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8/13/2016

PhilippineCPAReview:SummaryoftheOldConceptualFrameworkissuedbytheAccountingStandardsCouncil(ASC)

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Sunday,May24,2015

SummaryoftheOldConceptualFrameworkissuedby
theAccountingStandardsCouncil(ASC)
FRAMEWORKFORTHEPREPARATION
AND
PRESENTATIONOFFINANCIALSTATEMENTS

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PURPOSEANDSTATUSOFTHEFRAMEWORK

The FRSC Framework for the Preparation and Presentation of Financial


Statements describes the basic concepts by which financial statements are
prepared.TheFrameworkservesasaguidetotheBoardindevelopingaccounting
standards and as a guide to resolving accounting issues that are not addressed
directly in Philippine Accounting Standards or Philippine Financial Reporting
StandardsorInterpretations.Thepurposeoftheframeworkasoutlinedisto:
a. Assist the Financial Reporting Standards Council (FRSC) in developing
accounting standards that represent generally accepted accounting
principle
b. Assist the FRSC in its review and adoption of existing International
AccountingStandards
c.AssistpreparersofthefinancialstatementsinapplyingFRSCStatementsof
FinancialAccountingStandardsandindealingwithtopicsthathaveyetto
formthesubjectofanFRSCstatement
d. Assist auditors in forming an opinion as to whether financial statements
conformwithPhilippineGAAP

AED 320

AED 45

AED 140

AED 135

AED 140

AED 349

AED 29

AED 39

AED 199

AED 375

AED 85

AED 99

e. Assist users of financial statements in interpreting information contained in


thefinancialstatementspreparedinconformitywithPhilippineGAAP
f.ProvidethosewhoareinterestedintheworkoftheFRSCwithinformation
aboutitsapproachtotheformulationofStatementsofFinancialAccounting
Standards

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ScopeoftheFramework:

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PhilippineCPAReview:SummaryoftheOldConceptualFrameworkissuedbytheAccountingStandardsCouncil(ASC)
Definestheobjectiveoffinancialstatements

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Identifiesthequalitativecharacteristicsthatmakeinformationinfinancial

statementsusefuland
Defines the basic elements of financial statements and the concepts
forrecognizingandmeasuringtheminfinancialstatements.
Conceptsofcapitalandcapitalmaintenance.

GeneralPurposeFinancialStatements
The Framework addresses general purpose financial statements including
consolidatedfinancialstatementsthatabusinessenterprisepreparesandpresents
atleastannuallytomeetthecommoninformationneedsofawiderangeofusers
externaltotheenterprise.Therefore,theFrameworkdoesnotnecessarilyapplyto
special purpose financial reports such as reports to tax authorities, reports to
governmental regulatory authorities, prospectuses prepared in connection with
securities offerings, and reports prepared in connection with business
combinations.

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UsersandtheirInformationNeeds
The principal classes of users of financial statements are present and potential
investors, employees, lenders, suppliers and other trade creditors,
customers, governments and their agencies and the general public. All of
these categories of users rely on financial statements to help them in decision
making.

Whilefinancialstatementscannotmeetalloftheinformationneedsoftheseuser
groups, there are information needs that are common to all users, and general
purposefinancialstatementsfocusonmeetingtheseneeds.
ResponsibilityforFinancialStatements
Themanagementofanenterprisehastheprimaryresponsibilityforpreparing
andpresentingtheenterprise'sfinancialstatements.
TheObjectiveofFinancialStatements
Theobjectiveoffinancialstatementsistoprovideinformationaboutthefinancial
position,performanceandchangesinfinancialpositionofanenterprisethat
isusefultoawiderangeofusersinmakingeconomicdecisions.
FinancialPosition
The financial position of an enterprise is affected by the economic resources it
controls,itsfinancialstructure,itsliquidityandsolvency,anditscapacityto
adapt to changes in the environment in which it operates. The balance
sheetpresentsthiskindofinformation.
Performance
Performance is the ability of an enterprise to earn a profit on the resources that
have been invested in it. Information about the amounts and variability of profits
helpsinforecastingfuturecashflowsfromtheenterprise'sexistingresourcesand
in forecasting potential additional cash flows from additional resources that might
be invested in the enterprise. The Framework states that information about
performanceisprimarilyprovidedinanincomestatement.
ChangesinFinancialPositionorCashFlows
Usersoffinancialstatementsseekinformationabouttheinvesting,financingand
operatingactivitiesthatanenterprisehasundertakenduringthereportingperiod.
Thisinformationhelpsinassessinghowwelltheenterpriseisabletogeneratecash
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6PagesSource:
CPAReviewSchool
ofthePhilippines
(CPAR)ManilaI've
gotthismaterialof

and cash equivalents and how it uses those cash flows. The cash flow
statementprovidesthiskindofinformation.
UnderlyingAssumptions(Postulates)
CPARevi...

