CONCEPTUAL FRAMEWORK AND ACCOUNTING

STANDARDS (CHAPTER 2, PAS 1, PAS 7 & IFRS 18) CONCEPTUAL FRAMEWORK; ITS NATURE:
PDF BASED • The Conceptual Framework is intended to
guide the standard-setters, preparers, and
users of financial information in the
CONCEPTUAL FRAMEWORK, DEFINED: preparation and presentation of statements.
• It is a summary of the terms and concepts that
• The Conceptual Framework for Financial
Reporting is a complete, comprehensive, and underlie the preparation and presentation of
single document promulgated by the financial statements for external users.
• In other words, it describes the concepts for
International Accounting Standards Board
(IASB). GENERAL PURPOSE FINANCIAL REPORTING

SCOPE OF THE CONCEPTUAL FRAMEWORK

HIERARCHY OF ACCOUNTING STANDRADS (ORDER OF
PRIORITY) 1) The Objective of General-purpose Financial
Reporting
1) Q: Is there an existing standard for it?
2) Qualitative Characteristics of Financial
a. Yes – PFRS
Information
b. No - management “shall” use
3) Financial Statements and the Reporting entity
judgment
2) Q: Are there any requirements in PFRS dealing
with similar issues?
OBJECTIVE OF FINANCIAL REPORTING
a. Yes – PFRS
b. No – Conceptual framework (Does this • To provide financial information about the
mean the Conceptual Framework is a reporting entity that is useful to existing and
standard? No. What is the potential investors, lenders, and other
authoritative status of the Conceptual creditors in making decisions relating to
Framework? The hierarchy of providing resources to the entity.
Accounting Standards.) • The objective of general-purpose financial
reporting forms the foundation of the
Conceptual Framework. Other aspects of the
CONCEPTUAL FRAMEWORK; ITS PURPOSE conceptual framework flow logically from the
objective.
• assist preparers in developing consistent
accounting policies when no Standard applies
to a particular transaction or when a Standard
allows a choice of accounting policy; and GENERAL-PURPOSE FINANCIAL REPORTS, DEFINED
• assist the International Accounting Standards • A report that provides financial information
Board (IASB) in developing Standards that are about the reporting entity’s economic
based on consistent concepts resources, claims against the entity, and
o (The Conceptual Framework will be changes in those economic resources and
used in future standard-setting claims that is useful to primary users in making
decisions. What about the current decisions relating to providing resources to the
standards? Will there be any changes entity. (CF 1.12)
to them as well? How about if there • Cater to the common needs of external users.
are changes in the Conceptual External users are those who are not involved
Framework? Will current standards in the managing of the entity.
need revisions as well?)
• assist all parties in understanding and How does the objective will be carried out through
interpreting the Standards. general purpose financial reporting?

