CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS

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APDS; BSA

MODULE 2: CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING

THE SCOPE OF THE REVISED CONCEPTUAL FRAMEWORK:
Revised Conceptual Framework ❖ Objective of financial reporting.
❖ Qualitative characteristics of useful financial
CONCEPTUAL FRAMEWORK FOR FINANCIAL information
REPORTING ❖ Financial statements and reporting entity
❖ Elements of financial statements
⎯ Is a complete, comprehensive, and single
❖ Recognition and derecognition
document promulgated by the International
❖ Measurement
Accounting Standards Board.
❖ Presentation and disclosure
⎯ It is a summary of terms and concepts that
❖ Concepts of capital and capital maintenance.
underlie the preparation and presentation of
financial statements for external users.
⎯ Describes the concepts for general purpose Objective of Financial Reporting
financial reporting.
⎯ Is an attempt to provide an overall theoretical The objective of financial reporting forms the foundation of the
foundation for accounting. Conceptual Framework.
⎯ Intended to guide standard setters, preparers and
users of financial information in the preparation The overall objective of financial reporting is to provide
and presentation of statements. financial information about the reporting entity that is
⎯ The underlying theory for the development of useful to existing and potential investors, lenders and
accounting standards and revision of previously other creditors in making decisions about providing
issued accounting standards. resources to the entity.
⎯ The objective of financial reporting is the "why",
The Conceptual Framework will be used in future standard purpose or goal of accounting.
setting decision, but no changes will be made to the current
IFRS. SPECIFIC OBJECTIVES OF FINANCIAL REPORTING
To provide information useful in making decisions about providing
❖
The Conceptual Framework provides the foundation forresources to the entity.
Standards that: ❖ To provide information useful in assessing the cash flow prospects
⎯ Contribute to transparency by enhancingof the entity.
international comparability and quality❖ ofTo provide information about entity resources, claims, and
financial information. changes in resources and claims.
⎯ Strengthen accountability by reducing
information gap between the providers of capital LIMITATIONS OF FINANCIAL REPORTING
and the people to whom they have entrusted their • General purpose financial reports do not and cannot
money. provide all of the information that existing and potential
⎯ Contribute to economic efficiency by helping investors, lenders and other creditors need. These users
investors to identify opportunities and risks need to consider pertinent information from other
sources, for example, general economic conditions,
across the world.
political events and industry outlook.
• General purpose financial reports are not designed to
The PURPOSE of the Revised Conceptual Framework as outlined is to:
show the value of an entity, but the reports provide
⎯ To assist the International Accounting Standards information to help the primary users estimate the value
Board to develop IFRS Standards based on of the entity.
consistent concepts. • General purpose financial reports are intended to
⎯ To assist preparers of financial statements to provide common information to users and cannot
develop consistent accounting policy when no accommodate every request for information.
Standard applies to a particular transaction or • To a large extent general purpose financial reports are
other event or where an issue is not yet addressed based on estimate and judgment rather than exact
by an IFRS. depiction.
⎯ To assist preparers of financial statements to
develop accounting policy when a Standard Qualitative Characteristics
allows a choice of an accounting policy.
⎯ To assist all parties to understand and interpret QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL
the IFRS Standards. INFORMATION
• These characteristics are the attributes that make
This Conceptual Framework is NOT an IFRS or PFRS, the information in financial statements useful to
and hence, does not define standards for any investors, creditors, and others.
particular measurement or disclosure issue. • In deciding which information to include in
financial statements, the objective is to ensure

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 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS
APDS; BSA
that the information is useful to the users in 2. FAITHFUL REPRESENTATION - Financial reports
making economic decisions. represent economic phenomena in words and
numbers. To be useful, financial information must
TWO CLASSIFICATIONS OF QUALITATIVE CHARACTERISTICS not only represent relevant phenomena, but it
❖ FUNDAMENTAL - Relate to the content or must also faithfully represent the phenomena that
substance of financial information. it purports to represent.
❖ ENHANCING - Relate to the presentation or form of
financial information.

FUNDAMENTAL QUALITATIVE CHARACTERISTICS

1. RELEVANCE – Capacity of the information to
influence a decision. The information is relevant
when it can make difference in the decisions
made by users.

