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Authoritative status of Conceptual Framework If there is a standard or an interpretation that specifically applies to a transaction, the standard or interpretation overrides

the Conceptual Framework. In the absence of a standard or an interpretation that specifically applies to a transaction, management shall consider the applicability of the Conceptual Framework in developing and applying an accounting policy that results in information that is relevant and reliable. However, it is to be stated that the Conceptual Framework is not a Philippine Financial Reporting Standard and hence does not define standard for any particular measurements or disclosure issue. Nothing in this Conceptual Framework overrides any specific Philippine Financial Reporting Standard. In case where there is a conflict, the measurements of the Philippine Financial Reporting Standards shall prevail over the Conceptual Framework. Users of Financial information Under the new Conceptual Framework for Financial Reporting, the users of financial information may be classified into two, namely primary users and other users. The primary users include the existing and potential investors, lenders and other creditors. The other users include the employees, customers, governments and their agencies, and the public. Primary users The primary users of financial information are the parties to whom general purpose financial reports are primarily directed. Such users cannot require reporting entities to provide information directly to them and therefore must rely on general purpose financial reports for much of the financial information they need. The primary users and their information needs are as follows: 1. Existing and potential investors Existing and potential investors are concerned with the risk inherent in and return provided by their investments. They need information to help them determine whether they should buy, hold or sell. Shareholders are also interested in information which enables them to assess the ability of the entity to pay dividends. 2. Lenders and other creditors Existing and potential lenders and other creditors are interested in information which enables them to determine whether their loans, interest thereon and other amounts owing to them will be paid when due.

Other users By residual definition, other users are users of financial information other than the existing and potential investors, lenders and other creditors. Other users are so called because they are parties that may find the general purpose financial reports useful but the reports are not directed to them primarily. The other users and their information needs are as follows: 1. Employees Employees are interested in information about the stability and profitability of the entity. They are interested in information which enables them to assess the ability of the entity to provide remuneration, retirement benefits and employment opportunities. 2. Customers Customers have an interest in information about the continuance of an entity especially when they have a long-term involvement with or are dependent on the entity. 3. Governments and other agencies Governments and their agencies are interested in the allocation of resources and therefore the activities of the entity. These users require information to regulate the activities of the entity, determine taxation policies and as a basis for national income and similar statistics. 4. Public Entities affect members of the public in a variety of ways. For example, entities make substantial contribution to the local economy in many ways including the number of people they employ and their patronage of local suppliers. Financial statements may assist the public by providing information about the trend and the range of its activities. Scope of Conceptual Framework The Conceptual Framework deals with the following: a. Objective of financial reporting b. Qualitative characteristics of useful financial information c. Definition, recognition and measurement of the elements from which financial statements are constructed d. Concepts of capital and capital maintenance Financial reporting

Financial reporting is the provision of financial information about an entity to external users that is useful to them in making economic decisions and for assessing the effectiveness of the entitys management. The principal way of providing financial information to external users is through the annual financial statements. However, 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 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. Financial reports also include nonfinancial information such as description of major products and a listing of corporate officers and directors. OBJECTIVE OF FINANCIAL REPORTING The objective of general purpose financial reporting forms the foundation of the Conceptual Framework. Other aspects of the Conceptual Framework, such as the qualitative characteristics of useful information and measurement of the elements of financial statements, flow logically from the objective. The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity. Target users General purpose financial reporting is directed primarily to the existing and potential investors, lenders and other creditors which compose the primary user group. The reason is that existing and potential investors, lenders and other creditors have the most critical and immediate need for information in financial reports. As a matter of fact, the primary users of financial information are the parties that provide resources to the entity. Moreover, information that meets the needs of the specified primary users is likely to meet the needs of other users such as employees, customers, governments and their agencies. The management of a reporting entity is also interested in financial information about the entity. However, management need not rely on general purpose financial reports because it is able to obtain or access additional financial information internally.

Specific objectives of financial reporting

The overall objective of financial reporting is to provide information that is useful for decision making. Specifically, the Conceptual Framework for Financial Reporting states the following objectives of financial reporting: a. To provide information useful in making decisions about providing resources to the entity. b. To provide information useful in assessing the prospects of future net cash flows to the entity. c. To provide information about entity resources, claims and changes in resources and claims. Economic decisions Existing and potential investors need general purpose financial reports in order to enable them in making decisions whether to buy, sell or hold equity investments. Existing and potential lenders and other creditors need general purpose financial reports in order to enable them in making decisions whether to provide or settle loans and other forms of credit. Assessing future cash flows Decisions by existing and potential investors about buying, selling or holding equity instruments depend on the returns that they expect from an investment, for example, dividends. Similarly, decisions by existing and potential lenders and other creditors about providing or settling loans and other forms of credit depend on the principal and interest payments or other returns that they expect. Consequently, financial reporting should provide information that is useful in assessing the amount, timing and uncertainty of prospects for future net cash inflows to the entity. Economic resources and claims General purpose financial reports provide information about the financial position of a reporting entity. Financial position is information about the entitys economic resources and the claims against the reporting entity. The economic resources are the assets and the claims are the liabilities and equity of the entity. In other words, the financial position of an entity comprises its assets, liabilities and equity at a particular moment in time. Information about the nature and amounts of an entitys economic resources and claims can help users identify the entitys financial strength and weakness. Otherwise stated, information about financial position can help users to assess the entitys liquidity, solvency and its need for additional financing. Liquidity is the availability of cash in the near future to cover currently maturing obligations.

