present obligations to transfer
economic resources resulting from past events, characterized by the absence of the obligation, the
obligation to transfer an economic resource, and the present nature of the obligation arising from
past events. Income involves increases in assets or decreases in liabilities leading to increased
equity, excluding contributions from equity holders, while expenses encompass decreases in assets
or increases in liabilities resulting in decreased equity, excluding distributions to equity holders. This
framework establishes a comprehensive understanding of the essential components in financial
reporting.
CHAPTER 6: CONCEPTUAL FRAMEWORK - RECOGNITION AND MEASUREMENT

The revised conceptual framework outlines key principles governing the recognition and
measurement of financial statement elements. Recognition is the process of incorporating items
meeting asset, liability, equity, income, or expense definitions into financial statements. Income is
recognized when earned, while expenses are acknowledged when incurred, aligning with the
matching principle's three applications: cause and effect association, systematic and rational
allocation, and immediate recognition. Derecognition involves removing recognized assets or
liabilities from the statement of financial position. Measurement involves quantifying elements in
monetary terms, with historical cost and current value as the two categories. Current value,
encompassing fair value, value in use for assets, fulfillment value for liabilities, and current cost,
provides a dynamic approach to financial statement quantification. The framework establishes a
comprehensive guide for consistent and meaningful financial reporting.

CHAPTER 7: CONCEPTUAL FRAMEWORK-PRESENTATION AND DISCLOSURE CONCEPTS OF CAPITAL

Presentation and disclosure play a crucial role in effectively communicating information within
financial statements. Classification involves sorting assets, liabilities, equity, income, and expenses
based on shared characteristics, while aggregation combines elements with similar characteristics
within the same classification. The revised conceptual framework introduces the term "statement
of financial performance," encompassing the income statement and the statement presenting
other comprehensive income. The capital maintenance approach dictates that net income only
occurs after maintaining the capital used from the beginning of the period. In a financial capital
concept, such as invested money or purchasing power, capital is synonymous with the net assets
or equity of the entity. Physical capital, on the other hand, quantifies the productive capacity for
producing goods and services. These principles collectively contribute to a comprehensive
understanding of financial statement information.

CHAPTER 9: PAS 1: INCOME STATEMENT

The income statement, a formal record showcasing an entity's financial performance within a
specified timeframe, plays a crucial role in predicting future performance and cash flow
generation. Income derives from various sources such as merchandise sales, services rendered,
resource utilization, and non-product disposals. Alternatively, the natural presentation groups
expenses based on their nature within the entity. Comprehensive income, reflecting equity
changes excluding owner transactions, goes beyond the traditional income statement by
incorporating items not recognized in profit or loss, offering a more comprehensive perspective on
financial performance. This approach aims to provide a thorough understanding of an entity's
financial dynamics.
CHAPTER 10: PAS 7: STATEMENT OF CASH FLOWS

The statement of cash flows, an integral part of financial statements, succinctly summarizes an
entity's operating, investing, and financing activities. Its primary purpose is to furnish relevant
information about an entity's cash receipts and payments during a specific period. Cash,
encompassing cash on hand and demand deposits, and cash equivalents, short-term highly liquid
investments with negligible risk of value change, are key components. Operating activities involve
cash flows primarily from the entity's main revenue-producing endeavors, while investing activities
stem from the acquisition and disposal of long-term assets and other non-cash-equivalent
investments. Financing activities comprise cash flows derived from equity capital and borrowings.

CHAPTER 11: PAS 8: ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATE AND ERRORS

Accounting policies are the principles and practices used by an entity in preparing financial
statements. A change in accounting policy occurs when an entity adopts a new generally accepted
accounting principle. Retrospective application involves adjusting the opening balance of retained
earnings to account for the change. Changes in accounting estimates are routine adjustments to
assets or liabilities based on updated information. Prior period errors, resulting from omissions or
misstatements, are corrected retrospectively by adjusting the opening balances of retained
earnings and affected assets and liabilities.