INGREDIENTS OF RELEVANCE INGREDIENTS OF FAITHFUL REPRESENTATION

• PREDICTIVE VALUE – Information can help 1. COMPLETE
users increase the likelihood of correctly • A complete depiction includes all information
predicting or forecasting the outcome of necessary for a user to understand the
certain events. phenomenon being depicted, including all
• FEEDBACK VALUE – Information can help necessary descriptions and explanations.
users confirm or correct earlier • Also known as Principle of Full/Adequate
expectations. Disclosure

MATERIALITY
• Information is material if omitting, misstating, or
obscuring it could reasonably be expected to
influence the economic decisions that primary
users make on the basis of those statements
which provide financial information about a
specific reporting entity.
• A practical rule when items are not Significant
enough to affect the evaluation, decision, and
fairness.
• is an entity-specific aspect of relevance based on 2. NEUTRAL
the nature or magnitude, or both, of the items to • A neutral depiction is without bias in the selection
which the information relates in the context of an or presentation of financial information.
individual entity’s financial report. • A neutral depiction is NOT slanted, weighted,
• Also known as the “DOCTRINE OF emphasized, de-emphasised or otherwise
CONVENIENCE” manipulated to increase the probability that
financial information will be received favourably
or unfavourably by users.

3. FREE FROM ERROR

• means there are no errors or omissions in the
description of the phenomenon.
• the process used to produce the reported
information has been selected and applied with
no errors in the process.

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 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS
APDS; BSA
ENHANCING QUALITATIVE CHARACTERISTICS COST CONSTRAINT ON USEFUL FINANCIAL REPORTING

❖ COMPARABILITY, VERIFIABILITY, TIMELINESS COST is a pervasive constraint on the information that

, AND UNDERSTANDABILITY are qualitative can be provided by financial reporting.
characteristics that enhance the usefulness of
information that is relevant and faithfully Reporting financial information imposes costs, and it is
represented. important that those costs are justified by the benefits
of reporting that information.

COMPARABILITY is the qualitative characteristic that Financial Statements and Reporting Entity
enables users to identify and understand similarities in,
and differences among, items. GENERAL OBJECTIVE OF FINANCIAL STATEMENTS

FINANCIAL STATEMENTS provide information about

economic resources of the reporting entity, claims
against the entity and changes in the economic
resources and claims.

The financial statements provide financial information about an entity's

assets, liabilities, equity, income and expenses useful to users of financial
statements in:
• Assessing future cash flows to the reporting
entity.
• Assessing management stewardship of the
VERIFIABILITY helps assure users that information entity's economic resources.
faithfully represents the economic phenomena it
purports to represent. Verifiability means that different TYPES OF FINANCIAL STATEMENTS
knowledgeable and independent observers could ❖ CONSOLIDATED FINANCIAL STATEMENTS - These are
reach consensus, although not necessarily complete the financial statements prepares when the
agreement, that a particular depiction is a faithful reporting entity comprises both the parent and its
representation. subsidiaries.
❖ UNCONSOLIDATED FINANCIAL STATEMENTS - These
are the financial statements prepared when the
reporting entity is the parent alone.
❖ COMBINED FINANCIAL STATEMENTS - These are
financial statements when the reporting entity
comprises two or more entities that are not linked
by a parent and subsidiary relationship.

REPORTING ENTITY
• A reporting entity is an entity that is required or
chooses to prepare financial statements.
TIMELINESS Having information available to decision-
• The reporting entity can be a single entity or a
makers in time to be capable of influencing their
portion of an entity or can comprise more than
decisions. Quarterly or Interim Reports enhances
oone entity.
Timeliness to Financial Information. The Older the
• A reporting entity is not necessarily a legal entity.
Information the Less Useful Except When assessing
Trends. Accordingly, the following can be considered a reporting entity:
• Individual corporation, partnership or proprietorship
UNDERSTANDABILITY - Financial Information must be: • The parent alone
• The parent and its subsidiaries as single reporting entity
Clear and Concise, Presented & Expressed with • Two or more entities without parent and subsidiary relationship as
terminologies intended users readily understands. a single reporting entity.
• A reportable business segment of an entity .

