CONCEPTUAL FRAMEWORK FOR FINANCIAL (c) In the absence of a standard or an

REPORTING interpretation that specifically applies to a

Hierarchy of accounting
- Specific Standard transaction, management shall consider
-Related Standard the applicability of the Conceptual
Basic Concepts - Conceptual Framework (if wala yung Framework in developing and applying an
bith)
- Other Standards GAAP international accounting policy that results in
Definition and Background (kapag wala yunh Conceptual) information that is relevant and reliable.
The Conceptual Framework- Old
is aLiterature
summary (kapag
ofwala
theparing
GAAP)
terms and concepts that underlie the preparation Underlying Assumptions
and presentation of financial statements. Accounting assumptions or accounting postulates
> FS - general purpose financial statement
are the basic notions or fundamental premises on
The Conceptual Framework is concerned with which the accounting process is based.
general purpose financial statements, including CF PFRS
consolidated financial statements. Special purpose a) Going Concern (Continuity Assumption)
reports are outside the scope of the framework. Going concern assumption means that the
accounting entity is viewed as continuing in
Underlying Theme operation indefinitely in the absence of
The underlying theme of the framework is decision evidence to the contrary. Going concern is the
usefulness or Usefulness of information in making foundation of cost principle.
economic decision.
Examples of application of going concern
Purposes principle:
• The current and non-current
Basic Purpose: To serve as a guide in developing classification of assets and liabilities
• The accrual of income and expenses and
future PFRSs and as a guide in resolving accounting prepayments and unearned income
issues not directly addressed by existing PFRS. • Depreciation of PPE, amortization of
intangible assets and etc.
BV - SALVAGE VALUE ÷ USEFUL LIFE
Specific Purposes: b) Accrual Principle
Accrual principle addresses the recognition of
1. To assist BUSINESSES
income and expenses as against the cash
(a) in developing future PFRSs and basis principle. Under this principle, income is
reviewing existing PFRSs. recognized when earned rather than when
FRSC (b) in promoting harmonization of received and expense is recognized when
regulations, accounting standards incurred rather than when paid.
and procedures relating to the
presentation of FS. c) Accounting Entity Concept
Preparers of FS in applying PFRSs. Under this concept, the entity is viewed
separately from its owners. Accordingly, the
Users of FS in interpreting the information in FS. personal transactions of the owners among
in forming an opinion as to whether themselves or with other entities are not
Auditors the FS conforms with PFRS. recorded in the entity’s accounting records.
2. To provide information to those who are
d) Time Period Principle
interested with the work of FRSC.
According to the going concern principle, the
Authoritative Status of the Conceptual Framework operation of the business is viewed
(a) The Conceptual Framework is not a indefinitely. That was the foundation of the
Philippine Financial Reporting Standard time period principle. Under this principle,
(PFRS) and hence does not define the life of the entity is divided into series of
standard for any measurement or reporting periods. An accounting period is
disclosure issue. Thus, nothing in the usually 12 months and may either be a
Conceptual Framework overrides any calendar year or a fiscal year.
specific Philippine Financial Reporting
Standard. e) Monetary Unit Principle
Under this principle, accounting information
should be stated in a common measurement
(b) In case where there is a conflict, the basis to be useful, which is in the Philippines
requirements of the Philippine Financial it is peso. Also, this concept assumes that the
Reporting Standards shall prevail over the purchasing power of the peso is regarded as
constant.
Conceptual Framework.
> Identifiability - FACE VALUE
Conceptual Framework - GENERAL > STABILITY - doesn't affect the value regardless of inflation or deflation
PFRS - SPECIFIC
Scope of the Conceptual Framework Chapter 2: Qualitative Characteristics of Useful
Information
Chapter 1: Objective of Financial Reporting (The Definition
Foundation of the CF) Qualitative characteristics are the qualities or
Users of financial information attributes that make financial accounting
Users of financial information is classified into information useful to the users.
primary and other users. Primary users include
potential and existing investors, lenders and other Under the Conceptual Framework for Financial
creditors. They are considered as primary users since Reporting, qualitative characteristics are classified
they are the primary providers of resources to the into fundamental qualitative characteristics and
entity. Other users include employees, customers,
government and their agencies and public. enhancing qualitative characteristics.