1) Objective of Financial Reporting

2) General-purpose Financial Reports
 3) Primary Users (they have the common needs) QUALITATIVE CHARACTERISTICS
a. Existing and potential investors
• Overriding Objective
b. Lenders and other creditors
o Decision Usefulness
What kind of information is provided by general- • Fundamental Characteristics
purpose financial reports? o Relevance
▪ Predictive Value
• Financial position– information on economic
▪ Confirmatory Value
resources (assets) and claims against the
▪ Materiality
reporting entity (liabilities and equity).
o Faithful Representation
o Does providing this information
▪ Completeness
directly show the value of a reporting
▪ Neutrality
entity? No. The provided information
▪ Free from error
only helps users to estimate the value
• Enhancing Characteristics
of an entity.
o Comparability
• Changes in economic resources and claims–
o Verifiability
information on financial performance (income
o Timeliness
and expenses) and other transactions and
o Understandability
events lead to changes in financial position.
o What is the importance of knowing the FUNDAMENTAL QUALITATIVE CHARACTERISTICS
changes in economic resources? Is the
1) Relevance – capacity of the information to
financial position already enough?
influence a decision. “To be relevant, the
financial information must be capable of
making a difference in the decisions made by
OBJECTIVE OF FINANCIAL REPORTING
users.”
• To provide financial information that is useful a. Predictive value– the information can
to users in making decisions relating to help users in making predictions about
providing resources to the entity future outcomes.
1) User’s decision involves decisions about b. Confirmatory value (feedback value)–
a. Buying, selling or holding equity or the information can help users in
debt instruments confirming their previous predictions.
b. Providing or settling loans and
Often, information has both predictive and
other forms of credit
confirmatory value. These aspects of
c. Voting or otherwise influencing
relevance are interrelated.
management’s actions
2) To make these decisions, users assess What does Materiality have to do with Relevance?
a. Prospects for future net cash
• “Information is material if omitting, misstating
inflows of the entity
or obscuring it could reasonably expect to
b. Management’s stewardship of the
influence decisions that the primary users of a
entity’s economic resources
specific reporting entity’s general purpose
3) To make both these assessments, users
financial statements make on the basis of those
need information about both
financial statements”.
a. The entity’s economic resources,
claims against the entity, and • “The Conceptual Framework states that
changes in those resources materiality is an ‘entity-specific’ aspect of
b. How efficiently and effectively relevance, meaning materiality depends on the
management has discharged its facts and circumstances surrounding a specific
responsibilities to use the entity’s entity.
economic resources • The Conceptual Framework does not specify a
uniform quantitative threshold for materiality.
Very often, this is dependent on good
judgment, professional expertise and
commonsense.
 FUNDAMENTAL QUALITATIVE CHARACTERISTICS • Q: Is this information BOTH relevant and
(CONT’D) faithfully represented?
o Yes - THEN THAT INFORMATION IS
2) Faithful Representation– means the
USEFUL
information provides a true, correct, and
o No - NOT USEFUL
complete depiction of the economic
• Q: Are there any attributes that enhance this
phenomena that it purports to represent.
USEFUL information?
a. Completeness– all information (in
o Yes - “MORE” USEFUL
words and numbers) necessary for
o No - “STILL” USEFUL
users to understand the phenomenon
❖ Accordingly, the enhancing qualitative
being depicted is provided.
characteristic should be maximized to the
b. Neutrality–information is selected or
extent possible.
presented without bias. Information is
❖ There are no prescribed order in applying the
not manipulated to increase the
enhancing qualitative characteristics.
probability that users will receive it
❖ Sometimes, one enhancing qualitative
favorably or unfavorably.
characteristic may have to be sacrificed to
c. Free from error – means there are no
maximized another.
errors in the description and in the
❖ Relevance and faithful representation may
process by which information is
conflict in which a case a tradeoff is made
selected and applied. This does not
favoring one or the other.
mean that information is perfectly
accurate in all respects.

ENHANCING QUALITATIVE CHARACTERISTICS

ELEMENTS OF FINANCIAL STATEMENTS
1) Comparability – information is comparable if it
helps users identify similarities and differences The elements of financial statements are the “building
blocks” from which financial statements are
between different sets of information.
constructed.
a. A single entity but in different periods
(intra-comparability); or 1) Financial position
b. Different entities in a single period a. Assets
(inter-comparability) b. Liability
c. Equity
Comparability is the goal, and consistency
2) Financial Performance
helps to achieve that goal”
a. Income
2) Verifiability–information is verifiable if b. Expense
different users could reach a general
agreement as to what the information purports
to represent. ASSET, DEFINED:
a. Direct verification (counting of cash)
b. Indirect verification (checking inputs) “a present economic resource controlled by the entity
3) Timeliness – information is timely if it is as a result of past events. An economic resource is a
available to users in time to be able to influence right that has the potential to produce economic
their decisions. “Generally, the older the benefits.”
information, the less useful”. a. Right
4) Understandability – information is b. Potential to produce economic benefits
understandable if it is represented in a clear c. Control
and concise manner.
- Accordingly, the information should be Control, explained:
presented in a form and expressed in
• Synonyms: POWER, AUTHORITY,
terminology that a user understands.
DOMINANCE, etc.