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 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS
APDS; BSA
REPORTING PERIOD TIME PERIOD
This assumption requires that the indefinite life of an
The REPORTING PERIOD is the period when financial entity is subdivided into accounting periods, usually of
statements are prepared for general purpose financial equal length or period, for the purpose of preparing
reporting. Financial statements may be prepared on an financial statements. The “one-year” period is
interim basis, for example, three months, six months or traditionally the accounting period.
nine months.
The accounting period may be:
Underlying Assumptions • CALENDAR YEAR - A twelve (12) – month period
that ends on December 31
ACCOUNTING ASSUMPTIONS • NATURAL BUSINESS YEAR - A twelve (12) –
❖ are the basic notions or fundamental premises on month period that ends on any month when the
which the accounting process is based. business at its lowest or slack season.
❖ also known as postulates. • FISCAL YEAR - A Twelve (12) - month period that
❖ These serve as a foundation or bedrock of starts from any other month than January.
accounting to avoid misunderstanding but rather • INTERIM PERIOD - business period within an
enhance the understanding and usefulness of the accounting period. These are financial reports
financial statements. prepared at any date even if the 12-month period
is not yet due. (Weekly, monthly, quarterly, or
The Conceptual Framework for Financial Reporting mentions semi-annual)
ONLY ONE ASSUMPTION, that is GOING CONCERN.
MONETARY UNIT
GOING CONCERN means financial statements presume This assumption pertains to (1) quantifiability of the
that an enterprise will continue in operation indefinitely peso and (2) stability of the peso.
or if that presumption is not valid, disclosure and a 1) QUANTIFIABILITY OF THE PESO means that the
different basis of reporting are required. Its foundation elements of the financial statements should be
is the COST PRINCIPLE (assets are recorded at COST). stated under one unit of measure which is the
Philippine Peso.
The ACCRUAL ACCOUNTING founding on the going 2) STABILITY OF THE PESO means that the
concern assumption, depicts the effects of purchasing power of the peso is stable or constant
transactions and other events and circumstances on a and that instability is insignificant and therefore
reporting entity’s economic resources and claims in ignored.
the periods in which those effects occur, even if the ➢ STABILITY is also an amplification of the going
resulting cash receipts and payments occur in a concern assumption, that adjustments are
different period. unnecessary to account for nominal pesos only
and not for constant pesos.
The illustration below shows changes in economic resources and claims
as reflected by accrual basis and compared with cash basis of accounting:
Elements of Financial Statements

COMPONENTS OF FINANCIAL STATEMENTS

1) A statement of financial position as at the end of
the period
2) A statement of comprehensive income for the
period
3) A statement of changes in equity for the period
4) A statement of cash flows for the period
5) Notes, comprising a summary of significant
accounting policies and other explanatory
information.
INHERENT ASSUMPTIONS OF FINANCIAL 6) A statement of financial position as at the
STATEMENTS beginning of the earliest comparative period
when an entity applies an accounting policy
ACCOUNTING ENTITY OR SEPARATE ENTITY CONCEPT retrospectively or makes a retrospective
This assumption means that the entity is separate from restatement of items in its financial statements,
the owners, managers and employees who constitute or when it reclassifies items in its financial
the entity. Personal transactions of owners shall not be statements.
allowed to distort the financial statements of the entity.
ELEMENTS OF FINANCIAL STATEMENTS (FS)
SINGLE ECONOMIC ENTITY - This is where a Parent • Refers to the quantitative information reported in
and Subsidiary (PS) Relationship exists. the statement of financial position and income
statement.

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 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS
APDS; BSA
• “Building Blocks” from which FS are constructed. FORMS OF STATEMENT OF FINANCIAL POSITION

STATEMENT OF FINANCIAL POSITION REPORT FORM

Shows the financial condition of an entity of a particular This form set forth the three (3) major sections in
date. Downward sequence of Assets, Liabilities and Equity

• ASSET - A resource controlled by the enterprise

as a result of past events and from which future
economic benefits are expected to flow to the
enterprise.
• LIABILITY- A present obligation of the enterprise
arising from past events, the settlement of which
is expected to result in an outflow from the
enterprise of resources embodying economic
benefits.
• EQUITY- The residual interest in the assets of the
entity after deducting all of the liabilities.