TheFrameworksetsouttheunderlyingassumptionsoffinancialstatements:
AccrualBasis.Theeffectsoftransactionsandothereventsarerecognized
when they occur, rather than when cash or its equivalent is received or
paid, and they are reported in the financial statements of the periods to
whichtheyrelate.
Going Concern. The financial statements presume that an enterprise will

continue in operation indefinitely or, if that presumption is not valid,


disclosureandadifferentbasisofreportingarerequired.
TheFRSCconceptualframeworkmentionstwoassumptionsonly.However,itis
widely believed that an inherent trait of the financial statements are the basic
assumptionsof:
AccountingEntity.Thebusinessisseparatefromtheowners,managers,
andemployeeswhoconstitutethebusiness.Thereforetransactionsofthe
saidindividualsshouldnotbeincludedastransactionsofthebusiness.
TimePeriod.Financialreportsaretobepreparedforoneyearoraperiod
oftwelvemonths.
Monetary unit. There are two aspects under this assumption. First is
the quantifiability of the peso, meaning that the elements of the financial
statements should be stated under one unit of measure which is the
PhilippinePeso.Secondisthestabilityofthepeso,meansthatthereisstill
anassumptionthatthepurchasingpowerofthepesoisstableorconstant
andthatinstabilityisinsignificantandthereforeignored.
QualitativeCharacteristicsofFinancialStatements
These characteristics are the attributes that make the information in financial
statements useful to investors, creditors, and others. The Framework identifies
fourprincipalqualitativecharacteristics:
a.Understandability
b.Relevance

c.Reliability
d.Comparability

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October(3)
November(3)
December(3)
February(1)

PrimaryCharacteristics

April(1)
May(5)

Relevance Information in financial statements is relevant when it influences the


economicdecisionsofusers.Itcandothatbothby(a)helpingthemevaluatepast,
present, or future events relating to an enterprise and by (b) confirming or
correctingpastevaluationstheyhavemade.

Ingredientsofrelevance:

June(2)
October(4)
November(1)
May(1)
June(3)
May(25)
June(2)

PredictiveValueInformationcanhelpusersincreasethelikelihoodof
correctlypredictingorforecastingtheoutcomeofcertainevents.

August(2)
September(5)
October(1)

FeedbackValue Information can help users confirm or correct earlier


expectations.Notethatthepredictiveandconfirmatoryrolesofinformation
areinterrelated.

November(6)
December(2)
January(1)
February(3)

TimelinessInformationlosesitsrelevanceifitisnottimely

March(1)
May(17)
June(4)

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PhilippineCPAReview:SummaryoftheOldConceptualFrameworkissuedbytheAccountingStandardsCouncil(ASC)

ReliabilityInformationinfinancialstatementsisreliableifitisfreefrommaterial
error and bias and can be depended upon by users to represent events and
transactions faithfully. Information is not reliable when it is purposely designed to
influenceusers'decisionsinaparticulardirection.

July(42)
August(3)
September(13)
October(11)
November(5)

Factorsofreliability

January(2)
February(3)

Faithful Representation Information must represent faithfully the


transactionsandeventsiteitherpurportstorepresentorcouldreasonably
purporttorepresent.
Substance over form Transactions are to be accounted for and
presentedaccordingtotheirsubstanceandeconomicrealityandnotmerely
theirlegalform.
NeutralityInformationcontainedinthefinancialstatementsmustbefree
frombiasanderror.
Prudence (Conservatism) The inclusion of a degree of caution in the
exerciseofjudgmentsneededinmakingestimatesorchoosingalternatives
sothattheoutcomewillhavetheleasteffectonequity.

May(3)
June(2)
July(2)

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Completenesstobereliable,theinformationinthefinancialstatements
mustbecompletewithintheboundsofmaterialityandcost.
ConstraintstoRelevantandReliableInformation
TimelinessUnduedelayinreportingofinformationmayleadtotheloss
of relevance even though enhancing it reliability. While providing
information before all aspects of a transaction or other events are known
mayincreasetherelevanceofinformation,thusimpairingitsreliability.

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Balance between Benefit and Cost The benefits derived from relevant
andreliableinformationshouldexceedthecostofprovidingit.

SecondaryCharacteristics
Understandability Information should be presented in a way that is readily
understandable by users who have a reasonable knowledge of business and
economic activities and accounting and who are willing to study the information
diligently.
Comparability Users must be able to compare the financial statements of an
enterprise over time so that they can identify trends in its financial position and
performance. Users must also be able to compare the financial statements
of different enterprises. Disclosure of accounting policies is essential for
comparability especially when the enterprise adopts a new or changes its
accountingpolicies.