CHAPTER 12: PAS 10: EVENTS AFTER THE REPORTING PERIOD

PAS 10, specifically in paragraph 3, outlines events after the reporting period as occurrences,
whether favorable or unfavorable, that transpire between the end of the reporting period and the
date on which the financial statements are authorized for issue. Adjusting events after the reporting
period offer evidence of conditions existing at the end of the reporting period, while nonadjusting
events indicate conditions arising after this period. Financial statements receive authorization for
issue following a review by the board of directors. This framework provides clarity on the treatment
of events occurring after the reporting period in the context of financial statement preparation.

CHAPTER 13: PAS 24: RELATED PARTY DISCLOSURES

Related parties are identified based on criteria involving control, significant influence, or joint control
over another reporting entity. A related party transaction encompasses the transfer of resources or
obligations between such parties, irrespective of whether a price is involved. According to PAS 24,
disclosure is mandated under paragraph 12 when a related party relationship involves control,
regardless of transaction occurrence. Additionally, paragraph 17 necessitates disclosure of the
nature of related party relationships, along with comprehensive information about related party
transactions and outstanding balances, when transactions have taken place. This framework, as
outlined in PAS 24, ensures transparency and a comprehensive understanding of the financial
implications associated with related party involvements in financial statements.

CHAPTER 14: PAS 2 : INVENTORIES

Inventories are assets for sale, in production, or as materials for services. Trading concerns buy and
sell goods without altering them, while manufacturing concerns transform goods before sale.
Inventory cost includes purchase, conversion, and related expenses. Purchase cost comprises price,
duties, taxes, freight, and handling. Conversion cost involves production-related expenses like direct
labor. Other costs are included if they contribute to the inventory's condition. Cost methods include
First in, First out and Weighted Average. The measurement of inventory at the lower of cost and net
realizable value is known as LCNRV.

CHAPTER 15: PAS 16: PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment (PPE) are tangible assets held for production, rental, or
administrative purposes, expected to be used over multiple periods. The cost model values PPE at
cost less accumulated depreciation and impairment losses. The revaluation model values PPE at a
revalued carrying amount. Derecognition involves removing the cost and accumulated
depreciation from the financial position statement. Depreciation is the systematic allocation of the
depreciable amount (cost less residual value) over an asset's useful life. Residual value is the
estimated net amount at the end of the useful life. Useful life is the period an asset is available for
use or the expected production units. Depreciation methods include straight line, production, and
diminishing balance.

CHAPTER 16: PAS 20: GOVERNMENT GRANT

PAS 20, in paragraph 3, defines a government grant as assistance provided by the government in
the form of resource transfers to an entity. This assistance is given in return for the entity's past or
future compliance with specific conditions related to its operating activities. If a government grant
is receivable to compensate for expenses or losses already incurred, or to offer immediate financial
support with no further related costs, it is recognized as income in the period when it becomes
receivable. Additionally, government assistance is characterized as actions taken by the
government to provide an economic benefit tailored to a specific entity or a group of entities
meeting certain criteria.
CHAPTER 17: PAS 23: BORROWING COSTS

Under PAS 23, borrowing costs include interest and related expenses incurred in obtaining funds.
There are two types of borrowings: specific, used exclusively for acquiring a qualifying asset, and
general, intended for both qualifying assets and general purposes. Qualifying assets are those
requiring a substantial time for preparation. PAS 23, paragraph 12, states that for specific
borrowings, capitalizable borrowing cost is the actual cost incurred minus investment income from
temporary use. For general borrowings, as per paragraph 14, the capitalizable cost is the average
carrying expenditures multiplied by a capitalization rate or average interest rate.

CHAPTER 18: PAS 28: INVESTMENT IN ASSOCIATES

An associate, as per PAS 28, is an entity over which the investor holds significant influence, defined
as the ability to participate in financial and operating decisions without control or joint control. If the
investor pays more or less than the carrying amount of an investment's net assets, an accounting
issue arises. PAS 28, paragraph 32, states that any excess of the investor's share of the associate's
net fair value over the investment cost is treated as income in the investor's share of the associate's
profit or loss when acquiring the investment. If significant influence is lost, as per paragraph 22, the
investor must discontinue the equity method and measure any remaining investment in the
associate at fair value on the date of loss of significant influence.

