New Conceptual Framework of Accounting

Definition of Accounting

Accounting is a service activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities, that is intended to be useful in making economic decision.

Definition of Accounting

Accounting is the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are in part at least of a financial character and interpreting the results thereof.

Accounting is the process of identifying, measuring and communicating economic information to permit informed judgment and decision by users of the information

Important points

1. Accounting is about quantitative information 2. Financial in nature 3. Information should be useful in decision making

Components o f Accounting

Identifying as the analytical component Measuring as the technical component Communicating as the formal component

A. Identifying

The recognition or nonrecognition of business activities as accountable events

Economic Activities

1. External transactions (purchase of merchandise from a supplier, borrowing money from a bank, sale of merchandise to customer and payment of salaries to employees

Economic Activities

2. Internal transactions economic events involving the entity only e.g. Production, casualty

B. Measuring

The assigning of peso amounts to the accountable economic transactions and events Historical cost the most common measure of financial transactions

C. Communicating

The process of preparing and distributing accounting reports to potential users of accounting information

Recording/ Journalizing is the process of systematically maintaining a record of all economic business transactions after they have been identified and measured.

Classifying is the sorting or grouping of similar and interrelated economic transactions into their respective classes. Posting to the ledger group of accounts

Summarizing is the preparation of financial statements which include the statement of financial position, income statement, statement of comprehensive income, statement of cash flows and statement of changes in equity.

The Accountancy Profession

RA 9298 Philippine Accountancy Act of 2004

Board of Accountancy

The body authorized by law to promulgate rules and regulations the practice of the accountancy profession in the Philippines PRC to issue Certificate of Registration

Public Accounting

Auditing - the attest function Taxation Service Management Advisory Services

Private Accounting

Accounting staff Chief accountant Internal auditor Controller

Government Accounting

Encompasses the process of analyzing, classifying, summarizing and communicating all transactions involving the receipt and disposition of government funds and property and interpreting the results thereof (BIR, COA, DBM,SEC, NBI)

Continuing Professional Education

Accounting vs Auditing

Accounting constructive in nature Auditing - analytical

Accounting vs Bookkeeping

Bookkeeping procedural and largely concerned with development and maintenance of accounting records (how of accounting) Accounting conceptual and is concerned with the why, reason or justification for any action adopted

Accounting vs Accountancy

Accountancy refers to the profession of accounting practice Accounting used in reference only to a particular field of accountancy such as public accounting, private accounting, and government accounting

Financial Accounting vs Managerial Accounting

Financial accounting general purpose reports, internal and external users Managerial Accounting accumulation and preparation of financial reports for internal users only

Generally Accepted Accounting Principles

Encompass the conventions, rules and procedures necessary to define what is accepted accounting practice. These principles have developed on the basis of experience, reason, custom, usage, and practical necessity. SFAS, PAS, PFRS

Purpose of accounting standards

To identify proper accounting practices for the preparation and presentation of financial statements

FINANCIAL REPORTING STANDARDS COUNCIL

The accounting standard setting body created by the Professional Regulation Commission upon recommendation of the Board of Accountancy to assist the BOA in carrying out its powers and functions under RA No. 9298

FRSC

Main function is to establish and improve accounting standards that will be generally accepted in the Philippines

FRSC

15 members BOA, SEC, BSP, BIR, COA, Major orgn of preparers and users of FS (1 each) Accredited national professional organization of CPAs (ACPAPP, ACPACI, ACPAE, ACPAG

Philippine Interpretations Committee

Formed by FRSC in 2006 Interpretations are intended to give authoritative guidance on issues that are likely to receive divergent or unacceptable treatment because the standards do not provide specific clearcut rules and guidelines

Philippine Financial Reporting Standards

PFRS IFRS PAS IAS PI - IFRIC

Underlying Assumptions

Accounting Assumptions are the basic notions or fundamental premises on which the accounting process is based.