CURRENT/NONCURRENT DISTINCTION
An entity must normally present a classified statement of
financial position, separating current and noncurrent assets
and liabilities. Only if a presentation based on liquidity provides
information that is reliable and more relevant may the
current/noncurrent split be omitted.

NORMAL OPERATING CYCLE

The time between the acquisition of assets for
processing and their realization cash or cash
equivalents. When the entity’s normal operating cycle
is not clearly identifiable, its duration is assumed to be
twelve months.
ACCOUNT FORM
Assets are shown in the Left side and the liabilities and
SHAREHOLDERS’ EQUITY
equity on the Right.
I. CONTRIBUTED (PAID-IN / INVESTED CAPITAL)
CAPITAL
⎯ Represent the amount invested or contributed by
owners.
1. CAPITAL SHARE – the contributions equal to the
par or stated value of the share purchased by
owners, or the total contribution by owners in
case of no-par share.
2. SHARE PREMIUM – contribution more than the par
or stated value, gains from share transactions and
“other” equity items that are not included in
earnings or other comprehensive income. INCOME STATEMENT / STATEMENT OF
COMPREHENSIVE INCOME
II. RETAINED EARNINGS
⎯ Accumulated profits and losses that have not 1. PROFIT AND LOSS - Income minus Expenses
been declared as dividends. including Tax expense and any Income or Loss
Classified into retained earnings that are prohibited from being declared
as dividends due to legal and contractual requirements or upon the from Discontinued Operations.
decision of the Board of Directors, “appropriated” and retained earnings 2. OTHER COMPREHENSIVE INCOME – –Items of
available as dividends to shareholders, “unappropriated”. income and expenses including reclassification
1. INCREASES – Effect of changes in accounting adjustments (RA) that are not included in Profit
policy and correction of prior period errors, Net and Loss as required by a standard or
Income and Quasi re-organization. interpretation. There are two types of OCI items,
2. DECREASES - Effect of changes in accounting those that are reclassified to profit or loss (RA)
policy and correction of prior period errors, and those that are reclassified to Retained
Dividends, Losses on share transactions like Earnings (RE). OCI includes the following;
retirement and reissuance of treasury shares, o Unrealized gain or loss on equity
conversion of preference shares and investments measured at FVOCI (RE)
recapitalization of par value other than share
splits.

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 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS
APDS; BSA
o Unrealized gain or loss on debt investments • Future Economic Benefits will flow directly or
measured at FVOCI (RA). indirectly to the entity.
o Unrealized gain or loss from derivative
contracts designated as cash flow hedge LIABILITY RECOGNITION PRINCIPLE
(RA) • A liability is recognized in the statement of
o Revaluation Surplus (RE) financial position when it is probable that an
o Remeasurement Gains and losses for outflow of resources embodying economic
defined benefit plans (RE) benefits will result from the settlement of a
o Change in fair value arising from credit risk present obligation and the amount at which the
for financial liabilities measured at FVPL settlement will take place can be measured
(RE) reliably.
o Translation gains and losses of foreign
operations THREE (3) ASPECTS ON THE DEFINITION OF
ASSETS
NATURE OF EXPENSE METHOD – Expenses are aggregated PRESENT OBLIGATION - a duty or responsibility that an
in the income statement according to their nature and entity has no practical ability to avoid.
are not reallocated among various functions within the TYPES OF OBLIGATION
entity. o LEGAL OBLIGATION - Obligations may be
legally enforceable because of a binding
FUNCTION OF EXPENSE OR COST OF SALES METHOD – contract or statutory requirements.
Classifies expenses according to their function as part o CONSTRUCTIVE OBLIGATION - Arise from
of cost of sales or, for example, the cost of distribution normal business practice, custom and a
or administrative activities. desire to maintain good business relations or
act in an equitable manner.
Recognition and Derecognition TRANSFER AN ECONOMIC RESOURCE - Another term for
Settlement of Liability
RESULT OF PAST EVENT - A present obligation exists
RECOGNITION OF THE ELEMENTS of the FS
because of past events only if.
o The entity has already obtained economic
RECOGNITION PRINCIPLES
benefits and
• Recognition is the process of incorporating in the
o Consequently, the entity will transfer
financial statements an item that meets the
economic resource.
definition of an element and satisfies the following
criteria for recognition.
INCOME RECOGNITION PRINCIPLE
• It is PROBABLE that any future economic benefit
• Income is recognized in the when an increase in
associated with the item will flow to or from the
future economic benefits related to an increase in
enterprise; and the item's cost or value can be
an asset or a decrease of a liability has arisen that
MEASURED with reliability.
can be measured reliably. This means, in effect,
that recognition of income occurs simultaneously
ASSET RECOGNITION PRINCIPLE
with the recognition of increases in assets or
• An asset is recognized in the statement of
decreases in liabilities.
financial position when it is probable that the
future economic benefits will flow to the
enterprise and the asset has a cost or value that
can be measured reliably.