CHAPTER 19: PAS 36: IMPAIRMENT OF ASSETS

The fundamental principle in accounting stipulates that an asset should not be carried on the books
at a value exceeding its recoverable amount, leading to the recognition of an impairment loss if the
carrying amount surpasses this threshold. The recoverable amount, determined by the higher of
fair value less disposal costs or value in use, is crucial. Fair value is the price achievable in an orderly
transaction, while value in use represents the present value of anticipated future net cash flows
from the asset. According to PAS 36, paragraph 114, any impairment loss recognized for an asset in
previous years must be reversed if there is a change in the estimate of the recoverable amount.
Additionally, the concept of a cash-generating unit is introduced, denoting the smallest identifiable
group of assets generating cash inflows independently of other assets or groups.

CHAPTER 20: PAS 38: INTANGIBLE ASSETS

An intangible asset, as defined, is an identifiable nonmonetary asset lacking physical substance

and is characterized by three key criteria: identifiability, control, and future economic benefits.
Identifiability is established when the asset is separable and arises from a contractual or legal right.
Control refers to the entity's power to obtain future economic benefits from the intangible asset and
restrict others' access to those benefits. Future economic benefits encompass revenue from
product sales, cost savings, or other advantages derived from utilizing the asset. Entities must
choose between the cost model and revaluation model as their accounting policy for intangible
assets. Amortization, the systematic allocation of the amortizable amount over the useful life, is
applied in the accounting of intangible assets.

CHAPTER 21: PAS 40: INVESTMENT PROPERTY

Investment property, as defined, comprises land, buildings, or parts thereof held by an owner or
lessee under a finance lease, with the primary aim of earning rentals, capital appreciation, or both.
Notably, some properties may serve dual purposes, with one part intended for rentals or
appreciation and another for manufacturing or administrative uses. The fair value of an asset is
determined by the price achievable in an orderly transaction between market participants at the
measurement date. Entities must choose between the fair value model and cost model as their
accounting policy for investment property, applying the chosen policy consistently. Under the fair
value model, changes in fair value are recognized in profit or loss annually, while the cost model
involves carrying the property at cost less accumulated depreciation and any impairment losses if
the entity opts for this method.

CHAPTER 22: PAS 41: BIOLOGICAL ASSET AND AGRICULTURAL PRODUCE

Biological assets encompass living animals and plants, with agricultural produce representing the
harvested output of an entity's biological assets. Harvesting involves either the detachment of
produce from a biological asset or the cessation of its life processes. Agricultural activity involves
an entity's management of the biological transformation and harvest of such assets for sale or
conversion into agricultural produce or additional biological assets. The measurement of a
biological asset at initial recognition and the end of each reporting period is at fair value less the
cost of disposal. Any gain or loss arising from the initial recognition or subsequent changes in fair
value less cost of disposal is recorded in the profit or loss statement.

CHAPTER 23: PAS 37: PROVISION, CONTINGENT LIABILITY AND ASSET

A provision is an existing liability characterized by uncertain timing or amount, stemming from a

legal or constructive obligation. Legal obligations arise from contracts, legislation, or other legal
frameworks, while constructive obligations result from an entity's established policy, creating a valid
expectation to assume certain responsibilities. An obligating event, creating a legal or constructive
obligation, occurs when the entity has no realistic alternative but to settle the obligation. Notably,
accounting provisions cannot be established in anticipation of future events, and if it becomes
improbable that an outflow of economic benefits is required, the provision must be reversed.
Provisions are designated for the specific expenditures they were initially recognized for and should
not be repurposed. In contrast, contingent liabilities are potential obligations arising from past
events, confirmed only by uncertain future occurrences, and contingent assets are potential assets
dependent on uncertain future events.

CHAPTER 24: PAS 22: FINANCIAL INSTRUMENTS – PRESENTATION

As per PAS 32, a financial instrument, defined in paragraph 11, is any contract giving rise to both a
financial asset for one entity and a financial liability or equity instrument for another. Financial
assets include cash, contractual rights to receive cash or other financial assets, and equity
instruments of other entities. Financial liabilities encompass contractual obligations to deliver cash
or financial assets and to exchange financial instruments under potentially unfavorable conditions.
Equity instruments are succinctly defined in line with the basic accounting equation, where equity
equals assets minus liabilities. Additionally, PAS 32, paragraph 28, introduces the concept of a
compound financial instrument, characterized by both liability and equity elements from the
issuer's perspective.