Underlying Assumption

1. Going Concern In the absence of evidence to the contrary, the accounting entity is viewed as continuing in operation indefinitely thus assets are recorded at cost. Cost principle/ continuity assumption

Underlying Assumptions

2. Accrual ( no longer mentioned in the NEW Conceptual Framework) - Income is recognized when earned regardless of when received and expense is recognized when incurred regardless of when paid. The essence of accrual accounting is the recognition of accounts receivable, accounts payable, prepaid expenses, accrued expenses, deferred income and accrued income

Basic Assumptions

Accounting entity Time period Monetary unit

Accounting Entity

In financial accounting, the accounting entity is the specific business enterprise, which may be a proprietorship, partnership or corporation.

Accounting Entity Under this assumption, the business enterprise is separate from the owners, managers, and employees who constitute the firm.

Basic Assumptions

Time Period Requires that the indefinite life of an entity is subdivided into time periods or accounting periods which are usually of equal length for the purpose of preparing financial reports on financial position, performance and cash flows.

Accounting period A. Natural business year a twelve month period that ends on any month when the business is at the lowest or experiencing slack season B. Calendar year twelve-month period that ends on December 31.

Underlying Assumptions

Monetary Unit Quantifiability assets, liabilities, capital, income and expenses should be stated in terms of a unit of measure which is the peso. Stability the purchasing power of the peso is stable or constant and that its instability is insignificant and therefore may be ignored.

CONCEPTUAL FRAMEWORK

A summary of the terms and concepts that underlie the preparation and presentation of financial statements for external users

Purpose of Conceptual Framework

To assist the FRSC in developing accounting standards that will represent Philippine GAAP To assist preparers of financial statements in applying standards and in dealing with issues not yet covered by GAAP To assist the FRSC in its review and adoption of IFRS

4. To assist users of financial statements in interpreting the information contained in the financial statements 5. To assist auditors in forming an opinion as to whether financial statements conform with Philippine GAAP 6. To provide information to those interested in the work of the FRSC in the formulation of PFRS

Authoritative status of conceptual framework

1. If there is a standard or interpretation that specifically applies to a transaction, the standard or interpretation overrides the Conceptual Framework

2. In the absence of a standard of interpretation, management shall consider the applicability of the Conceptual Framework Conceptual Framework is not a Standard; does not override any specific PFRS

In case where there is a conflict, the requirements of the PFRS shall prevail over the Conceptual Framework

Users of Financial Information

Primary users the parties to whom general purpose financial reports are primarily directed; existing and potential investors, Lenders and other creditors Other users employees,customers, government and other agencies, public

Scope of Conceptual Framework

Objective of financial reporting Qualitative characteristics of useful financial information Definition, recognition and measurement of the elements from which financial statements are constructed Concepts of capital and capital maintenance

Objective of Financial Statement

The objective of financial statements is to provide information about the financial position, performance and cash flows of an entity that is useful to a wide range of users in making economic decisions. -common needs of users

Financial Statements

1.Financial Position of an entity comprises its assets, liabilities, and equity at a particular time. It pertains to the economic resources, liquidity, solvency, financial structure and capacity for adaptation of an entity

Liquidity availability of cash in the near future to cover currently maturing obligations Solvency the availability of cash over a long term to meet financial commitments when they fall due.

Financial structure The source of financing for the assets of the entity. It indicates what amount of assets has been financed by creditors (liability) and how much has been financed by owners (owners equity)

Capacity for adaptation the ability of the entity to use its available cash for unexpected requirements and investment opportunities (financial flexibility)

Financial Statements

2. Performance - comprises its revenue, expenses and net income or loss for a period of time. The level of income earned by the entity through the efficient use and effective use of its resources.

Financial Statements

3. Cash Flows Information about cash flows is useful in order to assess the operating, investing, and financing activities of the entity during a period.

Accounting Concepts

1. Entity theory Accounting objective is geared toward proper income determination. Proper matching of cost against revenue is the ultimate end.

Assets = Liabilities + Capital

Accounting Concepts

2. Proprietary Theory Accounting objective is directed toward proper valuation of assets Assets-Liabilities= Capital

Accounting Concepts

3. Residual Equity Theory The accounting objective is also proper valuation of assets. This is applicable where there are two classes of shareholders, ordinary and preference.