THREE ASPECTS ON THE DEFINITION OF ASSET

RIGHTS

POINT OF SALE
FUTURE ECONOMIC BENEFIT - It is probable that future
• Legal title to the goods passes to the buyer “the
economic benefits will flow to the entity.
risk & rewards” of ownership at point of sale.
CONTROL
• It is usually the point of delivery.
There is control when.
• Ability for DIRECT USE
• Ability to enforce LEGAL RIGHTS

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 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS
APDS; BSA
EXCEPTIONS to the POINT OF SALE MATCHING PRINCIPLE
• INSTALLMENT METHOD • It requires that cost and expenses incurred in
o Revenue is recognized at the point of earning a revenue shall be reported in the same
collection. period.
o Revenue = Gross Profit Rate X Collections • There must be a Cost in earning a Revenue.
• COST RECOVERY METHOD
o Revenue is recognized at the point of Application of Matching Principle
collection. 1. CAUSE AND EFFECT ASSOCIATION - Expense is
o Collections are applied first to cost of recognized when Revenue is Recognized.
merchandise sold. Examples
• PERCENTAGE OF COMPLETION METHOD o Cost of Merchandise Inventory, Doubtful
o Contract Revenue and Contract Cost Accounts, Warranty Expense, Sales
associated with construction contract shall Commission
be recognized as revenue and expenses, 2. SYSTEMATIC AND RATIONAL ALLOCATION -
respectively. Expensed by Allocating over the PERIODS
• PRODUCTION METHOD benefited.
o Revenue is recognized at the point of Examples
production. o Depreciation, Amortization, Allocation of
o Applicable to Agricultural, forest and Prepayments
mineral products 3. IMMEDIATE RECOGNITION - Cost Incurred is
Expense outright because. NO future economic
OTHER INCOME RECOGNITION Benefit. Cease to qualify as an asset.
Examples
• INTEREST REVENUE o Administrative & Selling Expenses, Loss
o Revenue is Recognized on a TIME from Disposal of Asset
Proportion basis that considers the
EFFECTIVE YIELD on the asset. DERECOGNITION
• ROYALTIES • is defined as the removal of all or part of a
o Accrual = Based on AGREEMENT recognized asset or liability from the statement of
• DIVIDENDS financial position.
o Upon Declaration • Derecognition of an asset normally occurs when
• INSTALLATION FEES the entity loses control of all or part of the asset.
o Stage of Completion • Derecognition of a liability occurs when the entity
• SUBSCRIPTION REVENUE no longer has a present obligation for all or part of
o Straight Line Basis over the Subscription the liability.
Period
• ADMISSION Measurements
o When the Event Takes Place
• TUITION FEES MEASUREMENT involves assigning monetary
o The Period in Which Tuition is Provided amounts at which the elements of the financial
statements are to be recognized and reported.
EXPENSE RECOGNITION PRINCIPLE
• Expenses are recognized when a decrease in The Revised Conceptual Framework mentions two categories, including:
future economic benefits related to a decrease in 1. HISTORICAL COST - Also known as “Past
an asset or an increase of a liability has arisen that Purchase Exchange Price” & it is the Most
can be measured reliably. This means, in effect, Commonly Adopted
that recognition of expenses occurs The Amount of:
simultaneously with the recognition of an A) Cash or Cash Equivalent PAID or RECEIVED
increase in liabilities or a decrease in assets. Transaction Cost
Costs that is directly attributable to the acquisition,
issue or disposal of an asset or liability. Examples:
Legal Fees, Finder’s Fee, Transportation Cost
B) Fair Value (FV) of the consideration given to
acquire the asset “at the time of acquisition” The
price that would be received to sell an asset or
transfer a liability in an orderly transaction
between market participants at the measurement
date.