APPLYING THE QUALITATIVE CHARACTERISTICS

 • An entity controls an asset if it has the present o Present obligation as a result of past
ability to direct the use of the asset and obtain events
economic benefits that flow from it.
Obligation, explained:
• Control also includes the ability to prevent
others from using such economic resource and • “a duty or responsibility that an entity has no
therefore preventing others from obtaining the practical ability to avoid.”
economic benefits from the asset. o Legal obligation – an obligation that
• Control normally stems from ownership or results from a contract, legislation, or
legal title. However, ownership is not always other operation of law; or
necessary for control to exist because control o Constructive obligation–an obligation
can arise from others. that results from an entity’s action
• Physical possession is also not always (e.g., past practice or published
necessary for control to exist. policies) that create a valid
expectation on others that the entity
will accept and discharge certain
Rights, explained: responsibilities.
• An obligation is always owed to another party.
• Synonyms: PRIVILEGE OR ENTITLEMENT However, it is not necessary that the identity
• Rights normally arise from law, contract or of that party is known.
similar means.
• Theoretically, each right is a separate asset.
However, for accounting purposes, related Transfer of an economic resource, explained:
rights are often treated as a single asset.
• Not all rights are assets. To be an asset, the • The liability is the obligation that has the
right must have the potential to produce for potential to require the transfer of an
the entity economic benefits that are beyond economic resource to another party and not
the benefits available to all other parties and the future economic benefits that the
those economic benefits must be controlled by obligation may cause to be transferred.
the entity.

Past events, explained:

Potential to produce economic benefits, explained:
• An obligation exists as a result of past event if
• For the potential to exist, it does need to be both of the following conditions are satisfied:
certain or even likely that the right will o An entity has already obtained
produce economic benefits. economic benefits
• It is only necessary that the right already o An entity must transfer an economic
exists. resource.
• A right can meet the definition of an economic
resource even if the probability that it will
produce economic benefit is low. EQUITY, DEFINED:
• The economic resource is the present right that
• residual interest in the assets of the entity after
contains the potential and not the future
deducting all its liabilities.
economic benefits that the right may produce.
INCOME, DEFINED:

• increases in assets, decreases in liabilities, that

LIABILITY, DEFINED:
result in increases inequity, other than those
• “a present obligation of an entity to transfer an relating to contributions from holders of equity
economic resource as a result of past events.” claims.
o Obligation • Encompasses both revenue and gains.
o Transfer of an economic resource
 o Revenue arises in the ordinary course Both the criteria above must be met before an item is
of the ordinary regular activities. The recognized.
essence of revenue is regularity.
Even if an item that meets the definition of an asset or
o Gain represents other items that do
liability is not recognized, information about that item
not meet the definition of income and
may still need to be disclosed in the notes.
do not rise in the course of the
ordinary regular activities.

EXPENSES, DEFINED: DERECOGNITION, DEFINED:

• Decreases in assets, or increases in liabilities, • the removal of all part or part of recognized
that result in decreases in equity, other than asset or liability from the statement of financial
those relating to distributions to holders of position.
equity claims. • normally occurs when an item no longer meets
the definition of an asset or a liability.
• Asset: occurs when the entity loses control of
RECOGNITION, DEFINED: all or part of the asset.
• Liability: occurs when the entity is no longer
• the process of capturing for inclusion in the
has a present obligation for all or part of the
financial statements an item that meets the
liability
definition of an asset, liability, equity, income
or expense.
• The amount at which an asset, a liability, or an
MEASUREMENT
equity is recognized in the statement of
financial position is referred to as its carrying • quantifying in monetary terms the elements in
amount the financial statements.
Recognition links the elements statement financial of • Measurement bases:
the of position and statement of financial performance o Historical Cost
o Current Value
▪ Fair Value
▪ Value in use for asset
▪ Fulfillment value for liability
▪ Current cost

HISTORICAL COST, DEFINED:

• Asset: is the cost incurred in acquiring or

creating the asset comprising the
consideration paid plus transaction costs.
• Liability: is the consideration received to incur
the liability minus transaction costs.
• The entry price or entry value to acquire an
asset or to incur a liability.
• Unlike current value, historical cost does not
reflect changes in value, but is updated over
RECOGNITION CRITERIA
time to depict certain changes.
Item is recognized if:

• It meets the definition of an asset, liability,

equity, income, or expense; and
• Recognizing it would provide useful FAIR VALUE, DEFINED
information, i.e., relevant and faithfully
• “the price that would be received to sell an
represented information.
asset, or paid to transfer a liability, in an
 orderly transaction between market • In most cases, no single factor will determine
participants at the measurement date.” which measurement basis should be selected.
• An exit price or exit value. • The relative importance of each factor will
• Reflects the perspective of market participants. depend on facts and circumstances.
Accordingly, it is not an entity-specific • The information produced by the
measurement. measurement basis must be useful to the users
• Can be measured directly by observing prices of the financial statements.
in an active market or indirectly using
measurement techniques, e.g., cash-flow-
based measurement techniques.
PAS 1: PRESENTATION OF FINANCIAL STATEMENTS
• Not adjusted for transaction costs.
OBJECTIVE:

VALUE IN USE AND FULFILLMENT VALUE, DEFINED: • overall requirements for the presentation of
financial statements, guidelines for their
• Value in use: The present value of the cash structure, and minimum requirements for their
flows, or other economic benefits, that an content.
entity expects to derive from the use of an • to improve comparability both with the entity’s
asset and from its ultimate disposal. financial statements of previous periods (intra-
• Fulfillment value: the present value of the cash, comparability) and with financial statements of
or other economic resources, that an entity other entities (inter-comparability).
expects to be obliged to transfer as it fulfill its
FINANCIAL STATEMENTS & ITS COMPONENTS:
liability.
• Exit value/exit price • Financial statements are a structured financial
• Are measured indirectly using cash-flow based representation of the financial position and
measurement techniques, similar to those financial performance of an entity.
used in measuring fair value but from an • The financial statements are the end product
entity-specific perspective rather than from a or main output of the financial accounting
market-participant perspective. process.
• Do not include transaction costs in acquiring • Complete set of financial statements
an asset or incurring a liability o Statement of Financial Position (as
at/of the end of the reporting period)
o Statement of Profit or Loss and other
CURRENT COST, DEFINED: comprehensive income (for the
period)
• Asset: “the cost of an equivalent asset at the
o Statement of Changes in Equity(for the
measurement date, comprising the
period)
consideration that would be paid at the
o Statement of Cash Flows(for the
measurement date plus the transaction costs
period)
that would be incurred at that date.
o Notes to Financial Statements
• Liability: the consideration that would be
o Additional statement of financial
received for an equivalent liability at the
position (required only when certain
measurement date minus the transaction cost
instances occur)
that would be incurred at that date.
GENERAL FEATURES OF FINANCIAL STATEMENTS