TheElementsofFinancialStatements
Financial statements portray the financial effects of transactions and other events
by grouping them into broad classes according to their economic characteristics.
Thesebroadclassesaretermedtheelementsoffinancialstatements.
Theelementsdirectlyrelatedtofinancialpositionandtheirdefinitionaccording
totheframeworkare:
AssetAnassetisaresourcecontrolledbytheenterpriseasaresultof
pasteventsandfromwhichfutureeconomicbenefitsareexpectedtoflow
totheenterprise.
LiabilityAliabilityisapresentobligationoftheenterprisearisingfrompast

events,thesettlementofwhichisexpectedtoresultinanoutflowfromthe
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PhilippineCPAReview:SummaryoftheOldConceptualFrameworkissuedbytheAccountingStandardsCouncil(ASC)

enterpriseofresourcesembodyingeconomicbenefits.
Equity Equity is the residual interest in the assets of the enterprise after

deductingallitsliabilities.
Theelementsdirectlyrelatedtoperformanceandtheirdefinition according to
theframeworkare:
Income Income is increases in economic benefits during the accounting
period in the form of inflows or enhancements of assets or decreases of
liabilities that result in increases in equity, other than those relating to
contributionsfromequityparticipants.
Expense Expenses are decreases in economic benefits during the

accounting period in the form of outflows or depletions of assets or


incurrence of liabilities that result in decreases in equity, other than those
relatingtodistributionstoequityparticipants.

RecognitionoftheElementsofFinancialStatements
Recognition is the process of incorporating in the balance sheet or income
statement an item that meets the definition of an element and satisfies the
followingcriteriaforrecognition:
Itisprobablethatanyfutureeconomicbenefitassociatedwiththeitem

willflowtoorfromtheenterpriseand
Theitem'scostorvaluecanbemeasuredwithreliability.

Basedonthesegeneralcriteria:
An asset is recognized in the balance sheet when it is probable that the

futureeconomicbenefitswillflowtotheenterpriseandtheassethasacost
orvaluethatcanbemeasuredreliably.
Aliabilityisrecognizedinthebalancesheetwhenitisprobablethatan

outflow of resources embodying economic benefits will result from the


settlementofapresentobligationandtheamountatwhichthesettlement
willtakeplacecanbemeasuredreliably.
Incomeisrecognizedintheincomestatementwhenanincreaseinfuture

economic benefits related to an increase in an asset or a decrease of a


liabilityhasarisenthatcanbemeasuredreliably.Thismeans,ineffect,that
recognition of income occurs simultaneously with the recognition of
increasesinassetsordecreasesinliabilities
Expenses are recognized when a decrease in future economic benefits

relatedtoadecreaseinanassetoranincreaseofaliabilityhasarisenthat
can be measured reliably. This means, in effect, that recognition of
expenses occurs simultaneously with the recognition of an increase in
liabilitiesoradecreaseinassets.

MeasurementoftheElementsofFinancialStatements
Measurement involves assigning monetary amounts at which the elements of
the financial statements are to be recognized and reported. The Framework
acknowledges that a variety of measurement bases are used today to different
degreesandinvaryingcombinationsinfinancialstatements,including:
Historicalcost
Currentcost
Netrealizable(settlement)value
Presentvalue(discounted)

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PhilippineCPAReview:SummaryoftheOldConceptualFrameworkissuedbytheAccountingStandardsCouncil(ASC)

Historical cost is the measurement basis most commonly used today, but it is
usuallycombinedwithothermeasurementbases.TheFrameworkdoesnotinclude
concepts or principles for selecting which measurement basis should be used for
particular elements of financial statements or in particular circumstances. The
qualitativecharacteristicsdoprovidesomeguidanceinthismatter.

ConceptsofCapital
Financialconceptofcapitalcapitalissynonymouswithnetassetsof
the enterprise. This is the concept of capital adopted by most
enterprises.
Physical concept of capital capital is regarded as the productive
capacityoftheenterprisebasedon,forexample,unitsofoutputperday.
ConceptsofCapitalMaintenance
FinancialcapitalmaintenanceUnderthisconcept,aprofitisearned
onlyifthefinancial(ormoney)amountofthenetassetsattheendofthe
oftheperiodexceedsthefinancial(ormoney)amountofthenetassets
at the beginning of the period, after excluding any distributions to, and
contributionsfrom,ownersduringtheperiod.
PhysicalcapitalmaintenanceUnderthisconcept,aprofitisearned
only if the physical productive capacity (or operating capability) of the
enterprise(ortheresourcesneedtoachievethatcapacity)attheendof
the period exceeds the physical productive capacity at the beginning of
the period, after excluding any distributions to, and contributions from,
ownersduringtheperiod.
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