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 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS
APDS; BSA
HIERARCHY OR BEST EVIDENCE OF FAIR VALUE • Dissimilar items may be aggregated only if they
❖ LEVEL 1 - INPUTS are individually immaterial.
• Quoted Price in an active market for Identical
Assets OFFSETTING
• Active Market – transactions take place with • Assets and liabilities, and income and expenses,
sufficient regularity and volume. may not be offset unless required or permitted by
❖ LEVEL 2 - OBSERVABLE INPUTS a Standard or an Interpretation.
• Quoted Price in an active market for Similar
Assets or COMPARATIVE INFORMATION
• Quoted Price in an inactive market for Similar • PAS 1 requires that comparative information shall
Assets or Identical be disclosed in respect of the previous period for
❖ LEVEL 3 - UN-OBSERVABLE INPUTS all amounts reported in the financial statements,
• Assets Developed by the entity using BEST both face of financial statements and notes,
AVAILABLE INFORMATION from entity’s own unless another Standard requires otherwise. If
data. comparative amounts are changed or
reclassified, various disclosures are required.
2. CURRENT VALUE - Also known as "Current
Purchase Exchange Price." Concepts of Capital and Capital Maintenance
Current Value includes:
• Fair value (at measurement date) CONCEPTS OF CAPITAL
• Value in use for asset- the present value of
the cash flows that an entity expects to FINANCIAL CONCEPT OF CAPITAL - capital is synonymous
derive from the use of an asset and from the with net assets of the enterprise. This is the concept of
ultimate disposal. capital adopted by most enterprises. A financial
• Fulfillment value for liability- the present concept of capital, e.g., invested money or invested
value of cash that an entity expects to purchasing power, means capital is the net assets or
transfer in paring or settling a liability. equity of the entity.
• Current Cost- the cost of an equivalent asset
at the measurement dare comprising the PHYSICAL CONCEPT OF CAPITAL – capital is regarded as
consideration that would be received less the productive capacity of the enterprise based on, for
any transaction cost at measurement date. example, units of output per day.

Presentation and Disclosure CONCEPTS OF CAPITAL MAINTENANCE

FINANCIAL CAPITAL MAINTENANCE – Under this concept,

GOING CONCERN a profit is earned only if the financial (or money)
• An entity preparing PFRS financial statements is amount of the net assets at the end of the of the period
presumed to be a going concern. exceeds the financial (or money) amount of the net
• If management has significant concerns about assets at the beginning of the period, after excluding
the entity's ability to continue as a going concern, any distributions to, and contributions from, owners
the uncertainties must be disclosed. If during the period.
management concludes that the entity is not a
going concern, the financial statements should NET ASSET END > NET ASSET BEGINNING = PROFIT
not be prepared on a going concern basis, in
which case PAS 1 requires a series of disclosures. PHYSICAL CAPITAL MAINTENANCE – Under this concept,
a profit is earned only if the physical productive
ACCRUAL BASIS OF ACCOUNTING capacity (or operating capability) of the enterprise (or
• PAS 1 requires that an entity prepare its financial the resources need to achieve that capacity) at the end
statements, except for cash flow information, of the period exceeds the physical productive capacity
using the accrual basis of accounting. at the beginning of the period, after excluding any
distributions to, and contributions from, owners during
CONSISTENCY OF PRESENTATION the period.
• The presentation and classification of items in the
financial statements shall be retained from one
period to the next unless a change is justified
either by a change in circumstances or a
requirement of a new PFRS.

MATERIALITY AND AGGREGATION

• Each material class of similar items must be
presented separately in the financial statements.

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