Summary of users and their needs or concerns on the Fundamental Qualitative Characteristics
financial statements - are the qualities that make the
information useful to the users in making
User Concern(s) economic decisions. These characteristics
(a) Risk and return of investment address the content or substance of
Investors (b) Ability to pay dividends
Lenders and Liquidity and solvency information. The fundamental qualitative
other creditors characteristics are relevance and faithful
Employees Stability and profitability representation
Customers Continuity
Government Regulatory Relevance means the capacity of information to
Public Various make a difference in a decision made by users.
Relevant information has the following ingredients:
Objectives of Financial Reporting a) Predictive Value – the information can help
Overall objective: To provide financial information users increase the likelihood of correctly
about the reporting entity that is useful to existing predicting or forecasting outcome of events.
and potential investors, lenders and other creditors b) Confirmatory Value – the information
in making decisions about providing resources to the enables users confirm or correct earlier
entity". expectations.
Specific objectives
A. To provide information useful in making TAKE NOTE:
decisions about providing resources to the 1) Predictive and confirmatory values are
entity. interrelated, meaning, often, information
B. To provide information useful in assessing has both predictive and confirmatory values.
the prospects of future net cash flows to the
entity.
C. To provide information about entity 2) Materiality is NOT an ingredient of relevance
resources, claims and changes in resources but rather an specific aspect of relevance.
and claims. Meaning, all material items are relevant but
not all relevant items are material.
Limitations of financial reporting it's general, not specific
3) What is materiality?
(a) General purpose financial reports do not
It is the omission or misstatement of
and cannot provide all of the information
information causing to influence the decision
that existing and potential investors,
of the users. Accordingly, the framework and
lenders and other creditors need.
PFRSs do not specify a uniform quantitative
(b) General purpose financial reports are not
threshold for materiality, thus, materiality is
designed to show the value of an entity
purely based on judgment. In the exercise of
but they provide information to help the
judgment in determining materiality, the
primary users estimate the value of the
following factors may be considered: (a)
entity.
Relative size of the item in relation to the
(c) General purpose financial reports are
total of the group to which the item
intended to provide common
belongs; (b) Nature of the item.
information to users and cannot
accommodate every request for
information. Faithful representation means that the information
(d) To a large extent, general purpose provides a true, correct and complete depiction of the
financial reports are based on estimate economic phenomena that it purports to represent.
and judgment rather than exact depiction. Simply stated, faithful representation means that the
descriptions and figures match what really existed or
happened. Also, faithful representation means that
the actual effects of the transactions shall be properly Information is comparable if it helps users identify
accounted for and reported in the financial similarities and differences between different sets of
statements. To be a perfectly faithful representation, information that are provided by:
a depiction should have three ingredients, namely: a) a single entity but different periods
(intra-comparability); or
b) different entities in a single period
a) Completeness – all information (inter-comparability).
necessary for users to understand the Although related, consistency and comparability are
phenomena depicted is provided, not the same. Comparability is the goal while
whether in words or in numbers. consistency is the means of achieving the goal.
Understandability requires that financial
b) Neutrality - means that the financial information must be comprehensible or intelligible if
statements should not be prepared so as to it is to be useful but complex matters cannot be
favor one party to the detriment of eliminated. Because of this, the framework requires
another party. A neutral depiction is the users to have a reasonable knowledge of business
"without bias" in the selection or and economic activities and must review and analyze
presentation o f financial information. the information diligently.
Timeliness means having information available to
c) Free from error - in this context, free from
decision makers in time to influence their decisions.
error does not mean perfectly accurate in
In other words, timeliness requires that financial
all respects. Free from error means there
information must be available or communicated
are no errors or omissions in the description
early enough when a decision is to be made. Relevant
of the phenomenon, and the process used
information may lose its relevance if there is undue
to produce the reported information has
delay in its reporting.
been selected and applied with no errors
in the process. The cost constraint

TAKE NOTE:reality faithful representation Cost is a pervasive constraint on the information