Solvency is the availability of cash over a long term to meet financial commitments when they fall due. Information about priorities and payment requirements of existing claims can help users to predict how future cash flows will be distributed among those with a claim against the reporting entity. Changes in economic resources and claims General purpose financial reports also provide information about the effects of transactions and other events that change the entitys economic resources and claims. Changes in economic resources and claims result from the entitys financial performance and from other events or transactions, such as issuing debt or equity instruments. The financial performance of an entity comprises its revenue, expenses and net income or loss for a period of time. In other words, financial performance is the level of income earned by the entity through the efficient and effective use of its resources. The financial performance of an entity is also known as results of operations and is portrayed in the income statement and statement of comprehensive income. Information about financial performance helps users to understand the return that the entity has produced on its economic resources. Information about the return the entity has produces provides an indication how well management has discharged its responsibilities to make efficient and effective use of the entitys resources. Information about past financial performance and how management discharged its responsibilities is usually helpful in predicting the future returns on the entitys economic resources. Information about financial performance during a period is useful in assessing the entitys past and future ability to generate net cash inflows from its operations. An entitys economic resources and claims may also change for reasons other than financial performance, such as issuing additional ownership shares. Such information is necessary to give users a complete understanding of why the entitys economic resources and claims changed and the implications of those changes on future financial performance. Accrual accounting The financial performance of an entity shall be measured in accordance with accrual accounting. Accrual accounting depicts the effects of transactions and other events and circumstances on an entitys economic resources and claims in the periods in which those effects occur even if the resulting cash receipts and payments occur in a different period.

In other words, under the accrual basis, the effects of transactions and other events are recognized when they occur and not as cash or its equivalents is received or paid, and they are recorded in the accounting records and reported in the financial statements of the periods to which they relate. Simply stated, accrual accounting means that 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. Information about financial performance measured in accordance with accrual accounting provides a better basis for assessing past and future performance than information solely about cash receipts and payments during a period. Limitations of financial reporting General purpose financial reports do not and cannot provide all of the information that existing and potential investors, lenders and other creditors need. These users need to consider pertinent information from other sources, for example, general income conditions, political events and industry outlook. General purpose financial reports are not designed to show the value of an entity but they provide information to help the primary users estimate the value of the entity. General purpose financial reports are intended to provide common information to users and cannot accommodate every request for information. To a large extent, general purpose financial reports are based on estimate and judgment rather than exact depiction. QUALITATIVE CHARACTERISTICS Qualitative characteristics are the qualities or attributes that make financial accounting information useful to the users. In deciding which information to include in financial statements, the objective is to ensure that the information is useful to the users in making economic decisions. Under the new Conceptual Framework for Financial Reporting, qualitative characteristics are classified into fundamental qualitative characteristics and enhancing qualitative characteristics. Fundamental qualitative characteristics The fundamental characteristics relate to the content or substance of financial information. The fundamental qualitative characteristics are: a. Relevance

b. Faithful representation Information must be both relevant and faithfully represented if it is to be useful. Neither a faithful representation of an irrelevant phenomenon nor an unfaithful representation of a relevant phenomenon helps users make good decisions. Relevance Relevant financial information is capable of making a difference in the decisions made by users. Simply stated, relevance is the capacity of the information to influence a decision. In other words, relevance requires that the financial information should be related or pertinent to the economic decision. Information that does not bear on an economic decision is useless. To be useful, information must be relevant to the decision-making needs of users. For example, broadly, the statement of financial position is relevant in determining financial position, and the income statement is relevant in determining performance. More specifically, the earnings per share information is more relevant than book value per share in determining the attractiveness of an investment. Ingredients of relevance Financial information is capable of making a difference in decision if it has predictive value and confirmatory value. Financial information has predictive value if it can be used as an input to processes employed by users to predict future outcome. In other words, financial information has predictive value when it can help users increase the likelihood of correctly or accurately predicting or forecasting outcome of events. For example, information about financial position and past performance is frequently used in predicting dividend and wage payments and the ability of the entity to meet maturing commitments. The net cash provided by operating activities is valuable in predicting loan payment or default. Financial information has confirmatory value if it provides feedback about previous evaluations. In other words, financial information has confirmatory value when it enables users to confirm or correct earlier expectations. For example, a net income measure has confirmatory value if it can help shareholders confirm or revise their expectation about an entitys ability to generate earnings.

Often, information has both predictive and confirmatory value. The predictive and confirmatory roles of information are interrelated. An example is an interim income statement which provides feedback about income to date and serves as a basis for predicting the annual income. For example, if the interim income statement for the first quarter is P2,000,000 (confirmatory value), and this trend continues for the entire year, it is logical to assume that the net income after four quarters or one year would be P8,000,000 (predictive value). Materiality Materiality is a 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 and fairness of the financial statements. This concept is also known as the doctrine of convenience. Materiality is really a quantitative threshold linked very closely to the qualitative characteristics of relevance. The relevance of information is affected by its nature and materiality. In other words, materiality is an entity-specific aspect of relevance based on the nature or magnitude or both of the items to which the information relates in the context of an individual entitys financial report. The Conceptual Framework does not specify a uniform quantitative threshold for materiality or predetermine what could be material in a particular situation. Materiality is a relativity. Materiality of an item depends on its relative size rather than absolute size. What is material for one entity may be immaterial for another. An error of P100,000 in the financial statements of a multinational entity may not be important but may be so critical for a small entity.