CHAPTER 25: PAS 12: INCOME TAXES

In the context of income and taxation, accounting income or financial income refers to the net
income for a period before considering income tax expenses, while taxable income is determined
according to tax law, forming the basis for payable or recoverable income taxes. Permanent
differences involve items included in either accounting or taxable income exclusively and never in
both, whereas temporary differences encompass items included in both income measures but at
different time periods. As outlined in PAS 12, paragraph 15, a deferred tax liability is mandated for all
taxable temporary differences, representing future taxable amounts in determining income for
subsequent periods. This liability arises when accounting income exceeds taxable income due to
anticipated future taxable amounts. Concurrently, a current tax liability, classified as a current
liability, is either the actual income tax payable or the current tax expense for a given period.

CHAPTER 26: PAS 19: EMPLOYEE BENEFITS

Employee benefits encompass all considerations provided by an entity for services rendered by
employees or termination of employment. Postemployment benefits, excluding termination and
short-term benefits, are payable after employment completion. Defined contribution plans involve
fixed contributions to a separate fund, while defined benefit plans commit the entity to provide
agreed-upon benefits. Current service cost reflects the present value increase of defined benefit
obligations due to employee service in the current period, while past service cost arises from prior-
period employee services under a defined benefit plan introduction, amendment, or curtailment.
Termination benefits are granted in exchange for ending an employee's employment.
CHAPTER 27: PAS 33: EARNINGS PER SHARE

Earnings per share (EPS) represents the amount attributable to each ordinary share outstanding
during a given period, focusing solely on ordinary shares. Ordinary shares, being equity instruments
subordinate to other equity classes, are the subject of EPS information. Entities are required to
disclose basic and diluted EPS on the income statement for both continuing and discontinued
operations. Share options, granted to employees for acquiring ordinary shares at a predetermined
price within a specific timeframe, are accounted for using the treasury share method. This method
simplifies the calculation of incremental or potential ordinary shares assumed to be issued for no
consideration due to share options.

CHAPTER 28: PAS 34: INTERIM FINANCIAL REPORTING

Interim financial reporting, as defined, involves the preparation and presentation of financial
statements covering a period of less than one year. PAS 34 does not prescribe which entities are
obligated to release interim financial reports, their frequency, or the timeframe after the end of an
interim period. According to Paragraph 8A, entities have the flexibility to present a separate
condensed income statement or a complete set of financial statements in their interim reports. The
term "condensed" implies that all headings and subtotals from the entity's latest annual financial
statements are necessary, but additional detail is not mandated unless explicitly required.
Furthermore, Paragraph 25 of Appendix B in PAS 34 stipulates that inventories for interim financial
reporting should be measured using the same principles as at the financial year-end. Lastly,
Paragraph 17 of PAS 34 requires the disclosure of inventory writedowns to net realizable value and
the subsequent reversal of such writedowns in later interim periods.

CHAPTER 29: PAS 29: REPORTING IN HYPERINFLATION ECONOMY

PAS 29, which addresses financial reporting in hyperinflationary economies, refrains from
establishing a definitive rate for determining hyperinflation, recognizing it as a matter of judgment.
According to PAS 29, paragraph 8, entities reporting in the currency of a hyperinflationary economy
must express their financial statements in terms of the measuring unit prevailing at the end of the
reporting period. PAS 21 defines monetary items as money held, along with assets and liabilities to
be received or paid in fixed or determinable amounts of money. Nonmonetary items, as identified
by exclusion, encompass those not classified as monetary, their reported peso amounts differing
from amounts ultimately realizable or payable. Monetary items are not restated, as they
automatically reflect the current purchasing power of the peso. Purchasing power denotes the
goods and services money can purchase, and in times of rising prices, monetary assets experience
a loss in purchasing power, while gains are realized on the settlement of monetary liabilities due to
decreased purchasing power.