1) Substance over form and conservatism that can be provided by financial reporting. In other
are not ingredients of faithful words, the cost constraint is a consideration of the
representation and are specific aspects cost incurred in generating financial information
only. against the benefit to be obtained from having the
2) If there is a conflict between substance information. The benefit derived from the
and form, the economic substance of the information should exceed the cost incurred in
transaction shall prevail over the legal obtaining the information.
COST should NOT EXCEED the BENEFIT the INFORMATION
form. Examples of situation where
substance over form is applied: (a)
accounting for non-interest-bearing Chapter 3: The Financial Statements and The
notes receivable/payable; (b) finance Reporting Entity
lease accounting.
Objective and Scope of Financial Statements
3) The Conceptual Framework did not The objective of general-purpose financial
include conservatism or prudence as an statements is to provide financial information about
aspect of faithful representation because the reporting entity’s assets, liabilities, equity,
to do so would be inconsistent with income and expenses that is useful in assessing:
neutrality. Under conservatism, when a) The entity’s prospects for future net cash
alternatives exist, the alternative which has inflows and
the least effect on equity shall be chosen. b) Management’s stewardship over economic
resources.
That information is provided in the:
Enhancing Qualitative Characteristics 1) Statement of Financial Position (for
- are the qualities of information that enhance recognized assets, liabilities and equity)
2) Statement(s) of Financial Performance (for
its usefulness. These characteristics address income and expenses)
the form or presentation of information. The 3) Other Statements and Notes
enhancing qualitative characteristics are
verifiability, comparability, understandability
and timeliness. Reporting Period of Financial Statements
Verifiability means that different knowledgeable and Financial statements are prepared for a specified
independent observers could reach consensus, period or the reporting period. Financial statements
although not necessarily complete agreement, that a also provide comparative information for at least
particular depiction is a faithful representation. ONE PRECEDING REPORTING PERIOD.
Reporting Entity Equity - is the residual interest in the assets of the
A reporting entity is an entity who must or choose entity after deducting all of its liabilities.
to prepare the financial statements and is NOT Income – is the increase in economic benefit
necessarily a legal entity. during the accounting period in the form of an
As a result, we have a few types of financial inflow or increase of asset or decrease of liability
statements: that results in increase in equity, other than
a) Consolidated – a parent and subsidiaries
report as a single reporting entity. contribution from equity participants. Simply
b) Unconsolidated or Individual – a parent stated, income is an inflow of future economic
alone provides reports. benefit that increases equity, other than
c) Combined – reporting entity comprises two contribution by owners.
or more entities not linked by parent-
subsidiary relationship
NOTE: Income encompasses both revenue and gains
Chapter 4: Elements of Financial Statements REVENUE VS. GAIN
The elements of financial statements refer to the Revenue Gain
quantitative information shown in the statement of Arises from Ordinary course Incidental or
financial position and statement of comprehensive of business peripheral
income, namely: Assets, Liabilities, Equity, Income operations
Presentation in At gross amount At net amount
and Expense. the FS (net of direct
cost)
These elements are classified into:
Elements directly related to Entity's Comprehensive income is classified into two: Profit
Financial Financial Performance or Loss (P/L) or Other Comprehensive Income (OCI).
Position
General rule is, an income is part of profit or loss
Asset Income
Liability unless it will be classified as OCI which are as follows:
Expense
Equity
Assets – a present economic resource controlled by 1. Unrealized gain or loss on financial asset
measured at fair value through other
the entity as a result of a past event. An economic comprehensive income
resource is a right that has the potential to produce 2. Gain or loss from translating the financial
economic benefits. statements of a foreign operation
3. Revaluation surplus during the year
The essential characteristics of an asset are: 4. Unrealized gain or loss from derivative
contracts designated as cash flow hedge
a) The asset is controlled by the entity. 5. Remeasurements of defined benefit plan
b) The asset is the result of a past transaction including actuarial gain or loss on defined
or event. benefit obligation
c) The asset provides future economic benefits.
d) The cost of the asset can be measured Expense – is the decrease in economic benefit
reliably. during the accounting period in the form of outflow
or decrease in asset and increase in liability that
NOTE: Tangibility and ownership are not results in decrease in equity, other than distribution
essential characteristics of assets. Also, the to equity participants.
presence or absence of expenditure is not
necessary in determining the existence of assets.
Liability – is a present obligation of an entity Chapter 5: Recognition and Derecognition
arising from past transaction or event, the Recognition is a term which means the process of
settlement of which is expected to result in an reporting an asset, liability, income or expense on the
outflow from the entity of resources embodying face of the financial statements of an entity
economic benefits.
Recognition criteria:
The essential characteristics of a liability are: a) It meets the definition of an asset, liability,
a) The liability is the present obligation of a equity or expense and
particular entity.
b) The liability arises from past transaction or b) Recognizing it would provide useful
event. information
c) The settlement of the liability requires an
outflow of resources embodying economic
benefits. The recognition of an item may not provide useful
information if:
a) It is uncertain whether an asset or liability
NOTE: Identification of payee and certainty of exists
timing of settlement and amount of liability are b) An asset or liability exists but the
not essential characteristics of liabilities. probability of an inflow or outflow of
economic benefits is low.
NOTE: On derecognition, the entity:
a) The recognition criteria above apply to (a) derecognizes the assets or liabilities
assets, liabilities, income and expense. that have expired or have been
There is no Equity Recognition Principle / consumed, collected, fulfilled or
Criteria because it is a residual interest. transferred and recognized any resulting
b) The expense recognition principle is the income and expenses.
(b) continues to recognize any assets or
application of the matching principle. liabilities retained after the derecognition.
Accordingly, the matching principle NOTE: Derecognition is NOT appropriate if
requires that those costs and expenses the entity retains substantial control of a
incurred in earning a revenue should be transferred asset.
reported in the same period.
c) Expenses are incurred in conformity with Chapter 6: Measurement
the three applications of the matching Measurement is the process of determining the
principle, namely: monetary amounts at which the elements of the
c.1) Cause and effect association - the financial statements are to be recognized and carried
cause- and- effect association in the statement of financial position and income
principle means that "the expense statement.
is recognized when the revenue is
already recognized" on the basis of a The Framework acknowledges that a variety of
presumed direct association of the measurement bases are used today to different
expense with specific revenue. This is degrees and in varying combinations in financial
the "strict matching concept". statements including:
Historical cost – This measurement is based on the
Examples: Cost of sales, warranty transaction price at the time of recognition of the
expense, sales commissions. element. The historical cost of an asset is the
consideration paid to acquire the asset plus
c.2) Systematic and rational allocation - transaction costs. The historical cost of a liability is
Under the systematic and rational the consideration received to incur the liability minus
allocation principle, some costs are transaction costs.
expensed by simply allocating them
Current value – It measures the element updated to
over the periods benefited. Example: reflect the conditions at the measurement date.
Depreciation of PPE, amortization of Current value measurement bases include the
intangible assets and depletion of following:
wasting assets. (1) Fair Value – is the price that would be
received to sell an asset or paid to transfer
c.3) Immediate recognition - Under a liability in an orderly transaction
immediate recognition principle, the between market participants. Fair value is
cost incurred is expensed outright not an entity specific measurement.
because of uncertainty of future cost (2) Value in use is the present value of the
economic benefits or difficulty of kung cash flows or other economic benefits,
reliably associating certain costs with saan ka
nag that an entity expects to derive from the
future revenue. Examples: officers benefit, use of an asset and from its ultimate
salaries and most administrative yun lang
disposal. Fulfilment value is the present
nirerecog
expenses, casualty losses. nize value of the cash or other economic
- yunh resources that an entity expects to be
nagamit
Derecognition is the OPPOSITE of recognition. It is mo lang obliged to transfer as it fulfils a liability.
the removal of a previously recognized asset or
liability from the entity’s statement of financial NOTE: Value in use and fulfilment value
position. DO NOT include transaction costs in
acquiring an asset or incurring the liability
Derecognition occurs when the item no longer meet but include transactions costs expected to
the definition of an asset or liability, such as when be incurred on the ultimate disposal of
the entity control of all or part of the asset or no the asset or fulfilment of the liability.
longer has a present obligation for all or part of the
liability. (3) Current cost of an asset is the cost of an
equivalent asset at the measurement
date, comprising the consideration that
would be paid at the measurement date
 plus transaction costs that would be Under the physical capital concept, net income
incurred on that date. Current cost of occurs "when the physical productive capital of the
liability is the consideration that would be entity at the end of the year exceeds the physical
received for an equivalent liability at the productive capital at the beginning of the period,
measurement date minus transaction also after excluding distributions to and
costs that would be incurred on that date. contributions from owners during the period."