Assets Liabilities-Preference shareholders equity= Ordinary Shareholders equity

Accounting Concepts

Fund Theory The accounting objective is neither proper income determination nor proper valuation of assets but the custody and administration of funds Fund = Cash inflows-cash outflows

Financial Reporting

Encompasses not only financial statements but also other means of communicating information that relates directly or indirectly to the financial accounting process.

Financial Reports represent the main product of financial reporting. Financial reports include not only financial statements but also other information such as financial highlights, summary of important financial figures, analysis of financial statements and significant ratios. These also include nonfinancial information such as description of major products and a listing of corporate officers and directors

Objective of Financial Reporting

The overall objective if financial reporting is to provide information that is useful for decision making

Specifically, A. to provide information useful in making decisions about providing resources to the entity B. To provide information useful in assessing cash flow prospects C. To provide information about entity resources, claims to those resources and changes in them

Qualitative Characteristics

The qualities or attributes that make financial accounting information useful to the users A. Fundamental qualitative characteristics Relevance and faithful representation

B. Enhancing qualitative characteristics Understandability, comparability, verifiability, timeliness

Relevance

The capacity of information to make a difference in a decision by helping users form predictions about the outcome of past, present and future events, or confirm and correct expectations.

The capacity of the information to influence a decision

Relevance

Financial information should be related or pertinent to the economic decisions. Information that does not bear on an economic decision is useless.

Ingredients of relevance

1. Predictive value when it can help users increase the likelihood of correctly or accurately predicting or forecasting outcome of events 2. Confirmatory or Feedback value when it enables users to confirm or correct earlier expectations

Ingredients of relevance

3. Timeliness providing information to the decision maker while it has a capacity to affect a decision. Relevant information furnished after a decision is made is useless or of no value.

Materiality

Doctrine of convenience Practical rule in accounting which dictates that strict adherence to GAAP is not required when the items are not significant enough to affect the evaluation, decision, fairness of the financial statements

When is an item material?

Depends on good judgment, professional expertise and common sense Information is material is its omission or misstatement could influence the economic decision that the users make on the basis of the financial information about an entity

Factors of materiality

Size and nature

Faithful Representation

That financial reports represent economic phenomena or transactions in words and numbers Descriptions and figures match what really existed or happened

Ingredients of Faithful Representation

1. Completeness 2. Neutrality 3. Free from error

Completeness

Relevant information should be presented in a way that facilitates understanding and avoids erroneous implication The result of the adequate disclosure standard or the principle of full disclosure

Standard of adequate disclosure

Accountant shall disclose a material fact known to him which is not disclosed in the financial statements but disclosure of which is necessary in order that the statements would not be misleading

Notes to Financial Statements

To provide necessary disclosures required by PFRS Provide narrative description or disaggregation of the items presented in the financial statements and information about items that do not qualify for recognition

Neutrality

The contained in the financial statements must be free from bias. The financial information should not favor one party to the detriment of another party Principle of fairness

Free from Error

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

Substance Over Form

The economic substance of transactions and events are usually emphasized when economic substance differs from legal form

Conservatism

Inconsistent with neutrality When alternatives exist, the alternative which has the least effect on equity should be chosen Understatement of net income and net assets Synonymous with prudence

Prudence

The desire to exercise care and caution when dealing with the uncertainties in the measurement process such that assets or income are not overstated and liabilities or expenses are not understated

Enhancing Qualitative Characteristics

Intended to increase

Elements of Financial Statements

A. Financial Position Assets Liabilities Equity B. Performance Income Expenses

Assets resources controlled by the entity as a result of past transactions or events and from which future economic benefits are expected to flow to the entity Liabilities present obligations of the entity arising from past transactions or events the settlements of which is expected to result in an outflow from the entity of resources embodying economic benefits

Equity the residual interest in the net assets of the entity after deducting all of its liabilities
Income- Increase in economic benefits during the accounting period in the form of inflow or increase in asset or decrease in liability that results in increase in equity, other than contribution from equity participants

Income- decrease in economic benefits during the accounting period in the form of outflow or decrease in asset or increase in liability that results in decrease in equity, other than distribution to equity participants