1) Fair Presentation and Compliance with PFRS

SELECTING A MEASUREMENT BASIS
• The application of PFRSs, with additional
• When selecting a measurement basis, disclosures, when necessary, is presumed to
o The nature of information provided by result in financial statements that achieve a fair
a particular measurement basis; and presentation.
o The qualitative characteristics, the cost • PAS1 requires an entity whose financial
constraint, and other factors. statements comply with PFRS to make an
 explicit and unreserved statement of • Measuring assets net of valuation allowances, for
compliance in the notes. example, obsolescence allowances on inventories,
allowances for doubtful accounts on receivables,
• There may be cases where in an entity’s
and accumulated depreciation on property, plant,
management concludes that compliance with and equipment are not offsetting.
a PFRS requirement is misleading. In such
cases, PAS1 permits a departure from a PFRS 6) Frequency of reporting
requirement if the relevant regulatory • An entity shall present a complete set of financial
framework requires or allows such a departure. statements (including comparative information) at
least annually.
• When an entity departs from a PFRS
• When an entity changes the end of its reporting
requirement, it shall (1) disclose the period and presents financial statements for a
management’s conclusion as to the fair period longer or shorter than one year, an entity
presentation of the financial statements, shall disclose the following:
(2)that all other requirements of the PFRSs are o The period covered by the financial
statements,
complied with; (3) the title of the PFRS from
o The reason for using a longer or shorter
which the entity has departed; and (4)the period, and
financial effect of the departure. o The fact that amounts presented in the
financial statements are not entirely
comparable.
2) Going Concern
7) Comparative Information
• When preparing financial statements, management • An entity shall present comparative information in
shall assess the entity’s ability to continue as a going respect of the preceding period for all amounts
concern, taking into account all available reported in the current period’s financial
information about the future, which is at least, but statements, unless other standards permit or
not limited to 12 months from the reporting date. require otherwise.
• An entity is not a going concern if, as of the financial • An entity may present comparative information in
reporting date or prior to the date of authorization addition to the minimum requirement.
of the financial statements for issue, management • An additional statement of financial position is
either: presented as at the beginning of the preceding
o (a.) Intends to liquidate the entity or to period when an entity:
cease trading, or o Applies an accounting policy
o (b.) Has no realistic alternative but to do retrospectively, or
so. o Makes a retrospective restatement of
• If there are material uncertainties on the entity’s items in its financial statements, or
ability to continue as a going concern, those o Reclassifies items in its financial
uncertainties shall be disclosed. statements.
• If the entity is not a going concern, its financial • …..and the effect of the event on the statement of
statements shall be prepared using another basis. financial position as at the beginning of the
This fact shall be disclosed, including the basis used, preceding period is material.
and the reason why the entity is not regarded as a
going concern. 8) Consistency of presentation
• An entity shall retain the presentation and
3) Accrual Basis of Accounting classification of items in the financial statements
• All financial statements shall be prepared using the from one period to the next unless:
accrual basis of accounting except for the o Result in information that is reliable and
statement of cash flows, which is prepared using a more relevant; or
cash basis. o a PFRS requires a change in presentation

4) Materiality and Aggregation

• Each material class of similar items must be MANAGEMENT’S RESPONSIBILITY OVER FINANCIAL
presented separately in the financial statements. STATEMENTS
• A class of similar items is called a “line item”.
• Individually immaterial items are aggregated with The management is responsible for an entity’s financial
other items. statements. The responsibility encompasses:
a. The preparation and fair presentation of financial
5) Offsetting statements in accordance with PFRSs;
• Assets and liabilities, and income and expenses, b. Internal control over financial reporting
shall not be offset unless required or permitted by c. Going concern assessment
a PFRS. d. Oversight over the financial reporting process
 e. Review and approval of financial statements. • the liability is due to be settled within twelve months
after the reporting period; or
The responsibilities are expressly stated in a document called • the entity does not have the right at the end of the
“Statement of Management’s Responsibility for Financial reporting period to defer settlement of the liability
Statements” for at least twelve months after the reporting
period.

PRESENTATION OF STATEMENT OF FINANCIAL POSITION The operating cycle of an entity is the time between the
acquisition of assets for processing and their realization in
A statement of financial position may be presented as either: cash or cash equivalents.
• Classified – showing distinctions between
current and noncurrent assets and liabilities, or When an entity’s operating cycle is not clearly identifiable, it
• Unclassified (based on liquidity) – showing no is assumed to be 12 months.
distinction between current and noncurrent
items Liabilities that do not form part of the entity’s normal
A classified presentation shall be used except when an operating cycle are presented as current only when they are
unclassified presentation provides information that is expected to be realized or settled within 12 months after the
reliable and more relevant. reporting period.

PAS 1 prescribes the minimum line items in the statement All other liabilities are classified as noncurrent.
of financial position (but the list is not exhaustive)