NOTE: Current cost and historical cost are

ENTRY VALUES while value in use,
fulfilment value and fair value are EXIT
VALUES.

The framework points out that it can be

appropriate to measure some
components of equity directly but it is
not possible to measure total equity
directly.

Chapter 7: Presentation and Disclosure

Information about assets, liabilities, equity, income
and expenses is communicated through
presentation and disclosure in the financial
statements.
Effective communication makes information more
useful. Effective communication requires:
(1) Focusing on presentation and disclosure
objectives and principles rather than on
rules.
(2) Classifying information by grouping
similar items and separating dissimilar
items.
(3) Aggregating information in a manner
that it is not obscured either by
excessive detail or by excessive
summarization.
NOTE: Classification refers to the sorting of
assets liabilities, equity, income or expenses
with similar nature, function and measurement
basis for presentation and disclosure purposes.
Aggregation is the adding together of assets,
liabilities, equity, income or expenses that have
shared characteristics and are included in the
same classification.

Chapter 8: Concepts of Capital and Capital

Maintenance

The "capital maintenance approach" or net assets

approach means that net income occurs only after
the capital used from the beginning of the period is
maintained.

Under the financial capital concept, net income

occurs "when the financial or nominal amount of the
net assets at the end of the year exceeds the
financial or nominal amount of the net assets at the
beginning of the period, after excluding distributions
to and contributions by owners during the period."