PAS 1, Paragraph 57, provides that the standard does not CURRENTLY MATURING LONG-TERM LIABILITIES
prescribe the order or format in which the items are to be • General rule: Currently maturing long-term liabilities
presented in the statement of financial position. are presented as current liabilities.
• Exception: The entity has the right, at the end of the
A. Current and Non-current Assets reporting period, to roll over the obligation for at
least twelve months after the reporting period under
An entity shall classify an asset as current when: an existing loan facility – non-current liability
• it expects to realize the asset or intends to sell or • Refinancing refers to the replacement of an existing
consume it, in its normal operating cycle; debt with a new one but with different terms, e.g., an
• it holds the asset primarily for the purpose of extended maturity date or a revised payment
trading; schedule.
• it expects to realize the asset within twelve months
after the reporting period; or BREACH OF LOAN AGREEEMENT
• the asset is cash or a cash equivalent unless the • General rule: A liability that is payable on demand is
asset is restricted from being exchanged or used to a current liability.
settle a liability for at least twelve months after the • Exception: It is presented as non-current liability if the
reporting period. lender provides the entity, on or before the balance
sheet date, a grace period ending at least 12 months
The operating cycle of an entity is the time between the after the balance sheet date to rectify a breach of loan
acquisition of assets for processing and their realization in covenant.
cash or cash equivalents.
STATEMENT OF PROFIT OR LOSS AND OTHER
When an entity’s operating cycle is not clearly identifiable, it COMPREHENSIVE INCOME
is assumed to be 12 months. Income and expenses for the period may be presented in
either:
Assets that do not form part of the entity’s normal operating • A single statement of profit or loss and other
cycle are presented as current only when they are expected comprehensive income (statement of
to be realized or settled within 12 months after the reporting comprehensive income)
period. • Two statements – (1) a statement of profit or loss
(income statement) and (2) a statement presenting
All other assets are classified as non-current. comprehensive income
PAS 1 requires an entity to present information on the
following:
B. Current Liabilities a. Profit or loss;
b. Other comprehensive income; and
An entity shall classify a liability as current when: c. Comprehensive income
• it expects to settle the liability in its normal
operating cycle;
• it holds the liability primarily for the purpose of
trading; (PROFIT OR LOSS)
 • Profit or loss is income less expenses, excluding the • All other financial statements are intended to be
components of other comprehensive income. read in conjunction with the notes.
• This method, “income less expenses” of computing • Accordingly, information in the other financial
for profit or loss is called the “transaction statements shall be cross-referenced to the notes.
approach”. • PAS 1 requires an entity to present the notes in a
• PAS 1 prohibits the presentation of any items of systematic manner. Notes are normally structured
income or expense as extraordinary items in the as follows:
statement(s) presenting profit or loss and other o General information on the reporting
comprehensive income or in the notes. entity
o Statement of compliance with the PFRSs
PRESENTATION OF EXPENSES and Basis for preparation of financial
• Expenses may be presented using either of the statements.
following methods: o Summary of material (significant)
o Nature of expense method accounting policy information
o Function of expense method (cost of sales) o Disaggregation (breakdowns) of the line
• PAS 1, paragraph 99, provides that an entity shall items in the other financial statements
present an analysis of expenses using a andother supporting information
classification based on either the function of o Other disclosures required by PFRSs.
expenses or their nature within the entity,
whichever provides information that is reliable and
more relevant.
• If the function of the expense method is used,
additional disclosures on the nature of expenses
shall be provided.

OTHER COMPREHENSIVE INCOME

• Other comprehensive income “comprises of items
of income and expense (including reclassification
adjustments) that are not recognized in profit or
loss as required or permitted by other PFRSs.
• Amounts recognized in OCI are usually accumulated
as separate components of equity.
• Reclassification adjustments “are amounts
reclassified to profit or loss in the current period that
were recognized in other comprehensive income in
the current or previous periods.
• The other comprehensive income section shall
group items of OCI into the following:
o Those for which reclassification
adjustment is allowed; and
o Those for which reclassification
adjustment is not allowed

TOTAL COMPREHENSIVE INCOME

• Total comprehensive income is “the change in
equity during a period resulting from transactions
and other events, other than those changes
resulting from transactions with owners in their
capacity as owners.
• Total comprehensive income is the sum of profit or
loss and other comprehensive income.
• It comprises all ‘non-owner’ changes in equity.
• Presenting information on comprehensive income,
and not just profit or loss, helps users better assess
the overall financial performance of the entity.

NOTES TO FINANCIAL STATEMENTS

• The notes provide information in addition to those
presented in other financial statements. It is an
integral part of a complete set of financial
statements.